BY DEFINITION, a loss leader is a product on which you lose money-but through which you also generate sales of other products in your mix. And for many home medical equipment providers, loss leaders are just what ostomy and urological products are becoming.

Making Your Choice This particular market niche has a large customer base, but declining Medicare and managed care reimbursement have hit profit margins hard in recent years. What's more, many manufacturers have gone direct, and an increasing number of retail pharmacies have added these products to their mixes.

The declining margins and volume this causes necessitate that you make some important business decisions. If you are a high-volume regional business, you may want to explore the opportunity of picking up more market share by investing in promotions or by actually acquiring other businesses' failed lines. If you are losing money in your ostomy and urological lines, however, you need to find out why and then look at what else you could do to cut your costs.

The larger the volume of your sales, the easier it is to pare costs. But if you don't have a high volume business and ostomy is nothing more than a profit drain, it may be time to let the business go. One way to make a graceful exit is to offer your customers an alternative buying source. Just be sure it's one that can be a good strategic partner in handling your customers and doesn't compete with you on your other lines.

If you don't feel you can segment your business and exit unprofitable lines, then you have to figure out why you want to be in the business and what price you're willing to pay. You may find, for example, that you need to sell ostomy and urological products simply to keep your largest, most profitable accounts.

A Maturing Market The challenges currently posed by the ostomy and urological business are typical of a mature market. In order to understand how to manage the challenges better, it's helpful to understand the various stages of a product life cycle.

The first phase is introduction of the product. The introductory stage of the ostomy and urological market occurred in the early 1980s, when the supply of these products shifted out of the hospital setting and into retail sites. One of the major obstacles in this stage of development was educating consumers and clinical referral sources about the benefits of retail shopping.

Through the balance of the '80s, the market exploded with high growth. This growth phase of the product life included the fast adoption of site-buying alternatives. A multitude of retail and home delivery options opened up for patients, and many HME companies built specialty niches in the ostomy and urological market segment.

During the early '90s, market growth rates slowed significantly, especially on the top line. Providers in more advanced managed care markets saw rates slashed significantly. Over the past six years, prices in the U.S. ostomy and urological markets have crept steadily downward. This third phase of the product life cycle is called "maturity."

The defining characteristic of a mature market is a slow to flat growth rate in price, which leads to a weeding out of competitors. Companies with high volume and low cost positions are the successful firms in this market phase. The strategy is to pare business costs to a minimum, reducing advertising, selling, distribution and product purchase expenses. Without these cost-cutting measures, the mature product line won't be profitable on its own. In fact, mature markets usually have few winners. Many retail companies exit as manufacturers begin selling direct and other channels of distribution open up.

Making Changes Another characteristic of this market phase is that companies pare their value-added services to save costs. For HME companies that stock ostomy and urological products, now is the time to evaluate whether they should continue dedicating retail space or high-cost customer service people. It may also mean HME providers must stop paying for delivery or should require that customers pick up products. If this isn't possible, providers may want to consider alternate distribution channels, such as putting consignment inventory into key managed care locations.

Another high cost area that HME companies should reexamine is reimbursement. The billing and collection of services is costly-and costs can be cut if patients have to do their own billing. Sound outrageous? Physician offices used to always provide this service, but many now only handle cash, requiring that patients bill their insurance companies directly. This cuts costs dramatically for them-and it could for you, too.