Hearing instrument unit sales in the US fell for the second year in a row while average revenues at the retail level continued to increase. In 2002, digital instruments sales grew to make up 45% of all dispensing activity, and today more than one-half (52%) of all instruments sold are digital. Pricing pressures within the digital segment are starting to chip away at revenue growth, and it appears that this trend will continue unless unit sales growth commences. Find out what happened in the market during 2002, and what might be expected in 2003-04.

With a few important exceptions, the 2002 hearing instrument market looked a lot like the 2001 hearing instrument market. That is to say, it didn’t look very good from a “units sold” or marketing penetration perspective, and there are few indications that it’s going to get any better in this area anytime soon.

According to Hearing Industries Association (HIA) statistics1, a total of 1.90 million hearing instruments were dispensed in the US during 2002—a 1.3% decline from 2001. In a word, when measured by unit volume, the market is FLAT, and has not moved up or down by more than 2% or varied by more than 52,000 units in the last five years (Figure 1). When exports are included, the number of hearing instruments dispensed equalled 1.98 million units, a decrease of -2.3%.

f01_fig01.jpg (28627 bytes)Figure 1. Hearing instrument manufacturer net sales delineated by dispensing source. In 2002, hearing instrument sales, including exports, totaled 1.98 million units (a 2.3% decrease from 2001). When considering only sales by dispensing offices, unit sales were 1.67 million units. For the first time in several years, government (VA) sales of hearing instruments were flat. Source: Hearing Industries Assn (HIA).

Dispensing Sources
One of the most disheartening trends is that sales by the “typical” dispensing office/practice continue to decline. In Figure 1, the dark purple bars show that, when VA sales and exports are ignored, the “core” sales element of the hearing industry—private dispensing offices which account for almost 9-of-10 (87.6%) hearing aids sold in the US— has been treading water (or going slightly under) since 1998. In 2002, dispensing offices were responsible for the sales of 1.67 million hearing aids compared to 1.73 million in 1998, or about a 3.5% loss in units over five years. However, as discussed later, the gross revenues of these businesses have continued to climb steadily as the market has become dominated by higher-priced programmable and digital aids.

For only the second time in 25 years, HIA statistics indicate that the Department of Veterans Affairs (VA) experienced a decline (albeit by only -0.15%) in its dispensing activity during 2002. However, it should be that the VA still dispensed more than 236,000 aids—or 12.4% of all the hearing aids. Additionally, as last year’s HR market survey2 pointed out along with MarkeTrak VI3 statistics, this decline follows four years of very rapid unit volume growth due to a loosening of eligibility requirements passed by Congress in 1996.3 It’s possible that the VA finally caught up with the backlog of veterans who were eligible for receiving these new benefits. Lucille Beck, PhD, director of the VA audiology division, says that the organization actually increased its unit volume by about 5% during its 2002 fiscal year which ended in September. However, like most government entities, the VA has been tightening its belt and it has even closed enrollment to certain groups (eg, individuals with high incomes who have disabilities with little service-related connection).

Table 1. How Did Your State Fare During 2002?

The following are state-by-state statistics on: 1) the number of net hearing aid units sold in the state; 2) the percentage change in units sold during 2002 relative to 2001; and 3) the percentage of the total US hearing aid market that the state represented in 2002. Note: Due to the larger-than-usual number of unallocated units, some care should be used in the consideration of these figures. Source: HIA.

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The slump in sales was fairly well distributed throughout the country (Table 1). Thirty-nine of the 50 states experienced unit volume losses, with noteworthy sales shortfalls in the Mid-Atlantic states of Pennsylvania (-24.8%) and New Jersey (-13.2%, New York escaped relatively unscathed, -0.53%). The particularly hard-hit states were mostly those with smaller populations: Maine, Connecticut, Vermont, Delaware, Maryland; Oklahoma, Louisiana and Alabama; and Oregon, Idaho and Colorado.

Possible Reasons
The pat answer to why hearing instrument sales are down is the economy, as well as uncertainty about the looming war with Iraq. In February, consumer confidence levels sank to their lowest levels in over 10 years, and only a lucky few can brag about their stock portfolios’ performance in recent years. Carnegie Research has shown a high correlation between stock returns and growth in the hearing instrument market after the late 1980s.4 (Prior to that time, there was little or no correlation.)

Some bonds and CDs, traditionally a large staple of seniors’ portfolios, have also yielded lackluster returns. And currently, the Bush Administration has proposed plans that would allow businesses to reformulate pensions on a “cash-basis” which some argue is good for businesses but might ultimately jeopardize the accounts of retirees.

