Whats Up in This Down Economy? Sergei Kochkin, Ph.D.

What’s Up in This Down Economy?What’s Up in This Down Economy?

Sergei Kochkin, Ph.D.Sergei Kochkin, Ph.D.

AgendaAgenda

• Impact of economy on domestic hearing aid Impact of economy on domestic hearing aid sales (20 year trend)sales (20 year trend)

• Probable impact of inexpensive ALD’s on Probable impact of inexpensive ALD’s on hearing aid saleshearing aid sales

• On the issue of price elasticity & the tax On the issue of price elasticity & the tax credit billcredit bill

• Notes on the issue of valueNotes on the issue of value

The Effects of The Economy on Gross The Effects of The Economy on Gross Domestic Hearing Aid SalesDomestic Hearing Aid Sales

BackgroundBackground

• Study conducted while at KnowlesStudy conducted while at Knowles

• Period covered 1978-1998Period covered 1978-1998

• Recessions during this period:Recessions during this period:– Jan-Jul 1980 & Jul 1981-Nov 1982Jan-Jul 1980 & Jul 1981-Nov 1982– Jul 1990 – Mar 1991Jul 1990 – Mar 1991

• Major Shocks: FDA 1993-1994Major Shocks: FDA 1993-1994

MethodMethod

• Twenty year data collected in quarters.Twenty year data collected in quarters.• Economic indicators:Economic indicators:

– GDPGDP– S & P 500S & P 500– Actual CD interest ratesActual CD interest rates– Gross rates (interest adjusted for inflation)Gross rates (interest adjusted for inflation)– InflationInflation

• HIA domestic sales – private marketHIA domestic sales – private market• Trend isolated using X11 Bureau of Census seasonal Trend isolated using X11 Bureau of Census seasonal

de-compositional model.de-compositional model.• Trend expressed as % change from previous quarter.Trend expressed as % change from previous quarter.

Reagan

VariableVariable COEFFCOEFF Predictive ValuePredictive ValueS & PS & P .235.235 5.5%5.5%CD RatesCD Rates .412.412 17%17%Interest Rate less InflationInterest Rate less Inflation .433.433 19%19%InflationInflation .176.176 3%3%GDPGDP .01.01 0%0%S&P + CD (with lags)S&P + CD (with lags) .56.56 31%31%

Hearing Aid Sales PredictorsHearing Aid Sales Predictors

•Small but significant relationships between HIA Domestic Small but significant relationships between HIA Domestic Sales Change versus Changes in the S & P 500 value, actual Sales Change versus Changes in the S & P 500 value, actual CD Rates, the gross rate (interest adjusted for inflation), and CD Rates, the gross rate (interest adjusted for inflation), and inflation.inflation.

Hearing Aid Sales PredictorsHearing Aid Sales Predictors• No relationship between HIA sales and the No relationship between HIA sales and the

economy as measured by gross domestic economy as measured by gross domestic product. product.

• Time lags (e.g. how long was the change in the Time lags (e.g. how long was the change in the economy felt) indicates that we can explain economy felt) indicates that we can explain 31% of HIA sales based on changes in the 31% of HIA sales based on changes in the value of stock portfolios and CD rates.value of stock portfolios and CD rates.

• Greatest historical impact was the FDA Greatest historical impact was the FDA initiative in 1993-1994 --- without advertising initiative in 1993-1994 --- without advertising and marketing claims you cannot sell product.and marketing claims you cannot sell product.

Current Economic ClimateCurrent Economic Climate

• Hearing aid sales are related to perceptions Hearing aid sales are related to perceptions of available assets relative to expected life-of available assets relative to expected life-span.span.

• Low interest rates on CD’s given Greenspan Low interest rates on CD’s given Greenspan philosophy during Bush years while safe did philosophy during Bush years while safe did not deliver acceptable yields.not deliver acceptable yields.

• Were boomers & retirees taking greater risks Were boomers & retirees taking greater risks with their “nest eggs” with larger mix in the with their “nest eggs” with larger mix in the stock market?stock market?

• WSJ would tend to agree --- with retirees WSJ would tend to agree --- with retirees seeking jobs to supplement reduced wealth.seeking jobs to supplement reduced wealth.

• Could impact long term growth of HA market.Could impact long term growth of HA market.

