BOSTON, October 2, 2012—Many medical technology (medtech) companies have commercial costs that are unsustainably high, and the industry’s current commercial model no longer fits the market, according to a new Commercial Excellence Benchmarking study released by The Boston Consulting Group (BCG) today at AdvaMed 2012 - The MedTech Conference.
The cost structure that was required in the past to meet customer needs is now misaligned with the relentless pricing pressures facing the industry and the increasing challenges in realizing return on innovation. Further, the capabilities required to sell effectively have changed as customers increasingly balance clinical considerations with economic objectives, broaden the number of influencers involved in choosing products, and centralize buying decisions.
“To stay competitive, medtech companies face a critical juncture,” says Colm Foley, a BCG partner and coauthor of a forthcoming BCG report based on the study. “The time to reinvent the commercial model and build best-practice go-to-market capabilities is now.”
BCG’s Medtech Commercial Benchmarking
Fielded from March through September 2012, BCG's Medtech Commercial Benchmarking study compiled data from 38 medtech business units in several formats: 4,500 web-based self assessments from employees in the medtech industry, 80 interviews with senior managers at medtech businesses, and a BCG analysis of industry commercial-cost and productivity measures. Eleven countries were covered: the United States, the EU-5 (France, Germany, Italy, Spain, and the United Kingdom), Japan, and the BRIC nations (Brazil, Russia, India, and China).
Selling Not in Sync with How the Market Buys
In terms of selling, general, and administrative costs, many medtech firms spend 200%, 300%, or even 500% more than the typical high-tech or industrial firm, given adjustments for margin differences across the industries. This cost structure was required in the past, but the margins in medtech are expected to shift over time such that they resemble the margins in these other industries, making medtech’s current commercial-cost structure unsustainable. Further, commercial costs range widely within the industry, with low-cost models being at least three times as productive as high-cost models.
Study respondents reported that medtech companies believe their commercial capabilities have not kept up with the dramatic changes in how customers buy products. Many important capabilities—such as key account management, value-based marketing, reimbursement, and pricing and contracting—were rated at a “basic” or “intermediate” level of maturity. And study respondents said that organization enablers such as information technology need upgrades to support such commercial capabilities.
“Each industry goes through periods during which companies need to transform to keep up or face being uncompetitive,” says Foley. “In medtech, that period has arrived, and some early movers have recognized the situation. These companies, which are highlighted in our benchmarking study, have already developed more cost-efficient methods to deliver the same value of goods to the same customers at a lower cost.”
”Additional good news is that strong tailwinds are driving higher unit volumes," says Götz Gerecke, a BCG partner and report coauthor. With aging populations in developed countries, universal health-care coverage in the U.S., and broader access to health care in countries such as China, greater demand does exist.
“This is good news for the industry,” says Gerecke, “but it requires a new mindset and approach of medtech companies. There are different demands on the commercial organization when revenue is driven purely by unit-volume growth than there were in the past, when much of the growth came from innovation and higher price realization."
Building a Sustainable Commercial Model
According to the study, the productivity of a firm’s sales reps depends on the selling model the company employs. Although many different selling models exist, the study identified three basic archetypes: “clinical-driven,” “contract-driven,” and the “hybrid” of those two. Sales rep productivity ranges from $1 million per rep for the most intensive clinical models to more than $6 million per rep for centrally driven contract models. Of greatest concern: many companies are stuck in one model, while their customers have shifted to another purchasing model for some or all of their products.
The study included the often-overlooked back-office functions of medtech firms—and found opportunities for action. Most importantly, medtech firms are not taking advantage of scale economies in these functions, which means that as volumes grow, so do costs. As revenue growth is driven more by unit volumes than by price realization, optimizing scale efficiencies in these functions will be critical to sustainable profitability.
“Medtech firms have to take a critical look at both their sales and their back-office operations,” says Gerecke. “Rethinking both pieces of the operation—and finding opportunities to improve productivity and drive economies of scale—is the key to creating a sustainable model that works. At the same time, cost savings in these areas can help fund the investments necessary to bring commercial functions, such as those aimed at driving pricing and reimbursement strategies, up to best-in-class levels."
Foley continued, “We're not saying simply 'cut costs.' That is easy but shortsighted, and it misses the mark in terms of creating competitive advantage. Instead, we suggest reinventing the model to get both efficient and sustainable before reinvesting selectively to win.”
The task of remaking the commercial model and upgrading critical capabilities is certainly daunting. BCG has identified six steps to help drive the transformation:
Customize the go-to-market strategy and commercial model. Firms must systematically review where they want to play by geography, customer segment, and product category and then tailor their commercial model to win in the highest-priority segments.
Reinvent clinical selling. Create a smaller—but more focused—team of sales reps that reflects the shift in decision-making power in the market.
Partner with key accounts. Foster a renewed focus on driving business with the largest and most important clients.
Build real marketing muscle that drives home the value of products. As purchasers become more focused on achieving the same or better health outcomes at a lower cost, build evidence and messages focused on the value delivered by your products.
Invest in pricing-and-reimbursement capabilities. Build teams that can have an effective voice in decisions involving pricing and reimbursement for your products.
Make service a differentiator—and a source of revenue. Create differentiated service offerings that are best-in-class and, where possible, generate additional revenue streams.
To arrange an interview with a BCG expert, please contact Kathryn Sasser at 617-849-2683 or sasser.kathryn@bcg.com.