Successful Marketing Management
I haven’t done an entry in about a week, because I have been focused on a consulting assignment on pricing strategies in a couple of medical device segments. Interestingly, it was for a large investment banking firm. In this down-market, research into medical companies, because they are spending more time analyzing the fundamentals of these corporations.
Part of my assignment was to give a one day training session on how manufactured products get to the market. Trying to condense 20 years of knowledge in this industry down to a six hour Powerpoint presentation (yes, too long, but they didn’t have 20 years to get up to speed) is challenging, but it was critical to their understanding of the medical products market.
I often relate a story about the medical products market whenever I am interviewing someone for a marketing position in this industry which helps define the almost every challenge for product marketing managers in this business. There are over 50,000 medical products companies in the United States (probably more, but it’s hard to obtain exact data). If each one of those companies sent a sales representative into a physician’s office, surgery center or hospital, there would be no time for patients. Since the primary (but hardly exclusive) method for marketing a medical product is through the sales process–new product introductions are especially sales critical.
A system has evolved to make this system efficient, but makes pricing strategy and analysis difficult. First, most products flow from the manufacturer to the health care customer through a distribution system. For larger customers, such as hospitals, the market is dominated by Cardinal and Owens & Minor, and a few regional or super-regional distributors. For smaller non-hospital customers, often described as alternate site, the market is dominated by PSS, McKesson, Henry Schein along with a fairly large number of smaller regional distributors. The manufacturers sell their products, provide significant co-marketing assistance, and train distributor sales representatives.
The distributors set their own pricing to the customer. Usually. But control of pricing has mostly moved to Group Purchasing Organizations (GPO), such as Novation and Premier, who negotiate national contracts with manufacturers. The customers who participate in the GPO’s get lower prices for products. The distributors have to sell at lower prices, but receive rebates from the manufacturers for every product sold to a GPO customer. The distributor has some control over pricing, but only in a narrow band.
At the manufacturer level, pricing strategy has essentially become the negotiation of national contracts with GPO’s. For a smaller manufacturer, gaining or losing one of these contracts can have a significant effect on their revenues and EBITDA. GPO’s may sign contracts with several manufacturers for one type of product, which means that the market shares of each company in the segment does not change much. Sometimes, GPO’s sign exclusive contracts with one manufacturer (in the hope of receiving the lowest possible price for a product or product line), which can effectively lock out competitors for the length of the contract.
At the distributor level, pricing is often out of their control (except in alternate site accounts, with some exceptions), so it becomes a game of maximizing rebates to maximize gross margin. ERP software solutions for medical distributors often include modules to manage rebates.
Of course, I just digested the whole pricing strategy of the medical products market into a few paragraphs, and it still shows how complex it is. But most manufacturers in this market are doing well, but pricing strategy is paramount to success. Marketing managers for these companies need to have skills beyond simply promotion and sales support, but more in maximizing pricing. It becomes critical for the successful marketing manager to fine tune pricing to the customer segment.
As a CEO of a medical products company once said to the marketing group, “we don’t pay you to lower prices. We pay you to professionally raise prices.”
By Michael W Simpson
Part of my assignment was to give a one day training session on how manufactured products get to the market. Trying to condense 20 years of knowledge in this industry down to a six hour Powerpoint presentation (yes, too long, but they didn’t have 20 years to get up to speed) is challenging, but it was critical to their understanding of the medical products market.
I often relate a story about the medical products market whenever I am interviewing someone for a marketing position in this industry which helps define the almost every challenge for product marketing managers in this business. There are over 50,000 medical products companies in the United States (probably more, but it’s hard to obtain exact data). If each one of those companies sent a sales representative into a physician’s office, surgery center or hospital, there would be no time for patients. Since the primary (but hardly exclusive) method for marketing a medical product is through the sales process–new product introductions are especially sales critical.
A system has evolved to make this system efficient, but makes pricing strategy and analysis difficult. First, most products flow from the manufacturer to the health care customer through a distribution system. For larger customers, such as hospitals, the market is dominated by Cardinal and Owens & Minor, and a few regional or super-regional distributors. For smaller non-hospital customers, often described as alternate site, the market is dominated by PSS, McKesson, Henry Schein along with a fairly large number of smaller regional distributors. The manufacturers sell their products, provide significant co-marketing assistance, and train distributor sales representatives.
The distributors set their own pricing to the customer. Usually. But control of pricing has mostly moved to Group Purchasing Organizations (GPO), such as Novation and Premier, who negotiate national contracts with manufacturers. The customers who participate in the GPO’s get lower prices for products. The distributors have to sell at lower prices, but receive rebates from the manufacturers for every product sold to a GPO customer. The distributor has some control over pricing, but only in a narrow band.
At the manufacturer level, pricing strategy has essentially become the negotiation of national contracts with GPO’s. For a smaller manufacturer, gaining or losing one of these contracts can have a significant effect on their revenues and EBITDA. GPO’s may sign contracts with several manufacturers for one type of product, which means that the market shares of each company in the segment does not change much. Sometimes, GPO’s sign exclusive contracts with one manufacturer (in the hope of receiving the lowest possible price for a product or product line), which can effectively lock out competitors for the length of the contract.
At the distributor level, pricing is often out of their control (except in alternate site accounts, with some exceptions), so it becomes a game of maximizing rebates to maximize gross margin. ERP software solutions for medical distributors often include modules to manage rebates.
Of course, I just digested the whole pricing strategy of the medical products market into a few paragraphs, and it still shows how complex it is. But most manufacturers in this market are doing well, but pricing strategy is paramount to success. Marketing managers for these companies need to have skills beyond simply promotion and sales support, but more in maximizing pricing. It becomes critical for the successful marketing manager to fine tune pricing to the customer segment.
As a CEO of a medical products company once said to the marketing group, “we don’t pay you to lower prices. We pay you to professionally raise prices.”
By Michael W Simpson