Impact of Low Cost Listening Impact of Low Cost Listening Devices on Hearing Aid SalesDevices on Hearing Aid Sales

IntroductionIntroduction

• Low cost listening devices have been available for at Low cost listening devices have been available for at least 25 years.least 25 years.– Price range $20-$50Price range $20-$50– Some infomercials 2 for $19.95Some infomercials 2 for $19.95

• Most notable historically Whisper 2000Most notable historically Whisper 2000• Recent proliferation of devices with extensive Recent proliferation of devices with extensive

television ads.television ads.– Silver Sonic XLSilver Sonic XL– Loud N’clearLoud N’clear– + dozen others+ dozen others

• Apparently tend to be introduced close to recessions.Apparently tend to be introduced close to recessions.• Do these devices cannibalize legitimate hearing aids Do these devices cannibalize legitimate hearing aids

sales?sales?

Sample of ProductsSample of Products

Also Resurgence of Internet Sold Also Resurgence of Internet Sold Hearing aidsHearing aids

New direct mail firm selling digital New direct mail firm selling digital programmable open fit ($495-$895) programmable open fit ($495-$895)

Increased trend in non-owner Increased trend in non-owner purchase of listening devicespurchase of listening devices

• Use less expensive device in place of hearing Use less expensive device in place of hearing aidsaids

• MarkeTrak III (1993)MarkeTrak III (1993)– 2.6% “somewhat a reason”2.6% “somewhat a reason”– 1.1% “definitely a reason”1.1% “definitely a reason”– 3.7% Total3.7% Total

• MarkeTrak VII (2004)MarkeTrak VII (2004)– 5% “somewhat a reason”5% “somewhat a reason”– 3% “definitely a reason”3% “definitely a reason”– 8% Total8% Total

Relative Internet Ranking (000)Relative Internet Ranking (000)Internet ALDs versus HIA MembersInternet ALDs versus HIA Members

576462

427397

385356

334271

178156

11874

6762

0 100 200 300 400 500 600 700

HIA1

HIA2

HIA3

HIA4

HIA5

HIA6

Ampli-ear

HIA7

HIA8

HIA9

HIA10

Loud n Clear

Songbird

Silver Sonic

Rank (000)Note: Lower ranks denote higher traffic

Estimated Web Visitors Per MonthEstimated Web Visitors Per MonthALDs versus HIA MembersALDs versus HIA Members

ALD= Songbird, Sonic XL, Loud n Clear, Ampli-earALD= Songbird, Sonic XL, Loud n Clear, Ampli-ear

0 100000 200000 300000 400000 500000 600000

Jan

Dec

Nov

Oct

Sep

Aug

Jul

Jun

May

Apr

Mar

Feb

Jan

HIAALD

2008

2009

Simulation of cannibalization of Simulation of cannibalization of legitimate hearing aid saleslegitimate hearing aid sales

• Query MarkeTrak VII database (2004)Query MarkeTrak VII database (2004)

• Segment into hearing aid candidates Segment into hearing aid candidates based on hearing loss decile.based on hearing loss decile.– Top 50% of people with hearing loss in Top 50% of people with hearing loss in

U.S.U.S.– 83% of hearing aid owners are in the top 5 83% of hearing aid owners are in the top 5

deciles of HL.deciles of HL.

Hearing aid adoption rates by hearing Hearing aid adoption rates by hearing loss decile.loss decile.

1.9 4.16.6

11.315.5

23.929.8

48.3

59.9

37.7

0

10

20

30

40

50

60

70

1 2 3 4 5 6 7 8 9 10

Hearing Loss Decile

HI

Pen

etra

tio

n (

%)

83% hearing aid owners

39% non-adopters

Simulation (Cont.)Simulation (Cont.)

• Non-candidate segmentsNon-candidate segments– Tried hearing aids and failed or they did Tried hearing aids and failed or they did

not worknot work– Surgical issue – had or scheduled forSurgical issue – had or scheduled for

Simulation (cont.)Simulation (cont.)

• Determine if individual purchased low Determine if individual purchased low cost listening device in place of hearing cost listening device in place of hearing aid.aid.– Score of 4-5 (definite reason) on 5 point Score of 4-5 (definite reason) on 5 point

scale.scale.– Score of 3 (somewhat reason)Score of 3 (somewhat reason)

Decision Tree ResultsDecision Tree Results

Total Non-Owners24.1 Mil.

HA Candidate7.8 Mil

Mild HL ProbableNon-candidate

13.6 Mil

Tried Hearing Aids.83 Mil.

Surgery1.8 Mil

840,000 741,000 161,000 222,000

Segment

1.96 Mil. purchased less expensive device

Purchase

ALD

Simulation (cont.)Simulation (cont.)

