THE BLOG
11/18/2013 11:31 am ET Updated Jan 23, 2014

Lean LaunchPad for Life Sciences - Revenue Streams

We're teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) at UCSF with a team of veteran venture capitalists. The class has talked to 2,056 customers to date.

This post is an update of what we learned about life science revenue models.

Life Science/Health Care Revenue Streams Differ by Category
For commercialization, the business model (Customers, Channel, Revenue Model, etc.) for therapeutics, diagnostics, devices, bioinformatics and digital health have very little in common.
This weeks topic was revenue streams - how much cash the company can generate from each customer segment. Revenue streams have two parts: the revenue strategy and the pricing tactics.

Figuring out revenue strategy starts by gaining a deep understanding of the target customer(s). Setting a revenue strategy starts with understanding the basics about the customer segments:

  • Who's the user, the recommender, buyer, and payer?
  • How the target customer currently purchases goods and services and how much they currently pay for equivalent products
  • Their willingness to pay for value versus lowest cost?
  • How much budget they have for your type of product?

Revenue strategy asks questions like, "Should we offer cost-based or value-based pricing? How about demand-based pricing? Freemium? Do we price based on hardware sales or do we offer hardware plus consumables (parts that need to be disposed or replaced regularly)? Do we sell a single software package or a subscription? These strategy hypotheses are tested against the target customer segment(s).

Once you've established a revenue strategy, the pricing tactics follow. Pricing is simply "how much can I charge for the product using the selected revenue strategy?" Pricing may be as simple as setting a dollar value for hardware or software, or as complicated as setting a high price and skimming the market or setting a low price as a loss leader.

You can get a feel for how each of the cohorts address the Revenue Streams by looking at the Revenue lectures below - covering the therapeutics, diagnostics, devices and digital health cohorts.

At the end of the lectures you can see a "compare and contrast" video and a summary of the differences in distribution channels.

Diagnostics
Week 5 Todd Morrill Instructor

To see the presentation, click here

Digital Health
Week 5 Abhas Gupta Instructor

To see the presentation, click here

Devices
Week 5 Allan May Instructor

To see the presentation, click here

Therapeutics
Week 5 Karl Handelsman Instructor

To see the presentation, click here

Life Science and Health Care Differences in Revenue Streams
This weeks lecture and panel was on Revenue; how much cash the company can generate from each customer segment - and the strategy and tactics to do so. Therapeutics, diagnostics, devices and digital health use different Revenue Strategies and Pricing Tactics, in the video and the summary that follows the instructors compare and contrast how they differ.

If you can't see the video above click here

Therapeutics (Starting at 0:30)
  • Therapeutics revenue is from drug companies not end users
  • 18 months to first revenue from a deal
  • Predicated on delivering quality data to a company
  • Deal can be front-end or back-end loaded
  • Quality of the data has to be extremely high for a deal
Diagnostics (Starting at 4:10)
  • Diagnostic revenue is from end users: a hospital or clinical lab
  • You need to figure out value of your product but...
  • Pricing is capped by your reimbursement (CPT) code limits
  • Reimbursement strategy is paramount, design to good codes avoid bad ones
  • Find a reimbursement code consultant
  • Don't do cost-based pricing... go for value-based pricing
Medical Devices (Starting at 8:23)
  • There really is no such thing as a perfect First Generation Medical Device
  • So Medical Device companies often start with a Volkswagen product and then build to the Ferrari product
  • Revenue models are typically direct product sales
  • Don't do cost-based pricing... go for value-based pricing, especially where your device lowers the treatment costs of the patient
  • In most cases, pricing is capped by your reimbursement (CPT) code limits
  • Or pricing can be capped by what competitors offer, unless you can demonstrate superior cost savings
  • In a new market there is no reimbursement code but if you show high cost-savings you can get a high reimbursement rate
  • A risk in device hardware is getting trapped in low-volume manufacturing with low margins and run out of cash
Digital Health (Starting at 10:35)
  • Digital Health revenue models are often subscription models to a company per month across a large number of users
  • Intermediation fees - where you broker a transaction - are another source of revenue (i.e. HealthTap)
  • Advertising is another digital health revenue model, but requires at least 10 million users to have a meaningful model, but can be lower if you have higher value uses like specialist physicians because you can charge dollars not cents
  • Don't do cost-based pricing... go for value-based pricing
  • Value-based pricing is based on the needs you've learned from the customer segment and the strength of your product/market fit
  • the sum of customer needs + product/market fit = the pricing you can achieve
Lessons Learned
  • Each of these Life Science domains has a unique revenue strategy and pricing tactic
  • In therapeutics revenue comes in lump milestone payments from drug companies based on quality data
  • Diagnostics revenue comes value pricing to hospital or clinical lab
  • capped by reimbursement (CPT) code limits
  • Device pricing starts by offering an initial value-priced base product and then following up with a fully featured product
  • capped by reimbursement (CPT) code limits
  • Digital health products use subscription value pricing. Alternatively may use advertising revenue model

Steve Blank's blog: www.steveblank.com