This is the first article about common pricing strategies for medical devices. I previously discussed the importance and impact of an effective pricing strategy here. I also highlighted the factors to consider in setting a pricing strategy here.
In this and the next posts, I will cover some of the most common pricing strategies used in the medical device sector with their advantages and disadvantages.
Most common pricing strategies
In my experience, medical device companies frequently orient their pricing on a cost basis.
However, companies that employ pricing as part of strategic marketing are aware of the different pricing strategies and tactics and use a combination of them.
Together, let’s explore some of the most common pricing strategies.
Cost pricing strategy
Companies following the pricing strategy based on the cost, normally use the full-cost pricing philosophy considering that every unit of a product must bear its full share of the total fixed and variable cost.
This approach is suitable when a company has high variable costs relative to its fixed costs. In such cases, prices are often set on a cost-plus basis that is, total costs plus a profit margin.
Medical device suppliers, distributors, and other intermediaries often find cost-plus pricing to be a simple, time-saving way to price.
If you work for a small medical device company or a distributor selling a very large number of small products, it would not be an effective use of your time to analyze the value to the user of each single small product. Instead, look at the value of the 20% of products that really contribute to the bottom line analyzing the perceived value and price.
A major problem in cost pricing is related to the determination of the full cost. The product’s full cost is the result of fixed cost allocation and variable costs. The allocation of fixed costs depends on production volume but the volume is influenced by the selling price.
Therefore, if applied without judgment cost pricing can lead to price decisions that reduce profitability.
For example, setting a high price to cover high fixed costs could start a spiral in which higher prices reduce sales volume producing a higher average product cost, suggesting (according to cost pricing strategy) that prices should be raised even higher.
Another disadvantage of cost-plus pricing is that this pricing strategy does not consider the customer.
Actually, how much the customer is willing to pay for a product has very little to do with product cost, on the contrary it is related to the perceived value.
For example, during the COVID-19 pandemic, the perceived value and price of face masks and other personal protective equipment increased exponentially while the cost increased only marginally.
Competitive Pricing
Competitive pricing is a pricing method that reflects market conditions.
In competitive pricing, medical device companies typically set the price at or around the average selling price of their competitors. This way, they do not shift the competition and it is unlikely that the customer will react negatively to this price.
This pricing method focuses solely on the prices of your competitors, but it does not consider how much customers value the product or production costs.
A solid competitive pricing model is based on strong market research because you need to know the price applied by the competitors and not only the list price.
Only when you know the prices of your top competitors in your market and how those prices might meet customer expectations, do you have the base for determining your prices.
The competitive pricing strategy can come in many forms, a company can choose to be the cheapest or the most expensive compared to the competitors.
One of the weaknesses of competitive pricing is the risk of letting others define your price policy.
If you follow your competitors in cutting the price most likely you will have a progressive reduction of profitability. But if sales drop significantly, your company risks running into financial problems.
In my next post, I will cover other common pricing strategies used in the medical device sector.
Meanwhile, let me know your thoughts about these pricing strategies below and if you enjoyed this post, please feel free to share it with friends and suggest they subscribe or follow me on LinkedIn.