Guidance for Healthcare Entrepreneurs: Development of the Business Model

Important questions need to be asked as physicians develop the business model for a new healthcare innovation.

Once an opportunity for a healthcare innovation is identified, we should think about a strategy that will help us move this opportunity forward, that is, our business model. The business model is the mechanism behind our start-up that will generate revenues and benefits. These are question to consider moving forward:

Will we sell our product at a higher price?

Or will we give it away for free in order to have many users and to get the revenues from maintenance fees?

Or perhaps sell additional services attached to that product?

How will we differentiate ourselves from competitors?

What is our competitive advantage?

This business model must allow us to optimize this opportunity to the maximum, to take advantage of our strengths and to minimize our weaknesses and has much to do with the definition of our strategy.

For example, suppose that our start-up tries to distribute a medical device that we want doctors to use in hospitals. The question that we should ask ourselves is how do we define how our business model: How will we contact the hospitals to distribute this product? Through whom? Is it good that this product can be found in other ways, not only in hospitals? Will we get revenues from the sale of the product or from a consumable used with the product? Will we cover our costs in a situation of contracted demand? Will we extend its consumption throughout the United States, all the world, or to only one city as a test? Will we make these products ourselves or subcontract their production to a third party according to our needs?

These are examples of complex questions we will need to face at some point.

1. Can we create barriers of entry?

Elevated barriers of entry play to our advantage in new healthcare initiatives, making it difficult for a competitor to imitate our project. One must take into account that every good initiative attracts imitators. Often, the first competitors enter the market with a strategy of “copying and pasting.” It is important to know ahead of time all the competitive threats and to think from the onset in terms of what measures we need to protect us from them. The protection of intellectual property for example, is quite usual and necessary in our field.

1. Who will be the clients of our product and service? Are they accessible and open to change? Another question that I usually ask entrepreneurs is can they give me the names of possible clients. If they cannot identify who they clients will be, they are still not ready to begin the process. Identifying future clients is not enough, however; they should be open as well to change to our product. Normally, the success of any start-up initiative depends on getting the client to let go of a previous way of doing something and adopting our proposal. Consequently, it is essential that the change offers a clear benefit.

2. Will we and our providers understand each other?

In this initial phase we should begin to decide if we are going to produce the product or service ourselves, or if we are going to hand it over to a third party. In the early stages of a start-up, it is very common not to invest in equipment or in our own manufacturing of the products. But all these decisions have a strong impact on the company, because what on one hand saves us money, on the other hand makes us more dependent on our providers who could use their position to take advantage of us.

1. Will we and our future clients understand each other?

When the consumers are citizens, patients, and individuals, they usually don’t have great buying power and are not able to influence our decisions. However, when the consumers are big institutions such as hospitals or the administration, one must take into account that the consumer will have great influence and therefore, will be able to highly influence our actions.

1. Can regulation of the health sector play to our favor?

The healthcare field is strongly regulated. This presents an important barrier of entry. It is necessary to know from the very beginning the possible regulatory requirements in the administration regarding market approval, methods and procedures, clinical trials, insurance, and so on.

Frequently, entrepreneurs have not reflected on how they are going to comply with these requirements, or even if these requirements can offer interesting competitive advantages to their business model.

Excerpt from, “Innovation and Entrepreneurship in the Healthcare Sector: From Idea to Funding to Launch,” by Luis G. Pareras, MD, MBA