Hardware manufacturers, including medical device manufacturers, and their product line managers are constantly challenged to increase revenue and profit. For many, the strategy to increase revenue is simple; sell more of the product they produce. Yet, the dynamics and pace of business in this competitive world make that harder than it sounds. This article explores the use of wireless RFID to protect and secure valuable medical technology.
Technology at Risk
Very often as a means to protect an established revenue stream, companies create barriers of entry with intellectual property, exclusive distribution agreements with key distributors or retailers, and the economy of scale achieved through volume manufacturing. Yet revenues remain at risk from either larger, well-financed companies with stronger manufacturing relationships, better execution, and a competitive product at a lower price, or an entirely new innovation that leaps ahead of an established product.
Further, regardless of a company’s production strategy, an unavoidable consequence of competitive hardware introductions is often an ultimate reduction of the original product’s planned life cycle in order to stay competitive against new and innovative features brought to market. The reduced life cycle negatively affects a product’s margin contribution over its planned life when the anticipated production volume falls well short of its original mark. Thus, the amortized cost of the product development may not ever be fully recovered.
Consider too, that traditional hardware manufacturers are also vulnerable to commoditization that puts pressure on producers to lower the unit sale price, reducing top line revenue and bottom line performance.
The outcome of these factors is the impetus for a medical manufacturer to consider alternative business models. It may no longer be enough to create a high-margin product from total all-in production cost versus selling price. Medical device manufacturers, especially startups of connected hardware, may seek recurring revenue streams using hardware as the enabler.
In some cases, startups are in reality software companies for which hardware is way to access customers. Their recurring revenue stream is derived from software or data services. It’s not only desirable for hardware companies to create recurring revenue streams, it is essential for some to remain viable.
Beyond a traditional manufacturing profit plan that subtracts the fully burdened cost from the sale price, there are four prevalent business models for connected hardware manufacturers to consider Hardware as a Service, Hardware Enabled Service, Hardware as a Platform, and Hardware as a Delivery Mechanism.
This article concentrates on these consumable models, especially as they relate to healthcare and medical device manufacturers and how passive radio-frequency identification (RFID) can be used to protect and secure an established revenue stream. Healthcare as a market segment is a significant user of consumable items, with regulatory oversight and provider focus on patient safety and infection control, in addition to an astounding number of diagnostic tests conducted annually on millions of individual patient samples.
Alternative Business Models
Here are four features of alternative business models that a hardware manufacturer might consider.
Hardware as a Service (HaaS) relies on the sale or lease of a device that only works when a recurring fee is paid. It is optimized for high lifetime value to the manufacturer through recurring fees rather than substantial gross margin on the initial sale. Examples are almost always a software license fee or service agreement paid on an annual or monthly basis. Some HaaS models are structured so that the client does not own the technology, but rather leases equipment, providing access to updates, maintenance, and eventually replacement after its useful service life has expired.
Hardware-Enabled Service is almost the same as HaaS, but the service portion is optional. The manufacturer must make a significant margin on the sale of each unit produced and offers optional services that enhance revenue. A recognizable example might be cloud-based data storage.
Hardware as a Platform creates profit from licensing rights to develop on the hardware platform. Example: A game console where profits are derived from sale of the licensed games developed to run on the hardware as opposed to the actual console itself.
Hardware as a Delivery Mechanism is the most challenging model for a hardware company to develop but is one that can be extremely defensible and astonishingly lucrative, especially when the consumable item can be authenticated to prevent revenue siphoning caused by knock-offs, grey markets, and outright counterfeits.
This consumable model is based on a one-time hardware sale as the dispenser and an ongoing sale of the consumable item. Occasionally, the dispenser hardware may be sold at or below cost to secure a recurring and very profitable consumable business. These companies totally rely on the consumable revenue stream, and it is, therefore, paramount to secure and protect possible erosion of the revenue stream. Otherwise, the model becomes no longer viable.
A few obvious consumer examples of this model include the razor blade to its handle or an ink cartridge to a printer. In healthcare, the consumable item might be a manifold and a hose used to collect biohazardous fluids in an operating room procedure, or a chemical or biochemical reagent used in clinical analyzers for lab testing and instrument calibration. Items like these are one-time use and consumed in huge volumes. It is no surprise for such items to attract attention from knock-offs and counterfeit manufacturers since siphoning even a fraction of the market can represent a sizable amount of business.
For items such as these, establishing barriers to entry is not nearly enough. Barriers merely delay the emergence of counterfeits, but the manufacturer needs to eliminate them. That’s where RFID comes in to uniquely solve the problem.
RFID: The Unique Identifier
RFID is a wireless technology. It is stealthy by its inconspicuous nature when applied as an anti-counterfeiting measure. Passive RFID transponders can be embedded into a wide variety of materials such as labels, plastics, glass, and rubber. It is rather difficult to duplicate what cannot be seen.
Each RFID tag has its own unique identifier in addition to its user memory. The UID is placed in a permanent, readonly partition and cannot be altered. User data can be locked to prevent access and secured using an impossible to hack, 256-bit AES encryption key. Depending on the protocol and tag’s security features, a system of mutual authentication between a reader and tag can be implemented, whereby the tag will only respond to a challenge issued by an authorized reader while remaining completely undetectable by an unauthorized reader device. Further, RFID incorporates an interesting “kill tag” function that incapacitates a tag for any future use, essentially ensuring the onetime-use of that item.
RFID is an ideal technology for authentication. It is fast, secure, and cannot be duplicated. It is simple for users to operate, and it produces valuable data streams. Any medical device manufacturer looking to protect an existing revenue stream or create a new one through consumable items needs to strongly evaluate and consider RFID as a part of their program.
This article was written by Michael Hrabina, Global Product Marketing Manager for FEIG Electronics, Duluth, GA. For more information, visit here .