Editor’s note: This series follows predictions by Lars Kolind[1] in the 1990s. Post #1 considered Audiologists as retailers; Post #2 , Post #3 and Post #6 looked at effects of new forms of competition on retailing and independent practices; Post #4 and Post #5 looked at Big Manufacturers’ innovations and retail distribution of product.
Lars Kolind’s Prediction #V: It will be increasingly difficult to base a hearing healthcare practice on aggressive marketing and selling.
This series is driving readers to write their own blogs. Last week, Dr. Christine Diles sent in a passionate call for Audiologists and dispensers to get it together as retailers. This week, another reader wryly recalls early economic training on the Demand Curve, a topic that deserves attention in these competitive times.
As a regular reader of Dr. Hosford-Dunn’s economics blog, I was reminded of one of my early lessons in economics. Struggling for money as an undergraduate, two of my friends joined me in a “can’t fail” Christmas sales project.
A relative gave me an “in” with a doll wholesaler and we managed to buy a couple of hundred dolls for $2 apiece, which we hoped to sell for $4- $5 each by going door-to-door in a very poor neighborhood made famous by Bill Cosby in his Fat Albert stories of football games played on glass strewn streets, with burned out buildings and moving streetcars menaced your tight end’s ability to make a catch.
I worked with Vince while partner Harvey, an aspiring entrepreneur, worked alone. At our first week’s business meeting in an unfriendly neighborhood bar, Vince and I reported 3 sales, 2 of which were “on the book” (credit).
Harvey, however, had sold 25 which astounded us. “How did you do it?!” “Volume,” replied Harvey, “Volume.” …. “And Pricing,” he added.
Harvey was selling the dolls for $1.75, meaning we were losing $.25 a sale. “Volume,” said Harvey, “Volume.”
It was determined that Harvey should take his entrepreneurship elsewhere. Vince and I had lots of dolls available even after the Christmas rush. Happily, we had no exchanges.
Dr. Kolind predicted that–like Harvey–independent hearing health practitioners would go down the tubes if they focused on Volume (via aggressive marketing) by competing on Price. We’re not selling seasonal dolls, but we are selling a commodity when it comes to this type of analysis, which means I get to bring forth an Econ 101 graph — the World Famous Demand Curve.
Here’s the scenario: You are a successful practitioner, fitting exactly Q1 patients every month at a price of P1, as shown on the top left of Demand Curve. You now invest in a big advertising campaign to which many new consumers respond, but you notice that your normally excellent close rate is lower with these new folks, most of whom are objecting on Price. They are bringing in fliers from their health insurance company showing prices that are half what you charge. You are convinced that Volume is key to success, so you cut your prices by more than half to undercut the health insurance company’s competitive threat. Now you are selling Q4 patients every month, so you have achieved Volume. You are selling them hearing aids at P4 pricing. Most likely, your Total Revenue has gone up (TR = P4 x Q4) and your bank account looks good. But, like Harvey, you’ve forgotten one thing. P4 is lower than your cost to fit a hearing aid (invoice + advertising campaign + fixed costs). Like Harvey, you’re losing money with every sale. Like Harvey, you are going to be invited to leave the building.
Once again, Dr. Kolind’s Prediction nails it. We cannot compete on Volume and Price against Big Boxes, giant manufacturers, online retailers, and health insurers that build their entire business plans around maximizing Volume. Today’s anonymous blogger figured that our back in college and left the doll business. Instead, he opted for a business model that is high-quality, low-volume, knowledge-driven, relationship-rich and premium-priced. He’s never looked back, except to occasionally bail his old buddy Harvey out of yet another get-rich-quick scheme.
I expect we’ll hear more along these lines in a few weeks when Brian Taylor posts again on Concierge Audiology.
Photo Courtesy of Investopedia
