“There are two fools in every market—one asks too little, another asks too much.”
Old Russian Proverb
The subject of a good pricing strategy has been long debated, raising questions and concerns for very obvious reasons. To begin with, some folks agree that charging too little helps to gain market share but reduces profitability.
Others say low-priced products can attract the wrong customers—those who will switch to competitors to save money.
A low price could cheapen the customer’s view of the product. Conversely, charging too much may reduce product acceptance and market penetration.
This topic of pricing is particularly very intense in the medical device business. Several forces like competition, concentration of buyers, globalization, internet diffusion, and lack of resources in the healthcare systems act to increase downward pressure on prices.
The challenge of medical marketing, then, is to find ways to fix prices and profitability in the current environment. Thankfully, these and more are what this article will address, so keep reading to learn more.
Pricing strategy complexity
The pricing strategy for a medical device is often considered a straightforward and adjustable process.
Especially in many small and medium-sized MedTech companies, changing prices has been considered a relatively uncomplicated procedure.
These assumptions contemplate only the tactical pricing decisions and do not consider a complete price strategy.
Strategic pricing takes into account the long-term profit objectives of the company. Conversely, tactical pricing, for example, optimizes prices to short-term market dynamics, including demand shifts and competitive effects.
The reality is that tactical pricing is not enough. This is because pricing is complex, and it’s only growing as the complexity of the medical market increases.
To set the right price, companies need to invest in knowledge and processes. These investments allow companies to create a pricing strategy by building the capabilities required to set prices for products and services that fit with the product value proposition, customer segments, suppliers, and constantly evolving market conditions.
The power of pricing
Pricing has a relevant impact on both the top and bottom lines.
According to the landmark book “The Price Advantage” by Walter L. Baker, Michael V. Marn, and Craig C. Zawada, a 1% increase in price would lead to an 11% increase in operating profit; a 1% increase in sales volume would increase profits by 3.7%; a 1% decrease in variable cost would increase the operating profit by 7.2%; and for a 1% drop in fixed cost, profits would increase by 2.7%.
Therefore, the pricing strategy is extremely powerful in gaining profitability and modifying price has the highest leverage. Small price increases can have a significant and immediate impact on profits. Of course, based on the assumption that an increase in price will not lower the sales volume.
While a drop in sales is certainly possible, we need to note that a 1% increase in price rarely reduces sales by 2%. Similarly, it results in a net increase in operating profit of 3.08%, even at a 2% loss in sales volume.
Of course, the reverse is true, too. As a result, for most products, minor reductions in price can have a significant impact on profitability.
Conclusion
Price is the most effective tool to increase profitability. Therefore, medical device companies need to develop competencies and instruments to optimize the way products and services are priced.
Obviously, increasing profits is an important goal but not if it comes at the expense of customer satisfaction. After all, extracting value from a product by pricing isn’t simply a matter of good tactics.
Share your ideas on the need for a pricing strategy. If you enjoyed this post, please feel free to share it with friends and suggest they subscribe or follow me on LinkedIn for more.