• Segment hearing aid candidates on Segment hearing aid candidates on ability to afford hearing aids.ability to afford hearing aids.– Previous research indicates they are telling Previous research indicates they are telling

the truththe truth– Household salary $20-$40,000 less then Household salary $20-$40,000 less then

people who say they can afford hearing people who say they can afford hearing aids depending on age segment.aids depending on age segment.

– Nearly 8 million at 150% of poverty or lessNearly 8 million at 150% of poverty or less

Median income comparing people who state they can and Median income comparing people who state they can and cannot afford hearing aids controlling for age.cannot afford hearing aids controlling for age.

62.567.5

72.5

62.5

41.3

31.323.8

31.323.8

20

0

10

20

30

40

50

60

70

80

21-44 45-54 55-64 65-74 75+

Age Group

Mea

n H

ou

seh

old

In

com

e $(

000)

Can afford Can't afford

Simulation – cannibalization of Simulation – cannibalization of legitimate/custom hearing aid saleslegitimate/custom hearing aid sales

HA Candidate7.8 Mil.

Purchased low cost device840,000

Definite reason321,200

Somewhat a reason518,800

Can’t afford – 80%

Can afford – 20%64,200

Can’t afford - 77%

Can afford – 23%119,100

HA Affordability

ResultsResults

• 64,200 hearing aid candidates64,200 hearing aid candidates– Definitely purchased lower cost listening Definitely purchased lower cost listening

devices in place of hearing aidsdevices in place of hearing aids– Who definitely can afford hearing aidsWho definitely can afford hearing aids

• 119,100 hearing aid candidates119,100 hearing aid candidates– Possibly purchased lower cost listening Possibly purchased lower cost listening

devices in place of hearing aidsdevices in place of hearing aids– Who definitely can afford hearing aidsWho definitely can afford hearing aids

Bottom line simulationBottom line simulation

• 100% of 100% of “definites”“definites” = 64,200 = 64,200• 30% of 30% of “somewhats”“somewhats” = 39,700 = 39,700• Probable siphoning off of legitimate hearing aid Probable siphoning off of legitimate hearing aid

sales for total viable HA candidates in U.S. sales for total viable HA candidates in U.S. population = 103,900population = 103,900

• Viable HA candidates = 8.9 millionViable HA candidates = 8.9 million• % probable siphoning off = 1.1% % probable siphoning off = 1.1% • Over 5 year purchase cycle <25,000 per year.Over 5 year purchase cycle <25,000 per year.

Historical NoteHistorical NoteWhisper 2000Whisper 2000

• Body aid type listening Body aid type listening devicedevice

• Introduced in U.S. in 1990Introduced in U.S. in 1990• Main sales during the 1991 Main sales during the 1991

recessionrecession• Sales at Walgreens Sales at Walgreens

reported to be 2 million.reported to be 2 million.• Still available in UK for $18Still available in UK for $18

Whisper 2000 – Sales PitchWhisper 2000 – Sales Pitch

• This might look like a tiny radio, but Whisper This might look like a tiny radio, but Whisper 2000(tm) is a major breakthrough in sound 2000(tm) is a major breakthrough in sound interception and amplification, allowing you to interception and amplification, allowing you to hear the quietest of sounds indoors or out. hear the quietest of sounds indoors or out. – Requires 1 x 9V battery (not included). Requires 1 x 9V battery (not included). – Hear a whisper across a room Hear a whisper across a room – Enjoy clear sounds of the TV/Radio turned low so Enjoy clear sounds of the TV/Radio turned low so

as not to disturb others as not to disturb others – Never miss a word at the cinema or theatre Never miss a word at the cinema or theatre – Listen to birds singing Listen to birds singing – Track the sounds of wildlife before they hear you Track the sounds of wildlife before they hear you

MarkeTrak VIIIMarkeTrak VIII

• Closer look at low cost ALD and Closer look at low cost ALD and Internet hearing aid salesInternet hearing aid sales

• Quantification of cannibalizationQuantification of cannibalization– Probability purchased product in place of a Probability purchased product in place of a

custom hearing aid.custom hearing aid.