Other factors that may be negatively impacting hearing industry sales:

  • Price, value, and hearing in noise: Sergei Kochkin has shown that a 50% reduction in hearing handicap leads to 57% satisfaction relative to value and 72% overall customer satisfaction.5 MarkeTrak studies have also come down strongly on the side of higher technology instruments, counseling, and directional microphones. It is encouraging that, in most of these areas, the hearing care field is making good progress.
  • Inadequate distribution: There are 28.6 million people reporting hearing difficulty, and hearing aids have a 22% market penetration rate.3 According to HR estimates, there are less than 11,500 dispensing offices (some of which are part-time and satellite offices) in the US. That means there are about 2500 people per dispensing office. Even if you halve this number to more accurately account for the people who are both physiologically and psychologically ready for hearing aids (ie, ready to be convinced they should obtain amplification for their hearing deficit), there may not be enough offices/practices—and hearing care professionals—to radically expand market penetration. Manufacturers generally agree that there are several regions of the country that are underdeveloped in terms of dispensing offices serving consumers. Additionally, very few start-up offices seem to fail and go out of business.
  • Longer repurchase times: It should be noted that recent surveys have found no evidence that the average time span between the repurchase of hearing aids is lengthening. However, it is certainly within the realm of possibility that the popularity of the high-performance instruments and their concomitant higher prices (a 77% increase in six years3) are causing consumers to hold onto their hearing aids longer, thereby increasing the average time between purchases.

n Demographics: When looking at the per-annum increases in the seniors population, there has been a slight “speed bump” in the growth of the age-65+ population—the age group to which 69% of hearing instruments are sold.6 According to the US Census Bureau, growth in the age-65+ group actually dipped below 1% per annum from 1995-2003, while the 55+ population group (read Baby Boomers) surged from a per-annum growth of 1.5% to 2.5-3.0% during the same period.

Digital Domination
The year 2002 may be best remembered as the year in which digital instruments overtook all other technology classes (Figure 2). On the year, DSP technology garnered 44.6% of the hearing aid market—a 67.2% increase over the previous year (848,822 units). And, by the Fourth Quarter of 2002, DSP instruments accounted for more than half (52.9%) of all the hearing instruments sold in the US. Should the instrument class continue at its current growth rate, there would be close to 1.3 million digital aids dispensed in 2003 (with digital instruments making up about 70% of the market by the Fourth Quarter).

figureFigure 2. The transformation of the market in terms of technology has been nothing short of amazing. Only 5 years ago, digital hearing instruments represented a nominal portion of the market; in 2001, they represented 45% of the total unit volume. Today, more than one-in-two (52.9% in Q4) of hearing instruments dispensed is digital.

The popularity of digital aids is putting a squeeze on analog products. For the first time since their introduction in the late-80s, analog programmable sales fell significantly (by 18.6%) in market share. Approximately one-quarter (26.2%) of the hearing aids sold in 2002—just under a half-million units—were analog programmable instruments (Figure 2). The predictions of some industry experts in the mid-90s may yet be proven true: while there will almost certainly be a place for analog aids in the market during the foreseeable future, analog programmable instruments may one day be viewed as a transitional technology that allowed for the first widespread use of WDRC and other advanced processing strategies.

Similarly, non-programmable analog hearing aids plummeted in market share during 2002 by 29.8%. It’s amazing to consider that analog non-programmable aids made up 29.2% of all the units dispensed in the US during 2002, after constituing more than twice (61.0%) that number only four years earlier (Figures 2-3).

figureFigure 3. A 4-year history of hearing instrument unit volume sales by technology type (left hand pie charts) versus estimated gross revenue generated by these hearing aids at the retail dispensing level (right hand pie charts). In 1999, DSP aids made up 13% of an average office/practice’s unit volume and 22% of its gross revenues. In 2002, these numbers climbed to 45% and 61%, respectively. Source: HIA and HR estimates.

Despite stagnant unit volume growth in the overall market, the higher average selling price (ASP) of digital and programmable hearing aids and the growing popularity of these instrument types in 2002 buoyed gross revenues for the average office/practice by 8-12%. According to HR statistics (which do not account for specially priced aids and include the price of most of the associated services related to dispensing), the average sales price of a hearing instrument in 2002 was $1725. HR estimates that retail gross revenues for hearing care professionals were $3.28 billion compared to revenues of $2.91 billion in 2002. Therefore the average gross revenues of a dispensing office were in the neighborhood of $285,000, which corresponds well with the HR Dispenser Survey.2 (Editor’s note: Estimates by HR of average retail gross revenues are derived by applying the price of each instrument type as reported in the annual HR Dispenser Survey6 and extrapolating them to HIA sales statistics1 for those instruments. It is important to note that considerable variations may exist in these estimations due to the predominant practice of “bundling” service and testing fees within hearing instrument pricing (i.e., in the HR Dispenser survey, prices for both instruments and services are usually reported as the “hearing instrument price”). Additionally, third-party discounts, leasing programs, VA sales, and free aids may affect retail values significantly. Thus, the retail dollar figures are offered here only as a useful gauge for the actual value of the market.)

