Pricing for a health information services provider
A national provider of health information collection, coding, and analysis asked Dean & Company to evaluate its pricing strategy.
The main goal was a deep understanding of the economics to serve different customer types and the appropriate pricing strategy. The client believed that they "compete in a scale sensitive business...we price down the scale-curve" but did not have a rigorous analytical understanding of their own costs. In particular, we wanted to determine how economics and scale varied by customer size as well as the types of records processed. With that understanding in hand, we would then review their existing pricing policies and how they should be adjusted going forward.
We conducted de-averaged profitability analysis of the business, with a focus on the "cost-to-serve" of each major customer segment. We identified the key drivers of their economics and the infrastructure necessary to monitor and capture this information going forward.
Dean & Company analysis indicated that the client was losing money on its largest accounts (nearly 50% of annual sales), and only breaking even on its second largest customers (12% of annual sales). We found that while programming, collections, and SG&A costs were scale sensitive, the total scale curves were fairly flat due to higher "analysis" costs for the largest customers; over time, the larger customers had requested and received incremental services not captures by the client's costing systems (nor priced). We developed a standard Statement of Work (SOW) to clearly articulate what services would be included in the core contract, and what the cost would be for "add-ons" to ensure that service upgrades did not reduce profitability. We additionally provided the tools and methodologies to cost and price core and "add-on" services, and to monitor these costs going forward.