• Customer satisfaction with productCustomer satisfaction with product

On the issue of price elasticity, value On the issue of price elasticity, value and the tax credit billand the tax credit bill

Consensus ElasticityConsensus Elasticity

• General agreement that elasticity for hearing aids is General agreement that elasticity for hearing aids is in the .6-.9 range.in the .6-.9 range.– Dissertation HA industry (1987)Dissertation HA industry (1987)– Kochkin - MarkeTrak III (1992)Kochkin - MarkeTrak III (1992)– Kochkin – MarkeTrak IV (1994)Kochkin – MarkeTrak IV (1994)– Amlani – ASHA (2005)Amlani – ASHA (2005)

• Meaning:Meaning:– Revenue cannot be maximized by price decreases at the Revenue cannot be maximized by price decreases at the

point of sale.point of sale.

• Some evidence in MarkeTrak III:Some evidence in MarkeTrak III:– hearing aid sales may be elastic when prices are very low hearing aid sales may be elastic when prices are very low

($100-$200)($100-$200)– high probability of cannibalization if the inexpensive high probability of cannibalization if the inexpensive

products deliver benefit.products deliver benefit.

Increasing Invisible CIC Price ($)05

1015202530354045505560

5 ye

ar p

u rc h

ase

inte

nt (

%)

H.I. Owners

Nonowners

Only 35% of non-owners would take a "free" invisible hearing instrument.

MarkeTrak IV: Only1/3 of non-owners MarkeTrak IV: Only1/3 of non-owners would take a FREE & INVISIBLE hearing would take a FREE & INVISIBLE hearing

aidaid

Positive impact of hearing aid enhancements Positive impact of hearing aid enhancements on the total hearing loss population currently on the total hearing loss population currently

not using hearing aids.not using hearing aids.

10

11

11

19

19

20

27

40

0 10 20 30 40 50

Language translator

Built in FM radio

MP3 connectivity

Self fit/adjust

Headset functionality to phone

Built into fashionable eyeglass

Able to buy software upgrade

$500 tax credit

PercentMarkeTrak VII: 40% indicate they would take advantage of the $500 tax credit

Local Public RelationsLocal Public RelationsTax Credit Bill GrassrootsTax Credit Bill Grassroots

• If hearing aid price is inelastic how can tax If hearing aid price is inelastic how can tax credit bill possibly work?credit bill possibly work?

• The importance of the Tax Credit Bill:The importance of the Tax Credit Bill:– Price elasticity is approximately .6 Price elasticity is approximately .6 – That means for every 10% decline in price That means for every 10% decline in price

you could get about 6% growthyou could get about 6% growth– $500 tax credit is roughly 25% decline in $500 tax credit is roughly 25% decline in

priceprice– Therefore in PERFECT marketing world Therefore in PERFECT marketing world

growth for hearing aids could be 15%.growth for hearing aids could be 15%.

Local Public RelationsLocal Public RelationsTax Credit Bill GrassrootsTax Credit Bill Grassroots

• Perfect marketing world:Perfect marketing world:– 100% of non-owner market knows about it100% of non-owner market knows about it– It’s even built into Turbo TaxIt’s even built into Turbo Tax– There are no other or only minor obstacles There are no other or only minor obstacles

to hearing aid adoption.to hearing aid adoption.

• It works because the price discount is paid It works because the price discount is paid for by a third party – the tax payer.for by a third party – the tax payer.– Volume increasesVolume increases– Total net revenue increasesTotal net revenue increases

With reintroduction of bills we will need concertedWith reintroduction of bills we will need concertedactivism on the Tax Credit Billactivism on the Tax Credit Bill

• Inform all hearing aid users (non-VA sales) & Inform all hearing aid users (non-VA sales) & users of ALD with insert card.users of ALD with insert card.

• Tell it on your website Tell it on your website • Promote the site on your business cardPromote the site on your business card • Send your own eBlastSend your own eBlast• Do a post card campaign to past customersDo a post card campaign to past customers• Place an OpEd piece in your local newspaper Place an OpEd piece in your local newspaper • Promote the website in your community Promote the website in your community • Start a chain eMail Start a chain eMail • Get corporate awarenessGet corporate awareness• Write your own professional letterWrite your own professional letter• Issue a local press releaseIssue a local press release

Tax credit goal 2009Tax credit goal 2009

• 500,000 letters using 500,000 letters using www.hearingaidtaxcredit.orgwww.hearingaidtaxcredit.org

• Will need involvement of:Will need involvement of:– HIA members and their sales staffHIA members and their sales staff– Mobilization of audiologists & dispensersMobilization of audiologists & dispensers– To contact current and past customersTo contact current and past customers– Remobilization of people writing letters last yearRemobilization of people writing letters last year– More pressMore press

Couple Notes on Value & Market Couple Notes on Value & Market GrowthGrowth

• Price is not correlated with customer Price is not correlated with customer satisfaction.satisfaction.

