Pricing in Hearing Healthcare: Which Race are You Running?



Author: Amyn M. Amlani, Ph.D.

Part 1: Market Segmentation
In hearing healthcare, price continues to be a hot-button topic of discussion among consumers, providers, advocacy groups, legislators, professional organizations, and manufacturers of consumer electronic products and traditional hearing aids. The fundamental issue is that consumers and their supporters believe the costs associated with and the value received in treating impaired hearing are misaligned. This disparity is one reason that impaired listeners do not adopt or delay adopting amplification technology, despite its positive effects on improved quality of life. However, rather than focusing its value-proposition of enhanced service delivery, the supply-side of the market is hedging a bet that reduced retail prices will entice a marked uptick in impaired listeners purchasing amplification technology.

Don’t believe me? Then consider, at a minimum, the continued acquisition of independent practices by hearing aid manufacturers to create large-scale vertically integrated retail, competitive outlets as a means to compete on price with large-scale Big Box retailers. Also, consider the forthcoming direct-to-consumer (DTC) supply of over-the-counter (OTC) devices that will be available directly—and at lower retail prices than most traditional hearing aids—to impaired listeners with milder hearing losses without the need to interact with a licensed professional. These examples of market competition based on reduced price is known as the “Race to the Bottom.”

The examples of competition, based on price, support the evolving transition of hearing healthcare from a predominately provider-based market segment—predicated on professional interaction that, in theory, substantiated a high retail cost—to a multi-segmented, retail model within the healthcare space. The purpose of this blog is to share the developing retail segmentation occurring in the market. In Parts 2 and 3 on this topic, the reader will be informed on how profitability is affected in these segments.
Market Segmentation in Hearing Healthcare
Figure 1 displays the pyramid-shaped segmentation taking form in the hearing healthcare space.
Figure 1. Market Segmentation Occurring in Hearing Healthcare
Demographic Segment
The base of the market, or the Demographic Segment, will consist primarily of DTC products; namely, OTCs and PSAPs (i.e., personal sound amplification products). Here, products are marketed and distributed directly to consumers based primarily on price (e.g., < $1000) and degree of hearing difficulty (i.e., mild-to-moderate), with little to no professional support. A priori estimates indicate that a large number of individuals with mild-to-moderate hearing difficulty will resort to these products in lieu of traditional hearing aids. For practice’s that engage in the dispensing of DTC products, profitability in this segmentation will be minimal, at best, because of the practice’s inability to capitalize on retail markups associated with the product itself. A practice’s opportunity to supplement or recoup profits in this segment is available through itemized professional service offerings, such as verification, validation, and communication training.
Behavioral Segment
The middle and largest segment of the market, as seen in Figure 1, is the Behavioral Segment. This segment consists of traditional products and associated services delivered to listeners mainly through retail outlets (e.g., Big Box, vertical integrated chains). This segment is considered “behavioral” given the average listener’s purchasing behaviors related to product and service acquisition that stems primarily on price. The Costco Model is considered the gold standard in this market segment.

The behavioral segment appears to be steadily growing, as some practices in the independent channel have elected to delve into reducing their cost of goods (COGS) in order to lower retail prices. The ability for an independent practice to offer products and services at lower retail prices is often viewed positively, as practice’s feel the need to remain competitive with Big Box and manufacturer-owned retail chains. This perception is not without fault. Specifically, participation in this segment—or in the demographic segment—is a threat to a practice’s brand and its profit. Competing on price creates a brand image associated with terms such as “discounted,” “bargain,” “cheap”, and “economical.” None of these terms is correlated with the perceived value expected in a doctoring profession.

As we’ll address later in this article, practices that participate in reducing retail pricing could be limiting their profit opportunities and, perhaps, more importantly, making themselves vulnerable to being cannibalized by the demographic segment. (Note: A similar outcome is expected for those practices whose revenue stream is heavily dependent on third-party reimbursement.) Simply stated, being cheap and being good do not go together, and reversing this perception is a monumental task.

