GE Healthcare Races to the Bottom …and it’s a Beautiful Thing

Earlier this week General Electric announced that it is investing $3 billion to develop low-cost medical imaging and diagnostics equipment.  Long known for dominating the high end of these markets, GE has built a $17 billion-a-year business.  So the question is why in the world would the market leader invest so much money in offerings that could cannibalize existing business?

The answer?  Because GE understands pricing strategy.  While they have built a formidable business selling top-of-the-line equipment, growth has stalled.  First quarter revenues actually fell 9% – in a business that should be growing.  This points to a need for an update to their strategy.  As CEO Jeffrey Immelt put it “The high end in health care is never going to go away, but this will make us broader in terms of price points and offerings.”

This is a classic move in adjusting your strategy as the technology and market lifecycle moves ever forward.  When targeting early adopters, who are price insensitive, it is best to use a skim pricing strategy.  Companies can maintain this strategy for a while as demand picks up and the market moves into the high growth phase.  The risk however is in sticking with only a skim strategy for too long.  This retards growth and leaves the low end of an already developed market open to new competitors.

Top pricing organizations know that when the growth of premium priced offers starts to slow, it’s time to expand the pie.   In order to increase their market footprint and bring in incremental business, GE is “breaking for the bottom.”  They doing this not by lowering prices on their high-value offerings but by introducing low-priced flanking offerings that won’t appeal to their high-end customers but will bring in customers who don’t have the budget for the latest in phased-array, high-definition, four-dimensional ultrasonic imaging.

Making this transition is critical because it address a number of critical business needs.  First, it restarts growth by targeting underserved customers.  Second it increases pricing power by giving sales the ability to offer a lower-value, lower-priced flanking offering to customers that try to negotiate for a straight price discount.  Finally, it drives innovation by forcing a rethink of how beautifully engineered products can be made even more relevant for changing customer needs.  These all add up to one beautiful image – increased revenues and profits.  This after all, is the only purpose for pricing strategy.