Value based segmenting; Understanding and creating value through market segmentation

Value based segmenting;

Understanding and creating value

through market segmentation

A research into market segmentation based on

customer value

Rutger Heukensfeldt Slaghek

December 2008

University of Groningen

Faculty of Economics and Business

Msc Business Administration

Specialization Business Development

Preface

This thesis is the result of months of research in the values of customers and the values for X. This research was performed as part of my graduation for the master Business Development on the university of Groningen, and is also on behalf of X Diagnostics the Netherlands.

During this research the term ‘customer value’ was the central topic. I noticed during this research that ‘customer value’ has a lot of different meanings in both academic literature as for the people working with it. Fact is that there is not one way to describe customer value and it is both to the researcher and the company to define what customer value really is. I think that the result of this research provides a good overview of this search for customer value.

First I would like to thank all the people who have supported me during this research. This means not only the direct people involved, but also the managers of laboratories who where so kind enough to supply me with valuable information. Especially I would like to thank x, Marketing manager X Diagnostics, who has given me all the support and help to perform my research in both a fun and interesting way. He taught me that open mindedness is on of the most ‘valuable’ things in business. Also I would like to thank dr. Miedema for his help and expertise during my thesis period.

In the end there are only two people I should really thank; both my parents. They gave me the opportunity to study and supported me through the whole process. Thank you.

December, 2008

Executive summary

X is a global broad-based Health Care Company devoted to discovering new medicines, new technologies and new ways to manage health. This reseach concerns X Diagnostics, which is a global leader in in vitro diagnostics and offers a broad range of innovative instrument systems and tests for hospitals, reference labs, blood banks, physician offices and clinics. The main question that the management is facing is how the market for Dutch healthcare laboratories can be segmented based on customer value for both the customer and X. This segmentation is necessary because 1) there is a declining market, 2) There is unpredictable and fierce competition, and 3) the customer behavior is changing.

Based on the problem analysis the objective has been formulated. The objective of this research is twofold:

To give the management of X Netherlands insights and advice into:

1. What the value of the customer is to X and what the customer really values. 2. The segments that can be distinguished based on the identified values.

To decide how to segment the market, the current and potential value of the customers plays an important role. The current value of a customer can be defined as: ‘Operating profit before allocation contributed by a customer during an one year period of time’. The potential value can be described as the expected operating profit before allocation that can be obtained from a certain (or potential) customer when that customer uses only the supplier’s products. Also the current and future values of the customers play an important role in determining the segments. Value for the customer can be defined as: a customer’s perceived preference for and evaluation of those product attributes, attributes performances, and consequences arising from use that facilitate achieving the customer’s goals and purposes in use situations. The potential value is also of use for determining the attractiveness of the segments.

Based on the theoretical framework, the following two main research questions and sub questions have been formulated:

 What is the value of the customer to X and what does the customer consider to be

valuable in both the current and the future situation?

1. What is the current value of customers to X? 2. What is the potential value of customers to X? 3. What do customers value in the current situation? 4. What will customers likely value in the future situation?

5. What is the importance of value assigned by customer to each of these components of customer value?

 Which segments can be identified based on customer value for both X and the customer,

and which segments are attractive to serve?

1. Which segments can be distinguished based on ‘customer value’? 2. Which segments are attractive to serve?

It can be concluded that at his moment x% of the total value is obtained with x% of the

customers. This is very risky and might bring X in to difficulties if one of these customers decides to switch to competition. The current number of accounts of X that have been taken into

consideration is 87. These accounts have been ranked based on their value into four categories; Platinum, gold, Iron, and lead. The platinum accounts are the most valuable and consist of 4 accounts. The lead accounts are the least valuable with 28 accounts.

Off all the customers the platinum accounts are the most valuable customers in potential terms. These customers have both high current and high potential value. The lead category is the least attractive in potential terms, with a low potential value. Also a significant amount (18) of

current customers have high potential for growth. This means that X is still not utilizing these customers to an optimum. The total potential value distributed is calculated to be x million euros. Abbot currently possesses 9,43 million euros, which is 31,7% of the distributed value.

Currently the customers their needs are not fully met. Based on the focus group and especially the interviews, customers mentioned subjects that are not offered by X or X does not behave like that. There is a small gap between what X thinks is valuable and what the customers think is valuable. Customers almost all uniformly value the attributes that help to guarantee continuity on the lab. This ranges form stable and durable equipment till a high service level, fast delivery times and the direct need for continuity.

The current market can be described as conservative, traditional and small where everybody ‘knows’ each other. The need for new value added services cannot be described as significant. Therefore, the potential added value elements will (currently) never be order-winning factors, certainly not if the rest of the offer will not meet the expectations. Customers mostly mentioned IT related services like E-ordering, Online helpdesk, and E-learning. Customers also value new ways to understand the value of equipment with the help of Total Cost of Ownership concept. Fact is that customer considered ‘image’ not to be very valuable when they have to choose between different suppliers. However, when taking in consideration the definition of image, customers do find it valuable that the company has a good image. There can be concluded that the importance of continuity can also be found in other answers because respondents also valued stable equipment, high service level, preventive maintenance and on time delivery as being very valuable. On a potential level there is not one attribute that really generates the ‘wow’ effect. Customer show the highest interest in the use of IT (E-ordering, E -learning) and TCO.

