In 1952, the Sonotone 1010 hearing aid hit the market. Priced at $229.50, the device stood out as exceptional. It was the first consumer product to rely on a transistor, which Bell Labs had invented a few years earlier. The transistor proved such a leap forward in miniaturizing hearing aids and modulating sound that 97 percent of hearing aids were based on transistors by 1954.
In subsequent decades, hearing aids have made dramatic leaps forward in performance, but they certainly have not enjoyed the same price/performance curves of the most famous transistor-based invention—the computer chip. In inflation-adjusted dollars, that 1952 hearing aid would cost about $2,000. The average retail price for a hearing aid today, though, runs from $3,000 to $6,000. If you know anyone who has bought one recently, you’ve probably heard them gripe about how expensive the devices—which insurers in the U.S. do not typically cover—cost.
To get at the heart of a hearing aid’s cost, we can turn to data data unearthed by a German regulator (PDF) studying the major manufacturers. Based on this information, it costs about $250 to make a device that will get sold to an audiologist retailer for $1,000. Hearing aid makers spend $75 per device on research and development and $250 on marketing and then chalk up $425 in profit. The retailers then mark up the price $2,000 to cover overheard and make a profit, resulting in a $3,000 price tag.
My dad, like so many dads, comes prepared with plenty of common sense on matters like these. He recently paid $6,000 for a new pair of hearing aids. They were not covered by insurance but do work very well—a blessing to my mother’s sanity. “The price includes adjustments and cleaning as often as needed,” dad says. “Except for the cost, I am pleased with them. They really should not cost more than a laptop.” Indeed.
While hearing aids don’t have the same sales volumes as laptops or iPads, they do sell by the tens of millions per year. They’re also much simpler devices. The typical hearing aid has a microphone to pick up sound and what’s known as a digital signal processor, which filters out the stuff you don’t want to hear and then amplifies the stuff you do want to hear, then sends it to a speaker. Digital signal processors are commodity parts used in a wide range of electronics. They come cheap.
Audiologists have maintained that they need to add those overhead costs in order to pay for the stores at which they can give people a personal touch, including cleanings and adjustments. According to government and industry data, there are about 13,000 audiologists in the United States, and they each sell a grand total of about 16 hearing aids a month. Costco (COST), in particular, has gone after the hearing aid market.
A number of startups think they can get even more extreme with the cost cutting. Audicus and Embrace Hearing, for example, have Web-based services that mail you a hearing aid that costs about $600. You simply upload your prescription and an audiologist reviews it and discusses options with you. As for the personal touch and the adjustments? “We offer people free adjustments and reprogramming,” says Patrick Freuler, founder and chief executive office of Audicus. “Around 80 percent of people don’t need additional programming.”
Six companies dominate the hearing aid manufacturing business, including Siemens (SI) and Phonak. Audicus has its aids built by competing companies in the U.S. and Europe. “The big six account for 95 percent or so of the market,” says Freuler. “The technology has become quite similar over the last couple of years, and they all make basically the same product. We partner with independent manufacturers that don’t come with the same brand mark up.”
The websites of Audicus and Embrace Hearing look almost identical. Both companies follow a trend that has taken off over the past couple of years: a Web company tries to specialize in a particular physical good, be it diapers or razor blades. About a year into operations, Audicus has three full-time employees and a pair of part-time audiologists. The company, which has taken no venture capital funding to date, declines to disclose its customer count or revenue, but Freuler says it has saved consumers $1.7 million in hearing aid costs so far.