Is D2C in HealthTech a viable business model in 2024?
After the hype, the rebuilding.
The last four years have been a whirlwind journey for direct-to-consumer HealthTech companies, speeding through their own ‘hype cycle’. After the ‘inflated expectations’ in telehealth during Covid lockdowns, and the ‘disillusionment’ which led to a vast drop in venture funding for HealthTech after 2021, this year we’re at the beginning of the recovery. Time for startups with fundamentally stronger products to show their impact.
D2C models have enormous potential to make healthcare more people centric, and accelerate HealthTech innovation at the same time. But just like D2C in other industries, it needs to be seen as one of several sales channels on the way to industry leadership. We can learn a lot from the recent boom in D2C Consumer Products brands: To sustain growth most of them had to establish wholesale & B2B sales channels.
That said, going direct-to-consumer in the early stages of company building makes great sense structurally, at least in certain sectors. Let’s look at the three key reasons: A shift in consumer demand, preventive medicine hype and a faster route to market.
The rise of consumerisation & health spending
More and more industries are being ‘consumerised’, mainly because of the ubiquity of cheaper and more engaging digital comms channels - it’s much easier for companies to reach, acquire and retain customers in niche and mainstream audiences through social media and owned digital channels. The consumer and tech industry has laid the groundwork to bring healthcare services directly to consumers: it’s almost as normal now to see a doctor through your phone than to buy flights or clothes that way.
It also seems we’re moving on from the experience economy into the ‘well-being economy’. Many people realise they don’t gain much from additional wealth or experiences, if they don’t feel well enough to enjoy any of it. Consumer health & well-being spending continues to soar in most affluent economies.
At the same time many public healthcare systems are badly underfunded. So direct-to-consumer is jumping in to take more of the overall health spend. I’m not saying this is the right direction for maximising health outcomes but it seems to be the reality.
And, with consumers directly responsible for more of the healthcare spend, they’re also less likely to put up with bad customer experience delivered by a lot of incumbent healthcare players. The incentives are simply not aligned in favour of consumers - if governments, employers or health plans settle the bill, they’ll be the main priority for many healthcare providers.
Preventive medicine is driven by education & consumer demand
Many consumers are becoming more ambitious about their health outcomes than most healthcare systems can deliver. Thanks to some influential public personas, like Andrew Huberman and Peter Attia, public education about longevity and optimising healthspan is becoming much more accessible than it used to be. We’re still talking about a niche market in affluent economies who have the education-levels and income to use preventive services. But we can see a glimpse of a future of preventive medicine already: Fast-growing startups including 23andme, despite its recent struggles, or Levels Health which help people understand what health metrics to keep track of, show us the direction we’re headed.
Many consumers who can afford it will do everything in their power to boost their chances for a long healthy life. And they won’t rely on the existing healthcare systems to deliver what’s needed. Technologies that are in demand usually get much more affordable and better over time, so there’s hope this opens up the opportunity to bring preventive health tools to a much wider population before too long.
D2C offers a much faster route to market in healthcare
Selling directly to consumers is much faster than going through more traditional routes of health plans, governments or employers. There’s just one person to convince of the benefits of the product versus an inefficient bureaucracy. In healthcare in general it’s great to have friction to ensure the safety and efficacy of new treatments, but our systems have likely overshot the mark. Consumers are often more willing to adopt new innovations than certain experts holding the purse strings of organisations.
Secondly, ‘point solution fatigue’ of employer buyers is a real problem for startups now. During the HealthTech hype phase of the last years, employer benefits managers have been overwhelmed by startups pitching individual solutions. Going to employers was an efficient sales channel at the time but is much less so now. Startups still need to focus on specific health challenges to start off with, in order to be able to grow. So going directly to consumers can offer a much more receptive audience at this point.
D2C models can drive better outcomes
There are three key benefits of integrating a D2C model, even if the startup eventually scales through a B2C2B or traditional B2B model:
Very fast sales cycles with consumers make it possible to show traction and consumer demand at a relatively small scale, to open up funding & distribution routes.
Incentives are well aligned: Consumers are the user and payer, contrary to traditional healthcare. So the incentive for the startup is to optimise the best user-experience and health outcomes.
Immediate feedback cycles with customers can lead to very fast product improvements.
Using a small market to unlock a big one
The two main challenges with D2C in HealthTech are the limited market size of self payers, and like in most consumer-facing industries, high customer acquisition cost.
Much of HealthTech tends to be expensive for customers and hence most would expect health plans to cover this expenditure. This inevitably limits the total addressable market if customers are expected to pay out of pocket. High prices are most common in virtual care, mental health treatment, and personalised medicine or genetics.
