- Teddy Citrin
Why is Consumer Healthcare an attractive market for Startups?
Why is consumer healthcare an attractive market for startups?
Market Size: The market for DTC healthcare products is truly massive. It’s hard to pinpoint an exact number, but Euromonitor International sizes consumer healthcare products at ~$700B in global annual sales. Total U.S. healthcare spend is $3.5 trillion annually, and consumers are increasingly bearing a higher percentage of this cost of care, particularly as people shift to high deductible health plans. As people pay more money out of pocket for their healthcare, they begin to expect the quality of experience they find in other great consumer companies. The power dynamic is evolving as people who were previously “patients” are now becoming “consumers.” Companies who treat them as such will be rewarded.
Retention: Many healthcare products have a form of built-in retention. If a product is maintaining, improving, or monitoring, your health, you likely will use it frequently and for an extended period of time.
Margin / LTV: Consumer healthcare products is one of the highest margin sectors in the global economy. Incumbents such as Pfizer and Johnson & Johnson enjoy EBITDA margins of 35–45%. Retail/OTC drugs gross margins are significantly lower than pharmaceutical manufacturers but are still healthy. Most startups start by working with an industry partner with an existing supply chain, but eventually many of these startups will vertically integrate at scale, which will improve margins. The existing margin profile of many healthcare products allows startups to compete by offering lower prices to consumers, while still maintaining attractive unit economics. The margin profile and subsequent high LTV of this category allow for significant customer service, and customer acquisition spend.
Regulation: While regulation is a risk (which I will speak to), it can also serve as a competitive moat. In consumer healthcare, it can take years to properly set up a company, find the right partner, and get various approvals.
Broken consumer experience: The current care model of a doctor visit resulting in a written prescription followed by a trip to a brick and mortar retail pharmacy is a one-size-fits-all model that doesn’t do any one thing particularly well. In this market, each of these product areas have different prescription, cost, delivery, adherence, retention models that may necessitate unique product/go-to-market models. New companies can drive down cost, improve customer experience, and even improve outcomes through personalization, improved adherence, and expanded access.
What changes are enabling and propelling the shift to DTC in healthcare (aka WHY NOW)?
Telemedicine: Telemedicine is a critical enabler of this market because it supports remote evaluation, diagnosis, prescription, and ongoing treatment. When a customer has an existing need, such as for birth control or acne medication, they can order online, and a doctor can evaluate and prescribe their appropriate therapy asynchronously on the backend. This common operating model enables companies to sell direct via online channels and reduces the customer friction of an in-person visit.
Data: Today, healthcare DTC companies, can create brands that directly engage with the end consumer. These new companies, armed with first- party data, can internalize product pain points and quickly adapt to their customer’s needs. Targeting specific types of people is now possible with social media marketing. Many of these products only serve a certain type of consumer who may be reachable at scale through digital marketing channels. With these inputs, companies can now efficiently target specific age ranges, genders, locations, incomes, and psychographic profiles.
Cutting out the middlemen: DTC flips the value chain of healthcare products on its head. Selling products directly allows startups to pass savings on to the end consumer, rather than giving margin to third parties such as distributors, doctors, and retailers. Also, the increase in high deductible plans makes consumers more price sensitive in categories where they might not have been previously.
Incumbents see DTC potential: Manufacturers and distributors who are tied to legacy distribution channels and sell commoditized products feel the pressure to innovate and are now open to partnering with new DTC brands that can target and engage the end consumer more effectively.
Increased transparency: Social media, online reviews, and increased access to information have contributed to greater transparency and awareness in the healthcare industry. Brand authenticity matters more as the decision-making and purchasing power shifts from industry practitioners to consumers faced with choice. A survey run by Fortune/GHG found that a minority of millennials view doctors as the single best source of healthcare information (41%, vs. 68% of non-millennials).
Consumer consciousness: People care more about what is going into their bodies than they have before and are spending more on elective healthcare products. An example of this is the skincare market, which has been growing at a 10% CAGR for the past five years.
What are the major risks in the category?
Regulation and operational excellence: Operating in a highly regulated environment is fraught with obstacles, and regulatory compliance is imperative. Many of these products require FDA approval and clinical oversight. The bar on quality is significantly higher when people’s health is at stake, as it should be. Companies that bend the rules will quickly find themselves out of business, which is not the case in all other VC-backed industries. One way companies can reduce the burden of navigating the regulatory environment is by creating a new brand around an existing FDA-approved product.
Competition: Competition is omnipresent, both from new startups and industry incumbents with large balance sheets. There are few network effects in this area, which could make it hard for startups to survive if incumbents invest meaningful capital behind building DTC operations. Startups need to find creative ways to scale efficiently and should be prepared to navigate competition, regulation, and even litigation. In certain categories, the barriers to entry can be low, which is why you see five or more companies spring up in a short timeframe chasing the same market. This can manifest in increased acquisition costs, churn, and decreased capital efficiency.
If you can’t already tell, I am super excited about this space! If you are building a Healthcare Consumer Products company at any stage, I would love to chat. If I am clearly missing a company, please email me and I will add it. You can find me at teddy@greycroft.com