According to MarkeTrak VI3, the average sales price of a hearing instrument increased by 35% from 1997 to 2000, and the average sales price of an aid was $1009 in 2000 (this figure includes the effects of free, discounted and third-party reimbursed hearing instruments).

However, the retail revenue picture may be changing fast, and it is highly unlikely that office/practice revenues will continue to grow at the 7-12% annual rate experienced in the last five years. This is because average sales prices (ASP) within the digital segment are falling, and in some market segments, falling rapidly. For example, in the 2002 HR Dispenser Survey6, only digital CICs ($2728) and ITEs ($2403) were more expensive than the 2001 baseline value ($2389) for digital instruments, and many other instrument classes/styles fell in price, as well. This is the result of manufacturers who have released more economical digital instruments. What this means is that growth in revenues may come much more difficult to dispensing offices in the near-future.

Styles and Return Rates
With the exception of the increased popularity of BTEs and CICs, hearing instrument styles have not changed significantly in the last five years. Changes in CIC and BTE utilization may be due to the use of these instruments in directional and digital applications respectively. However, in 2002, it appears that digital half-shell ITEs made large gains in popularity, doubling market share from 2.2% to 5.0%. BTEs also continued to gain in popularity (to 23.7%).

It is interesting to note that four of the six most popular instrument choices are digital. Overall, the six most-popular types of hearing instruments fit by dispensing professionals are: 1) digital BTE ( 10.2% of the market); 2) digital CIC (9.7%); 3) programmable full-shell ITE (9.3%); 4) digital ITC (9.3%); 5) digital full-shell ITE (8.9%); and 6) analog full-shell ITE (8.6%).

Hearing instrument returns for credit (RFC) were significantly lower in 2002 (16.4%) than in 2001 (19.1%). Four of the 6 most frequently returned hearing instrument types were digital. In fact, about one-in-four digital instruments dispensed is returned for credit, compared to about one-in-seven non-digital instruments.

Coming Your Way to an Industry Near You?
While conjecture about the future is always a dangerous game, there are a number of interesting possibilities in 2003:

n The digital age: The safest wager that anyone can make about the US hearing instrument market is that digital aids will continue to dominate the industry in terms of both unit volume, revenue, and R&D focus. It is altogether possible that digitals will grow in unit volume to consume almost three-quarters of the total hearing instrument market by the Fourth Quarter of 2003.

n Directional as standard. Another no-brainer. In the same way that digital is taking the industry, directional systems will become a “gold standard” on all hearing instrument styles that are large enough to accommodate them. The HR Dispenser Survey6 indicates that 22% of all the hearing instruments currently being dispensed contain some provision for directionality; MarkeTrak VI shows that about 10% of hearing instruments in place are directional.7 There remains no surer way to increase the SNR and reduce background noise than to employ a directional microphone system.

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n Continued lower prices for digital aids. The average selling price (ASP) of digital hearing instruments is falling, and in some segments, the ASP is falling rapidly. Although it’s difficult to think of DSP as a “mature” hearing instrument technology class, their market penetration (52% in the Fourth quarter) and the introduction of second- and third-generation digital products heralds at least the “adolescence” of digital products. An argument can be made that, while the various brands of digital aids offer different hardware and processing strategies, most promise the same core benefits for the end-user. Due to this, there have been some fears that—despite all the high technology and R&D money being poured into the development of these systems—the digital market could devolve into a “lowest price takes all” contest.

However, there are good reasons why this shouldn’t happen. In the last two years, dispensing professionals have shown some resistance to the adoption of the economical DSP aids, instead choosing to focus a good deal of their interest on premium digital products that offer all the “bells and whistles” to patients (and also yield a more handsome profit). Another reason that “commoditization” seems unlikely is that considerable resources continue to be dedicated to R&D, resulting in significant variability between product attributes like channels, fitting software, processing and directional microphone strategies, and even company service aspects. In contrast to DSP aids becoming a “commodity,” a more likely scenario is one of more distinct product categories (eg, good, better, best) for DSP aids via a set of evolving and better-defined product features and capabilities (which have yet to emerge fully).

