Medical Device Commoditization Hits Health Care

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, 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: Fellow connectologist Brian writes:

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 this article 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.

Here is an excerpt from the article. 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? Certainly. Usability, serviceability and design can all be used to differentiate a product in any kind of market, including a commoditized one. Here’s the excerpt that Brain quotes:

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.

It does make the mind reel. Any readers with thoughts on this, feel free to give me a call.


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