Relative to pricing, the hearing instrument market has what economists would call an inelastic demand. Here we discuss what that means, why it might be so, and how it might affect your business decisions and your own pricing structure.

It’s a matter of economics—price impacts demand. In general, the higher the price, the lower the quantity sold; the lower the price, the higher the quantity sold. These relationships also affect total revenue. This economic theory, called the price elasticity of demand, is the key to developing an effective pricing strategy that increases total revenue.

However, there are some prevalent misconceptions in clinical practice that run counter to sound economic principles. For example, many hearing care professionals believe that reducing the price of low-end devices will increase the number of units sold, ultimately yielding an increase in practice revenue. Unfortunately, this is not true.

Understanding Demand Elasticity

Price elasticity of demand is determined by calculating the percent change in quantity sold by the percentage change in price. This ratio represents the consumer’s desire to purchase the product—or their demand—as price is increased or decreased. Demand is elastic when change in price results in a marked increase or decrease in units sold. Conversely, demand is inelastic when a change in price results in little or no change in units sold.

Research has shown that price elasticity of demand for hearing aids, overall, is inelastic.1-3 This means that decreasing prices only increases the number of potential hearing aid users by an insignificant amount. As a result, lowering hearing aid prices will not markedly increase the number of units sold, resulting in a decrease in total revenue.

How to Calculate the Impact of Elasticity on Revenue

Total revenue equals the price of the product multiplied by the quantity sold. The key to an effective pricing strategy is to estimate whether revenue will increase or decrease as price is increased or decreased. This is determined by the product’s demand elasticity—that is, how the consumers’ buying behavior changes as price changes.

Elastic demand: A change in price results in a large change in units sold.
Inelastic demand: A change in price results in a small change in units sold.

In an elastic market, reducing price results in an increase in total revenue. In an inelastic market, reducing price results in a decrease in total revenue (Table 1).

Factors Impacting Consumer Demand

Availability. Several factors determine the elasticity of demand. The leading factor is the availability of substitutes from other sources. When a consumer has a wide variety of readily available choices, such as over-the-counter pain and fever medication, consumers are more sensitive to price changes.

For example, when cold medicine “A” increases in price by 25%, consumers are more apt to choose an equivalent medication that is priced lower. When the number of substitutes is limited, as it is with hearing aids, demand is inelastic.

Luxury versus necessity. The second factor is the perception by the consumer on whether the product is a necessity or a luxury. Nonessential items, such as home-theater systems, tend to have an elastic demand. This means that higher-priced items tend to have fewer units sold.

Conversely, products viewed as a necessity, such as automotive gasoline, have an inelastic demand. In this type of a market, the quantity demanded does not decrease markedly as price is increased.

With respect to hearing aids, individuals with hearing loss are more likely to purchase a device when their perception of the loss reaches a point of severe communication breakdown and the devices are perceived as a necessity.4

Uniqueness and comparability. Demand, or units sold, is also impacted by whether the product has unique features that differentiate it from other substitutes. Price becomes less of a determining factor (ie, inelastic) when consumers actively seek out the unique features of that product. On the other hand, demand will be elastic for products that are viewed to be a commodity.

Similarly, when products have benefits or qualities that are difficult for the consumer to evaluate and compare—like with hearing aids—demand tends to be inelastic. For example, electronics stores make it easy for consumers to compare between brands of a big screen television, making it relatively easy for consumers to decide which is best suited for their needs. Unfortunately, it is difficult for potential hearing aid users to evaluate and compare the quality of a hearing aid themselves. Instead, the consumer must rely on the expert advice of the hearing care professional to establish the value of differing hearing instruments.

Large investment. When the product’s price represents a sizeable percentage of the consumer’s budget or income, the demand will be more inelastic. Because the primary consumers for hearing aids tend to be older people on lower fixed incomes, hearing aids are deemed as a large investment and, therefore, inelastic.

One way to make consumers less price sensitive to high-ticket items is by providing them the opportunity to make payments over time. Car manufacturers and furniture and electronics re­tailers have used this strategy successfully. To reduce the inelasticity, a similar strategy should be applied to hear­ing aid purchases using an outside patient payment program.

Pricing Strategies for Hearing Care Professionals

Given these factors, the hearing aid market is expected to be inelastic. Why? Because hearing aids:

  1. Have few substitutes;
  2. Are seen as an essential purchase by those experiencing severe communication breakdown;
  3. Do not differentiate between unique features across brands;
  4. Represent a significant investment; and
  5. Are not typically covered by insurance.

Pricing strategies. Effective pricing strategies require a dispensing practice to test different price points and track consumer behavior. The key is to estimate the price point at which sales are optimized. For an elastic demand, we would expect an increase in the number of units sold as price is decreased.

To illustrate, assume that a hearing aid was dispensed at $4,000 per unit and two devices were sold ($8,000) in the previous fiscal year. In an elastic market, as the price of the same device is reduced by $1,000 to $3,000, the number of units is forecasted to increase by 3 to a total of 5 units sold. At this price, note that total revenue at this price point increases from $8,000 to $15,000.

Price (each) Units Sold Total Revenue
$4,000 2 $8,000
$3,000 5 $15,000

 

Let’s extend this example to further price reductions:

Price (each) Units Sold Total Revenue
$1,450 15 $21,750
$1,100 18 $19,800

 

So here, as price is decreased from $1,450 per unit to $1,100 for the same device, the number of units expected to be sold increases by 3. However, note that, even though price was reduced and the quantity increased, there is decrease in total revenue of nearly $2,000 (from $21,750 to $19,800). In an inelastic demand, total revenue could have been increased by raising prices, even though slightly fewer devices would have been dispensed:

Price (each) Units Sold Total Revenue
$1,700 13 $22,100

 

In addition to determining optimal pricing for your practice, programs can be implemented to reduce the inelasticity of consumer demand. Some practical ideas to consider are:

  • Provide potential hearing aid users with a comparison of different technologies across products. Doing so will allow the user to have an input on the device being purchased, and increase the probability of a sale.
  • Reduce the percentage of the patient’s budget or income the purchase of a hearing aid represents by offering low monthly payment options for hearing aids at every price point.
Demand Raise Prices Reduce Prices
Elastic Total Revenue Decreases Total Revenue Increases
Inelastic Total Revenue Increases Total Revenue Decreases
TABLE 1. Characteristics of an elastic and inelastic market relative to pricing.

References

  1. Aaron MJ. An Economic Study of the United States Hearing Aid Industry: A Demand- and Supply-Side Examination [dissertation]. Chicago: University of Illinois; 1987.
  2. Lee K, Lotz P. Noise and silence in the hearing instrument industry [working paper]. Copenhagen, Denmark: Department of Industrial Economics & Strategy, Copenhagen Business School; 1998.
  3. Amlani AM, De Silva DG. Effects of business cycles and FDA intervention on the hearing aid industry. Am J Audiol. 2005;14(1):71-79.
  4. Kochkin S. MarkeTrak IV: Correlates of hearing aid purchase intent. Hear Jour. 2000;51(1):30-38.

Contributor: Amyn M. Amlani, PhD, is assistant professor of audiology and the director of the audiology undergraduate program at the Department of Speech & Hearing Sciences, University of North Texas, Denton, Tex. He serves as a consultant to CareCredit, Costa Mesa, Calif.

Image credit: © Kheng Ho Toh | Dreamstime.com