(Note: The reader should note that the commentary in this article is not directed to practices that negotiate lower COGs and offer products and services at non-reduced retail prices, while providing the highest level of patient care.)
Value-Based Segment
At the top of the pyramid resides the independent channel (Figure 1). Note that this segment—called the Value-based Segment—is the smallest of the three discussed and has seen a considerable decline in growth over years due to manufacturer acquisition (i.e., vertical integration) of independent practices and a declining pipeline of graduates interested in becoming independent practice owners. While this segment is by no means immune from being cannibalized, it is the segment in the market that is considered to provide the greatest value to the consumer with respect to service delivery. As such, most practices in the value-based segment do not attempt to compete on price. In fact, value-based practices tend to command higher-than-average retail prices for amplification technology and associated professional services. In many cases, these practices also offer expanded diagnostic and treatment services in areas such as balance, tinnitus, and central auditory processing.

The market for hearing healthcare is evolving into a multi-segmented, retail-based market. The evolving market is predicated on increasing affordability and access through a reduction in retail price (i.e., the base and behavioral segments in Figure 1), with the expectation that a prolific number of impaired listeners will utilize amplification products. Practices that intend to compete on price, instead of service delivery, are enrolling themselves in the race to the bottom. This race is fraught with risk associated with a diminished brand and an increased likelihood of reduced or cannibalized profit opportunities.
Part 2: Consequences of Reduced Retail Pricing
In this section, we will highlight how practices that participate in reducing retail pricing run the risk of decreased profit opportunities by means of market and brand cannibalization. First, let’s examine the concept of market cannibalization.
What is Market Cannibalization?
Market cannibalization is the reduction in sales volume, sales revenue, or market share caused primarily by:
  1. the introduction of a new product by the same producer;
  2. lowering/discounting prices of a product; and
  3. a saturation of the same retail companies in close proximity.
Examples of (1) and (3) above, respectively, include Apple’s introduction of the iPad and its negative affect on the sales of the MacBook and Walmart’s decision to close profitable stores due to direct competition with its own stores.
Economics of Lowering/Discounting Price
In hearing healthcare, there is a notion that reducing retail price of a product results in an uptake in adoption that yields to an increase in gross revenue. To quantify the effect of reducing retail price, we utilize the economic principle of law of demand.

Let’s leave the world of audiology for a moment and explore the law of demand for pencils. Below is an example of a retail outlet that sells pencils.
Table 1. Retail outlet data for fiscal year 2018. Key: Q = quantity sold; P = price, and R = gross revenue (i.e., Q x P).
Fiscal Year 2018
Q (Unit)s P ($) Demand R ($)
90 0.25 22.50
65 0.50 -0.48 32.50
50 0.75 -0.65 37.50
30 1.00 -1.75 30.00
Total 235 122.50


Table 1 displays that this outlet sold four different levels of pencils at varying prices (i.e., P), totaling 235 units (i.e., Q) for fiscal year 2018, yielding a gross revenue (i.e., R) of $122.50. This demand function is graphed in Figure 2.
Figure 2. Demand function for data shown in Table 1.


Prior to fiscal year 2019, the owner of retail outlet elected to reduce prices by $0.05 for all four pencil levels. The owner’s notion was that reducing prices would yield an increase in units sold and, in the end, an increase in gross revenue. At a minimum, the owner hypothesized that the market would increase organically by 3%, or 7 additional units (i.e., 235 x 3%), to 242 units. What the owner had failed to realize was that the market yielded an inelastic demand. Results for fiscal year 2019 are shown in Table 2 and Figure 3.
Table 2. Retail outlet data for fiscal year 2019. Key: Q = quantity sold; P = price, and R = gross revenue (i.e., Q x P).
Fiscal Year 2019
Q (Unit)s P ($) Demand R ($)
99 0.20 19.80
72 0.45 -0.41 32.40
47 0.70 -0.97 32.90
24 0.95 -2.14 22.80
Total 242 107.90
Figure 3. Demand function for data shown in Table 2.


(Note: The hearing aid industry has an inelastic demand. To that end, an inelastic demand indicates that lowering price will not result in an appreciable increase in the number of units sold and increasing prices will not result in a marked decrease in the number of units sold. In addition, increasing total revenue in an elastic market requires reducing price and increasing total revenue in an inelastic market dictates increasing price.)

