Will Commoditization & Vertical Consolidation Increase Hearing Aid Adoption Rates?



Author: Andre Marcoux, PhD, MBA, Martin Lees, MD, PhD, and Amyn M Amlani, PhD

Introduction
The consequences associated with untreated hearing sensitivity include psychological (e.g., reduced self-esteem, anger, depression, increased anxiety) and psychosocial (e.g., social withdrawal, socially inappropriate behavior or responses, lack of concentration) behaviors, in addition to reduced physical well-being and cognitive decline1,2. Despite these consequences, the overwhelming majority of individuals with decreased hearing sensitivity, globally, do not receive audiological services and augmentative technologies (e.g., hearing aids, assistive listening devices [ALDs]) that could improve quality of life. Reasons for this behavior are multiple, stemming, in part from the stigma of being perceived as old3, devaluing decreased hearing sensitivity in light of co-morbidities4, and a lack of intervention by primary-care providers 5. Concurrently, the hearing aid industry has adopted certain strategies towards commoditization and vertical integration, while the profession of audiology has also commoditized clinical services within the availability of its technologies. Together, vertical integration and commoditization are strategies designed to lower retail prices, an approach used in many industries to increase the demand of a product, service, or both. The purpose of this survey is to gain a better understanding of the consumer perspective towards commoditization and vertical integration in hearing healthcare (i.e., lower price), and whether the perception of reduced price could improve the adoption of audiological services and the uptake of hearing aids.

Commoditization
Commoditization is the process by which a product or service having economic value and distinguishable attributes is perceived as undifferentiated by the consumer6. From an economic standpoint, commoditization occurs when a product or service is sold on the basis of price, not brand or value, such as hearing aids7. While professional and service industries do not inherently possess the highest commoditization potential due to their high level of diversification, the commoditization potential of hearing healthcare is somewhat enhanced by such factors as the stigmas associated with hearing loss and hearing aid use, the use of non-standardized clinical practices and an archaic service-delivery model, the use of a small cohort of highly-qualified professionals, who are limited in providing economies of scale, and perhaps, most importantly, the perceived need by the consumer to purchase an augmentative object, to which the consumer has no loyalty or engagement6.
Figure 1. A representative demand function of the hearing healthcare market. The bold black line represents the equilibrium between price and quantity demanded, and D denotes the consumer’s sensitivity towards a product or service.


Over the past two decades, commoditization pressures have led to petitions by listeners experiencing hearing difficulties for the market to lower costs of hearing products and services8, which was expected, and is illustrated in Figure 1. Note the consumer’s sensitivity to price towards a product or service (i.e., demand function), denoted as D, indicate that at high prices (i.e., P1), a low quantity of units (i.e., Q2) will be demanded. Here, the consumer is not price sensitive because the product or service they are purchasing is unique. Conversely, at low prices (i.e., P2), a high quantity of units (i.e., Q2) will be demanded. At this point, the consumer is price sensitive because the product or service they are purchasing is not unique (i.e., commoditized). The bold black line represents the equilibrium between price and quantity demanded. These petitions are, in part, the catalyst for the recent recommendations by the President’s Council of Advisors on Science and Technology (PCAST) and, more recently, the National Academy of Sciences, Engineering, and Medicine (NAS; formerly the Institute of Medicine) to establish a new category of over-the-counter (OTC), wearable devices.

Hearing aid manufacturers, who represent the supply-side, have also sought to increase consumer demand through commoditization, by producing low-end hearing aids and OTC devices, as well as by increasing economies of scale by using alternative sales channels such as the Internet and Big-Box retail outlets. However, this model employed by manufacturers has failed to increase adoption rates9, 10. Conversely, models that incorporate a customer-centered business model are known to increase adoption rates, market share, and stock value11.

Figure 2. An illustration of supply-side demand, denoted as S, in a market where the manufacturer has direct contact to the end user through a retail distribution chain. D represents the demand function from Figure 1. See text for additional details.


