In my previous post, I discussed the commoditization of medical products. How it is becoming very common and a visible threat to company profitability.
As a result of commoditization, business models that MedTech and pharma companies were able to implement in the past are becoming unsustainable.
Today’s post is about strategies you’ll have to implement to avoid commoditization in MedTech.
Strategies countering commoditization of MedTech products
To begin, the ideas and the strategies to avoid commoditization presented here are not a panacea. Every company must find its way of countering commoditization’s power, exploiting market knowledge and core competencies.
The company facing commoditization has 2 options: compete within the trap or escape the trap. It is also possible to work on both strategies simultaneously to increase the chance of success.
Compete within the trap – Operations efficiency
Companies that have decided to follow this strategy need to increase operations efficiency.
Developing operational excellence can create value by offering the customers a cheaper product made possible through efficiency and cost reductions.
For example, if the process of making the product is not commoditized, restructuring production & logistics and developing economies of scale will have to be established.
Escape the trap
The first step to getting out of the commodity trap is to analyze the current situation and identify the mechanisms responsible for the product’s commoditization.
Understanding where the company’s product is situated in the matrix below, published by Keith Goffin, Aleksei Beznosov, & Matthias Seiler in 2021, could help define the possible moves. The two-by-two Commoditization-Innovativeness Matrix allows placing the product in one of the 4 quadrants.
Quadrant 1: Low innovativeness and Low commoditization
Products in this zone have relative success. Without being unique and extremely innovative, the position is vulnerable if competition start eroding margins. This position could be the result of high-entry barriers.
Quadrant 2: Low innovativeness and High commoditization
Products in this zone are in the commodity trap where market share and margins are both under pressure.
Quadrant 3: High innovativeness and Low commoditization
This zone is the most attractive position because the products have a clear value proposition, a unique offering, and high margins that can be translated into higher customer loyalty. This quadrant is the opposite of the commodity trap.
Quadrant 4: High innovativeness and High commoditization
Products in this quadrant have some uniqueness related to key features, processes, and services. But the market does not recognize the singularity of the offering. Also, the advantages of the product are not well communicated or understood.
After analyzing the product’s position on the matrix, the company can develop a strategy to tackle commoditization and decide which direction to move.
Strategic foundation: customer focus and alignment
No matter which strategy will be implemented by the company, after understanding the position on the matrix, the company should put in place practices to increase customer knowledge. And to understand its customers and their needs better.
The purpose of customer focus entails the following:
- Understanding the different customer segments through a detailed segmentation
- Identifying unarticulated customer needs
- Discovering what the customer value beyond the price.
These sometimes overlooked elements can be the source of insights that lead to redefining the company’s product offering, regaining a differentiator by means of customer value creation, and re-establishing a win-win relationship.
Customer alignment is more than customer focus. It is a different supplier/customer relationship where the supplier changes the way of doing business, developing a synergistic relationship with the customers.
The objective is an in-depth understanding of the customer beyond the current purchase. This means identifying issues and gaps in how the customer buys and uses products and the impact on the customer’s performance.
Strategic trajectories
There are 2 ways to add value to a commoditized and non-differentiated product, and I’ll discuss these methods below.
#1 Moving across
To move across, a company can:
1. Communicate the product’s value through marketing and sales campaigns: Here, the product has some key features and produces value for the customer; however, the customer does not recognize it. Therefore, a marketing effort such as KOL support, customer training, publications, etc. can be useful to defend or establish a company’s advantage compared to the competition.
2. Shift toward specific market segments (niche) where there is less commoditization pressure: Some surgeries can have higher reimbursement; therefore, using the product in these applications can have less price pressure.
3. Build and maintain strong customer relationships as a competitive advantage: As customers become more experienced with products, more price-sensitive customer relationship practices are a way to distinguish them from the competition. Thanks to their exceptional skills, some sales reps become the real differentiator.
#2 Moving up
To move up a company, you can:
4. Innovate around the product: When the product value proposition is outdated, identifying specific customer needs can lead to innovation strategies that offer customers compelling extra values.
5. Bundling related products: Companies can develop integrated bundles of products that offer extra value thanks to integrating different constituents of the bundle. A typical example is the procedure pack, a combination of products packaged together with the purpose of being used for a specific medical purpose.
6. Develop services: This strategy consists in moving from product to service, offering extra value, changing the business model, or providing add-on services such as preventive maintenance, repairs, etc.
7. Create solutions beyond the product to enhance customer success: In this case, the company value creation moves away from the core business and addresses specific customer problems with specific solutions. The solutions can combine products and intangible services with helping the customer succeed. For example, a company supplying medical imaging can propose to the hospitals a full range of consulting services to increase the productivity and operational efficiency of investments made in medical imaging equipment.
Final words
Commoditization is a pervasive threat in many medical segments. In my opinion, countering commoditization begins with a thorough assessment using the Commoditization-Innovativeness Matrix, which helps managers to identify the market position.
Any company can counter commoditization effectively by identifying customers’ needs and the subsequent strategies to create and demonstrate more value to customers.
From my experience, MedTech companies, especially SMEs, tend to underestimate the value of market research. They are unaware of the power of using different techniques to collect the VOC. Hence, they are missing the strategic foundation.
What is your experience with commoditization? Share your thoughts in the section below and if you like the content of this blog, hit the subscribe button and connect on LinkedIn.