Four segments are distinguished based on what customers value. These segments are (1) Low price buyers, (2) Core product buyers, (3) Augmented product buyers, and (4) Warranty buyers. The price buyers segment is looking for the lowest price. Segments 3, the augmented product buyers, are looking for high-end solutions to satisfy their needs. The core product buyer are conservative and value mainly the core product offering. Segment 4, Warranty buyers, is a segment where the customer is looking for experience and continuity. It be concluded that based on the weighted factor analysis, the core product buyers segment is the most attractive. The second most attractive segment is the warranty buyers segment. This segment can be

considered stable as it has an average size, and the average potential value still to catch is also considered to be reasonable. Third most attractive segment is the augmented product buyers segment. This segment has a high potential value still to catch. However, the size of this segment is small. The least attractive segment is the price buyers segment. This segment has a relatively high size, but has a low potential value and is also heavy price orientated.

The following recommendations have been formulated. The management should:  Develop for each segment a different (product) positioning in order to communicate the

products’ key distinctive benefits to the market.

 Evaluate the used segmentation scheme each year in order to decide if it still functions in the way that it was intended to.

 Should use customer value models to communicate the value of their products to the customer.  First focus on the quality of the core of the offered product and should then start differentiating

with value added services.

 Not underestimate the power of word of mouth and should develop a total customer satisfaction/loyalty program, in order to make their current customer base totally satisfied.  Must introduce a more outside-in culture based on the ideals of market orientation.

 Put in place at least 40% of its resources to satisfy the four (high value) customers in order to retain them.

Table of content

1.9 Mission, vision and strategy... 9

1.10 Management question... 10

1.11 Customer value in perspective... 10

1.12 Content of thesis ... 11 2. Problem analysis... 12 2.1 Introduction ... 12 2.2 Problem identification ... 12 2.3 Main causes... 12 2.4 Problem ... 13 2.5 Objective... 13 2.6 Restrictions ... 13 3. Theoretical framework ... 14 3.1 Introduction ... 14 3.2 Value process ... 14

3.3 Current customer value X... 14

3.4 Potential customer value X... 15

3.5 Current customer value ... 16

3.6 Future customer values ... 17

3.7 Market segmentation... 18

3.8 Segmentation procedure ... 18

3.9 Segment attractiveness ... 19

3.10 Conceptual model ... 20

4. Methodology & question statement ... 21

4.1 General ... 21

4.2 Main questions... 21

4.3 Sub questions ... 21

4.5 Current value customers to X ... 21

4.6 Potential value ... 22

4.7 Current value to the customers... 23

4.8 Potential value to the customers... 23

4.9 Importance of values ... 24

4.10 Value based segments ... 24

5. Current value Customers... 26

5.1 Introduction ... 26 5.2 Current value ... 26 5.3 Platinum accounts... 26 5.4 Gold accounts ... 27 5.5 Iron accounts ... 27 5.6 Lead accounts... 28 5.7 Conclusion ... 28

6. Potential value Customers... 29

6.1 Introduction ... 29 6.2 General ... 29 6.3 Platinum accounts... 29 6.4 Golden accounts ... 29 6.5 Iron accounts ... 30 6.6 Lead accounts... 30 6.7 Other accounts... 30

6.8 Current vs. Potential value ... 30

6.9 Conclusion ... 31

7. Current customer values ... 32

7.1 Introduction ... 32

7.2 General level... 32

7.3 Product level specific... 34

7.4 Service level specific ... 35

7.5 Sales level specific ... 36

7.6 Conclusion ... 37

8. Future value customers ... 38

8.1 Introduction ... 38

8.2 Potential levels... 38

9. Importance of values... 41 9.1 Introduction ... 41 9.2 General level... 41 9.3 Product level ... 41 9.4 Service level... 42 9.5 Sales level ... 42 9.6 Potential level... 43 9.7 Conclusion ... 43

10. Value based Segments... 45

10.1 Introduction ... 45

10.2 Segment 1 : Low price buyers ... 45

10.3 Segment 2: Core product buyers ... 46

10.4 Segment 3: Augmented product buyers... 47

10.5 Segment 4: warranty buyers... 48

10.6 Conclusion ... 49

11. Segment attractiveness ... 51

11.1 Introduction ... 51

11.2 Size of segments... 51

11.3 Value to catch per customer ... 51

11.4 Competitive intensity ... 51

11.5 Exposure economic fluctuation ... 51

1. Introduction

1.1 Introduction

This chapter takes in consideration specific information about the company for which the research is conducted. Also the motive and subject will be revealed. This chapter will end with the

clarification of the structure of the thesis. 1.2 X Laboratories

Abbot is a global broad-based health care company devoted to discovering new medicines, new technologies and new ways to manage health. Their products span the continuum of care, from nutritional products and laboratory diagnostics through medical devices and pharmaceutical therapies. X people have been driven by a constant goal: to advance medical science to help people to live healthier lives. Today around 68.000 people work for X. Headquatered in Chicago Illinois USA, X had sales of 25.9 billion dollar in 2007.

1.3 History

More than a century ago, 30-year-old Dr. Wallace C. X, a practicing physician and drug store proprietor, founded the X Alkaloidal Company. Using the active - or alkaloid - part of a medicinal plant, he formed tiny pills, called “dosimetric granules,” which provided a more accurate and effective dosing for his patients than other treatments available at the time. The demand for these accurate granules soon far exceeded the needs of his own practice and from these modest X was born, one of the world’s most broad-based health care companies.

1.4 Areas of Expertise

X offers a broad range of medical solutions as can been seen in figure 1.