Vertical Integration
By definition, vertical integration is the merger of two (or more) businesses that are at different stages in the supply chain12. To illustrate, consider a parent company that manufactures hearing aids, while also owning a retail distribution chain. This type of merger is known as forward (or downstream) integration, where the supply chain process has direct contact with the end user. As seen in Figure 2, the outcome of a forward merger in an oligopoly market with an inelastic demand—such as the hearing aid industry—in theory, lowers the retail price to the end user. This is seen as the yellow triangle positioned between the initial supply—labeled as S1—and supply stemming from the forward vertical integration, denoted as S2, for the inelastic demand curve (i.e., D). The reduction in S2, compared to S1, occurs because (1) vertical integration does not yield an improvement in cost-profit margin (i.e., gross profit expressed as a percentage), and (2) marginal cost (i.e., total cost to produce and sell one additional item) is decreased. Together, these variables decrease the need by the parent company to increase the wholesale markup on their product(s)13.
Purpose
The purpose of the current study was to assess the degree to which experienced hearing aid users demonstrated perceptions that were conducive to a commoditized and vertically-integrated hearing healthcare industry, and how these perceptions influenced their behavior towards audiological services and amplification technology.
Method
Participants
A 16-item survey, constructed by the first two authors, was distributed online to a random sample (n = 642) of participants—all of whom are consumers—belonging to the Canadian Hard of Hearing Association (CHHA) and the Justice Canada Wellness Group of Hard of Hearing Employees. The survey was distributed by the respective Directors of each association through weekly newsletters or in e-mail communications during the month of January 2016. In total, 61 participants completed the survey during the one-month period, representing a 9.5% participation rate.

Survey
The survey consisted of questions related to commoditization (i.e., questions 1 – 11) and vertical integration (i.e., questions 12 – 16). Eleven questions were inspired from a 44-item commoditization scale developed by Reimann and colleagues14 designed to elicit responses at the managerial level in the corporate environment. The commoditization portion of the survey assessed four dimensions: (a) homogeneity (i.e., product is interchangeable), (b) price sensitivity (i.e., demand for product), (c) switching cost (i.e., perceived risk when changing from one supplier to another), and (d) industry stability (i.e., consistent competitive structure). The final 5 items of the survey pertained to vertical integration, and were developed by the first two authors. For each item, respondents provided categorical responses on a 5-point scale ranging from (1) disagree to (5) agree. Response ratings closer to 1 indicated a low commodity or vertical integration potential, while responses closer to 5 indicated a high commodity or vertical integration potential. Participants were required to answer all 16 questions in order for their responses to be included in the analysis. For each question, responses were tabulated and expressed as a percentage. The data was analyzed descriptively as a means to identify possible market trends. Table 1 highlights whether the majority of responses represent low commodity/vertical integration potential or high commodity/vertical integration potential.
Table 1. Representation of the majority of responses for each survey question indicating low, neutral, or high for commodity and vertical integration potential within the hearing aid market. See text for details.
Question Low
(Majority response closer to 1)
Neutral
(Majority response closer to 3)
High
(Majority response closer to 5)
Commoditization
1 X
2 X
3 X
4 X
5 X
6 X
7 X
8 X
9 X
10 X
11 X
Vertical Integration
12 X
13 X
14 X
15 X
16 X
Results and Discussion
Commoditization
A description of the findings from the 11 questions that addressed the four dimensions of commoditization (i.e., product/service, homogeneity, price sensitivity, switching cost) are reported below.

Product homogeneity: Four items, out of a possible 11, pertained to the consumers’ perception towards the availability of products and the provision of services in the hearing healthcare industry.

The first item queried respondents’ perceptions towards similarities in products provided among hearing aid manufacturers. Findings revealed that only 25% of respondents (n = 15) reported homogeneity across products (i.e., responses of a 4 or 5, indicating “agree”), 55% (n = 34) reported differences among products (i.e., responses of a 1 or 2, indicating “disagree”), and the remaining 20% of respondents (n =12) were neutral (i.e., responses of 3). This result suggests that respondents perceive product differences within the hearing aid industry. This finding was not unexpected and is supported by evidence that consumers shop around—either in person or online—prior to purchasing their hearing aids 7,15. However, the reader should be cautioned when interpreting this finding, especially given that consumers are rarely in a position to compare differences in real-world performance across hearing aids. That is, a typical clinical practice often presents the consumer with printed feature specifications from various makes and models, and then asks the consumer to select a device for a trial period that meets their real-world expectations. More expensive hearing aids are normally touted as having the potential of delivering superior benefit, but research has shown that is not the case for every listener16, 17.

In Question 2, respondents were asked whether the benefit they receive from amplification technology is independent of the manufacturer and model (i.e., brand). Nearly two-thirds of respondents (i.e., 64%, n = 39) indicated that benefit they received was dependent on the product they selected (i.e., responses of a 4 or 5, indicating “disagree”), while 28% (n = 17) perceived the same benefit independent of manufacturer and model (i.e., responses of a 1 or 2, indicating “agree”). A mere 8% (n = 5) were neutral (i.e., respond of a 3). The outcome of this question suggests that the experienced hearing aid users in our sample are brand sensitive. This finding is consistent with the theory of self-concept, where brand image portrays the consumer’s self-perception about his/her capabilities, characteristics, shortcomings, appearance, and personality in different social contexts18, 19.

