Pricing is among the most important concerns for the longevity and sustainability of an innovation and the brand behind it. And, let’s face it: bringing a healthcare innovation to market ain’t cheap. This may be especially true for radical innovations that disrupt the status quo, which brings about a new set of considerations for innovators and customers alike.
There’s a delicate balance between finding a price that satisfies consumers while still covering costs for innovators, all while bringing in that coveted profit margin that companies need in order to thrive and expand into the marketplace.
Considerations for Pricing an Innovation
When you look at the pricing strategy of more established products and services, you’ll find that they’re often decided based on issues like costs, customer value, and competition in the marketplace. However, you’ll find that innovations are often priced with launch goals in mind. Considerations like positioning and differentiation from the competition become increasingly important.
In fact, research from The Journal of Product Innovation Management shows that service and production companies are most heavily influenced by their firm’s objectives as well as product and market conditions when they’re deciding between a value-based, competition-based, or cost-based pricing strategy.
On top of this, innovators need to consider other issues like whether they’ll go direct-to-consumer or take advantage of certain reimbursement models offered by the Centers for Medicare and Medicaid Services (CMS).
How Funding Impacts Pricing Decisions
It’s rare for an innovation to be completely bootstrapped from the pockets of the innovators (did we mention it ain’t cheap?). High costs of research and development mean that most companies must secure funding from an outside source(s), which might include:
- Venture capitalists
- “Angel investors”
- Private and federal loans and grants
- Small business development centers
- Third party innovation contests
- Crowdfunding on websites like Kickstarter
The terms of your funding will likely have a substantial impact on your pricing strategy. For example, if you’ve received a loan that’s building interest with each passing day, you’re under much more pressure to recover your development costs than an innovator who was funded through a grant, contest prize, or donations.
This brings us to our next point: choosing the right pricing model for your cost recovery needs, while still maximizing your likelihood of adoption from your key audiences.
Pricing Models: Skimming vs. Penetrating
Similarly to distributing an innovation, studies suggest that pricing also has a smaller impact on early adopters than it has on the mainstream market. This is likely due to the varying goals and interests of each type of group.
For this reason, many high-tech innovators with little or no competition may choose to adopt a “skimming” pricing strategy. Conversely, innovators looking to gain market share among competitors may seek a “penetrating” pricing strategy.
In a skimming strategy, the price of an innovation is higher at the initial launch. Within a year or so, as the innovation diffuses into the mainstream market, the price is then lowered to accommodate the more sensitive pricing concerns of the mainstream audience. This strategy earns innovators a high profit margin to recover development costs quickly.
When innovators have more competition in the marketplace, a penetrating strategy may be more effective. A penetrating strategy is virtually the opposite of skimming: the pricing is initially lower and is then increased as the innovation gains footing in the marketplace. This strategy provides more incentive for consumers to opt for this innovation in lieu of others.
Price Can Hinder Diffusion
It’s important to note that pricing can play a detrimental role in how well the product becomes integrated into the market. In many cases, brands that begin with a skimming strategy find that they haven’t met their revenue goals. To counter this, the price remains high instead of being dropped as originally planned.
However, this can hurt the brand in a roundabout way. Keeping higher costs will often continue to limit diffusion of the innovation into the mainstream market. As a result, the revenue and diffusion goals may still be left unmet. So, when adjusting pricing strategies, be sure to consider a careful analysis of your mainstream market and projections for how your pricing will perform.
Ensure Success with a Commercialization Expert
Are you unsure of which pricing strategies or price points you should set for your innovation’s introduction to the market? If this is the case, we’ve got answers and we’re glad to help.
The team at Legacy DNA has been in the healthcare marketing industry for more than a decade. We were the first agency to help healthcare companies differentiate value-based from volume-based healthcare, and we have an intricate knowledge of what it takes for new innovations to not only survive but thrive in today’s fiercely competitive environment.
To learn more about our expertise in the commercialization of innovation (CoI) process, download our free whitepaper, “10 Steps to Healthcare Technology Innovation Success: Commercialization Strategies to Reach Adoption, Diffusion, and Market Acceptance.”