For medtech, pricing is perhaps one of the most important areas that impact the bottom line, but it often doesn’t get the investment it deserves. To explore why, and determine ways to solve it, ZS’s Abhishek Rathi sat down with a panel of leaders in ZS’s medtech practice who have expertise in pricing strategy: Tim Joyce, Bhargav Mantha and John Balamuta. They discussed the importance of pricing excellence and offered best practices to fully realize its potential. Their conversation has been edited for length and clarity.
Abhishek Rathi: Why is a pricing function needed? How have you seen companies organize this function, and what are the right structures, roles and responsibilities to achieve pricing excellence?
Bhargav Mantha: Medtech as an industry is evolving, and pricing is very important because it’s the best way to gain profitability. But when it comes to medtech, certain behaviors have been embedded for many years. It’s been a sales-oriented culture, but because there’s so much focus on value and evidence, medtech needs to think about how to address those needs, leveraging price. There’s an opportunity for medtech to create more discipline around pricing and make pricing a core capability in the organization. It’s not relegated to one specific function like sales, marketing or finance, but it’s a cross-functional capability that needs to be developed. It needs to be a CEO-level mandate to drive better pricing discipline by bringing these functions together.
AR: Do you think pricing should be a responsibility in addition to people’s day jobs or a full time role? How should anyone in the organization think about it if they want to be a part of the pricing team?
Tim Joyce: Companies need to take a hard look at what their current level of maturity is. Do they have a pricing strategy that the sales and marketing team and leadership are all actually aligned with, and can they articulate the role pricing should play? Even in mature pricing organizations, the answer tends to be, not really. If you do have a strategy, you have to find out if your price book is optimized. Do you have the right pricing architecture? Have you packaged your offers correctly? If yes, are you actually executing and selling the full value of your products? Do you have the right governance process to meet needs of customers and make it easy to do business with you? Do you have the right processes in place to take the pressure off the field and off the customer? Then, does everyone need to deliver against it? That’s how I think about the maturity curve.
AR: What you’re saying is, there’s a range of activities, from setting strategy, to architecting the price book, to getting that price, to maintaining the contract. Perhaps that’s one of the reasons pricing has been challenging, right? There are different people involved and a lot of handover.
TJ: That’s right. If you come into the journey at the wrong place; for example, if you think you have an execution problem but your price book isn’t optimized, you won’t meet the needs of the customer. You’re going down an impossible path, and we see a lot that underlying requirements haven’t been met, or more simply, the field is incentivized to drive revenue and management wants to optimize for profit. That pricing strategy is misaligned, and we see adverse results from that. So, we suggest a pricing journey that starts with strategy and ends with governance.
BM: To that point, pricing isn’t a simplistic function. For the same reason, you need an organization that’s separate from the price-setting function. Having a more disciplined pricing structure and making it a function on its own creates a collaborative, cross-functional environment. Driving best practices and standardized processes and specific capabilities to elevate role of pricing is required. There are two main models: a pure, centralized pricing function, which is relevant when you have a narrow portfolio of products and customers with not a lot of heterogeneity. On the other extreme, you have pricing being decentralized, as in a global company with many different products, customers and geographies. A decentralized pricing organization helps cater to local dynamics and nuances but quickly gets siloed, and you’re not able to connect the dots between different segments.
Having a center of excellence (COE), which marries the best of centralized and decentralized methods, is becoming more common. The COE pricing function drives price and revenue management activities systematically across business units and up to the executive level; provides consistent, rigorous analytical support for proper pricing decisions; drives consensus on issues requiring broader, cross-unit review and provides theoretical expertise on models and techniques. It also designs internal training programs and acts as an internal consultant and helps companies focus on pricing and contracting process excellence.
TJ: As a follow-up to that, we see a lot of clients ask whether they should centralize their pricing function as a response to customers wanting to buy globally or customers wanting to consolidate their buying power. What do we say to those clients?
BM: Consolidation and supply chain procurement are becoming more sophisticated. The pricing function, whether it’s center-led or centralized, should take those nuances into account and help the companies figure out what your portfolio strategy should be and how you interact with affiliates in other geographies. Pricing collaborates with local markets and KAM functions to drive a portfolio-based approach.
AR: Given finite resources, what are competing priorities that trump investments in establishing pricing excellence, and how should people think about rallying their organization and setting these structures, capabilities and incentives?
TJ: Diagnostics play an incredible role in this. Organizations lack visibility into where their pricing opportunities are and how big they are. Without hard evidence, it’s hard to rally the organization and prioritize pricing work.
BM: I agree; analytics has a role to play. Leveraging analytics and getting visibility into price erosion to create a business case on how much money you’re leaving on the table because of inconsistent pricing policies is helpful. Discount management is an important capability you need to build. Setting prices too high or low can hurt you.
Behavioral insights and psychology, knowing consumers’ preferences for losses or gains, is also important. Another thing to think about is change management, making sure the changes you’re proposing are understood and bought into by different stakeholders.
AR: Can you elaborate on the change management piece and what challenges you’ve seen there?
BM: Be more service-oriented, more of an advisor versus just a sales rep. Sales reps should communicate value and negotiate a win-win situation, and, after that, their role is elevated to someone who is selling a solution and solving a problem. It’s not about selling more, it’s about selling what’s right for the customer. That’s a win-win for your sales reps.
AR: What impact has COVID-19 had on pricing practices, and how has the pandemic changed the way people see the need for pricing excellence in the long-term, or for good?
TJ: Impact really varied by how exposed companies were to elective procedures: If you were overexposed to orthopedic procedures, you were more hurt by the downturn. COVID changed portfolio risk, our biases toward short-term gains and thinking more about long-term stability. Now, business leads have to think about the riskiness of customer segments and how they’ll pay if elective procedures are slowed again.
John Balamuta: Change is only thing that’s constant right now. Organizations set up to take advantage of opportunities are best placed to capture them. Have the tools to support quick changes and capture those opportunities, and the flexibility to execute.
AR: What should companies consider in terms of moving up the maturity level in pricing excellence right now?
BM: Think about how to build pricing as a core capability within your organization. Then, make sure you think beyond just selling a product. Create a more robust offering strategy so that you’re not just marketing to clinical stakeholders but also to your economic stakeholders.
TJ: Ask where your biggest pricing opportunities are today, and how big they are. If you don’t have a good answer, geographically or by segment, product or brand, run that analysis right now so money isn’t left on the table.