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

Agenda Impact of economy on domestic hearing aid sales (20 year trend)Impact of economy on domestic hearing aid sales (20 year trend) Probable impact of inexpensive ALDs on hearing aid salesProbable impact of inexpensive ALDs on hearing aid sales On the issue of price elasticity & the tax credit billOn the issue of price elasticity & the tax credit bill Notes on the issue of valueNotes on the issue of value

The Effects of The Economy on Gross Domestic Hearing Aid Sales

Background Study conducted while at KnowlesStudy conducted while at Knowles Period covered Period covered Recessions during this period:Recessions during this period: –Jan-Jul 1980 & Jul 1981-Nov 1982 –Jul 1990 – Mar 1991 Major Shocks: FDA Major Shocks: FDA

Method Twenty year data collected in quarters.Twenty year data collected in quarters. Economic indicators:Economic indicators: –GDP –S & P 500 –Actual CD interest rates –Gross rates (interest adjusted for inflation) –Inflation HIA domestic sales – private marketHIA domestic sales – private market Trend isolated using X11 Bureau of Census seasonal de-compositional model.Trend isolated using X11 Bureau of Census seasonal de-compositional model. Trend expressed as % change from previous quarter.Trend expressed as % change from previous quarter.

Reagan

VariableCOEFF Predictive Value S & P % CD Rates.41217% Interest Rate less Inflation.43319% Inflation.1763% GDP.010% S&P + CD (with lags).5631% Hearing Aid Sales Predictors Small but significant relationships between HIA Domestic Sales Change versus Changes in the S & P 500 value, actual CD Rates, the gross rate (interest adjusted for inflation), and inflation.Small but significant relationships between HIA Domestic Sales Change versus Changes in the S & P 500 value, actual CD Rates, the gross rate (interest adjusted for inflation), and inflation.

Hearing Aid Sales Predictors No relationship between HIA sales and the economy as measured by gross domestic product.No relationship between HIA sales and the economy as measured by gross domestic product. Time lags (e.g. how long was the change in the economy felt) indicates that we can explain 31% of HIA sales based on changes in the value of stock portfolios and CD rates.Time lags (e.g. how long was the change in the economy felt) indicates that we can explain 31% of HIA sales based on changes in the value of stock portfolios and CD rates. Greatest historical impact was the FDA initiative in without advertising and marketing claims you cannot sell product.Greatest historical impact was the FDA initiative in without advertising and marketing claims you cannot sell product.

Current Economic Climate Hearing aid sales are related to perceptions of available assets relative to expected life- span.Hearing aid sales are related to perceptions of available assets relative to expected life- span. Low interest rates on CDs given Greenspan philosophy during Bush years while safe did not deliver acceptable yields.Low interest rates on CDs given Greenspan philosophy during Bush years while safe did not deliver acceptable yields. Were boomers & retirees taking greater risks with their nest eggs with larger mix in the stock market?Were boomers & retirees taking greater risks with their nest eggs with larger mix in the stock market? WSJ would tend to agree --- with retirees seeking jobs to supplement reduced wealth.WSJ would tend to agree --- with retirees 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 Devices on Hearing Aid Sales

Introduction Low cost listening devices have been available for at least 25 years.Low cost listening devices have been available for at least 25 years. –Price range $20-$50 –Some infomercials 2 for $19.95 Most notable historically Whisper 2000Most notable historically Whisper 2000 Recent proliferation of devices with extensive television ads.Recent proliferation of devices with extensive television ads. –Silver Sonic XL –Loud Nclear –+ 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 sales?Do these devices cannibalize legitimate hearing aids sales?

Sample of Products

Also Resurgence of Internet Sold Hearing aids

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

Increased trend in non-owner purchase of listening devices Use less expensive device in place of hearing aidsUse less expensive device in place of hearing aids MarkeTrak III (1993)MarkeTrak III (1993) –2.6% somewhat a reason –1.1% definitely a reason –3.7% Total MarkeTrak VII (2004)MarkeTrak VII (2004) –5% somewhat a reason –3% definitely a reason –8% Total

Relative Internet Ranking (000) Internet ALDs versus HIA Members Note: Lower ranks denote higher traffic

Estimated Web Visitors Per Month ALDs versus HIA Members ALD= Songbird, Sonic XL, Loud n Clear, Ampli-ear

Simulation of cannibalization of legitimate hearing aid sales Query MarkeTrak VII database (2004)Query MarkeTrak VII database (2004) Segment into hearing aid candidates based on hearing loss decile.Segment into hearing aid candidates based on hearing loss decile. –Top 50% of people with hearing loss in U.S. –83% of hearing aid owners are in the top 5 deciles of HL.

