Selling medical device products profitably — the Ioptex example
“How Are We Doing Today?”
In 1986, I began my first day of work as president of Ioptex in Irwindale, CA. Our offices were adjacent to an abandoned quarry being considered as a location for construction of the LA Raiders’ new stadium. Sitting at my desk, I looked up to find I was not alone. Facing me, no more than several feet away, was former CEO and cofounder Ken Rainin.
“What are you doing here?” I asked.
“I’m here to train you”
Surprised, I replied, “Okay . . .” and then thought, What am I doing here?
For the Ioptex COO job, I had just relocated from Switzerland, where I had enjoyed ample responsibility establishing and leading the Europe and Middle East business for Rorer Group, an American pharma and device company. I already had ample ophthalmic company and industry experience, both in the US and abroad.
“Okay, let’s see,” Ken said, continuing what I saw as a new level of micromanagement.
We proceeded to pass back and forth to each other various invoices and outgoing checks needing approval. We found instances of employees misusing the company FedEx account to send out their personal payments, purchasing things the company did not need, and so on.
“You need to go speak with those employees right now,” Rainin said, which I dutifully did.
Later that day, Rainin asked, “How are we doing?”
“Fine,” I replied.
The next day, around the same time, midday, it happened again. Rainin asked, “How are we doing today?”
“Good, I think.”
Bad answer; Rainin stood up and motioned for me to follow him. He took me to Customer Service.
“How are we doing today?” he asked the manager.
“Thirty orders in, twenty-eight orders shipped, at an average sales price of [whatever it was], totaling [whatever it was] of revenues.”
It was an ah-hah moment. I get it! Rainin is showing me that at Ioptex, revenues count more than anything else.
What a valuable lesson I learned from him asking “How are we doing?” At Ioptex, the question was not rhetorical. It related precisely to Ken’s strategy to obsess over sales. What Ken meant by the question was, “What have we sold today and how was the business doing right now?”
Ioptex and Value-Added Selling
Rainin was an outstanding businessman. People were drawn to him. He was high energy, grounded, and funny, with extraordinary business instincts. He had graduated from The Ohio State University with a degree in English and, following a brief stint as a scientific instrument salesperson, had founded (in 1963, at age 25) the Rainin Instrument Company, an Oakland CA-based developer and manufacturer of scientific instrumentation. It had invented and commercialized the automated pipette system found in most scientific laboratories. Rainin had demonstrated a clear strategic vision every step of the way toward the company’s position as a scientific instrument market leader. He understood the target market, what the market needed, and how products should be packaged, positioned, priced, and delivered to the customer. These skills, plus uncanny instincts, had made him a great executive and leader. (Eventually, in 2001, Rainin Instruments was acquired for $290 million.)
Rainin was also a serial investor. In 1979, encouraged by his ophthalmologist brother, he had founded and financed Ioptex to design, manufacture, and sell surgical implants that replace the natural eye lens when it becomes a cataract. Cataracts can be corrected in simple, sub-ten-minute outpatient surgery during which the natural lens is replaced by an artificial intraocular lens. The procedure constituted just about the highest/most-often Medicare-reimbursed surgical line item.
From day one, Ioptex faced several formidable challenges. First, it was a late entrant in a market crowded with many notable and deep-pocketed competitors (Johnson and Johnson, 3M, etc.). Second, its products, while safe and clinically effective, were not differentiated. Third, with a limited product offering and little cash, Ioptex could not aggressively lower prices to buy market share from larger competitors.
To meet these market challenges, Rainin knew he needed to identify the most immediate target-market segment and a strategy to profitably sell products to that segment. Because he was still running Rainin Research, he brought on an Ioptex COO, a head of sales (the late Jim Rybicki), and a sales rep from the contact lens industry (Tom Smith). Smith recalls Rainin as “an inspirational, creative and driven leader who provoked thought on a valid sales strategy.”
Rybicki and Smith hit on the idea of combining a valued and valuable sales approach alongside the sale of Ioptex’ physical product. Called value-added selling, the concept was introduced to the business world in 1984. It was lauded for enabling salespeople to compete more profitably by selling value, not price. The team thought the value-added selling approach could be the key differentiator for overcoming barriers to success in the competitive market.
