In my previous blog post, I discussed the challenges that medtech companies face when they transition from a capital equipment business model to one in which software features prominently. Once the company has identified the right team, organizational structure and operating model that allows software solutions to innovate and develop properly, and once it has understood the buying process sufficiently, the company then faces the toughest challenge: pricing and customer transitions.

I ended my last blog post with an analogy about purchasing an Audi with an onboard computer and learning later that the manufacturer plans to charge subscription fees to keep the computer up to date. Such a customer would likely vow to never purchase an Audi again. If a manufacturer is introducing new, software solutions, this is less of an issue. But when taking existing, on-premise software and attempting to convert it to a subscription-based pricing model, this may be a real challenge.

 

The first hurdle is identifying a value proposition that unlocks the customer’s willingness to pay. Rarely are bug fixes and security updates sufficient as customers expect that to be part of what they paid for. Many Audi owners would be less than delighted to pay even $10 a month for bug fixes and security updates. However, unlocking AI-based features that enable workflow improvements, more efficient reimbursement, improved patient care through more accurate diagnoses or predictive treatment planning is more promising. Manufacturers need to identify not only what these features are but also how they will improve over time since a subscription software model demands constant value creation. Moreover, given that customers can cancel subscriptions at any time, developing a strong customer success team—a function that few medtech companies have—is important.

With each on-premise software release, companies incur incremental service burdens. One of the reasons why companies may wish to move to a subscription model is to create a predictable and repeatable revenue stream. Another is to reduce the number of software releases that they support, but this only works if they’re able to develop cloud-based versions of the software and successfully transition their customers to the cloud. Medtech companies should expect several challenges. Here are three:

  1. Transforming legacy software for the cloud is not a trivial, technical undertaking.
  2. Some customers may have barriers to cloud utilization due to concerns about data privacy and business continuity. Would customers be able to continue treating patients effectively if they lost internet access?
  3. Willingness and ability to pay will not be uniform. Some customers may lack incremental budgets. Others may be comfortable with the existing product and be unwilling to make a change.

Assuming that the organization can work through the technical challenges of moving to the cloud, what about reticent customers? Adobe has often been cited as a case study after the company adopted a subscription-based model for its software products and transitioned its customers from desktop to the cloud relatively seamlessly, but there are marked differences in medtech. Adobe’s desktop software installation was simple and handled by the customer, whereas many medtech software installations have been custom and highly complex since they need to work within a unique nexus of electronic health records and enterprise resource planning systems. While desktop users yield little buying power, large hospital systems have a lot, and the stakes are higher for medtech companies undergoing this type of transition. If medtech customers lose internet access, a patient's life could be at risk.

 

Even if the value proposition is strong, manufacturers need to get creative to remove existing barriers. These barriers should be considered in product design, for example, ensuring that critical information is cached locally to mitigate the risks associated with loss of internet access. A variety of service models can also be utilized to encourage customers to make the transition. Offering new software solutions to make reticent customers more comfortable in the cloud before trying to pull the legacy software over could also help.

 

The organization should also consider whether it wants to continue to support all of its current customers or lose some in order to more effectively manage and grow business. In the subscription model, there must also be plans for how to handle customers who unsubscribe. If they’ve purchased equipment in addition to the software subscription, exactly what will they lose access to? 

 

Choosing to leave customers behind requires a shift in mindset that’s familiar to software companies but unfamiliar to the many medtech companies that constantly introduce new products but rarely (if ever) retire them. In healthcare, it can also represent a unique risk that can irreparably damage the company’s standing with customers and create a PR disaster if any patients are harmed. On the other hand, many companies already require their customers to pay annual service contracts, and similar PR risks apply if a customer doesn’t pay and the equipment fails. However, allowing customers to hold you back from innovation and efficiency has its own risks. Either service costs will compound as you continue to support legacy software alongside the new cloud-based models, or both revenue and cash flow may be at risk as you lowball pricing to maximize customer transitions and invest to pull the laggards along.

 

Medtech companies need to consider the customer transitions in product design and pricing strategy. Product design must work seamlessly with pricing such that value-added features can be turned on or off without creating undue risk to patients. Also, companies need to do research to understand the organizational tolerance for customer attrition to identify an optimal pricing model.