This is a story about two guys who considered a then current automated external defibrillator (AED) and asked, "Why does this thing cost $4,000?" Founded seven years ago on the concept of medical device commoditization, Defibtech's been selling AEDs since 2003. With 30 employees and using state-of-the-art contract manufacturing and indirect distribution channels, revenues are approaching $30 million - with 3,000 units delivered in the last 6 months alone. They've been profitable for the past 3 years.

From the inception of the company, Defibtech's founders set themselves up for a challenge: Create a rugged consumer product on the outside, equipped with a medical device that is subject to the highest level of FDA scrutiny on the inside. And they were driven to make it for less than $1,500, about half the price that existing AEDs were selling for, without sacrificing on quality.

Defibtech is a model for the successful medical device companies of the future; ruthlessly wring out product cost and undersell established competitors. Taking this commoditization a little further, do you really need $30,000 patient monitors in your ICU? Wouldn't monitors that cost a third (or less) meet the needs of the vast majority of your patients?

"When we first came out, we `Defibteched' people. We cut the cost of the product in half without shortchanging them on any features," President and co-founder Gintaras] Vaisnys said. "I would hate to have another company pop up and `Defibtech' us. ... I want to be the guy doing that to ourselves before someone else does."

Mature undifferentiated medical device markets (and that's most of them) combined with the availability of new lower-cost technologies mean that some day soon you may be "Defibteched", or you can "Defebtech" yourself before someone else does it for you.

UPDATE: A fellow connectologist comments:

I would have commented directly on your blog but I wanted to attach this article that speaks directly to the commoditization of undifferentiated products and markets. I absolutely agree with you and this is exactly what I was thinking when I read it about two years ago. I was at Siemens/Draeger at the time and it would be relatively easy to create a very low cost monitor using off-the-shelf hardware and software components. Even most of the algorithms you can license from the market leaders.

Know anyone who is entrepreneurial enough to challenge GE and Philips with a $3k ICU monitor? Talk about killing a cash-cow market for a big company ...that might be kind of fun! Lots of opportunities and so little time.

..............

He's right of course. But does anything differentiate commodity products besides price? Yes, most definitely. Product attributes like Usability, serviceability and design, (the "Ilities", remember those?), can all be used to differentiate a product in any kind of market, including a commoditized one.

Here's an excerpt from the article:

"Call it the age of the instant company. Commoditization -- the process by which technology products become standardized and their prices are shoved relentlessly downward -- has now driven the cost of the building blocks of tech so low that hardware expense has been all but eliminated from the equation of creating new products. Now entrepreneurs and innovators are discovering that they can use cheap standardized parts as basic ingredients, stir in their own flavor of distinctive software, and -- voilà! -- pop out a low-budget company that can swiftly attack a niche market or outmaneuver bigger, bloated rivals."

Conclusion

Everything in this post remains valid and applicable today, almost 10 years later. Add to the commoditization strategy the power of miniaturization and virtualization, and a product from a mature undifferentiated market segment can be transformed into a product that not only costs substantially less, but also touts innovative features, a vastly improved user interface (a touchscreen, or voice commands, for example), or built-in connectivity, that are not possible to implement with a traditional old school approach.

Sources:

  1. Kalra, R, February 2006, “Jump Start, Defibtech’s Olympic Victory”, Hartford Courant Newspaper
  2. Malik, O., December 2003, The Rise of The Instant Company Commoditization isn't a curse. For a new wave of entrepreneurs, it's a blessing. Here's how they're using it to make millions, Business 2.0 magazine
  3. Nielsen, J., March 2004, “Why Consumer Products Have Inferior User Experience”, Nielsen Norman Group Website Article
  4. NPD Solutions, 2016, Design for Serviceability/Maintainability Workshop
  5. Postrel, V., 2003, The Substance of Style, How the Rise of Aesthetic Value is Remaking Commerce, Culture and Consciousness, HarperCollins
  6. Life-Cycle Properties of Engineering Systems: The Ilities, De Weck Engineering Systems, June 2016, http://strategic.mit.edu/docs/es_book_004_proof.pdf