They put an extreme focus on the role of strategic salespeople and hired a small sales force of fewer than ten people, all of them mature, sophisticated, consultative professionals who could build a customer base. They also put an extreme focus on the process of sales. Smith explains, “Value-added selling provided more to the customer than just product features and benefits, which was the competitors’ approach. It was designed around building strong relationships with targeted, pre-qualified clients, and introducing them to the practice-development value-add tools.” The Ioptex salespeople identified new, young clinicians just beginning to build a practice. The salespeople recognized and appreciated the extent to which these clinicians led small businesses, roles for which they had no training. Ioptex reps could help fill that gap.
Joe Breeland, a new, regional sales leader who became a good friend of mine, came to Ioptex from a traditional vendor. He says, “Ioptex had a sales culture and suite of practice-development tools that offered the sales pro a chance to grow financially and professionally. It got you in the clinician’s practice and kept you there.” The typical Ioptex representative, he says, “worked to fulfill the customer’s specific professional objectives, which may have had little to do with the device being sold.”
This sales strategy was transformational, not transactional. Transactional selling is tactical in nature; the salesperson focuses on features, benefits and price. Transformational selling begins by understanding the customer’s real needs. For instance, Smith began sales calls by asking open-ended questions:
· What are your objectives for the practice?
· Where do you want to be in five years?
· Do you have a strategic plan to help get there?
The questions focused more on the practice than the product, and the customer-first attitude built strong relationships and eliminated normal barriers to entry in most practices. The Ioptex rep spent far more time than competitors with the clinician , who wanted to discuss the business of being a clinician and developing a practice. The rep delivered simple, common-sense advice. For example, the sales team often suggested the clinician develop patient education tools to describe surgical procedures to prospective patients in a tasteful way and that all employees wear a uniform in the office and have a name tag. They also suggested clearing the waiting room of all expired publications — simple tools, executed effectively.
Tom Chirillo, a sales rep in Chicago recalls, “Our value-added skills were our most in demand feature, more so than the devices. As we visited customers and prospects, they wanted to discuss how we could help grow their practice.”
The sales strategy began to take hold, and revenue growth accelerated. The company developed a strong foothold in practices and a small, growing, loyal customer base, with each customer seeing increasing surgical volumes. For that, the customers loved Ioptex and its practice development tools. Their practices worked better, patient flow increased, and sales volumes grew. Whatever early barriers may have existed due to Ioptex’ limited product offering and late market entry were overcome by its game-changing sales strategy.
The company soon needed a more experienced leader than the current COO to take it to the next level and ultimately replace Rainin as CEO. This is when I showed up and when Rainin made clear to me through his Week One micromanagement tactics that I needed to know the intimate details of leading his company. At Ioptex, he showed me that each day began and ended with the state of revenues.
As follow up to the Week One management lessons . . . the questionable behavior regarding employee expenses soon stopped, and I soon received a voicemail from Rainin saying he trusted me to lead the company and was heading back to the Bay Area. He, of course, did not disappear entirely; he called me almost every night at 10 p.m. and asked many questions, most of which he knew the answers to because he had already spoken to many of my direct reports.
Shortly after my arrival at the company, investment bankers took note of Ioptex’ growth and suggested Rainin consider an IPO. Eager for liquidity and faster growth, he agreed. Unfortunately, market conditions soured, the offering was canceled, and Rainin had to find an alternative. (This whole canceled IPO event deserves a story in itself.) A young, ambitious investment banker, Bob Stockman, proposed that Rainin consider a leveraged buyout (read: debt). He agreed, and the LBO was conducted. Afterward, Rainin had modest liquidity but of course his company now carried significant debt.
Even Better Value-Added Selling
The unexpected LBO and resulting high debt levels meant that as COO about to become CEO, I held day-to-day responsibility for achieving not only revenue growth but also high-margin revenue growth to pay down debt. I had to walk a daily tightrope of tightly managing cash and delivering faster growth. We refreshed our corporate strategic plan so we could develop highly profitable, cash-generating, and faster sales growth. This partly entailed expanding our product offering and enhancing our market image. For our products, we hired a world-class polymer scientist, appointed a revered CalTech scientist to our board, and cautiously invested in new materials and designs. For market positioning, we did things like renaming ourselves Ioptex Research, which enhanced our identity as a technology-driven company.
