Pricing healthcare has to be one of the most challenging tasks in the profession. Rising healthcare costs and debate over how best to manage and pay for them is a hot-button issue. Treacherous waters indeed for sales and marketing professionals in this industry.
Now suppose you are medical device company with an innovative product that delivers tremendous value. How do create a compelling value proposition that enables you to command an acceptable price that doesn’t earn the wrath of critics in the health profession, not to mention the public? Johnson & Johnson offers an encouraging case study with their drug-coated coronary stents. This example comes to us from the latest edition of the Strategy and Tactics of Pricing by T. Nagle, J. Hogan and J. Zale
Illustrated here is J&J’s value model for these new stents. When compared to conventional uncoated stents, J&J’s stents provide a tremendous amount of differentiation value – estimated at $4,500 because they reclog less thereby reducing the need for an expensive repeat procedure.
Most people would expect and accept that such an innovation should deserve a premium above the $1,400 price for conventional stents. But how much more? 10% more? 100% more?
Answering that question requires looking at the interests of the specific stakeholders who are involved in the purchase and use of the product. Illustrated here is a map showing how three stakeholders: surgeon, payer, and patient react to this value driver. Although they are all favorable, they have their own unique reasons.
For example, the Payer (i.e., insurance company) is primarily motivated by holding down overall claim costs. The value message for this stakeholder is therefore: our drug-coated coronary stents will reduce the amount of insurance claims due to repeat procedures by a significant amount (in this case 15%) and since such procedures are expensive ($30,000) the economic value is worth $4,500 (15% x $30,000).
In contrast, the patient naturally is motivated by his/her health, quality of life, and comfort – reasons which are more psychological than economic. However, it is also true that a patient may have economic reasons too; for example, lost income (at least for those patients who don’t have the benefit of paid sick leave).
The point is that both psychological as well as economic factors come into play when establishing a price. Illustrated here is a price sensitivity analysis. The pink bar indicates a Custom Price of $3,500, which is the price that J&J initially chose for its new product. This is a 250% increase over the uncoated stents. Fair to say this price would be impossible to justify without showing the huge amount of differentiation value, which is exactly what J&J did.
It’s interesting to note that this analysis also includes a Calculated Price of $3,650 (yellow bar). This is the mid-point of the Differentiation Value area (blue background). Below the chart is a Sensitivity Factor table. Experts have identified a number of factors that either have an upward or downward influence on a customer’s willingness to pay. So for example, End-Benefit Expectation is a phenomenon where customers are positively influenced by other non-economic factors, e.g., psychology. In considering the impact of this factor on the patient stakeholder with regards to the drug-coated stents, we may want to rate this higher on the scale, which in the second illustration below would suggest the possibility of an even higher price – up to $4,775!
Therefore, intelligent value management requires understanding the economic and psychological impacts on stakeholders. Companies that take a sophisticated approach to communicating value like this avoid leaving money on the table. In these tough economic times, sales and marketers need to work hard to capture every dollar.
Note: this is another in a series of value models to illustrate current business topics using the LeveragePoint for Value Management solution.