Diagnostic labs, which have taken price hikes since last year after hitting a stagnancy due to intense competition from online players, have seen an improvement in margins as a result. Leading diagnostic labs have raised prices by 3–6 per cent to offset rising input costs and inflationary pressures, with price hikes contributing directly to revenue and margins.
Despite these increases, competition from online diagnostic platforms continues to constrain average selling prices (ASP), limiting labs’ ability to fully pass on rising costs, claim industry insiders.
Diagnostic companies like Metropolis Healthcare and Dr Lal PathLabs have implemented price hikes to cope with inflationary pressures, but the impact of online competitors still looms over future pricing strategies.
At the beginning of 2024, Metropolis Healthcare increased prices by 5–6 per cent, following a similar price hike by Dr Lal PathLabs in February 2023. The companies are adjusting prices not just to offset inflation, but to maintain their service quality and counter rising input costs for equipment, reagents, and operational expenses. However, this hasn’t been without its challenges, especially with online diagnostic players influencing customer behaviour.
According to Ameera Shah, executive chairperson and whole-time director of Metropolis Healthcare, price hikes of 5–6 per cent typically contribute around 2.5 per cent to revenue growth, with some of this flowing down to the net margins, though inflationary costs for wages and equipment also impact the bottom line. At Metropolis, 56 per cent of their business comes from B2C services, which allows them to pass some of the price increases directly to consumers. An estimated 1.25 per cent margin improvement is accounted for after the price increase.
In the first quarter of FY25, Metropolis Healthcare reported an Ebitda of Rs 78.2 crore, reflecting a year-on-year increase of 21.2 per cent, with margins rising by 170 basis points to 25 per cent. However, the previous quarters showed a mixed performance in margins. In Q4 FY24, Ebitda grew by 15.3 per cent to Rs 79.7 crore, pushing margins up by 100 bps to 25.50 per cent. However, in Q3 FY24, Ebitda saw a decline, resulting in a drop in margins by 300 bps to 22.50 per cent. In Q2 FY24, margins fell by 270 bps to 24.30 per cent. The overall trend for FY24 indicated challenges, with margins decreasing by 290 bps year-on-year to 25.50 per cent. Despite the recent gains in Q1 FY25, Metropolis Healthcare is navigating a volatile margin environment amidst fluctuating Ebitda performance.
Aditya Khemka, healthcare fund manager at InCred, highlights a core challenge for diagnostic labs in raising prices. He points out that while customers aren’t shifting en masse to online diagnostic providers, they frequently use the lower online prices as a bargaining tool. “ASP [average selling prices] in diagnostics have been stagnant for the past 3–4 years. Customers negotiate with labs using the prices they see online, even if they don’t go through with those services,” Khemka said.
Metropolis Healthcare, for example, has managed to raise prices in the past two years and expects to continue doing so over the next 12 to 24 months. “The market has seen a complete rebound. We’ve seen continuous growth in average revenue per patient, driven both by price increases and product mix improvements,” said Ameera Shah, executive chairperson and whole-time director of Metropolis Healthcare.
Similarly, Dr Lal PathLabs increased prices in 2023, particularly for its specialised test portfolio, contributing approximately 3 per cent to total revenue growth. However, Ved Goel, group CFO and CEO – IB of Dr Lal PathLabs, mentioned that no further price hikes are planned for the current financial year, as the company plans to absorb rising costs through higher testing volumes.
Operating profit margins of Dr Lal PathLabs reached 34.48 per cent in June 2024, the highest since June 2023.
Dr Lal PathLabs has shown consistent improvement in Ebitda margins over recent quarters. In Q1 FY25, the company reported an Ebitda margin of 28.2 per cent, up 120 basis points (bps) from 27.0 per cent in Q1 FY24. The trend of margin expansion is evident across other quarters as well—Q4 FY24 margins rose by 290 bps to 26.5 per cent compared to Q4 FY23, and Q3 FY24 margins increased by 300 bps to 26.1 per cent from 23.1 per cent in Q3 FY23. In Q2 FY24, the company achieved a margin of 29.6 per cent, a 270 bps increase from Q2 FY23. These margin gains are a result of both price increases and operational efficiencies, contributing to higher profitability.
Looking forward, diagnostic labs are likely to review their pricing strategies within the next 12–24 months. “We’ve raised prices recently, and we may revisit pricing in 2025 or later, depending on market conditions,” Shah stated. Dr Lal PathLabs, on the other hand, plans to review its pricing strategy next year, though no major increases are expected for the current financial year.
While online diagnostic platforms haven’t made substantial market inroads, their presence has led to price sensitivity among consumers. For example, Redcliffe Labs has opted for only marginal price increases of 10–12 per cent over the past few years.
“Online providers might offer lower prices, but we emphasise our superior quality, customer support, and reliability,” said Aditya Kandoi, founder and CEO of Redcliffe Labs. The company is also enhancing its omnichannel presence, offering customers a consistent experience across both online and offline services.
Despite the pressure from online competitors, traditional labs remain dominant, particularly for more complex and specialised tests. Goel from Dr Lal PathLabs highlighted that customers are still willing to pay more for high-quality services, faster turnaround times, and convenience, which justifies higher prices in certain cases.
While diagnostic labs have managed to raise prices, the competitive landscape remains challenging. As the sector faces rising input costs and inflation, the ability to maintain or increase ASPs will depend on how effectively companies can balance price hikes with customer retention strategies.
First Published: Sep 23 2024 | 6:42 PM IST