Figure 1: X medical soluitions

1.5 X core values

X has formulated four core values that are the drivers of the organization.  X set her sights on pioneering solutions that advance health care.

 X strives to achieve results for those they serve by setting their own high standards  X shares a deep passion for work and caring for the people they help

 X is focused on the long term; building on their strong, enduring heritage and continuing to invest in the future to Xress health needs where they are the greatest.

1.6 X diagnostics

X Diagnostics is a global leader in in vitro diagnostics (IVD) and offers a broad range of innovative instrument systems and tests for hospitals, reference labs, blood banks, physician offices and clinics. With more than 69,000 institutional customers in more than 100 countries, X's diagnostic products offer customers automation, convenience, cost effectiveness and flexibility. X has helped transform the practice of medical diagnosis from an art to a science, helping to create the modern diagnostics industry through the company's commitment to improving patient care and lowering overall costs. The history of X Diagnostics is filled with examples of first-of-a-kind products and significant technological advancements. X Diagnostics is a part of X Laboratories. X is worldwide market leader in the Immunochemistry segment.

1.7 Products

Generally seen there can be made two main differences in the product offerings of X (X Diagnostics Division):

1. Analyzers. These are equipment that are used to analyze blood samples in three related areas:

- Hematology - Clinical chemistry - Immunochemistry

The equipment can be bought for small volumes (Cell-Dyn 1800, AXSYM W/5.0) and large volumes (I 2000, Cell-DynSapphire) (see appendix 1)

2. Reagents. These product come along with the analyzers and are used to perform different diagnosis treatments on the blood samples. For each performed test on a blood sample there is a need for one specific reagents.

1.8 Competition

In international perspective, X has more competitors. In the Dutch market there are three main competitors. These are:

1. Roche. German pharmaceutical company who also operates in the diagnostics market. Roche is currently overall market leader and has an especially large market share in clinical Chemistry.

2. Beckman. American company who primary leads in the hematology market.

3. Siemens. German healthcare division of the electric company. Has recently acquired

Bayer, Dade and DPC. 1.9 Mission, vision and strategy

1.9.1 Vision

To be the most respected IVD manufacturer that enables the clinical laboratory to supply diagnostic intelligence to its customers - through best-in-class solutions - to help transform the laboratory for an even healthier future.

1.9.2 Mission

Regain undisputed global market share leadership in core automated hospital markets and similar-sized private laboratories – typically running from 150M to 5MM tests per year; move to top two position in global hematology market and grow leadership share in dedicated blood banks - while meeting Division profit guidelines.

1.9.3 Strategy

focus on Customer Intimacy to meet market needs and to be competitively differentiating as can be seen in figure 2 based on the model of Treacy and Wiersema (1994).

Figure 2: Possible strategies (adapted from Treacy and Wiersema, 1994)

1.10 Management question

As can be seen in the mission and vision, X wants to regain market share leadership in the different markets and wants to be the most respected manufacturer. However, the Dutch market for healthcare laboratories is unpredictable and changing constantly. The management wants to regain a firm grip on the market. In order to accomplish this, the management wants to seek ways to improve their understanding of the market and to serve their customers to an optimum with the help of market segmentation.

The new introduced management dimension that X uses, is away from customer satisfaction and more to understanding, creating and delivering value for their customers. X wants to use the value dimension to understand and segment their customers so that their needs and values can be met. In the early days the main focus of X was on customer value for X (inside-out). Currently they want to change this focus on creating value for the customer (outside-in), which as a result must lead to customer value for X.

Concluding, the main question that the management is facing is how the market for Dutch healthcare laboratories can be segmented based on customer value for both the customer and X. 1.11 Customer value in perspective

Creating and understanding customer value are subjects that are widely used in academic literature. Therefore, customer value also has a lot of different meanings in literature. For instance according to Gale (1994) customer value is market perceived quality adjusted for the relative price of your product. But according to Anderson et al. (2004) Value in business markets is the perceived worth in monetary units of the set of economic, technical, service and social benefits received by a customer firm in exchange for the price paid for a market offering. For this thesis we consider two types of customer value, which will be discussed in chapter x:

1. Customer value for the customer 2. Customer value for X Laboratories

X Customer

Figure 3 Value process X

Value for customer (product, services, etc.)

1.12 Content of thesis

2. Problem analysis

2.1 Introduction

This chapter explains the context of the researched problem and the objective of the research. This chapter will end with the limitations of the research.

2.2 Problem identification

To achieve an in depth understanding of the problem, there is made use of the strategy model of Kotler (2001). Kotler states that a company its strategy depends on different factors as mentioned in figure 4. When a company is defining a strategy it has to take in consideration these factors. The main problem that X is facing is due to the red marked subjects in the model. These are economic, political, and mainly competitor forces and will each be discussed separately.

figure 4 Factor influencing strategy (adapted from Kotler, 2000)

2.3 Main causes

Based on conversations with key people within X, there are some worrying changes identified which form the base and the main reason for this research:

1. Declining market (economic environment)

Due to the radical change in the market caused by mergers and acquisitions, the total numbers of commercial and hospital laboratories are declining. Established players are having a difficult time and are even thinking about outsourcing their laboratories. Because of these developments the total need for laboratory equipment is declining. The market is transforming from a heterogeneous to a more homogenous market, where there is only room for a small number of suppliers. According to Grupta strategists (2008) more hospitals will merge in the nearby future to accomplish scale and procurement advantages.