Hearing aid adoption rates by hearing loss decile. 83% hearing aid owners 39% non-adopters

Simulation (Cont.) Non-candidate segmentsNon-candidate segments –Tried hearing aids and failed or they did not work –Surgical issue – had or scheduled for

Simulation (cont.) Determine if individual purchased low cost listening device in place of hearing aid.Determine if individual purchased low cost listening device in place of hearing aid. –Score of 4-5 (definite reason) on 5 point scale. –Score of 3 (somewhat reason)

Decision Tree Results Total Non- Owners 24.1 Mil. HA Candidate 7.8 Mil 840,000 Mild HL Probable Non-candidate 13.6 Mil 741,000 Tried Hearing Aids.83 Mil. 161,000 Surgery 1.8 Mil 222,000 Segment 1.96 Mil. purchased less expensive device Purchase ALD

Simulation (cont.) Segment hearing aid candidates on ability to afford hearing aids.Segment hearing aid candidates on ability to afford hearing aids. –Previous research indicates they are telling the truth –Household salary $20-$40,000 less then people who say they can afford hearing aids depending on age segment. –Nearly 8 million at 150% of poverty or less

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

Simulation – cannibalization of legitimate/custom hearing aid sales HA Candidate 7.8 Mil. Purchased low cost device 840,000 Definite reason 321,200 Cant afford – 80% Can afford – 20% 64,200 Somewhat a reason 518,800 Cant afford - 77% Can afford – 23% 119,100 HA Affordability

Results 64,200 hearing aid candidates64,200 hearing aid candidates –Definitely purchased lower cost listening devices in place of hearing aids –Who definitely can afford hearing aids 119,100 hearing aid candidates119,100 hearing aid candidates –Possibly purchased lower cost listening devices in place of hearing aids –Who definitely can afford hearing aids

Bottom line simulation 100% of definites = 64,200100% of definites = 64,200 30% of somewhats = 39,70030% of somewhats = 39,700 Probable siphoning off of legitimate hearing aid sales for total viable HA candidates in U.S. population = 103,900Probable siphoning off of legitimate hearing aid sales for total viable HA candidates in U.S. population = 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 Note Whisper 2000 Body aid type listening deviceBody aid type listening device Introduced in U.S. in 1990Introduced in U.S. in 1990 Main sales during the 1991 recessionMain sales during the 1991 recession Sales at Walgreens reported to be 2 million.Sales at Walgreens reported to be 2 million. Still available in UK for $18Still available in UK for $18

Whisper 2000 – Sales Pitch This might look like a tiny radio, but Whisper 2000(tm) is a major breakthrough in sound interception and amplification, allowing you to hear the quietest of sounds indoors or out.This might look like a tiny radio, but Whisper 2000(tm) is a major breakthrough in sound interception and amplification, allowing you to hear the quietest of sounds indoors or out. –Requires 1 x 9V battery (not included). –Hear a whisper across a room –Enjoy clear sounds of the TV/Radio turned low so as not to disturb others –Never miss a word at the cinema or theatre –Listen to birds singing –Track the sounds of wildlife before they hear you

MarkeTrak VIII Closer look at low cost ALD and Internet hearing aid salesCloser look at low cost ALD and Internet hearing aid sales Quantification of cannibalizationQuantification of cannibalization –Probability purchased product in place of a custom hearing aid. Customer satisfaction with productCustomer satisfaction with product

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

Consensus Elasticity General agreement that elasticity for hearing aids is in the.6-.9 range.General agreement that elasticity for hearing aids is in the.6-.9 range. –Dissertation HA industry (1987) –Kochkin - MarkeTrak III (1992) –Kochkin – MarkeTrak IV (1994) –Amlani – ASHA (2005) Meaning:Meaning: –Revenue cannot be maximized by price decreases at the point of sale. Some evidence in MarkeTrak III:Some evidence in MarkeTrak III: –hearing aid sales may be elastic when prices are very low ($100-$200) –high probability of cannibalization if the inexpensive products deliver benefit.

