Thanks to Ed Belcher for passing this information on to me.  I'm looking forward to the 'rest' of the story!

27 April 2012 

Comparison of Hearing Aids and the iPad

Ed Belcher      belcherpe@comcast.net

The 2010 German Competition Regulator reported the following:

Assume Revenue for the Big-6 Hearing Aid Manufacturers is R. The Big-6 consortium reports the following costs:

Production Costs              25% of R (materials, labor, machinery maintenance, etc)

R&D Costs                            5%-10% of R

Marketing Costs              20%-30% of R

The balance (35% to 50%) goes to administration, profits, and plant reinvestment.

(http://www.bundeskartellamt.de/wEnglisch/download/pdf/entscheidungen/07_Phonak_e.pdf)

In a study of the Apple iPad manufacturing costs and profits, the Economist, April 21st 2012 page 8, stated:

“Researchers for the Personal Computing Industry Center at the University of California, Irvine, took apart an iPad and worked out where all the various bits inside came from and what it had cost to make and assemble.” They came up with the following breakdown:

The below comparison of financial components of an iPad and HA assumes retail price = 100% and assumes that a hearing aid costing a dispenser $1000 is sold for a bundled price of $3000.

Activity                                          Hearing Aid                            iPad

Production Cost                               8%                                          55%

Profit/R&D/Marketing              25%                                          30%

Dispensing                                          67%                                          15%

Comments

The manufacturing and distribution costs of a hearing aid are upside-down in comparison to the manufacturing and distribution costs of an iPad.

The iPad is subject to hard, unfettered competition resulting in its profit, marketing, R&D and dispensing costs contained within 45% of the final price.  The production cost makes up 55% of the retail price.

Most hearing aids are made by the Big-6 consortium which shares patents and does business in a mutually beneficial way.  The dispensing businesses have an eerily consistent, very large markup.  The actual production cost of a hearing aid is only 8% of its bundled price.  The remaining 92% is mostly composed of dispensing fees, administration salaries, and profits.

Hearing aid dispensing, based on my experiences when shopping in varied businesses for hearing aids, took 1 hour for the exam and discussion of HA options, 1 hour for fitting/training for purchased aids, and 2 hours for 4 30-minute additional adjustments/training, a total of 4 hours of contact time. 

What would a hearing aid cost if it had the iPad cost structure?  A hearing aid that a dispenser buys for $1000 costs about $250 to make (25% of manufacturer revenue).  So we start with the $250 production cost.

If the iPad-structure were followed based on the $250 production cost, the retail price would be $250/.55 = $455. The price paid by the specialist would be 0.85*455 = $387. If the specialist sells two aids for $455 each and adds $400 for four hours of service, two very good aids would have a retail price of $1,310 only 22% of the $6000 currently charged.  The specialist would net $536 per customer.

Can industry prosper and sell aids for $387?  They have sold millions of aids to the VA with prices decreasing from $375 to $333/aid from 2004 to 2011 respectively, according to Lucille Beck, Director of Audiology, VA, and The Hill

http://thehill.com/business-a-lobbying/175349-under-contract www.afaslp.org/AVAA%20conferences/Beck2005.pdf

Can a specialist prosper with a net revenue of $536/customer?  Yes s/he can, but that requires another short paper to explain how.