2. Unpredictable and fierce competition (competitors)

Competitors are making strange moves, like offering products well below the industry standards to erase competition.

3. Customer behavior change (Political environment)

There is a change in behavior due to the ‘ commercialization’ of the hospitals. The Dutch government has decided to introduce a market system in the healthcare industry as of 1 January 2005. Because of this more competitive system, there is an increasing pressure on prices. The management of hospitals are consequently seeking ways to increase their efficiency (Syllabus outsourcing, 2008). Therefore, hospitals are more aware of their costs and their positions compared to competitive hospitals. Patients and insurance companies are looking for the best and cheapest solutions (z-vision.nl, minvws). This means that hospitals have to find ways to cut costs and to do their operations with fewer expenses.

2.4 Problem

Based on the above mentioned trends in the market, X (X Diagnostics Division) Netherlands decided that they have to use an alternative approach in order to stay competitive and profitable. The values of the customer are changing and the only way to make a turnaround is to get a proper understanding of these customer values. The main problem of X is the fact that they do not understand their customers to an optimum. What do they value? What are the main things they judge when they decide on a competing offering? How can value be delivered to the customer?

X is in a struggle to gain market share (though on a profitable way) and to make a turnaround in the recent developments. To make this turnaround happening, X first wants to know how it can segment its market based on customer value.

2.5 Objective

The objective of this research is twofold:

To give the management of X Netherlands insights and advice into:

1. What the value of the customer is to X and what the customer really values.

2. The segments that can be distinguished based on the identified values. 2.6 Restrictions

The restrictions are made to get a clear understanding of the scope for the research.  The research will last for five months, form 1-7-2008 till 1-12-2008

3. Theoretical framework

3.1 Introduction

This chapter will take in consideration the used theory for the research. It will first explain the value process and will then explain the theory behind current and potential customer value for X. The current and future values for customers will also be discussed with the help of theory. This chapter will continue with thoughts on market segmentation and segment attractiveness. Finally, the conceptual model for this research will be discussed.

3.2 Value process

Value creation can be described as a process, which can be differentiated in steps. According to Anderson et al. (2004) the business market process or value process consists of three steps; (1) understanding value, (2) creating value, and (3) delivering value. Payne&Holt (2001) Xed an extra step, value assessment, as can be seen in figure 5.

Figure 5 Value creation process (adapted from Payne&Holt)

This thesis will be mainly focused at Understanding value or Value determination. According to Payne & Holt (2001) value determination involves a much more rigorous understanding of the values and beliefs that are motivating customers to buy products and understanding of both what the customer values as well as the customer’s lifetime value to the firm. The value process or customer value management (CVM) has in its essence two basic goals (Anderson et al., 2004):

 Deliver superior value to targeted market segments and customer firms  Get an equitable return on the value delivered.

3.3 Current customer value X

Gathering information on customer value not only has a positive effect on effective customer relationship management but is also an interesting base for segmenting customers.

Understanding the value of customers and the most profitable customers are essential to retain customers (Hawkes, 2000). Various scholars (Verhoef et al., 2001; Hwang et al., 2004) have made the connection between current customer value and market segmentation. A much-used methodology for categorizing customer based on current customer value is the customer pyramid (See figure 6).

The current value has been discussed widely in literature (Hwang et al, 2004; Verhoef et al., 2001) and is defined as profit contributed by customer during a certain period (Hwang et al, 2004). For this thesis current customer value for X is defined as :

 ‘Operating profit before allocation contributed by a customer during an one year period of

1

Platinum Gold Iron Lead

Figure 6 customer pyramid (adapted from Zeithaml et al., 2001)

The customerpyramid takes the following categories into account (figure 6):

 Platinum customers. Are the company’s most profitable customers. These customers are heavy users of the product, are not very price sensitive and are committed to the firm.  Golden customers. Profitability levels are not that high. These customers might

minimize risk by working with multiple vendor rather than just the focal company.  Iron customers. These are customers that provide the volume needed to utilize the

firm’s capacity but whose spending levels, loyalty, and profitability are not substantial enough for special treatment.

 Lead customers. These are the customers that are sometimes even costing the

company money. They are demanding more then they are paying for and are sometimes problem customers.

3.4 Potential customer value X

According to Verhoef et al., (2001) using a customer’s current value as segmentation variable solely might lead to sub-optimal strategies. They state that a more differentiated approach is needed which takes potential customer value into account. For that reason, potential customer value has been chosen as a variable for segmenting the market for healthcare laboratories. There is also a connection between potential customer value for X and segment attractiveness. According to (Dibb, 1999) an important market segment attractiveness factor is market size. Market size can be found in the context of market factors and can be seen very much in line with potential customer value. The calculation of potential value of customer does not only take in consideration the current customer base, but also potential new customers.

Table 1 customer current and potential value (adapted from Verhoef et al.)

Verhoef et al., (2001) made the following distinction of segments:

Segment I: This is an unattractive segment with low current and low potential value. Strategies

should focus on cost reduction.

Segment 2: This segment has high potential value but not succeeded yet in taking a large share

of this value.

Segment 3: This segment has low potential value and high current value. Companies should

strive to keep these customers

Segment 4: This segment can be considered as being the most valuable. These customers have

a high current and a high potential value.

The definition of potential value for this research is based on the definition of Hwang et al., 2004. They state that potential customer value can be defined as expected profits that can be obtained form a certain customer when that customer uses Xitional services. Therefore:

 ‘Potential customer value is the expected operating profit before allocation that can be

obtained from a certain (or potential) customer when that customer uses only the supplier’s products.’