• It is however highly correlated with It is however highly correlated with value =value =– Price/benefitPrice/benefit– Where benefit = (unaided – aided)/unaidedWhere benefit = (unaided – aided)/unaided– Or price paid for every % point drop in Or price paid for every % point drop in

hearing disability.hearing disability.

Customer Satisfaction is Highly Related to $$$ Customer Satisfaction is Highly Related to $$$ Spent per 1% Improvement in Hearing DisabilitySpent per 1% Improvement in Hearing DisabilityWhere % change = (benefit/unaided APHAB)Where % change = (benefit/unaided APHAB)

253035404550556065707580859095

100

5 15 25 35 45 55 65 75 85 95 125 200 500

Price ($$) spent per 1% disability improvement

Sat

isfa

ctio

n

Overall

Benefit

Value

Poly. (Overall)

Poly. (Benefit)

Poly. (Value)

$500 HA$50,000 HA

Overall Customer Satisfaction as a Function of Price and Overall Customer Satisfaction as a Function of Price and Hearing Disability ImprovementHearing Disability Improvement

(Statistical Model)(Statistical Model)

PriceHearing disability improvement (%)

Overall Customer Satisfaction (%)

R2=.86

The Cost of The Cost of Negative Word-of-Mouth Negative Word-of-Mouth

• 19% of total 23 million adults don’t purchase because 19% of total 23 million adults don’t purchase because of other hearing aid owners.of other hearing aid owners.

• That’s 4.4 million peopleThat’s 4.4 million people• Assuming 1.75 hearing aids each over 5 purchase Assuming 1.75 hearing aids each over 5 purchase

cycles of 5 years (their average age is now 60)cycles of 5 years (their average age is now 60)• That’s potentially 38,200,000 hearing aids not That’s potentially 38,200,000 hearing aids not

purchased over their lifetime….if we cannot purchased over their lifetime….if we cannot overcome these negative perceptions based on overcome these negative perceptions based on REAL experiences (@$1,800 retail price)REAL experiences (@$1,800 retail price)

• That’s 19 years of lost sales for the whole US!That’s 19 years of lost sales for the whole US!• That’s $69 billion in lost revenue!That’s $69 billion in lost revenue!

Recommendations for hearing aids highly related to Recommendations for hearing aids highly related to utility in various listening situations increased (n=2,066)utility in various listening situations increased (n=2,066)

0102030405060708090

100

None 1-9% 10-19%

20-29%

30-39%

40-49%

50-59%

60-69%

70-79%

80-89%

90-99%

100%

Listening Situations Satisfied

% R

ecom

men

d he

arin

g ai

ds

Overall SummaryOverall Summary• HA industry historically recession proof (GDP).HA industry historically recession proof (GDP).• Sales related to health of retiree nest-eggs and CD Sales related to health of retiree nest-eggs and CD

rates.rates.• Sales for custom hearing aids price inelastic.Sales for custom hearing aids price inelastic.• Vulnerable area is very low price direct mail hearing Vulnerable area is very low price direct mail hearing

aids or ALDs that deliver modest benefit.aids or ALDs that deliver modest benefit.• Price is not a correlate of satisfaction --- it is VALUE Price is not a correlate of satisfaction --- it is VALUE

= benefit relative to price.= benefit relative to price.• Positive recommendations (i.e. market growth) highly Positive recommendations (i.e. market growth) highly

related to utility of hearing aids to the consumer.related to utility of hearing aids to the consumer.• Growth formula:Growth formula:

– Impeccable consumer journey (Golden Protocol or ISO Impeccable consumer journey (Golden Protocol or ISO standard)standard)

– Positive impressions in the market place through PR and Positive impressions in the market place through PR and positive word-of-mouth from satisfied customerspositive word-of-mouth from satisfied customers

– Increased hearing aid utility (especially public places)Increased hearing aid utility (especially public places)

Improving the Consumer ExperienceImproving the Consumer ExperienceSample letterSample letter

I am a member of Algoma Blvd. Church in Oshkosh. What I experienced last Sunday was nothing short of a miracle. For the very first time in many, many years I was able to hear every single word said in church along with every note of music thanks to a hearing loop. I cannot express my thankfulness in words. It was truly one of my most memorable moments in my life and I felt "normal." Thank you. C. P. - Oshkosh