Medical Device Sales Index: High for Cost Management, Low for Revenue Growth

Recently Alexander Group did a deep dive into medical product sales performance and completely updated its benchmark database. Using a fresh data set from 61 U.S. medical device organizations, AGI documented the latest trends in revenue growth, job roles and headcount, customer coverage and incentive compensation. The resulting AGI U.S. Medical Device Sales Index reveals both unexpected and remarkable trends — and a hint of future growth.

Because commercial models vary widely across the large category called medical products, the Index breaks out the benchmark data into relevant segments, based on the selling environment and product category, e.g., Cardio/Neuro, Orthopedic, Surgical, Capital Equipment, Commodity and Post-Acute. Figure 1 below summarizes the Medical Sales Index.

Figure 1

Key Trends

Looking back at the past five years was enlightening and proved valuable when designing and executing new revenue growth strategies.

Figure 2 below shows year-over-year actual revenue growth and gross margin percent, in 2010 and in 2014. Revenue growth dropped from 5.8 percent to 3.1 percent  ̶  a significant cooling off. Much of the drop is attributable to IDN strategic sourcing initiatives without an offsetting increase in procedures that would drive vendor product volumes. The data support the story that several C-level IDN leaders have shared repeatedly over the past five years. They have a clear vision of profit growth through the combination of patient outcome quality improvements and cost reductions. But the vision is blurry on the quality side. It’s hard to connect the plethora of controllable factors contributing to patient outcome quality improvements. Yet, on the cost reduction side, the vision is much clearer. As a result, most IDN leaders moved forward first with cost reduction, putting patient outcome improvements on a longer timeline.

Figure 2

Alongside the revenue cooling off, one would expect to see vendor margins taking a big hit, with all that brute force strategic sourcing from the largest IDNs. However, Figure 2 shows only a modest decline in gross margin from 2010 to 2014. Vendors protected their margins in a time of slower revenue growth. Outside the U.S., stories abound about low-price, low-margin, “good enough” product vendors growing twice as fast as the rest of the industry. AGI’s research shows this isn’t really happening in the U.S. Keeping gross margins flat in a cooling market is a tribute to U.S. vendor P/L leaders who are much more talented than those leading “good enough” companies.

U.S. leaders did a commendable job reducing sales expense as a percentage of revenue. The data reveal closer management of field headcount, backfilling of veterans with junior reps and other non-traditional job roles, flatter organizations, lower overall compensation levels (due to mixing in non-traditional lower paid field jobs), and a tighter link between pay and performance. Overall sales expense-to-revenue declined from 18.5 percent in 2010 to 16.9 percent in 2014. So U.S. leaders get an “A” for margin and cost management but a low grade for revenue growth.

In the damp revenue environment, a few rays of sunshine beamed through the past four years. One bright spot was a serious commitment to value selling and key account management that combines the best legacy clinical value with enterprise account management borrowed from the B2B industry. Brilliant value propositions from managed services to bundling products with cloud software applications provide a glimpse into the future. For these reasons, AGI believes the next deep dive into the AGI Medical Device Sales Index will show year over year revenue growth above today’s dismal 3.1 percent.

AGI’s medical device sales consulting practice helps device clients strengthen their position in hospitals in an increasingly competitive and complex selling environment. Our clients achieve success by delivering insight to hospital customers and adapting winning practices from outside legacy hospital sales models.

Learn more about Alexander Group’s Medical Device practice.

Read more about the challenges facing the medical device industry.