Telemedicine Pricing Strategy and Distribution Channels

Introduction: Pricing Dynamics in an Emerging Industry

The pricing model for telemedicine has yet to be standardized, as the industry is only beginning to burgeon. As a result, many competitors use various pricing models that depend heavily on their individual business strategies. For startups with large amounts of cash and financial backing, many are willing to accept much lower profits in order to generate loyal and entrenched followings. Many technology-based companies such as Amazon and Microsoft followed this strategy during their startup phases. Amazon, for example, generated substantial losses for a majority of its existence as it worked to build a broad customer base while expanding its product offerings. Microsoft used the same tactic to become the dominant word-processing software provider. Once it achieved dominance, the company was then able to charge higher prices and add additional services.

Pricing strategies for startup telemedicine organizations appear to employ the same technique. This can be very disruptive, as these software providers are purposely absorbing financial losses and operating on thin margins to take market share from competitors. Competitors who do not have the financial backing, capital, or investor base to sustain these losses will ultimately lose market share and profitability. We are currently witnessing this within the retail sector, as many established department stores such as JC Penney, Sears, and Neiman Marcus have filed for bankruptcy due to their inability to compete with online retailers that employed aggressive pricing tactics.

On the other end of the spectrum are more established providers who are not "pure-play" telemedicine providers. These organizations offer a combination of services, each with different profit characteristics. As a result, they do not rely entirely on revenue from telemedicine operations alone, which gives them considerably more pricing flexibility relative to their competitors. Returning to the retail analogy, Costco has been able to thrive in the current environment because its core retail operations have performed very well due to its cost-focused strategy. Even with Amazon undercutting prices, Costco still offers such a compelling value proposition that consumers continue to use its services. As a result, Costco was able to gradually roll out its online offerings to better compete with Amazon.

The hospital addressed in this paper will take a similar approach to its pricing strategy relative to competitors. The hospital benefits from other "core" services that allow it to maintain flexibility in its telemedicine product offering. As a result, the institution does not feel pressured to take losses in order to properly roll out its product. Instead, it can be patient, deliver a compelling experience, leverage its healthcare expertise, and potentially charge premium prices (David, 2014).

Pricing Plan and Justification

The current pricing strategy will revolve around a low monthly base fee combined with consultation fees based on the specific product being demanded by the consumer. This pricing structure will be fully transparent to the consumer prior to their engaging with the company. The base monthly fee will start at $20 per month. Additional fees will be based partly on internal profit margin projections and partly on competitive pricing benchmarks. As stated above, the hospital will not engage in price wars with vendors and providers looking to capture market share. Instead, it will leverage its value proposition in a manner similar to Costco's approach in the retail industry.

The justification for this pricing model is that the hospital maintains both a physical and an online presence, which is very difficult for competitors to replicate. Consumers have considerably more flexibility and options in how they choose to engage with the organization. Furthermore, the physical presence allows the facility to offer services that many telemedicine providers simply cannot replicate. It is this seamless transition between online and offline services that gives the firm a sustainable competitive advantage relative to peers. In some cases, it will also allow the hospital to form partnerships with telemedicine providers that are unable or unwilling to provide these same services.

For example, it is very difficult for a competitor such as Doctor on Demand to provide an X-ray over the internet; as such, these providers often contract this work out to other providers. The hospital's pricing structure accounts for the costs needed to maintain a physical presence in the market, the flexibility and depth of product offerings, and the quality with which these offerings are administered. Accordingly, the hospital does not intend to lower its prices to match competitors who do not carry these offerings and their associated costs.

Chart 1 below depicts total telemedicine costs for various treatments and illustrates how dramatically the range varies even for basic and often routine procedures. As noted previously, this is primarily due to the infancy of the industry and the wide variety of pricing structures employed by market participants (Gerard, 2003).

Chart 1 – Cost Disparity for Telemedicine Treatment

Chart 2 below provides a focused example: it takes one treatment — birth control — and shows the split between the visit cost and the prescription drug cost. The variations are wide and often depend heavily on the provider, the quality of service, and the overall product offering. Some telemedicine competitors do not charge anything for the visit itself, with revenue derived solely from the sale of prescription drugs. Others charge a large consultation fee upfront with very low prescription drug costs on the back end. A majority of competitors, however, use a combination of both elements in their pricing strategy.

Chart 2 – Cost Disparity for Birth Control

The hospital's pricing strategy will therefore consist of a monthly service fee, along with a competitive consultation fee and a prescription drug fee.

References

David U. Himmelstein, et al., "A Comparison of Hospital Administrative Costs in Eight Nations: US Costs Exceed All Others By Far." Health Affairs 33, no. 9 (2014): 1586–1594. Available at

Gerard F. Anderson, et al., "It's the Prices Stupid: Why the U.S. Is So Different from Other Countries." Health Affairs 22, no. 3 (2003): 89–105.

Matthew B. Frank, et al. "The Impact of a Tiered Network on Hospital Choice." Health Services Research, forthcoming at (2015).