Diagnostics sector looks to raise prices with new entrants revising rates

Online players had kept rates low, but with Covid time volumes gone, the trend is changing

A price revision is in the offing in the diagnostics sector where rates have largely remained stable the past few years. With new entrants, primarily online players that had kept rates low, choosing to revise prices, the incumbents too have sensed an opportunity to do so.

Diagnostics players were absorbing the rise in costs through scale (of business), Om Manchanda, managing director, Dr Lal PathLabs, tells Business Standard.  “But now the Covid-19 volumes are gone, and so it is back to the pre-Covid business,” he says. “However, raising the cost of routine tests is still difficult. For some high-end and specialty tests, however, there has been a price rise.”

The race to the bottom is kind of over, agree players in the diagnostics industry. “There is firmness or stability in the market, and the sanity has returned,” Manchanda says.

Sriraam Rathi, analyst with BNP Paribas, noted in a recent sector report: “Our channel checks suggest some of the new-age companies (Healthians, Tata 1mg, etc.) have taken price increases of 20-30 per cent on particular diagnostic tests including preventive packages. This aligns with our view that a low-price model cannot sustain in the long term and competition from low-price providers is not a structural risk for incumbents. Given their cash burn, we believe another round of price hikes cannot be ruled out. This augurs well for incumbents such as Dr Lal Pathlabs and Metropolis Healthcare as pricing is one factor for attracting customers toward preventive and wellness packages.”

Gaurav Agarwal, co-founder, Tata 1mg, tells Business Standard that price adjustments may happen from time to time.

“At Tata 1mg, our scale, automation and technologies are helping us deliver diagnostics testing to consumers at really affordable prices, thus enabling timely diagnosis and hopefully reducing long-term disease burden,” he says. “While some pricing adjustments may happen from time to time, we are committed to ensuring ‘right priced’ diagnostics services for our customers at the highest quality. Similarly, pricing pilots will continue as we continue to learn about the demand and market creation opportunities available.”

Other online labs, too, say they have been bringing their prices at par with offline players wherever there has been a gap in pricing.

Dheeraj Jain, founder and MD, Redcliffe Labs, says that one cannot be a discounted player. “We are running 73 labs across the country, and are a national chain. In the smaller towns, in fact, our prices are at a premium of 10-20 per cent compared to unorganised players because we offer quality and faster turnaround times,” he says.

He adds that they have bridged the pricing gap that existed in certain tests with incumbents like Dr Lal PathLabs and SRL.

The competition

The diagnostics sector has in recent times seen increasing competition from new entrants and greater aggression from existing firms. Since the industry in India is fragmented and unorganised, the competition from low-priced players has existed for long. This explains why for Redcliffe Labs, for instance, nearly 40 per cent of the revenues come from non-routine tests.

Preventive health, which is only around 10 per cent of the total market, should be the key segment that new-age companies target, Rathi says, adding, “We expect large, organised companies to revert to 12-15 per cent revenue growth levels in the quarters ahead.”

Because of this intense competition, incumbents have not resorted to any noticeable price increase in four-five years.

“Given the rise in costs because of the appreciation of the US dollar, we think higher wages, and increased marketing and digital spending – besides the price hike by low-price companies – give incumbents an opportunity to consider increasing rates in high-end specialised tests where competition is low,” Rathi says. “We believe if incumbents increase rates, it may lead to a re-rating of valuation for the sector.”

That said, some incumbents have not gone for a steep price rise yet.

For example, SRL’s CEO Anand K says the firm has not increased rates in the last year or so. Instead, it has added more bundled tests at lower price points.

Meanwhile, Ameera Shah, Metropolis Healthcare promoter and MD, says they have increased prices only in one geography due to inflation. She adds that earlier money or funds were easily accessible, and the burn-rates and discounting were higher. Now, there is a relative funding winter, and thus everyone is focusing on building a profitable business.

Jain agrees. He adds that the focus now is on building a profitable business – and that online and offline players are on a level playing field.

Industry insiders say that since customer acquisition costs are high for online players, they are now focusing on repeat customers.