3.5 Current customer value

In the previous paragraphs a connection has been made between customer value for X and market segmentation. However, the primary driver for market segmentation is not only customer value for X, but there is also a strong emphasis on value for the customer. This can be seen as a more outside in approach (value for the customer) instead of only inside out (value for X)

approach. Therefore, it is important to identify what customers currently value when forming market segments.

Customer value has a lot of different meanings in academic literature. According to Butz et al., (1996), customer value means the emotional bond established between a customer and a producer after the customer has used a salient product or service produced by that supplier and found the product to provide an Xed value. In this research there is chosen for the definition of Woodruff (1997):

 ‘Customer value is a customer’s perceived preference for and evaluation of those product

attributes, attributes performances, and consequences arising from use that facilitate achieving the customer’s goals and purposes in use situations’.

There is chosen for the definition of Woodruff because it fits exactly in what X is looking for; in what way can Abbot help to reach the customer goals and objectives.

These current customer values will be seen very much in line with the expressed needs of the customer. These expressed needs can be defined as the needs and solutions of a customer of which the customer is aware and, therefore, can express (Narver et al., 2004). Woodruff (1997) presents an expanded customer value learning process, which he calls customer value

determination (CVD). In order to determine what customers really value, one should take the factors as presented in figure 7 in consideration.

Customer Current Value

Figure 7 customer value determination process (adapted from Woodruff, 1997)

3.6 Future customer values

The customer value construct points at future directions. Its strategic orientation aims at assessing how value can be created for customer and by which means a supplier’s market offering can best meet customer requirements (Eggert et al., 2002). So, when identifying customer value, it is not only about how customer requirements in the current situation can be met, but also in future situations. The firm who can anticipate on this future value in the best possible way, will most likely gain an competitive advantage on its competitors. Therefore, when segmenting markets, it is important to take in consideration the future value construct.

The potential customer values will be very much in line with the latent needs of the customer. Latent needs are defined as needs and solutions, of which the customer is unaware (Narver et al., 2004). Flint et al., (2001) uses the term ‘desired value’ that refers to the value that customers want to receive from products/services and their providers. They state that predicting customer-desired value may be difficult, but there is no evidence to suggest that it cannot be done. The following definition of future customer value will be used in this research:

 ‘Future customer value refers to the value (as stated in the definition of Woodruff, 1997)

that customers want to receive from products/services and the supplier in future scenarios’.

Predicting future customer value has had some attention in literature. Woodruff (1997) states that data has to be collected (Macro environmental forces, competitors, etc.) and converted into predictions. Narver et al. (2004) suggests the use of observations and lead users. Flint et al., (2001) presents a theoretical model as can be seen in Appendix 2, that explains what the main drivers are of change in customers’ desired value. They state that the central phenomenon leading to customer value change is customer tension. Three forms of tension can be distinct:

1. Affective strength

Represents emotional stress. This can be due to scarcity of available time and for instance organization uncertainty.

2. Perceived extensiveness

Depicts where tension may exist. This can be in one individual, in one group or throughout the organization.

3. Temporal dynamism

3.7 Market segmentation

Market segmentation is the process of partitioning a market into groupings of firms that have relatively similar requirements and preferences for market offerings. Freytag et al., (2001) states that segmentation in business markets is about identifying and targeting customer group through their needs and wants, as well as determining which customers and needs will be Xressed and with what manner and in what manner and intensity. When segmenting markets, you have to look for descriptors that capture significant differences in requirement and preferences for market offerings or how prospective customers will respond to market initiatives. Significantly,

irrespective of which descriptors a firm chooses, any can provide dramatically different view of the market and provide insights to gain competitive advantage (Anderson et al, 2004). Robertson et al., (1992) has formulated four criteria to judge validity of the proposed segmentation scheme as can be seen in Table 2.

Criteria description

Measurable Can the size, growth, and market potential of a segment be measured?

Profitable How profitable is the marketing effort likely to be? What is the payoff form each segment?

Accessible Can segments be identified and reached successfully? Actionable Can effective marketing and sales programs be formulated

for attracting and serving segments?

Table 2: Criteria for judging validity (adapted from Robertson et al., 1992)

3.8 Segmentation procedure

The segmentation procedure will be based on the procedure of Kotler (2001) and Dibb et al. (1997). Kotler (2001) states that that a marketer should use a three step procedure to segment markets; (1.) survey stage, (2.) analysis stage, and (3) profiling stage. According to Dibb et al. (1997) the segmentation program consists of 3 three continuing steps: (1) Analyses, (2)

Programs, and (3) strategy. In the marketing analysis stage the marketer will gain knowledge or current market intelligence. In the strategy development stage the generated ideas will be formalized, and the marketing programs stage is used to action the determined revised segmentation strategy.

Based on these two procedures, a four-step segmentation procedure is proposed:

Figure 8: Market segmentation model

1. Survey stage (customer value). In this stage data on customer needs and values will be collected.

2. Analysis stage. The analysis stage is used review the findings of the background analyses on customer behavior and needs, competition and trends, to make decisions about target segments (Dibb et al., 1997).

Survey

Programs

Analysis

3. Profiling stage. In this stage each located cluster is profiled in terms of its distinguishing attitudes, behavior, demographics, psychographics, and media patterns, then each segment is given a name based on its dominant characteristics (Kotler, 2001)

4. Marketing programs (not part of this research) In this stage the marketer will develop for each targeted market segment a detailed marketing mix programs aimed at facilitating the desired strategy (Dibb et al., 1997).

