Hearing Review’s report on the 4.8 percent increase in 2014 U.S. hearing aid unit sales underscores the roles Costco and the Veterans Administration (VA) have played in driving the growth of the hearing industry. The report shows that Costco, the “big box” retailer, and the government-funded VA accounted for nearly a third of the more than three million units sold in the U.S. last year, with both channels growing three-to-five times faster than sales through independent audiologists. What makes Costco and the VA different from private independent sellers, whose growth rate was less than three percent? Lower prices, for one thing. But the fact that both the VA and Costco are delivering better products than ever before may be even more important.
In the past, entry-level hearing aids were more expensive, less powerful, and offered less sophisticated sound processing capabilities than what’s available today. While a pair of premium hearing aids with all the bells and whistles still can cost more than $6,000, now it’s also possible to get excellent amplification with digital sound processing, feedback cancellation, directional microphones and other features in a pair of hearing aids for $2,000 or less.
Just as important, the products are more reliable, they are easier to program, and new, more standardized testing and dispensing protocols enable a less difficult, faster and more accurate fitting process. The result is not just lower product prices driven by reductions in the cost of technology, but a lower overall cost of sales and service. The buyer enjoys a lower purchase price and, just as important, a lower total cost of ownership over the lifetime of the hearing aid, with less need for follow-up service and a longer post-warranty product life.
Costco previously only sold older-generation hearing aids from top manufacturers, which reserved their newest models for the private independents. But with industry-leader Phonak’s agreement last year to provide its latest and greatest hearing-aid models to Costco, the big-box retailer closed the product performance gap. At the same time, the volume purchase agreement with Phonak enabled Costco to maintain a price advantage over private independent sellers.
In the meantime, Costco’s more efficient sales process — with ranks of well-trained licensed hearing aid dispensers working out of low-overhead kiosks within the Costco stores — has enabled hearing aid buyers to enjoy a fast fitting at the same time they are shopping for a month’s worth of groceries.
The same dynamic is at work with the Veterans Administration. Sure, hearing aids for veterans are subsidized by the government, and with hearing loss one of the most common disabilities suffered by veterans, it’s no surprise the VA dispenses huge volumes. But because there are limits to the size of the subsidies the VA offers, it won’t dispense premium-model hearing aids with all the bells and whistles. Now that standard and entry-level hearing aids are closing the performance gap and offering a much better user experience, volumes dispensed by the VA are soaring, nearing 700,000 units in 2014.
The 2014 unit sales report is only a hint of things to come. Hearing products are breaking through thresholds of cost, functionality and overall customer satisfaction that previously held back growth; going forward, those dynamics should result in even faster increases in volumes shipped through all channels.
But as in any technology-driven disruption, there will be winners and losers. Private independent audiologists are terribly anxious about their ability to continue providing excellent service to patients while making enough margin to continue running their own businesses. There may be more roll-ups of independents into retail chains with more buying power to compete with the volume purchase agreements Costco and other big retailers can negotiate.
But that doesn’t mean the game is over for private independent audiologists. We are already seeing more affordable new products coming from more manufacturers, giving independents an alternative to the “Big Six” manufacturers who in the past had enough market power to keep wholesale product prices relatively high. In fact, the top three publicly held manufacturers have complained in recent financial reports about pricing pressure that has impacted their profitability due to increased competition from new market entrants.
Independent audiologists will also benefit from more sophisticated sound processing software that’s more standard and easier to program, and from higher overall product quality and reliability, which should lessen the number of returns. The net could and should be higher sales volumes to offset lower selling prices and margins for the independents, while they maintain their traditional extremely high levels of service.
In the meantime, watch for other big box retailers to follow Costco’s lead, watch for the entrance of credible alternatives to the Big Six from credible new manufacturers with entry- and mid-range hearing aid products, and watch for a revolution in faster and more efficient sales, service and practice management by independent audiologists in 2015.