MarkeTrak VI: Hearing Aid Industry Market Tracking Survey Sergei Kochkin, Ph.D. Knowles Electronics, Inc. February 27, 2002

Method National family opinion panel –80,000 households Balanced to key census variables –HIA survey in 1984 used NFO –All MarkeTrak surveys Screening Question – Phase I (November 2000) –“Does anyone in your household have a hearing difficulty in one or both ears without the use of a hearing aid?” –Physician screening for hearing loss during last physical within last six months. –Self, Spouse, Other, Child (Under age 18) –15,800 hearing-impaired individuals –72% response rate

Method Hearing Aid Owner Survey - Phase II –Detailed questionnaire 3,000 hearing aid owners based on Phase I response. –Response rate 87% Topics: –Customer satisfaction (more than 50 areas) –Hearing aid usage (e.g. hours worn) –Use of ALDs –First time user influences –Brand selection –Factors impacting choice of audiologist/dispenser –Suggestions for improving hearing aids –Perceived quality of life changes –Use of computers in hearing healthcare

Hearing Aid Market Penetration has Historically been low (1 in 5). Recent advances due to VA and Direct mail

Hearing-impaired User & Non-user Population

Hearing Loss Population by Age Group Owners versus Non-owners (2000)

Clinton Announcement Spurred “Baby Boomer” Potential Market Growth Clinton news release 10/97. M5 Survey taken 11/97. Age hearing loss growth =23% $60k growth =35% Some college growth = 30% Growth continues. But penetration among “Boomers” unchanged. Huge Baby Boomer wave

Little Change in Market Penetration by Age Since 1989

Physician Screening for Hearing Loss During Physical Exam HIA Targeting with Physicians HIA Targeting ceases

Binaural Penetration Trend

Hearing Instrument Fittings by Perceived Profession

Hearing Instrument Fittings by Source of Distribution  Mail Order has grown 91% since 1997; 124,000 hearing aid users.  VA has grown 83% since 1997; 411,000 hearing aid users.

Current Hearing Aid Owners by Source of Distribution Total Users = 6.35 million

Factors Impacting Choice of Dispensing Practice (n=2,251) (Importance scores =4-5 on 5 point scale)

Third-party Payment Trend

Average Retail Price Paid by Consumer (includes free, direct mail hearing aids, & third-party discounts) +67%+61%+70%+53% Price increase % since 1994

Age of Hearing Instrument Mean age of instruments: 1991 = 3.1 yrs 1994 = 3.7 yrs 1997 = 3.8 yrs 2000 = 3.8 yrs

First Time User Rate FDA/FTC Issues Beltone’s Eddie Albert Ads

Factors Influencing New First Time Users to Purchase Factors less than 10% mentions: –Ad-magazine (3%) –HL Literature (2%) –Boss/co-worker (5%) –Newspaper (6%) –Direct mail (5%) –Ad - TV (2%) –Ad – radio (0%) –Telemarketing (0%)

Physician Recommendation Trends HIA advertising to physician. Current initiatives: –AAA Best Practice –BHI Referral program Trends +, but not enough. Family doctor – single most important influencer of hearing aid purchase.

Factors Influencing New First Time Users to Purchase Notable changes since last MarkeTrak: –Audiologist influence increased to 40.5% - up from 26% in –ENT influence increased to 22.1% - up from 10.8% in –“Free” hearing aid influence nearly doubled.

Factors Considered Helpful or Reliable When Choosing Brand of Hearing Aid (n=2,273) (Helpfulness/reliability scores =4-5 on 5 point scale)

Average Age of New Users

New User Mean Household Income

U.S. Customer Satisfaction Trends No significant differences (H.A. <5 years.)

U.S. Customer Satisfaction Trends New Hearing Aids (< 1 year)

Hearing Aids “In the Drawer”

Hearing Aid Improvements Sought by Current Hearing Aid Owners (n=2,428) (Highly desirable scores =4-5 on 5 point scale)

Hearing Aid Improvements Sought by Current Hearing Aid Owners (n=2,428) (Desirable scores =4-5 on 5 point scale)

Non-owner Demography “The Opportunity”

The Non-Owner Opportunities Self-admitted Hearing Loss Gender (Millions)

The Non-Owner Opportunities by Age Classification

The Non-Owner Opportunities by Household Income

The Non-Owner Opportunities by Level of Education

The Non-Owner Opportunities by Employment Status

The Non-Owner Opportunities by Metro-size

The Hearing-Impaired Market by State: Self-admitted Hearing Loss Top 10 states –California –Texas –New York –Florida –Pennsylvania –Illinois –Ohio –Michigan –Georgia –North Carolina

Conclusions Hearing-impaired population > to 28.6 million. Major increases in “Baby Boomer” and 75+ age brackets. Penetration increased to 22.2%: –Free and direct mail impact Physician screenings declined to 14%. Overall customer satisfaction unchanged. –New hearing aid satisfaction on decline Hearing aids in the drawer improved to 11.7%. Audiologist influence in dispensing continues to grow.