Market targeting strategies

Once a company has identified its market-segment opportunities, it can take a decision on which segment(s) to target. According to Kotler (2001) a company can consider four patterns of target market selection as can be seen in Table 3.

Pattern Description

Selective specialization The firm selects a number of segments each segment promises to be a moneymaker

Product specialization The firm makes a certain product for several segments Market specialization Firm concentrates on serving many needs

of a particular customer group

Full market coverage A firm attempts to serve all customer groups with all of the products they might need.

Table 3: (Adapted from Kotler (2001): Patterns of market selection

3.9 Segment attractiveness

Once all the segments are identified, there can be determined which segments have the greatest potential and are therefore the most attractive. The attractiveness of a segment is in essence a matter of a positive interaction between a firm and a segment and can be determined based on different factors as can be read below.

The need to assess target market attractiveness is of fundamental importance for marketers (Dibb, 1999). Decisions about attractiveness need to be made within the context of environmental conditions, available resources and level of competition. A significant amount of literature has been spent on the segment attractiveness topic. Authors use different criteria. Abratt (1993) for instance, uses competitive position, market size, expected market growth and market fit with organizational objectives and resources as key attractiveness criteria. Zhande (1996) uses different perspective criteria as: potential profitability, market growth, market size and likely customer satisfaction. Many authors also consider the five forces of Porter to be important criteria for segment attractiveness. Dibb (1999) has made an overall framework of segment

market attractiveness factors

Market factors Economic and technological factors Size of segments Barriers to entry

Segment growth rate Barriers to exit Stage of industry revolution Bargaining power of suppliers

Predictability level of technology utilization Price elasticity and sensitivity Investment required Bargaining power of customers Margins available Seasonality and cyclically of demand

Competitive factors Environmental factors Competitive intensity Exposure to economic fluctuation Quality of competition Exposure to political and legal factors

Threat of substitution Degree of regulation Degree of differentiation Social acceptability and physical

environment impact

Table 4: Framework of segment attractiveness criteria (adapted from Dibb, 1999)

3.10 Conceptual model

The information provided in this chapter gains inside into the factors on which market

segmentation is dependent. As can be seen in the conceptual model in figure 9 and can be read in this chapter, there are four factors which have a direct relationship with market segmentation. There is also a direct relationship between market segmentation and segment attractiveness and potential customer value and segment attractiveness.

Figure 9 conceptual model

4. Methodology & question statement

4.1 General

This chapter will outline the research questions and the used methodologies to answer these questions. Each question will be discussed with the used methodology. This chapter will begin with the questions, it will continue with theory for current and potential customer value for Abbot. After this it will take in consideration the current and future customer values and its importance ratings. The chapter will end with the used methodology for value based segments.

4.2 Main questions

This research is divided in two parts, understanding value and market segmentation, which as a result leads to two main questions.

4.2.1 Understanding value

 What is the value of the customer to X and what does the customer consider to be valuable in both the current and the future situation?

4.2.2 Market segmentation

 Which segments can be identified based on customer value for both X and the customer, and which segments are attractive to serve?

4.3 Sub questions 4.3.1 Understanding value

1. What is the current value of customers to X? 6. What is the potential value of customers to X? 7. What do customers value in the current situation? 8. What will customers likely value in the future situation?

9. What is the importance of value assigned by customer to each of these components of customer value?

4.3.2 Segment attractiveness

1. Which segments can be distinguished based on ‘customer value’? 2. Which segments are attractive to serve?

4.4 Methodology & Data collection

For the data collection there has been made use of three forms of data collection:

1. Focus groups. Focus groups have been used to gain inside into customer motivations, and

attitudes (Kotler, 2001)

2. Interviews. Interviews have been used to gain inside in customer values

3. Questionnaire. A questionnaire has been used to collect data on attributes and their

importance ratings.

4.5 Current value customers to X

The current value of customers to X is calculated based on customer information made by the financial department. Together with the marketing and financial department there is a

Classification Profit (Operating before allocation)

Platinum > 240.000 EUR

Gold > 120.000 EUR

Iron > 24.000 EUR

Lead > 0 EUR

Table 5: customer classification

4.6 Potential value

The potential value of the customers (current and potential customers) is based on the following calculation:

1. For the hospitals:

Total potential sales tests (quantity) * selling price * total product margin – Average costs = Potential profit:

(N*K(g)*Z(g)* M(g)) +( N*H(g)*Z(g) * M(g)) +( N*B(g)*Z(g) * M(g)) +(N*P(g)*Z(g))* M(g)) – C(g) = potential profit

in which:

N = Total number of hospital beds

K = clinical chemistry number of tests per bed dependent on g H = hematology number of tests per bed dependent on g B = Immunochemistry number of tests per bed dependent on g P = Protein number of tests per bed dependent on g

g = Gradation in category lab (1 to 7 and 9-10)) Z = selling price per test dependent on g M = margin per test based on g

C = average costs

The gradation in hospitals (g) is based on known information regarding the industry. The four levels of hospitals (Academic, topcare, <500 beds, >500 beds) and each have their own specific number of tests per category, price per test, and different margins.

2. Doctors labs

For the doctor labs it was more difficult to calculate the potential value. There is a classification mad in three sorts of labs (small, medium and large). There is an average on tests calculated for these labs and used in the different classification. The price per test is also connected to the gradation.