When comparing the data between fiscal years 2018 and 2019, note that the total number of units increased from 235 to 242. The data further suggest that in fiscal year 2019, 16 more units (i.e., 171 units compared to 155 units) were sold than in fiscal year 2018 for the two lowest price points. For the two highest price points, a decrease of 9 units (i.e., 71 units compared to 80 units) was seen between fiscal years 2019 and 2018.

Despite the increase in units sold for fiscal year 2019, total gross revenue yielded $14.60 less than the total gross revenue in fiscal year 2018. Stated differently, this retail outlet yielded an average transaction of $0.52 per unit sold (i.e., $122.50/235 units) in fiscal year 2018 compared to an average transaction of $0.45 per unit sold (i.e., $107.90/242 units) in fiscal year 2019. In this example, the practice cannibalized its own gross revenue by reducing prices. A similar effect on total gross revenue is often seen in hearing healthcare when practices attempt to provide the market with reduced hearing aid prices.
Effect of Reduced Retail Pricing on Purchase Intent
Price-quality inference theory1,2 predicts that consumers often perceive prices as an indicator of quality. That is, consumers use price as a perceptual compass of quality. When a retail outlet lowers its price, the consumer perceives that the product or service being purchased has a diminished quality. Simply stated, quality perceptions influence purchasing intent more so than price.3,4 At the same time, higher quality also means that consumer demands an exceptional experience during the purchase process.
Effect of Reduced Retail Pricing on the Multi-Segmented Market in Hearing Healthcare
Part 1 of this article revealed that the market was transitioning from a provider-based market segment to a multi-segmented retail model, the latter of which is shown in Figure 1. Independent practices in the value-based segment who elect to compete on reduced retail price not only diminish their brand, but often transition from the top of the pyramid to the middle and bottom where they are electing to compete with retailers in the Big Box and vertical integration channels, as well as with the direct-to-consumer retailers, respectively. For those independent practices who participate in the reducing pricing game, their downward transition—or race to the bottom—creates self-induced competition against corporations with greater brand awareness, and perceptually unlimited resources and marketing budgets.

So far, the reader was made aware of the impact of reducing price on (1) total revenue, (2) consumer purchase intent, and (3) the downward transition within the segmented market pyramid. For practices to sustain their place in the market—given the predicted compression of traditional devices as the direct-to-consumer market evolves—it would be wise to stay in their lane (i.e., operate in the value-based segment) instead of playing “chicken” with retailers in the behavioral and demographic segments.

Next, in Part 3, we will evaluate the impact of third-party reimbursement on this market pyramid and its effect on the race to the bottom.
Part 3: Implications of Health Insurance on Consumer Demand
In Part 3, we address the principles of health insurance and its effect on consumer demand, and then apply these principles to hearing healthcare.
Why Do Consumers Purchase Health Insurance?
Fundamentally, consumers purchase economic goods (i.e., physical object or service) to satisfy a need. Health, however, does not fit the definition of an economic good; it is neither a physical object nor a service. Instead, health is a condition or state. Consumers, therefore, demand other economic goods or services—for instance, pharmaceuticals and medical care—to meet their desired health state. Stated differently, consumers do not value medical care directly; instead, they value medical care because it improves (or maintains) their health and quality of life.

To achieve healthy living, many consumers acquire health insurance. Health insurance is any program—public or private—that provides protection to a consumer equally whether healthy or sick. The demand for health insurance is predicated on: (1) future health is uncertain (i.e., probability of sickness), (2) magnitude of potential economic loss, and (3) risk aversion. These points are described below.

Presume that consumers were able to foresee their entire health future (i.e., absence of uncertainty). They could financial plan accordingly to cover the costs of future medical expenses (i.e., potential economic loss). Because knowledge of the future is known, uncertainty is an essential consideration (i.e., planning for the future) in the demand for health insurance.