Question 3 queried respondents’ perceptions that across all clinics, practitioner’s knowledge and skill level were similar as it related to fitting hearing aids. Nearly eight out of 10 respondents (77%, n=47) perceived knowledge and skillset of fitting amplification technology varied across practitioners, while a mere 11.5% (n = 7) perceived these characteristics to be consistent among providers. This finding was also expected, given differences among practitioners with respect to clinical experience, education, skillset, and knowledge base. Further, with 77% of those surveyed indicating a lack of homogeneity in professionals, there appears to be low commoditization potential for hearing healthcare as so long as a professional element is required to achieve an optimal hearing aid fitting.

The final question for this dimension evaluated whether the benefit received from amplification depended on the practitioner. Results revealed that 87% of respondents (n = 53) agreed that the benefit they received from hearing aid technology depended on the practitioner (i.e., responses of 4 and 5), while 12% (n = 7) disagreed (i.e., responses of 1 and 2) and only 1% (n = 1) remained neutral (i.e., response of 3) While we did not assess the associations between these questions, one could argue that the selection of a knowledgeable and skilled professional could be the most important characteristic in relation to the overall benefit obtained from the provision of hearing aids.

Price sensitivity: Two questions were provided to respondents to gain their perspective on the dimension of price sensitivity.

On the dimension of price as the primary catalyst to product adoption (i.e., question 5), 53% (n = 32) of respondents indicated that price was not the primary factor for adopting amplification (i.e., responses of 1 and 2), while 34% (n = 21) indicated they relied on price as a primary factor (i.e., responses of 4 and 5). Eight additional respondents (i.e., 13%) provided neutral responses (i.e., response of 3) on the topic of hearing aid price. Respondents were queried, then, whether the practice that was selected was influenced by their price perception. Here, 66% (n=40) of respondents indicated that they did not rely on price when choosing a clinic (i.e., responses of 1 and 2), while 28% (n = 17) were influenced by price when selecting a clinic to obtain their care (i.e., responses of 4 and 5).

Together, these findings revealed that respondents, for the most part, were neither influenced to adopt the product nor the clinic based on price. This finding supports the notion that the demand for clinical services and hearing aid technology is price insensitive,20,21 given the present market structure.

Switching cost: We obtained responses on two questions related to switching costs, or the perceived risk when changing from one supplier to another. Overall, findings support the consumer’s view that audiological care is a high-risk, low-reward investment7, with less than half of consumers seeking the services of their previous provider3. Amlani22 proposes that re-adoption can be increased by earning consumer loyalty with a strong underlying relationship based on the adherence to strong clinic standards.

Specifically, question 7 queried respondents’ opinions on the notion of a seamless transition of care from one clinic to another. Seventy-one percent (n = 43) reported complexities when moving from one clinic to another (i.e., responses of 4 or 5), whereas only 13% (n = 8) perceived a seamless transition of care (i.e., responses of 1 or 2). The remaining 16% (n = 10) of respondents were neutral (i.e., responses of 3) on their perception of switching clinics.

When respondents considered whether risk was involved in transitioning their care from one clinic to another in Question 8, similar results emerged; 71% (n=43) indicated a perceived risk (i.e., responses of 4 or 5), only 13% (n=8) perceived little or no risk (i.e., responses of 1 or 2), and 16% (n=10) of respondents were neutral in their response (i.e., response of 3).

Industry stability: To explore industry stability, respondents were first asked, in Question 9, whether their preferences would remain the same when purchasing hearing aids over time. Results revealed that 49% (n = 30) indicated that their preferences would not change over time (i.e., responses of 4 or 5), while 38% (n = 23) reported a change in their purchasing behavior (i.e., responses of 1 or 2).

Respondents were also asked to respond to a statement, in Question 10, regarding the stability of the service delivery model of hearing aid fitting. Most respondents (62%, n=38) disagreed with the notion that hearing aids would continue to be fit the same way over time (i.e., responses of 1 or 2). Another 10% (n=6) were neutral to this statement (i.e., response of 3), while the remaining 28% (n=19) were in agreement with the notion of stability in regards to the provisioning of hearing aids (i.e., responses of 4 or 5). Of those in disagreement, 60% (n=23) were in complete disagreement (i.e., response of 1), while the remaining 40% (n=15) indicated partial disagreement (i.e., response of 2). Of those in agreement, only 29% (n=5) were in complete agreement (i.e., response of 5), while the other 71% (n=12) showed partial agreement (i.e., response of 4).

Lastly, respondents were asked whether hearing aid technology was slow to change over time. The majority of respondents (71%, n=43) disagreed with this statement (i.e., responses of 1 or 2), thus suggesting that the average experienced hearing aid user was mindful that hearing aid technology evolved at a faster-than-average pace. Six percent of respondents (n = 4) were neutral (i.e., response of 3) to this statement, while 23% (n = 14) were in agreement (i.e., responses of 5 or 5).