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

Positive impact of hearing aid enhancements on the total hearing loss population currently not using hearing aids. MarkeTrak VII: 40% indicate they would take advantage of the $500 tax credit

Local Public Relations Tax Credit Bill Grassroots If hearing aid price is inelastic how can tax credit bill possibly work?If hearing aid price is inelastic how can tax credit bill possibly work? The importance of the Tax Credit Bill:The importance of the Tax Credit Bill: –Price elasticity is approximately.6 –That means for every 10% decline in price you could get about 6% growth –$500 tax credit is roughly 25% decline in price –Therefore in PERFECT marketing world growth for hearing aids could be 15%.

Local Public Relations Tax Credit Bill Grassroots Perfect marketing world:Perfect marketing world: –100% of non-owner market knows about it –Its even built into Turbo Tax –There are no other or only minor obstacles to hearing aid adoption. It works because the price discount is paid for by a third party – the tax payer.It works because the price discount is paid for by a third party – the tax payer. –Volume increases –Total net revenue increases

With reintroduction of bills we will need concerted activism on the Tax Credit Bill Inform all hearing aid users (non-VA sales) & users of ALD with insert card.Inform all hearing aid users (non-VA sales) & users of ALD with insert card. Tell it on your websiteTell 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 newspaperPlace an OpEd piece in your local newspaper Promote the website in your communityPromote the website in your community Start a chain Start a chain 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 ,000 letters using letters using Will need involvement of:Will need involvement of: –HIA members and their sales staff –Mobilization of audiologists & dispensers –To contact current and past customers –Remobilization of people writing letters last year –More press

Couple Notes on Value & Market Growth Price is not correlated with customer satisfaction.Price is not correlated with customer satisfaction. It is however highly correlated with value =It is however highly correlated with value = –Price/benefit –Where benefit = (unaided – aided)/unaided –Or price paid for every % point drop in hearing disability.

Customer Satisfaction is Highly Related to $$$ Spent per 1% Improvement in Hearing Disability Where % change = (benefit/unaided APHAB) $500 HA $50,000 HA

Overall Customer Satisfaction as a Function of Price and Hearing Disability Improvement (Statistical Model) Price Hearing disability improvement (%) Overall Customer Satisfaction (%) R 2 =.86

The Cost of Negative Word-of-Mouth 19% of total 23 million adults dont purchase because of other hearing aid owners.19% of total 23 million adults dont purchase because of other hearing aid owners. Thats 4.4 million peopleThats 4.4 million people Assuming 1.75 hearing aids each over 5 purchase cycles of 5 years (their average age is now 60)Assuming 1.75 hearing aids each over 5 purchase cycles of 5 years (their average age is now 60) Thats potentially 38,200,000 hearing aids not purchased over their lifetime….if we cannot overcome these negative perceptions based on REAL experiences retail price)Thats potentially 38,200,000 hearing aids not purchased over their lifetime….if we cannot overcome these negative perceptions based on REAL experiences retail price) Thats 19 years of lost sales for the whole US!Thats 19 years of lost sales for the whole US! Thats $69 billion in lost revenue!Thats $69 billion in lost revenue!

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

Overall Summary HA industry historically recession proof (GDP).HA industry historically recession proof (GDP). Sales related to health of retiree nest-eggs and CD rates.Sales related to health of retiree nest-eggs and CD rates. Sales for custom hearing aids price inelastic.Sales for custom hearing aids price inelastic. Vulnerable area is very low price direct mail hearing aids or ALDs that deliver modest benefit.Vulnerable area is very low price direct mail hearing aids or ALDs that deliver modest benefit. Price is not a correlate of satisfaction --- it is VALUE = benefit relative to price.Price is not a correlate of satisfaction --- it is VALUE = benefit relative to price. Positive recommendations (i.e. market growth) highly related to utility of hearing aids to the consumer.Positive recommendations (i.e. market growth) highly related to utility of hearing aids to the consumer. Growth formula:Growth formula: –Impeccable consumer journey (Golden Protocol or ISO standard) –Positive impressions in the market place through PR and positive word-of-mouth from satisfied customers –Increased hearing aid utility (especially public places)

Improving the Consumer Experience Sample 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