Tuesday, May 31, 2016

You Should Never Say "What Customers Need to Understand is..."

I always cringe when product people utter the words “What customers need to understand is…”.  To me it shows a fundamental misunderstanding of how to serve a market.  I saw this sentiment reported in a recent New York Times article on the hearing aid market which explained that the pricing model is essentially a forced bundle where two thirds of the price was for service, including hearing evaluation, counseling and adjustments over the life of the product.  This approach has put a pair of hearing aids at or about $5,000.
The manufacturers believe, and perhaps rightly so, that diagnosing and treating hearing loss are too complex for consumers to do using consumer devices, without the aid of a professional and therefore justifies the forced bundle.  However, in this age of self-service people will search out their own solutions.
By assuming a status quo approach with forced bundles and captive customers, the industry is underestimating the strategic forces that are encroaching on their niche:
  • Active Government Intervention: An October 2015 report by the President’s Council of Advisors on Science and Technology recommended federal actions to “simultaneously decrease the cost of hearing aids, spur technology innovation and increase consumer choice options” including the ability to buy a basic hearing aid over the counter.

  • Underserved Market Invites Competition: The opportunity in hearing aids appears particularly striking. Nearly 30 million Americans, including two-thirds of those over 70, are said to have hearing loss. But only 15 to 30 percent of those who could benefit from hearing aids use them.

  • High Industry Concentration Invites Scrutiny: More than 90 percent of the business is controlled by six large manufacturers: Sonova, Sivantos, William Demant, GN Store Nord, Widex and the lone American company, Starkey Hearing Technologies.

  • Availability of Substitutes: The consumer electronics industry is encroaching on the hearing aid business, offering products that are far less expensive and available without the involvement of audiologists or other professionals. That is forcing a re-examination of the entire system for providing hearing aids, which critics say is too costly and cumbersome, hindering access to devices vital for the growing legions of older Americans.

  • Price Pressure: The Veterans’ Administration has been able to purchase hearing aids at the price of $400. This suggests some willingness to negotiate pricing.

There are a lot of dollars at stake here.  About 3.1 million hearing aids were sold in the United States in 2014, with a wholesale value of $1.7 billion and a retail value of $5.2 billion, according to estimates by Lisa Bedell Clive, an analyst at Sanford C. Bernstein & Company.
As product managers we need to be thoughtful in how we manipulate the levers of product, price, promotion and placement.  It seems this industry has left price and placement on autopilot by relying on a bundle and a network of sales agents.  It is also incumbent on anyone in this role to be mindful of what is happening in the business environment.  This industry is facing new competition, price pressure and government intervention.  Fortunately there seems to be lots of market share available for those clever enough to seek it out and not tell customers what they need to understand.