Overall, the response trends indicate a lack of current industry stability, which is generally not conducive for commoditization to occur.

Vertical Integration
In this subsection, we report respondents’ perceptions to the final five questions of the survey that addressed vertical integration within the hearing aid market.

Question 12 probed whether respondents’ thought hearing aid dispensaries were owned by the professionals who worked there. Results were mixed, revealing that 38% (n=23) of respondents agreed with this statement (i.e., responses of 4 or 5) another 38% (n = 23) disagreed (i.e., responses of 1 or 2), and 25% (n = 15) were unsure (i.e., response of 3).

Question 13 asked whether respondents agreed that hearing aid manufacturers should be allowed to retail products and services from hearing aid dispensaries they own. Almost half of respondents disagreed with this notion (49%, n=30, i.e., responses of 1 or 2), 28% (n=17) were in agreement (i.e., responses of 4 or 5), and 23% (n=14) were neutral (i.e., response of 3). Of those who disagreed, 60% (n=18) were in complete disagreement (i.e., response of 1), while the other 40% (n=12) were in partial disagreement (i.e., response of 2). Of those who agree, results were distributed almost evenly between those in complete agreement (53%, n = 9, response of 5) and those who agreed somewhat (47%, n = 8, response of 4).

When respondents were probed as to whether financial incentives should be disclosed to consumers during the provision of hearing aids, as queried in Question 14, the overwhelming majority agreed that disclosure should be provided (93%, n=57, i.e., response of 4 or 5). Only 5% of respondents (n=3) were in disagreement (i.e., responses of 1 or 3) and another 2% (n=2) were neutral (i.e., response of 3) to this statement.

In Question 15, nearly one-half of respondents disagreed (48%, n=29, i.e., responses of 1 or 2) with the notion that professionals working in dispensaries owned by hearing aid manufacturers would provide a similar or superior level of skill and knowledge as those working in professionally-owned clinics. In comparison, only 28% (n = 17) of respondents agreed (i.e., responses of 4 or 5) and 24% (n = 15) were neutral (i.e., response of 3) to this statement. The final question on vertical integration queried whether respondents were concerned with the ownership of the dispensary, while receiving hearing aids and professional services at a fair price. Thirty-nine respondents (64%) were unconcerned (i.e., responses of 1 or 2), while 17 respondents (28%) felt concerned (i.e., responses of 4 or 5). Only 5 respondents (8%) reported no response ((i.e., response 3) to this question.

The response trends for vertical integration suggest that a sizeable percentage of respondents were unaware of the current vertical consolidation within the hearing aid industry. This is likely due to a lack of disclosure. That is, the data reflect that consumers who obtain services from traditional clinics are unaware that consolidated clinics exist, or that consumers as a whole are not provided with the necessary information or disclosure on the ownership of clinics. One could also argue that a large percentage of listeners seeking products and services in the industry for the first time are also oblivious to this market structure. Interestingly, the majority of respondents were opposed to vertical integration of hearing healthcare clinics, and suggested that clinicians working in these clinics would likely have less knowledge and skill than those working in traditional clinics. As expected, respondents became indifferent of the ownership of the clinic once they were assured that would receive the appropriate products and services for the right price. This finding supports the ideology that an adherence to strong clinic standards is a primary factor to increasing satisfaction, adoption, and re-adoption in this market.

Conclusion
Studies on commoditization of industries are in their embryonic stages. As such, the findings of this study should be interpreted within the context of its sampling framework and response rate. Nevertheless, these same findings may provide early indications that the hearing healthcare industry may only provide a partial commoditization potential at best. Such findings are important given the documented risk to individuals with uncorrected or poorly-corrected hearing loss, which may be exacerbated as a function of a devaluation and commoditization of innovative products and related professional services. While lower priced items should be available for price-sensitive consumers, the proverbial “race to the bottom” of commoditization may not be mitigated using the following strategies: 1) keeping the price of disruptive innovation and professional services above a critical level, and 2) creating real value for the consumer by addressing requirements, and 3) addressing the low adoption rate more holistically by increasing the perceived need for products and services and reducing the stigma of hearing loss with innovative solutions. In closing, the current research project has, proverbially, only scratched the surface of the commoditization issue within hearing healthcare. Further studies, as well as a framework for the measurement of commoditization, is strongly recommended, and should become a vital aspect of the strategic plan and risk analysis of any corporation or industry within hearing healthcare.    
Andre Marcoux, PhD, MBA and Martin Lees, MD, PhD are affiliated with Athabasca University, Ottawa, Ontario, Canada.

Amyn M Amlani, PhD, is affiliated with the University of Arkansas for Medical Sciences/University of Arkansas at Little Rock.


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