When the individual becomes sick, insurance is utilized to lessen future uncertainty (i.e., the unanticipated expenses associated with medical services and income loss). That is, insurance engenders a smaller gap in terms of risk. In the private and public markets, the degree to which a consumer perceives risk will determine whether they enroll in insurance and supplemental insurance, respectively, and which medical protections to acquire. Consumers who are risk averse (i.e., prefer certainty to avoid risk) are more likely to purchase insurance and pay a higher premium for increased protection. Consumers who are risk seeking (i.e., willing to assume risk) and risk neutral (i.e., insensitive to risk) are less likely to purchase insurance, and if they do, they purchase insurance with lower premiums with a lower degree of protection.
Health Insurance and Demand for Hearing Healthcare
In today’s hearing healthcare market, insurance programs—both private and public—often limit the provider’s ability to render diagnostic and treatment options to the consumer. The limited options can include non-coverage of test procedures, non-coverage or limited coverage of amplification technology, and limited follow-up visits. Research suggests that limiting demand-side options increases the inelastic demand, which constrains the average individual from moving forward with improving (or maintaining) their health and quality of life.5 From the supplier-side, limited insurance coverage prohibits the provider from making the most of their scope of practice, which can also influence negatively the practice’s brand and revenue stream.

With respect to the occurring market segmentation in hearing healthcare (see Figure 1), the following assumptions should be considered with respect to health insurance and demand:
  1. Consumers who lack hearing health protection and who are risk averse will:
    1. Strongly consider options in all three tiers, with purchase intent based primarily on value and not price.
  2. Consumers who are enrolled in health insurance that includes hearing health protection and who are risk averse will:
    1. Strongly consider options in the value-based segment, with purchase intent based primarily on value and not price. If the perceived value displayed by the provider does not meet the expectations of the consumer, interest could potentially shift downward to the behavioral and demographic segments. Here, the intention is to improve the state of well-being, even at the cost of utilizing personal resources.
  3. Consumers who lack hearing health protection and who are risk seeking or risk neutral will:
    1. Consider options in the demographic segment, followed by the behavioral and value-based segments. For this consumer type, decisions are based primarily on price as opposed to value.
  4. Consumers who are enrolled in health insurance that includes hearing health protection and who are risk seeking or risk neutral will:
    1. Consider options in the value-based segment, with purchase intent based primarily on price and not value. If the criterion of price is not met, the likelihood of expending personal resources is small. This consumer type is the least likely to move forward with improving their hearing healthcare.
Use of a Clinical Application to Determine Risk
In order to improve patient flow and conversion rates in hearing healthcare, providers should become keenly aware of consumer demand towards the willingness to accept health-related risk. To that end, Amlani 6 provided readers with a resource that quantified risk preference as it related to purchase intent. As the landscape in audiology continues to evolve, and as the number of options for treatment of hearing difficulties expands, having such a resource will aid the provider in managing consumer motivation. This resource can also be used by the provider to self-evaluate and reflect on whether their demeanor is impacting consumer demand.

Pricing in hearing healthcare in a complex matter with several variables. The values and needs of the business must be balanced with the demands and behaviors of helping seeking individuals. This article provides data-driven insights to help audiologists and business managers develop their own effective pricing strategy.    
Amyn M. Amlani, Ph.D., is Director of New Practice Development at Audigy, a data-driven, management group for audiology and hearing care, ENT group, and allergy practices. Prior to this position, Dr. Amlani was an academician for 18 years, where he educated future Doctor of Audiology professionals and directed a research laboratory funded primarily from extramural grants and corporate sponsors.
References
1 Olson JC. (1977). Price as an informational cue: Effects on product evaluation. In AG Woodside, JN Sheth, PD Bennett (eds), Consumer and industrial buying behavior (pp. 267-286). New York: North Holland.

2 Monroe KB, Dobbs WB. (1988). A research program for establishing the validity of the price-quality relationship. Academy of Marketing Science, 16(1): 151-168.

3 Tellis G, Gaeth GJ (1990). Best value, price-seeking, and price aversion: The impact of information and learning on consumer choices. Journal of Marketing, 54(April): 34-45.

4 Shirai M. (2015). Impact of “high quality, low price” appeal on consumer evaluations. Journal of Promotion Management, 21(6): 776-797.

5 Pendzialek JB, Simic D, Stock S. (2016). Differences in price elasticities of demand for health insurance: A systematic review. European Journal of Economics, 17 (1):5-21.

6 Amlani, A (2019) Utilizing risk preference to quantify patient purchase intent of audiological services and technology. https://hearinghealthmatters.org/hearingeconomics/2019/risk-preference-patient-purchase-intent-audiology/

The article was originally published as a 3-part blog at Hearing Health & Technology Matters and is reprinted by permission.