Understanding Value Based Pricing - Lessons from a Surgeon
Updated: Aug 1, 2022
Last week I physically met one of my cousins after over 2 years. He is a doctor who has super specialised in oncology + gynecology. He was telling me about a recent 3 week training he attended on advanced laparoscopy.
Very often in such conversations, I tend to let my curiosity lead the way to glean out perspectives which help me better understand how different concepts have been applied in different industries.
In case you would rather read than watch, a lightly edited transcript of the video is below.
In this conversation, initially I was curious to understand the benefits of a laparoscopic procedure as against a regular open surgery.
Turns out that it offers a lot of benefits, but the 2 key things that caught my attention:
The incision is very small and hence the healing time is significantly reduced – days instead of weeks
Less pain, less medication, less complications
Next I was asking him about how these are priced in comparison to open surgeries and how the decision is made to go for a laparoscopic procedure vs an open surgery.
Turns out that there are certain conditions where a laparoscopic procedure is not recommended. But in other cases the decision is made by the patient.
Some of the considerations which patients factor in while deciding:
Hospital stay is minimal. Maximum of 1 day after the procedure vs 4-5 days after the surgery -> reduced hospital bill
That also means the person staying with the patient need not take leave for more than 2 days
Recovery period is about a week or so, as against 4-6 weeks – that means the patient can be back at work in a week or so -> a significant reduction in the loss of productivity!
This reduction in the loss of productivity is a significant factor when people decide
between these 2 options.
Then the conversation turned to whether private hospitals factored in the value (reduction in the loss of productivity) when they price these procedures. Turns out that they do and they have a value based differential pricing.
People who stand to lose more by being not productive for a longer period of time, gain more by going for a laparoscopic procedure, so they are charged a premium.
The way hospitals do this is by tying the price of the procedure to the kind of rooms that the patient selects. So if you select a general ward, you pay a lot less for the same procedure, as against, if you select a shared room. And if you select a single room, you pay a even more for the same procedure.
The assumption being that if you can afford a single room, then you are going to gain a lot more value from this procedure by being able to get back to work sooner.
It was fascinating for me to see how a completely different industry has applied value based pricing.
If you think there is room to optimise your pricing strategy...