Pricing in MedTech: finding a cure for low margins

By?Jay Zhu, EY-Parthenon MedTech Strategy, Transactions, and Commercial Leader?and?Malik Ajani Jr., EY-Parthenon Director – B2B Pricing, Sales and Commercial Growth

PE-backed B2B medical technology (MedTech) companies stand out among other sectors as actively adapting their pricing strategies, showcasing their ability to respond effectively to market dynamics, competitive pressures and customer demands.

This is one of the findings of the?2023 EY-Parthenon Global Private Equity B2B Pricing Study, which reveals that in PE-backed businesses as a whole, price increases in 2022 generally lagged behind inflation. The study predicts that the gap will close in 2023, but MedTech is one of only three sectors where price rises are predicted to actually surpass inflation, along with Oil & Gas and Manufacturing. In MedTech, the average price increase over the past 12 months was 6.7%, and this is anticipated to rise to 7.3%, compared with the expected inflation rate of 6.6%.

The study identifies a number of factors that have affected the profitability of PE-backed B2B businesses over the past year, including higher interest rates, rising input costs, more demanding regulation and supply chain challenges.

Customers are sometimes sympathetic to these challenges. Interviewed for the study, the Pricing Strategy Lead at a European MedTech company said:?“While these price increases are always a difficult subject, this year has been a bit easier. I think customers were aware that there is inflation and that prices will need to rise.”

But there’s no room for complacency. To stay competitive, MedTech companies need enhanced governance and better insights around pricing. When inflation stabilizes, they will also need to preserve margins in the face of likely customer resistance to further price increases.

Opportunities for growth

EY survey highlighted that high-growth MedTech organizations prioritize product enhancement to meet customer needs and drive pricing strategy. When making pricing decisions, 78% of these high-growth companies consider product features and improvements as important criteria, compared with just 25% of low-growth companies.

But this reliance on product features as the main differentiator means that even high-growth companies often neglect the importance of a robust pricing strategy. To safeguard margins and achieve sustainable growth, these organizations need to consider moving from a cost-plus pricing strategy to a value-based one. They need to look at combining products with additional benefits that appeal to buyers, and optimize market discount mechanisms to capture additional value. And they need to be flexible enough to operate different pricing strategies in different markets. One MedTech Pricing Strategy Lead said:?“In some regions you can make an inflation adjustment, but in others you can increase prices more.”

To facilitate they can deliver this strategy, it’s important that MedTech organizations have skilled pricing professionals in their teams, and that they support them with attractive career paths and development opportunities so that they retain them.

The value of possessing advanced pricing capabilities is illustrated by the finding in the EY-Parthenon study that MedTech companies that have these experienced 40% higher growth in 2022 than their peers that don’t have advanced capabilities.

Providing value

One issue that is particularly prevalent in the MedTech sector is that product features are not necessarily aligned to the value delivered, which connects directly to the pricing. The Pricing Strategy Lead of one MedTech company commented:?“You have to have an understanding of how strong your product is. There is always the fear of changing price, and you need to act against this.”

It’s particularly important to emphasize how technology-based products reduce inefficiencies. If the product features, particularly digital ones, address pain points along the patient pathway, then providers, health care professionals and payors are more likely to accept increased pricing that reflects that value.

Finally, it's vital that you understand your customers and their tolerance for price increases. As the Commercial Strategy Director of a UK MedTech company put it,?“The goal is to understand customers’ willingness to pay.”

With the right talent, data analytics and technology solutions in place, MedTech organizations can use pricing as a tool to unlock significant opportunities for growth and operational excellence. Here are three key takeaways:

• Take a long-term view:?In order to be able to quickly anticipate and respond to market conditions, you need to invest in pricing strategies, people and governance processes.
• Invest in pricing experts:?You need specialists who can develop agile pricing mechanisms and governance models, and who will help you maximize profitability and market competitiveness by collaborating closely with the Commercial Excellence team to align pricing strategies with go-to-market approaches.
• Understand your customer:?It’s essential to have a clear understanding of customers’ willingness to pay, and to exercise caution in terms of the frequency of price increases.

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Thanks to article contributors?Stephan Laux?and?Maryline Marquet

The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.