Sy. Med, a company founded in 1995 under the name “Medilink”, specializes in developing and licensing software that simplifies managed care for health providers. Its name was changed to Sy. Med Development, Inc. in November 1996 after an investment by the State Volunteer Insurance Company (SVMIC), Tennessee’s premier medical malpractice insurance company. In July 1998 Sy. Med was acquired by one of its software clients, the FPIC Insurance Group, Inc. (FIG). FIG was chosen in 1998 by the Forbes Magazine as one of its 200 Best Small Companies in America.
In April 1999, its credentialing application service bureau was spun off so the company can focus on development and licensing of software. Its management and investors, seeing tremendous opportunities and big demand for its products, completed an equity buy back in April 2000. Jim Ayers joined the company as President and Chief Executive Officer in 1997, and he believed “he was sitting on a goldmine. ” Sy. Med had little direct competition and never lost customers on price basis. Four years after assuming company leadership, everything turned around for Jim Ayers and his company.
Sy. Med in 2001 was behind its unit forecast by 66 percent, behind its net income forecast by 210 percent, and lost $40,000 (Exhibit 1). There are a lot of challenges in the environment. Used to cruising the business environment with ease, times have changed for this new company. Several critical issues have to be faced by Jim Ayers which will affect the company’s profitability in the near term and long term future. These critical issues are: 1. Should he change prices of Sy. Med’s products or their maintenance fees? 2.
Should he spend on developing additional products, put out of the market one or more existing product(s), or stick with current products but intensify selling efforts? 3. Should he shift marketing focus from time saving benefits to some other features? Pricing Ayers was thinking that $15,000 was at the high end of the amount that physicians would pay for administrative support software. He was thinking that sales could drastically improve if the software was sold for $10,000. Because customers become dependent on the software once they start using it, he was also thinking of increasing maintenance fees.
Ayers need to get his pricing right first before he could implement other measures such as hiring new staff to increase sales. He is cautious on hiring new staff. Market size There are around 690,000 licensed physicians in the United States, each, on the average, required to submit 10 credentialing applications each year. Credentialing and the OneApp software Credentialing is a process of ensuring the validity and timeliness of physician’s education and trainings. Normal process was for an administrative assistant to complete the process by photocopying documents such as diplomas and certificates.
It does not merely confirm professional accreditation, but is also a critical cash management process for medical practices. Initial filing takes up to 2 hours to complete. Follow ups for incorrect or illegible forms take another 1 hour. Submission of credentialing applications could consume more than 20 million hours or 10,000 full time workers. Sy. Med automated the process with its OneApp software offering customers accuracy and reducing the required clerical time. Eliminating redundant manual applications saves time time, resulting in fewer delays and improving cash flow.
According to its estimate, compared to manual credentialing, Sy. Med’s software reduces time to prepare the initial application by 95 percent and follow up time by 50 percent. At a selling price of $15,000 per system, and if a physician have 250 patients per month, a physician could have $1 million revenue per year. A physician providing service before their credentials are approved would be worth $80,000. OneApp software is worth the price given its accuracy and late submissions of manual procedures. Challenges with physicians Despite the perceived advantages of the credentialing software, many physicians are still adamant to use it.
They spend millions on diagnostic equipment but not on outsourcing or back office operations. One of the reasons is that they don’t actually see what is happening in their back office. Being a new business field, these are challenges and opportunities for Sy. Med. However, one positive aspect of Sy. Med’s business is the fact that the savings generated by this software goes into the pockets of the physicians. The Sy. Med difference Ayers said his company has not lost a customer based on price. Unlike its competitors, Sy. Med is physician centered, while the competitors are hospital centered.
No single company has a significant market share because the industry is still young, according to Ayers. Critical Issues 1. Should he change prices of Sy. Med’s products or their maintenance fees? Based on the breakeven analysis below, there is a big need to change the prices of the products of Sy. Med. In January 2001 the company tried to raise prices to $22,000 per unit with devastating effects. With the rise in prices the operating costs also rose drastically. Breakeven point was higher at 25. 39 compared to only 2. 73 when the price per unit was only $15,000.
Pricing the product at $10,000 per unit would have devastating effects too as the variable cost per unit is already $10,457. 8 per unit. Implementing the $10,000 price scheme would mean the company would be selling at a loss. Customers have become dependent on the product once they started using it. This only underlines the advantages in using the product and the many benefits that it brings to an organization. Raising maintenance fees is a possibility that is worth exploring. It is said that pricing is rather an art, not a science. Unless one uses a pricing simulator, usually people try the trial and error method in determining prices.
There are, however, factors to consider in undertaking a pricing strategy such as the cost of production and labor, the intended profit, or even the target market. There are effects on sales when one raises or lower down prices. Some markets are price sensitive, others are not. The non price sensitive markets usually require products that are technology and innovation intensive, differentiated or specialized. 2. Should he spend on developing additional products, put out of the market one or more existing product(s), or stick with current products but intensify selling efforts?
The market is still big with plenty of room to grow, even globally. The doctors could be educated on the benefits of back office technology and savings and the earnings that they can get in using Sy. Med’s OneApp software. Because the market is young and growing there is room for future innovations and new products. The best way, seeing the business in a long term perspective, is to keep existing products, try them in new markets, and come up with new products. The company should spend more on research and development so it could develop more products and come with innovations ahead of the competition.
The market for credentialing is still young and not yet well defined. It is growing and has the tendency to develop related products and services in the future. These are trends that Sy. Med could anticipate. 3. Should he shift marketing focus from time saving benefits to some other features? It is said that time is money, especially so for a physician that is always busy with a lot of patients. Time saving benefits is still one of the best features of OneApp, and there is no immediate need to change this focus. However, other features such as the advantages of using OneApp, such as accuracy, could be emphasized too.
The fact that the savings that those using the software go to the pockets of the physicians would be of great interest to them. This could be a business proposition that could be used to increase the interests of physicians to the product. Alternatives The market presents Sy. Med with a lot of alternatives. In pricing, there are several alternatives to take such as keeping current prices or trying out new price strategies. It could explore high prices or low prices, and see which strategy generates the highest profits for the company.
Generally, the higher the price per unit of the product the higher would be the profit. However, price sensitive markets would be discouraged to buy products that have high prices. A possibility would be embarking on R&D to justify the increase in prices of Sy. Med’s products. There are a lot of markets that the company could explore. It currently markets to only 24 States. There are still more than 20 other States where the product of Sy. Med has not yet been used or known yet. Aside from that, there is still the global market that is open for further exploration.
With regards to marketing, the company could hire additional staff to do product marketing, and increase its sales. Sy. Med staff could educate the doctors on the advantages of back office technology, as well as the products of Sy. Med. The company could explore other means of marketing too aside from trade shows, direct mail, website or product demonstrations. The doctors could become potential business partners as they can benefit directly from the savings that the software generate, which goes directly to their pockets. The company could remain small, or it could grow big.
There are a lot of opportunities in this new business environment as it is a fast growing and relatively new industry. People have been comfortable with the small organization, but there are a lot of opportunities that can be missed if organizations remain small. And there are even possibilities that small businesses run out of businesses when overran by bigger organizations. Recommendations Sy. Med is existing in a young, still undeveloped industry with plenty of room to grow. Taking into account the challenges that the company is currently facing, the following recommendations are drawn:
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