But most especially, we added to and deepened our sophistication in value-added selling. This did not entail reinventing the wheel or a “not-invented-here” syndrome on our part. I knew well that we were not doing a turnaround and that value-added selling had worked well and got us where we were. That success was to be respected and built-on. What was incredibly important, for our survival and growth, was that we make our value-added selling both a step-change better and even more value added. Here’s what we did:
· FOCUS: We had to remember that we could not get in a market-share battle. Instead, we grew in high-potential territories with clinicians who fit our profile — ambitious surgeons early in their career and looking to grow and develop successful practices while enhancing their own images as future key opinion leaders. We focused sales resources on helping only those high-potential customers, not others, build customer-centric practices.
· MORE & BETTER TOOLS: We needed to invest in more sophisticated tools for practice development, which was the driver of our value-added strategy and growth. The surgeons/owners of practices needed to understand how to manage their businesses. The clinicians had to be marketers, businesspeople, and to an extent, lawyers, all at the expense of time doing what they love — surgery. Sales veteran Tom Chirillo says, “We added a layer of sophistication, which was a powerful draw for new customers and difficult for competitors to copy.” This consisted of new-staff and patient-education offerings; marketing, reimbursement, productivity, and patient flow assistance; and patient outreach and referral networks. For instance, the company’s handbook, “Strategic Planning for the Ophthalmic Practice,” developed with an outside consultant, included a detailed evaluation of the practice and a potential strategy and plan to achieve the practice objectives.
SALESPEOPLE AND PROCESS: We built a large (or, larger), mature, talented, consultative sales team, sourced from within and outside the industry. We evaluated new sales professionals almost entirely based on their ability to enact a relationship- building customer-centric approach. Their capacity to understand and master the Ioptex practice development tools was a key metric for assessing the probability of success in the role. As importantly, we identified and targeted two very highly regarded industry sales leaders, both with a large and loyal customer base, Scott Flora and Fred Strehle, both beloved by their extraordinarily loyal customers. We showed them that Ioptex would provide an opportunity for them to grow professionally and financially, guaranteeing them a substantial compensation package for two years with the option to convert to our straight commission plan while paying their own expenses. We believed high producers could pay for themselves by retaining a certain percentage of their client base while attracting new clients. (Paying their own expenses as if they run their own business is foreign to traditional salespeople. However, viewing a territory as a business requiring their investment also provides motivation and usually leads to faster revenue growth. Also, unlike competitors, we did not cap earning potential for high-performing reps.)
Both top recruits joined Ioptex, after exacting their pound of flesh, and began successfully converting a percentage of their existing business and closing new business. Each transitioned to a commission-only plan inside the first year. In turn, they brought Ioptex credibility when approaching other high performers considering a job change. Growth accelerated, and we added incremental sales capacity to new, high-potential territories.
Consistent Execution = Success
Our ever-more-sophisticated value-added selling strategy worked, yielding customer stability and loyalty and faster growth. Value-added selling brought in not only sales but also the most important type of sales — profitable sales! Thus, although Ioptex launched itself with crummy market timing, we used value-added selling to make up for it. We were able to grow from number twelve to number four in market share, and our growth outpaced industry growth by 3 to 5x over a three-year period. During the first three years of my tenure, we achieved a compound annual revenue growth of over 60 percent in a slowing market with eroding prices. We successfully took share from the competition while maintaining industry-leading profitability; we maintained the industry-high “average realized price” while fanatically managing expenses and paying down debt.
We accomplished this because of our obsession with and commitment to value-added selling. Before I arrived, the company had assiduously understood what customers needed and how to best and most consistently meet those needs. With its differentiated approach to medical device selling, it had understood the customer’s needs more than the competition had, and its highly knowledgeable representatives had provided non-traditional tools and approaches to meet those needs. Post-LBO, the cycle of success we created was such that Ioptex customers increased productivity and surgical volumes even more; they referred even more practices (from outside their territory); Ioptex grew even more rapidly; happy salespeople recruited even more happy salespeople; and the pipeline of sales and salespeople accelerated its growth. In the industry, everyone wanted to be with the winning Ioptex team.
In 1989, three years after I joined Ioptex with a mandate to develop profitable sales, Smith & Nephew acquired it for a substantial multiple of revenues and earnings, the equivalent of $600 million today.
(Note: I originally wrote a case study about Ioptex for The Entrepreneur’s Journey, a book I co-authored with angel investors Ham Lord and Christopher Mirabile. I have adapted the case study for this article. You can read the original, and many more, in The Entrepreneur’s Journey.)