Conclusions New user rate has dropped to 31.6%. –Average age increase to 69 –Household income increase to $46.3k Binaural rate is at an all time high of 84.5% for bilateral loss consumers. Third-party payments continue to increase. “Out-of-pocket” retail price to consumer increased 67% since “Baby-boomer” age wave continues to grow with no indication that industry has tapped this segment.

Conclusions The top hearing aid improvements sought by current hearing aid owners: –Hearing in noise –Better sound quality –Less whistling & feedback –Lower price –More soft sounds Least important improvements: –Leasing a hearing aid –Color of hearing aid –More fashionable hearing aids

Conclusions Top factors in choosing dispenser: –Professionalism –Convenient location –Convenient hours –Price Top factors considered to be helpful and reliable when choosing a hearing aid brand: –Medical doctor recommendation –AARP recommendation –Manufacturer website –Hearing instrument specialist recommendation

Key Findings from Knowles Market Development Studies

The Decision To Purchase a Hearing Aid is Very Complex and Little Understood

The Relationship Between Ad Expenditures & Hearing Aid Sales is Weak

The Issue of Price & Value

Customer Satisfaction with “Value” = Price/performance Hearing aids 1-5 years of age

Satisfaction Highly Related to How Much $$ the Consumer Pays to Solve Their Problem Note: Handicap reduction measured by APHAB

Hearing Aid Prices are Inelastic at Higher Prices & Highly Elastic at Low Prices Starter Hearing Aid Market

Stigma & Price Are Not the Only Barriers to Market Growth

The Issue of Stigma

Invisible Hearing Aids Have Greater Consumer Acceptance

Can Positive Role Models Help Consumers Overcome Stigma? Only Two examples I am aware of in our industry : –President Reagan – 1983 (associated with 20% growth) –Eddie Albert in Beltone commercials – 1989 Apparent Clinton effect in Fall of 1997 –Probable impact on admission of hearing loss by male “baby-boomers” –No impact on sales to date

What is The Viable Market for Hearing Aids?

Market Penetration is Highly Related to Recognition of Hearing Loss Handicap

Discriminant Function Probability of Non-owner Resembling Current HA Owner Based on Multiple Subjective Hearing Loss Measures. Probabilities 1-39% =  71% of non-owner market  14% of the owner market.

Four Methods of Measuring Viable US Hearing Aid Market Based totally on hearing loss measures the additional possible market growth is:  Gallaudet Scores (est. dB Loss Better ear) = 125%  Hearing Handicap Inventory (HHIE) = 154%  APHAB = 127%  Discriminant Function Modeling = 102% Clear that the current market could easily double based totally on hearing handicap. And, even more based on situational need.

Why Buy Hearing Aids?

Attitudes Per Se are Important, But Relationship to Hearing Aid Purchase Intent is Perhaps More Important Sample of 2,753 non-owners Measured their attitudes on 76 issues. Measured their hearing aid purchase intent in the next five years. Categorized them as a high or low purchase intenders. Took ratio of high/low purchase intenders for each attitude item. Ranked ratios First – present their attitudes in key categories. –On following charts – view red (negative) as “barrier” to growth.

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor = Distribution

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor = Hearing Health Professional Influence

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor =Hearing Loss

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor =Knowledge Level

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor =Lifestyle

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor =Hearing Aid Performance

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor =Hearing Aid Characteristics

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor =Social Influence

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor =Stigma & Cosmetics

Hearing-Impaired Non-owner Attitudes Towards Hearing Aids Factor =Value of Hearing Aids

Top 12 Correlates of Hearing Aid Purchase Intent

Lowest Correlates of Hearing Aid Purchase Intent Brand HA make only certain sounds louder Too expensive HA sellers take advantage of you Can afford hearing aids Need surgery Know where to go for hearing tests Know where to buy hearing aids Old image of hearing aids Use lower expense product Customer orientation of dispensers HA warranty Knowledge of hearing aids