(K(g)*Z(g)* M(g)) +(H(g)*Z(g) * M(g)) +(B(g)*Z(g) * M(g)) +(P(g)*Z(g))* M(g)) – C(g) = potential profit

3. Commercial labs and region labs

For this category (small percentage) the amount of tests each determined separately. The price and costs are connected to the gradation (region labs and commercial labs)

Note

For some of the region and commercial labs the total amount of tests was determined separately because this information was available for input.

4.7 Current value to the customers

Figure 10 has been displayed in order to understand where the customer value possibilities are for X Netherlands.

Figure 10: overview of value possibilities X

In order to get an idea of what customer currently value, there has been made use of multiple sources. First of all an internal customer value meeting was organized in order to get a full picture of what customers currently value according to X. After this meeting, ten interviews were

conducted with customers (see appendix 4 for interview schedule). These people where the most important persons of the different laboratories. After these interviews and the customer value meeting, several topics where identified which customers might value. As a third source, the input from a focus group (see appendix 5) has been used. The focus group was conducted in Utrecht with the help of an external agency. There were approximately 9 participants from different labs. All this information combined has been used for input into an online questionnaire where customers generated their final input.

4.8 Potential value to the customers

The internal customer value meeting has been also used to identify new potential sources of value. First of all with discussions relating to what customers might need in the current situations. Secondly, there has been made use of mind mapping to identify new sources. Also the interviews with the customers where used to identify new sources of value. Finally, also the mentioned organized focus group was used as an input into getting a picture in what customer might value in the future. After all this collected information was bundled, it was used as input for the

questionnaire.

Product itself (Analyzer, reagents)

Customer service (components service quality)

Sales (customer contact)

Potential new sources.

Limited value Xed possibilities

Value Xed possibilities

4.9 Importance of values

As has been mentioned before, the results of the interviews, internal value meeting, and the focus group has been used as input for the web-based questionnaire (see appendix 14). This

questionnaire has been send to 136 customers and non-customers. Each of these customers where asked to rate a range of attributes with ‘most valuable’ or ‘least valuable’. This method was preferred above a Likert Scale because the respondents where forced to choose and could therefore not rate most attributes with a 3.

4.10 Value based segments

4.10.1 Response

Initially there were to 135 email Xresses requests send for the online survey. After a second reminder eventually 53 people responded, which is a response rate of 39,3%. At the end only 38 participants ended the survey, which is around 28% of the total population. The normal response rate with online survey is between 2-30%. The current response rate is in line with these findings.

4.10.2 Non response bias

One of the reasons that some people did not respond is due to the fact that they do not want to participate in a research with a commercial influence in it. Another problem lies in the fact that these people are constantly contacted by the industry for information. Currently they are tired of it and are therefore not interested in participating.

In order to have a representative sample of the population of 135 with a confidence level of 95% and a confidence interval of 10, you need at least 56 respondents. The current response rate is good for a confidence level of 95% with a confidence interval of 14.

4.10.3 Method

The value based segments have been determined based on the outcomes of the questionnaire. First with SPSS the data was bundled for each customer in into 1) general level, 2) Product level, 3) Service level, 4) Sales level, and 5) potential level. (see appendix 3). This was done in order to increase the possibility to formulate clusters with the same means.

On these bundled categories a quick cluster method was implemented in order to generate clusters that have an almost equal amount of accounts. There is chosen for a solution with four clusters. The total number of accounts belonging to the each segment can be found in Table 7. In order to determine if the several means are equal in the cluster, an ANOVA variance test has been implemented with the categories (general, product, service, sales, and potential) as

dependent variables and the four clusters as independent variable. The following hypotheses are formulated:

H0: The means of the segments match H1: The means of the segment do not match.

Table 6: Anova SPSS Test

Table 7: Cluster with accounts

4.10.4 External validity

In order to have a representative sample of the population of 135 with a confidence level of 95% and a confidence interval of 10, you need at least 56 respondents. The current response rate is good for a confidence level of 95% with a confidence interval of 14. This means that the current data is not sufficient to give a really reliable image of the whole population. However, the research population is not homogenized, and therefore the data is more difficult to generalize. The accounts that did not respond to the questionnaire, where each described and researched on with the different account managers. Based on their opinions and experience together with the corporate management, each account was individually assigned to the segment they belong to. This was done on the following criteria:

1. Description of the total lab - Economic situation - Lab size

2. Description of personality of lab manager

- Relationship orientated/not relationship orientated - More science focused or more management focused. - Conservative/Progressive

The reason this was done, is because there where not any statistical connections found between the segments and the different kind of laboratories. Therefore, a qualitative approach was used to assign the remaining accounts, making the segments based on a more grounded theory

5. Current value Customers

5.1 Introduction

In this chapter the current value of the current customer base is discussed. The customers are discussed in different categories; platinum, gold, iron, and lead. This chapter will end with a conclusion.

5.2 Current value

The current value of the current customer base has been based solely on profit contributed by a customer in monetary terms. The customer pyramid has been used to make a distinction in the value for X as can been seen in figure 11.

0% 20% 40% 60% 80% 100%

Customer pyramid profit

Platinum Gold Iron Lead

Figure 11: Customer profit Pyramid

The number of accounts that belong to the different categories as displayed in figure 11, can be seen in table 8.

