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The 'Bribing the Purchasing Agent Model' - Part II

In my last article, I wrote about the conditions to which the AAABribing the Purchasing Agent ModelAAA applies:

  • The existence of information asymmetry AAA the customers are ignorant about the technicality and quality measurement standards of the product or the service, whereas the providers and the intermediary possess in-depth knowledge that cannot be easily learned.
  • The end customer is not involved directly in the purchasing decision.
  • Higher price benefits both the provider and the intermediary so that there is powerful incentive for them to form an alliance.
  • The existence of monopoly, duopoly or oligopoly in the market. Again, the incentive bias is favorable AAA fewer dominant players will help keep price rational.
  • High barrier to enter due to brand name association, technological uniqueness, patent, regulatory burden, etc.
  • The existence of a price-insensitive payer for the products.

Let me clarify that not all of the above conditions have to be met for the model to apply. The hearing aids industry is one such example where five of the six conditions are present. The market is dominated by only six players AAA William Demant ( WDH ), GN Store Nord ( GN ), Sonova (SOON), Amplifon ( AMP ), Siemens (SIEMENS) and Widex. ThereAAAs tremendous barrier to entry due to technological expertise, patents and the oligopoly market. In the high-end hearing aid market, the customers are often not price-sensitive. Higher price benefits both the hearing aids manufacturers as well as the agent AAA the audiologists, who are keen to sell high-end products that have higher profit margins. High-end hearing aids can cost more than $1,000 and sometimes more than $2,000 with another charge of customized fitting, which can cost as much as the high-end device itself.

As a result, the AAABribing the Purchasing Agent ModelAAA has been working quite well. For instance, since 2002, William Demant has experienced annual compounded revenue growth of 8% and earnings growth of 10%. The stock price tracked the fundamental growth nicely with a CAGR since 2002 also about 10%.

At the end of my last article, I wrote that we have to watch any disruptions in technology as well as the distribution channel. Any change in technology, payment model or the relationship among the supplier, the agent and the end customer may break the model.

One recent trend in the high-end hearing aids distribution system should be monitored by investors as a potential disruptor of the model. In 2014, Sonova decided to sell a premium Phonak product in Costco ( COST ). While most manufacturers already sell through the Coscto channel, they mainly sell the low-end and mid-tier hearing aids, not the high-end ones. SonovaAAAs decision to sell its premium Phonak Brio created a riot in the independent channel. Here the traditional link between the manufacturers and the agent is disrupted by the new link between the manufacturers and the big box wholesale chain. Suddenly the audiologists are losing clients and high-profit businesses to Costco.

The impact of this development on the long-term margin profile and profitability of high-end hearing aids manufacturers remains to be

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LIOX 15-Year Financial Data

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WDH 15-Year Financial Data

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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