Setting a price for your product is one of the most important decisions a medical device startup will ever make. A recent A16Z podcast reminds us that “There’s no other single number that ties to the valuation” of your company.
Once set, prices are hard to raise. If you price too low, you can leave millions of dollars of revenue and profits on the table, starving your company of the funds it needs to re-invest in growth. If you price too high, product adoption will suffer.
So, it’s worth investing a fair amount of time and money with pricing experts before you launch your product. They’ve done this a lot more often than you have.
That said, you should know that there are five basic approaches to setting your price, as follows:
If you aren’t first to market in your category, you’ll likely need to price to compete with existing players. You can adjust your price up if you have superior features or superior clinical data, and you can adjust your price down if you want to take market share. Think of this like selling your house.
2. Code Economics
If your new product happens to fit into an existing reimbursement code for a procedure, then you can price your product so that the total provider procedure cost is covered by the reimbursement amount for the existing code. You should adjust your price down somewhat to give the provider some profit, to incentivize the provider to perform more procedures.
3. Cost-Savings (aka Payer Economics)
You can price your new product so that the incremental cost of the product to the payer is balanced by the risk-adjusted NPV of the longer-term savings that the use of the product engenders. This can be cost-neutral for the payer, or you can adjust your price down somewhat to give the payer more incentive to cover the procedure.
4. Cost-Effectiveness (aka Patient Economics)
You can price your new product to capture its whole value to the patient and healthcare system versus the best alternative therapy. Set a price that captures the incremental QALYs and cost-savings your device provides for the patient and health care system. The first hepatitis-C vaccines were the textbook example of this.
5. Provider Economics
For some products, such as trans-catheter valves, the biggest value for the provider is in the product’s ability to help build the provider’s brand, and thus drive more patients overall to the provider. A sophisticated marketing program is often a core component of these products, to ensure that the provider reaps the business benefits they desire. You can price these products to capture the value provided by the incremental overall business benefit to the provider.
What about value-based pricing? I encourage you to read Peter Bach’s article here. To paraphrase Frank David https://twitter.com/Frank_S_David, the reality is that value-based contracts are mostly smoke and very little fire. You’re one of 10000 line items the payer is managing. Until you become a big line item it’s not worth negotiating for them.