Do High Profits Stymie Innovation and Swell Prices? Unsticking Adam Smith’s Hand

Brian Taylor, AuD
Brian Taylor, AuD

“Signal & Noise” is a bimonthly column by Brian Taylor, AuD.

 

Profits are an essential part of a free enterprise system. They provide employees and their families with an income, give shareholders a return, foster innovation and signal where capital needs to be invested in order to improve or grow a business.

 

Profit Margins Reveal and Conceal

 

Any business with low pre-tax profit1 margins, say 5%, of total revenue is on life support. Companies with consistently low profits are sluggish albatrosses, prone to fail. Our economy is littered with companies failing to break even and move beyond a 5% profit margin.

On the other hand, as recent thought-provoking reports2 suggest, high profits across an entire industry can be a sign of poor economic health as well. High pre-tax profits, defined by one expert as greater than 15% of total revenues, can be an indicator of an industry not competitive enough. Firms not incentivized to reinvest profits back into their business, largely due to a lack of competition or barriers to entry, are apt to sit on their cash.

 

Barriers Protect Margins

 

Of course, from the perspective of the business enjoying the high profits – maintaining competitive advantages over its competitors is an enviable position no one wants to relinquish. Using the vernacular of Warren Buffet, industries construct moats, such as patents and government regulations, to stave off competitive upstarts who may erode those big profits.

Moats might be beneficial to industry, but one nagging by-product of high profits is inflated consumer prices, which according to one recent analysis plagues much of the US economy. Given the affordability questions dogging the hearing aid industry, the question of large profits (and perhaps even larger moats) stymying innovation and bloating consumer prices is a legitimate one. After all, even though the hearing aid industry is small by comparison to behemoths like Google and Microsoft, it’s an important sector of the US economy, employing thousands of people around the world, with the potential to help untold millions around the world with their products.

 

The Invisible Hand Moves, But Slowly

 

Before looking at how these issues may impact our industry, you may recall the work of Adam Smith’s invisible hand3: A business can only enjoy a competitive advantage for relatively short periods of time in which they can take in large sums of cash before an upstart company, inspired by theses riches, will aggressively enter a market to slim down the fat margins enjoyed by the incumbent. The result of this new competition is to reduce prices for consumers, encourage innovation and create new markets, which in turn creates both new employment and investment opportunities.

Considering the following:

  • More than 90% of hearing aids units are sold by six global vertically integrated firms;
  • Hearing aid prices remain unaffordable for many;
  • Innovations have come in 12 to 18 month increments since the dawn of the hearing aid industry’s digital signal processing era in the late 1990s;

is Adam Smith’s invisible hand stuck? In an industry with six incumbents that have consistently enjoyed profit margins around 20%, if we want to avoid ponderous governmental intervention entrepreneurial clinicians must identify ways to make hearing care more accessible and affordable.

 

We Can Grow the Market to Spur Competition

 

What can we do to boost competition within the manufacturing sector of our profession?

Here are two signals in the cacophony of noise:

  1. Creating a market for products and services for consumers in need a communication enhancement (not a hearing problem) in specific listening situations could spur greater competition among manufacturers.Generally, clinics offer one intervention option: hearing aids. By expanding the range of products (vetted non-hearing aids, such as hearables, ALDs and PSAPs) and services (computer-based rehab and educational programs) you can offer a broader range of services and products to a wider range of patients, many of which have self-reported communication difficulties, but do not consider themselves hearing aid candidates.
  1. By intervening in the care of adults in the primary care physician’s clinic, trauma center, senior center – places where people need immediate improvement in communication to conduct business or have their immediate needs met (e.g., know the correct dosage of meds to take throughout the day) – professionals can stimulate demand for new and innovative services.Many hearing care professionals rely on a vicious cycle: advertise – patiently wait for adults with hearing loss to find the gumption to pick up the phone and schedule an appointment for a consultation – convince the motivated patient to take action to try hearing aids – hope & pray that patient is happy with the result before the trial period ends – advertise to find more patients. Besides potential negative effects on the practice’s own profit margins, this cycle does not grow the market.It’s time to break the cycle. 

 

Large profits are a strong incentive for vertically integrated industry incumbents, both manufacturers and large retail chains, to protect the status quo. If we want to free up Adam Smith’s invisible hand without disruptive government changes in regulation, it will take the collective efforts of entrepreneurial clinicians to find new ways to create value for their products and services in this era of consumer-driven care.

 

References & Footnotes

1Admittedly, the term profit has different meanings. For the purposes on this post, it is defined as the pre-tax earnings that remain after all expenses, including R & D costs, salaries & bonuses have been deducted from total revenue.

2The March 26-April 1 cover story of the Economist cited here makes a strong, data-driven case for the US economy suffering from too many companies being too profitable.

3Smith, A.  The Wealth of Nations. 1776, first publication date.

 

Brian Taylor, AuD, is Senior Director, Clinical Affairs, for Turtle Beach/Hypersound.   He continues to serve as Editor of Audiology Practices, the quarterly publication of the Academy of Doctors of Audiology. During the first fifteen years of his career, he practiced clinical audiology in both medical and retail settings. Since 2005, Dr. Taylor has held a variety of leadership & management positions within the hearing aid industry in both the United States and Europe. He has published over 50 articles and book chapters on topics related to hearing aids, diagnostic audiology and business management. Brian has authored three text books:  Fitting and Dispensing Hearing Aids (co-authored with Gus Mueller), Consultative Selling Skills for Audiologists, and Quality in Audiology: Design & Implementation of the Patient Experience.  His latest book, Marketing in an Audiology Practice, was published in March, 2015.  Brian lives in Golden Valley, MN with his wife and three sons.  He can be reached at brian.taylor.aud@gmail.com or brian.taylor@turtlebeach.com.

feature image courtesy of Cambridge in Color



About Holly Hosford-Dunn

Holly Hosford-Dunn, PhD, graduated with a BA and MA in Communication Disorders from New Mexico State, completed a PhD in Hearing Sciences at Stanford, and did post-docs at Max Planck Institute (Germany) and Eaton-Peabody Auditory Physiology Lab (Boston). Post-education, she directed the Stanford University Audiology Clinic; developed multi-office private practices in Arizona; authored/edited numerous text books, chapters, journals, and articles; and taught Marketing, Practice Management, Hearing Science, Auditory Electrophysiology, and Amplification in a variety of academic settings.

1 Comment

  1. Terrific post. Thanks Brian. Anytime you can quote Paul Krugman, Adam Smith or George Carlin (maybe not him so much), the results are impressive and informative. Also, I hope people appreciate that you have offered some actions that are necessary for audiology to cope in perhaps the not so distant future. It’s easy to comment and speculate, but much more beneficial to find paths forward.

Comments are closed.