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July 13, 2011
Understanding True Net Price
By: Tony Romito

TonyRomito

For the vast majority of manufacturers in the medical technology industry, pricing has historically been a sales instrument used to drive access to, or acquisition of one’s products. As a result, contract “wins” were often considered a direct indicator of business growth. However, the rising proficiency of revenue management explores beneath the surface of this long-standing assumption to answer a very valuable, yet elusive question – what is the true net price we have extended to the customer? Or said another way, how profitable is the business we’ve just “won”?

Unlocking this mystery involves several key capabilities:

  • Having a home – to consistently understand all the customer discounts being given, you can’t store pricing deals in multiple systems and certainly not in filing cabinets. It is important to have visibility into all the pricing arrangements that are in market, in one home. Sounds simple, but many med-tech companies lack a single repository with the necessary information. Think of this as the basic foundation upon which any quality pricing analysis can be built upon. Without this you have leaks and cracks, and the truth about net price will continue to elude you.

  • Timing is everything – one of the biggest challenges manufacturers struggle with is being able to capture pricing impacts that happen over time, namely, rebates. For example, if we give 10% discount on a purchase today and 2% rebate in 12 months, when do we recognize a 12% total discount? Particularly if there are multiple agreements. There a several viable approaches to address this. For example, it can be based on accrued actuals, forecasted discounts, or trended historical data. But regardless, there must be a consistent method for capturing aggregate discounts at any point in time.

  • Make all the hops – the other fatal flaw in many pricing decisions is looking at discount to the given customer in isolation. It is critical to connect the dots, not only across other pricing incentives for that customer, but also across customers for that given product. For example, if you have a distributor rebate, a GPO admin fee, and a discount price to the end customer, the true net price must account for all of these components. Otherwise, we will be fooled into thinking we’re getting a much higher margin on the deal, than is actually being realized. Depending on the nature of your products and contracted customer segments, this can be complex. The key is to have the revenue management tools which can identify transactions that flow across contracts, to capture the net effect of making all the hops.

So is all of this academic, or is it genuinely fundamental to your business?

Some manufacturers have seen margin erosion or profitability gaps of 20-40+% resulting from a lack of these types of insights and revenue management capabilities. In that light, more and more of the medical technology industry is coming to realize just how much that true net price matters.

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