Direct sales strategy

I always thought of sales partnerships with distributors like GE Healthcare were always a logical 'foot in the door' kind of strategy for small companies like NAN. You leverage their brand, experience and scale of their network to get your product as quickly into the market as possible.

But once you get sufficient traction and recognition, it would be logical to switch to direct sales to capture a greater share of the profit margin.

This is because every sale of trophon that GE makes, enables them to not just capture the profit for that one trophon unit, but all future transactions in terms of the consumables and replacement units. I don't think many distributors would be happy to only be able to earn revenue for that one sale, and not additional sales that are generated as a result.

So GE only has to sell one trophon unit, to capture not just the revenue for that particular sale, but all future revenue, in terms of replacement units, upgraded units, consumables and servicing. This is of course assuming customers find the trophon process superior to previous methods and no new alternatives emerge.

How much is this worth? Wilson HTM models their assumptions on US$5,200 as a ‘transfer price’ for Trophon units sold to GE, with the Trophon units being sold at a list price of $10,000 - $11,000 USD. GE is capturing a hefty margin that Nanosonics should seek to capture more of. I don't know what the margin being captured by GE for consumables is, but this will also make a huge difference in the long run.

Yes, it will cost NAN more in the short term to build up their direct sales force, but as I mentioned before - if the product is as good as we (and authors of medical journals, and hospitals) think it is, then this would have been a very good investment to make. Same as GE Healthcare, NAN should only need to sell it to them once. Maybe twice if they're trying to convince them to buy a newer, more expensive model; to then reap the full profit margin of future sales on consumables, replacement units and servicing.

All this of course is dependent upon Nanosonics being able to successfully execute its sales strategy. But with nearly all of the top 50 hospitals in the U.S having adopted the trophon, the momentum certainly seems to be behind them and it looks like a good point to transition to direct sales.