From Products to Services: How Medical Device Companies Miss $100M+ Opportunities

Don’t be fooled by the rosy headlines predicting an $1.1 trillion medical device market by 2034. Underlying that prediction’s 6% CAGR, and even a more conservative 3% CAGR,  are seismic shifts reinventing the industry and redefining what it takes to succeed in an industry that is increasingly commodified.

Trends have become industry norms.

For over a decade, medical device industry analysts have warned about the impact of changing market dynamics that will require fundamental shifts to manufacturers’ business models. A few of the most prevalent and impactful include: 

• The power shift from clinical to economic buyers – Gone are the days when deep relationships with surgeons and other clinicians were sufficient to override cost concerns in equipment purchasing. Hospital systems and other care centers are increasingly weighing the financial costs and clinical benefits of devices against each other and opting for more economical but “good enough” solutions.
• Growing consumer empowerment and purchasing power – What started in wearables as a “wellness” trend is expected to grow into a nearly $170 billion market by 2030. Driven by remote patient monitoring and home healthcare, wearables are now used for cardiovascular, neurological, and respiratory conditions in addition to wellness and diabetes management. 
• Data and Intelligence are requirements, not differentiators – In 2018, KPMG warned that medical device companies risk becoming “mere commodity producers” unless they integrate intelligent services into their devices. This trend has only accelerated with advances in AI, as evidenced by a record number of FDA approvals of AI-enabled devices in 2023 and the incredible 83% investment premium given to AI-powered startups versus traditional device companies.

For most medical device companies, the response to these trends and the way out of commoditization looks like building a service business that operates alongside the core product business. However, most medical device executives who pursued this path found that designing a service business was far easier than launching or scaling one and, as a result, abandoned their efforts. Even those who focused on the more modest goal of monetizing patient data were soon overwhelmed by the technical and regulatory complexity.

The experience of these pioneers serves as an instructive guide to all medical device companies now feeling the urgency and inevitability of commodification.  

Invest in understanding economic and clinical buyers equally.

Healthcare companies have for decades invested in understanding and building relationships with clinicians, typically surgeons and physicians, capable of understanding the clinical superiority of their devices and overriding financial concerns that can slow or even prevent purchase decisions. However, as the balance of power shifted, not all companies adjusted accordingly.

Faced with increasing commoditization in its catheter lab market, one company recognized a need to go beyond interventional cardiologists to understand the entire ecosystem, including surgeons, physicians, nurses, hospital executives, private and government payers, and patients. 

As a global company, they also needed to understand this ecosystem and their varying priorities, challenges, and motivations in developed, emerged, and emerging markets.

Over the course of nearly one hundred interviews in ten countries, they identified twelve “strategic opportunity areas” (SOAs) where they had high confidence that profitable and scalable service businesses could be built and prioritized five that each represented at least $150 million in net new revenue, for brainstorming and concept development.  

Within six months, company executives funded two new service businesses. Additionally, leadership aligned the business unit around a clear and quantifiable three-year growth strategy and, using data from the initial research, twelve additional ideas were developed into concepts ready to pilot when resources freed up.

Prepare the C-Suite for financial shock.

The primary root cause of medical device companies’ struggles to launch and scale service businesses lies in the foundational differences between product and service business models.

Traditional medical device company business models invest heavily in R&D capabilities, manufacturing facilities, IP and patent protection, and regulatory expertise to bring safe, clinically efficacious, and feature-laden products to market. Conversely, healthcare service businesses rely much more heavily on human expertise and technology platforms to deliver outcomes, experiences, and ongoing support.

Most executives express awareness of and comfort with these differences until they confront the underlying financial costs. Medical device companies often enjoy 60-80% gross margins and monitor the health of their businesses with real-time metrics like units sold, average selling price, and R&D as a percent of revenue. This is quite different from healthcare services, where gross margins of 40-60% are constrained by labor costs, and business health is measured by customer lifetime value, recurring revenue, and churn rates.

It is the reality of these financial differences that eventually stymied the above company’s ability to capitalize on successful pilots. In contrast, another medical device company was able to overcome the operational and financial implications of two different yet co-existing business models to reposition itself as a provider of intelligent devices and value-added services.

Build from existing capabilities, not from scratch.

Companies that successfully navigate the financial shock of a services business model often offer, but don’t monetize, services. One such company prided itself on both its product development capabilities and the personal human-to-human services offered at key points in a patient’s journey. 

Building a multi-hundred-million-dollar service business, however, required going beyond helping people unbox and set up new devices. It required a deep understanding of all the challenges faced by patients, especially in key moments like leaving for college, dating, or receiving a diagnosis.

By identifying “critical intervention points” in which patients were likely to become non-compliant, the company was able to develop new products and supporting services to reduce the risk of non-compliance and improve both quality of life and clinical outcomes.

The existence of a service offering, even though it was not monetized, created a fertile environment from which to build scalable and financially attractive service businesses. Because the organization was culturally committed to supporting its customers through products and services, resistance to the different operational and financial requirements of each model was overcome with time, data, and persistence.

Your choice: Build a service or become a commodity

As trends around expanded decision-making ecosystems, consumer empowerment, data and intelligence, and economic uncertainty become everyday realities, the need for medical device companies to rethink and expand their business models becomes more urgent.

Gone are the days when it was sufficient to experiment and learn about intelligent devices and new delivery models. Medical device executives now need to find ways to quickly develop, launch, and scale product-service hybrids that leverage AI and intelligent data to empower consumers and clinicians while also meeting the needs of financial stakeholders like payers and their own in-house CFOs.

Doing so will not be quick, easy, or guaranteed to succeed. But not doing so is a path to commoditization, irrelevance, and extinction.

Photo: pick-uppath, Getty Images

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