A notable exception are health wearables and app-based wellness products. These are usually not covered by health plans so D2C models can capture more or less the entire market.
Startups need to map out which share of the market they can capture D2C and have a clear strategy how to move onto B2C2B or B2B sales channels before they saturated the small self-payer market. The goal for this D2C-first phase should be fine-tuning the solution with live customers and provide validation to kickstart their B2B sales channels. Regardless, having a D2C and B2B function simultaneously is more challenging from an organisational perspective than focusing on only one. Most founding teams will have a bias towards either B2C or B2B so they’d usually be well-advised to bring in an expert early hire or co-founder to fill any gaps in knowledge.
Customer acquisition cost needs to be put in perspective
The second main challenge is acquisition cost. In HealthTech there are two opposing trends that affect customer acquisition: On one hand, increasing costs of consumer marketing in general, and on the other, the increased visibility of consumer HealthTech which lowers the barriers to entry for many users.
The reasons why customer acquisition costs are high in consumer products are somewhat different from HealthTech: In most consumer industries the barriers to entry are now so low that genuine differentiation has become hard, putting more pressure on marketing and advertising to cut through the noise. In HealthTech there’s also a growing number of new products but there’s still a lot of room for new and genuinely more effective treatment options - but it’s much harder to prove. The challenge is around validation and credibility.
There are five factors that drive up acquisition costs in HealthTech specifically:
High prices
Consumers’ reluctance to pay out of pocket for healthcare
Trust barriers for startups around safety, efficacy and data privacy
Proving effectiveness to lay audiences without involving traditional healthcare players
Showing tangible progress in the case of long-term preventive models
There are effective communications and product strategies to overcome these which I’ll cover in a future post.
But customer acquisition will be high regardless whether startups are selling direct-to-consumer or through health plans or employers. So there is a trade-off: will they be able to build a better product, get faster traction or lower acquisition costs through a D2C approach vs going the more traditional B2B route?
The current market: Signs of recovery but still a way to go
The dominant model of D2C HealthTech keeps evolving: It started from mostly health consumables into the early 2010s, which is when the current wave of health wearables started taking off. The Covid years then created a telehealth boom which we’ve already moved past to some extent. The frontier of HealthTech innovation is now in integrated care delivery and the so-called Software-as-Service models (SaS not SaaS) - replacing physical through digital services. Digital and AI technology is underpinning most of this speed of innovation.
What does market data suggest is happening in D2C HealthTech right now? It’s easy to get distracted by the overarching trend of the last 3 years which has been a large drop in venture funding, not just for HealthTech but pretty much all sectors, combined with a big correction of valuations since the hype times of 2020 and 2021.
But, digging a tiny bit deeper, D2C HealthTech ventures seem to be leading the recovery in valuations for the last two years - a strong sign that we’re now building on more solid, sustainable grounds in this sector (check out this great Bessemer Ventures report for more detail, https://www.bvp.com/atlas/state-of-health-tech-2023).
Venture funding has somewhat stabilised in the last couple of years although it’s still below pre-Covid levels (https://www.svb.com/trends-insights/reports/healthtech-trends-report/).
A winding road ahead for HealthTech DTC
So what’s the upshot for D2C as a go-to-market model in HealthTech? There is huge potential for D2C to make the whole industry more user-centric and value-driven, with fewer middlemen and layers of bureaucracy. And the business opportunity is equally large: Healthcare is by far the biggest industry sector globally. And while the majority of the largest companies in tech are consumer brands, healthcare is still dominated by traditional incumbents.
To make D2C work in HealthTech from a commercial and growth perspective, we still need to refine our models some more.
Startups need to focus on what the tech industry has been best at: driving consumer engagement with digital technology and data science. D2C is most likely going to work for solutions that generate excess value through improved User Experience and more preventative approaches - which could be an integrated care and/or Software-as-Service model.
The limited market size for D2C is a real challenge, and startups always need to keep an up-to-date map for how D2C will combine with B2B sales routes in their case. D2C needs to fill a specific role in their go-to-market and scaling strategy. In most cases, this is driving product and early-market validation, by targeting a niche audience or health outcome. It’s the best route to grow D2C and, in the future, B2B. That way customer acquisition costs can be kept in check too.
Digital platforms, telehealth and AI models alone aren’t a competitive advantage anymore in 2024. The key to making D2C work is to build trust and prove efficacy in a niche market, continuously working to unlock the next bigger market segment, and eventually bringing together multiple go-to-market models to build scale. Now that the hype has reset, those builders and marketers with a long-term growth mindset are getting their chance to drive lasting change in healthcare.