Lastly, there are many more technologies to come that will radically alter what we now call “digital aids.” Indeed, the description of “digital” may seem absurdly simplistic 5-10 years from now when digital has become the primary platform for numerous other product classes (analogous to the “advanced transistor hearing aids” of the mid-50s). Digital technology promises to consume much more of the market, and it will increasingly be viewed less as a product class per se than as a platform for implementing new hearing solutions. And there are new product classes that have a good chance of emerging soon, like…

Conjunctive DSP Systems. Although it’s unlikely to happen this year, it is possible that the first conjunctive digital systems appear in 2003-04. These systems will, in all likelihood, consist of a cellphone-size processing unit clipped to the shirt or belt that transmits digital data in real-time (via Bluetooth or similar technology) to a pair of custom in-the-ear aids. This may prove to be the next “big leap” in hearing technology, opening the doors to greater power/processing capabilities, true binaural integration and localization, enhanced sampling analysis, separate and/or detachable microphones for improved directionality and noise reduction, and the use of other wireless technologies within an open and integrated communication system (eg, computers, Internet, cellular phones, etc).

Consolidation, Phase III. In 1999-2000, the industry saw a transformation, as some of the largest companies came together through mergers and acquisitions to reshape the competitive hearing aid landscape. The second wave of consolidation occurred in 2001, when the hearing industry experienced a wave of forward integration in which several hearing instrument manufacturers (or groups) either purchased, or struck distribution agreements with, chain retailers in an effort to procure larger and more reliable distribution systems.

There were few “blockbuster” deals in 2002 (Amplifon’s purchase of Sonus being the obvious exception, as the company is now the clear leader in global retail dispensing with an estimated 8% market share). However, there may be a few deals waiting in the wings. The phrase “economy of scale” has remained on the lips of many manufacturers during the last three years.8 In an industry that is increasingly being influenced by burgeoning R&D, manufacturing, and distribution costs (and, possibly, lower future prices), it makes sense that the larger global companies with greater resources and distribution networks have some key advantages. Indeed, a prominent European company president suggested publicly in February that, in the face of increasing R&D budget pressures, it was in the hearing industry’s best interest to continue consolidating.5

eBusiness: The HR 2002 Dispenser Survey indicates that 85% of dispensing professionals are currently online. However, researching products and hearing care topics (62%) and correspondence with colleagues (58%) are by far the predominant online activities for dispensers; only one-fifth have ordered hearing care products via the Internet. This number is expected to rise rapidly in 2003-04. Ordering online will dramatically simplify the ordering process, as new initiatives like eTONA (see Scott Peterson’s article on page 38) are implemented and, shortly thereafter, hearing instrument manufacturers’ ordering software modules become available. Although there are sure to be some bumps along the way, this promises to be one of the most important procedural changes in dispensing, with the potiential to save time, reduce redundancy and errors, and increase efficiency for dispensing professionals and manufacturers alike.

Renewed Commitment to Process and Quality Care: This year’s ASHA convention was a noble start (or restart) in recognizing the need for a renewed commitment to counseling and aural rehabilitation. Additionally, a movement that would establish “best practices” in testing, fitting, verification that could be used by all hearing care professionals might be promulgated to further raise customer satisfaction and word-of-mouth advertising.

Conclusion
Unit volumes have remained remain flat for the past five years, and it’s now possible that pressures in pricing within the high-tech digital segment might eventually start to pinch the finances of hearing care professionals and manufacturers alike. Despite a unit volume decrease of 1.3%, the gross revenues of dispensing offices in 2002 continued rose by around 10% due to the increased popularity of digital and programmable hearing instruments.

References
1. Hearing Industries Assn: Quarterly Statistics Report for the Fourth Quarter 2002. Alexandria, VA: HIA, 2003.
2. Strom, K. Slouching into the new millennium: 2001 brings little market growth to the hearing industry. Hearing Review. 2002; 9(3): 14-22.
3. Kochkin S: MarkeTrak VI: The VA and direct mail sales spark growth in hearing aid market. Hearing Review. 2001; 8(12):16-24,63-65.
4. Clemons M. Industry Report: For connoisseurs only. Copenhagen, Denmark: Carnegie Research, Oct 3, 2002.
5. Kochkin S. MarkeTrak VI: On the issue of value: Hearing aid benefit, price, satisfaction, and brand repurchase rates. Hearing Review. 2003;10(2):12-26.
6. Strom K. The HR 2002 dispenser survey. Hearing Review. 2001; 9(6):14-32.
7. Kochkin S. MarkeTrak VI: 10-year customer satisfaction trends in the US hearing instrument market. Hearing Review. 2003;9(10):14-26,46.
8. Smriga D, Trads C. Effects of mergers and acquisitions on hearing health care. Hearing Review. 2000;7(4):8-16.
Correspondence can be addressed to HR or Karl E. Strom, Hearing Review, 4131 E Superior St., Duluth, MN 55804; email: [email protected]