Category

Number of

accounts

Table 8: Number of customer in category

5.3 Platinum accounts

X has four accounts that belong to the platinum category. These customers are exceptionally important for the company and contribute an average of x% and a total of x% to the total operating profit before allocation (see appendix 6). Their average costs is x% of their sales an their average sales are €x. Fact is that the biggest customer x, is responsible for x%% of the total operating profit before allocation as can be seen in figure 12. x is the most valuable customer with an annual sales of over x million euro and with costs of x% of its total sales. The other three platinum accounts (x, x, and x) are significantly smaller in terms of total sales and contribution to the total operating profit. Their relative costs are also considerably higher compared to X. Least profitable

Platinum accounts 33,5% 3,0% 2,6% 2,7% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 40,0% 45,0% 50,0% 0 1 2 3 4 5 6 7 8 Millions Total sales (EUR)

% c o s ts o f s a le s a c c o u n t

% of total profit contributed

Figure 12: platinum account overview

5.4 Gold accounts

Eighteen customers of X belong to the gold account category (see appendix 7). These accounts together contribute 31,63% to the total operating profit before allocation. The average costs are x% of their sales and their average sales are €x. Each account contributes an average of x% to the total operating profit before allocation. The biggest contributor, x, contributes x% to the total operating profit. The highest amount of sales (most right bubble in figure 13) concerns x with an annual sales of x euro.

Gold accounts 1,7% 1,6% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 40,0% 45,0% 50,0% 0 100 200 300 400 500 600 700 Tho usa nd s

Total Sales (EUR)

% c o s ts o f s a le s a c c o u n t

% of total profit contributed

Figure 13: Golden accounts overview

5.5 Iron accounts

Iron accounts 1,17% 0,36% 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 0 50 100 150 200 250 300 350 400 450 500 Thousands Total Sales (EUR)

% c o st s o f sa le s ac co u n t

% of total profit contributed

Figure 14: Iron accounts overview

5.6 Lead accounts

28 accounts belong to the lead category (see appendix 9). The average lead account typically has high costs (average of x%) and a very low profit (average x%) before allocation. These 28 accounts together contribute for only x% of the total profit generated and have an average sales of €x. The account with the highest contribution to the operating profit is x with x% (upper right in Figure 15). The account that costs X the largest amount of money, is x. This customer has a negative profit of x Euro and is not scaled on Figure 15.

Lead accounts 0,1% 0,2% 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 0 100 200 300 400 500 600 Thousands Total sales account

% c o s ts o f s a le s

% of total profit contributed

Figure 15: Lead accounts overview

5.7 Conclusion

6. Potential value Customers

6.1 Introduction

This paragraph will provide information concerning the potential value of the customer of X. The value of the total market has been calculated. The chapter starts with some general information. IT will continue with the platinum accounts, golden accounts, Iron accounts, lead accounts, and other accounts. This chapter will end with a conclusion.

6.2 General

The total potential sales in the Netherlands have been calculated to an amount of 68 million euros (see appendix 11). This is in line with findings of the market (see appendix 10) that suggests that the total reagents sales in the Netherlands is around 68.564 million euros.

X currently has a reagents sales of x million euros, that results in a market share of around x% (only reagents). The potential value of this market (total profit that can be generated) is calculated to be around x (potential value) million euros. Currently X its customers have a value of x million euros. Therefore, X owns x% of the total distributed value.

Current value Potential value Difference Percentage Current cover potential value Platinum 3.949.154,7 4.916.116,0 966.961,3 80,33% Gold 2.984.008,1 5.090.144,3 2.106.136,2 58,62% Iron 2.303.018,1 7.046.500,8 4.743.482,7 32,68% Lead 198.274,1 4.899.110,6 4.700.836,5 4,05% total 9.434.455,0 21.951.871,7 12.517.416,7

Table 9: current and potential value

There are a total of 135 accounts of which 87 already have a sales connection with X. This results in the fact that X has a total market cover of x% of the total accounts taken into consideration.

6.3 Platinum accounts

The platinum accounts (4 customers) combined have a total potential value of x million euros. The current value as can be see in table 9, is x million euros. X already has an x% share in the total potential value and therefore the total potential value of these customers that can still can be obtained (potential value customer – current value customer) by X is x thousand euros. This results in an average of x Euros per customer.

6.4 Golden accounts

6.5 Iron accounts

The iron accounts (37 customers) together have a potential value of x million euros. Currently X owns a share of x% of the total potential value distributed in this category. Currently the potential value still to catch is x million euros. This results in an average value per customer that is still to catch (potential value-current value) of x euros.

6.6 Lead accounts

The lead category (28 customers) has a potential value of x million euros. Currently X owns x thousand euros, which results in only a x% share in the total distributed value in this category. The potential value still to catch is calculated to be x million euros. This results in an average value per customer still to catch of 167.887 Euros.

6.7 Other accounts

The other non-X accounts (48) have a potential value of x million euros, which is x% of the total potential profit distributed. This means that these customers have an average potential value of x.

6.8 Current vs. Potential value

The current and potential value of the current customer of X are scattered as can be seen on figure 16 (x and x are not scattered, they both belong to segment IV). This figure based on the work of Verhoef et al., (2001), shows 4 segments that as a result of this scattering appear. On the x-axis the current value of each customer is displayed. On the y-axis the potential value of customers that X still can catch (Potential value – current value) is scattered. See appendix 12 to see which customer belongs to what category.

Segment I can be regarded as the most unattractive segment with low potential and low current value. X currently has 18 accounts operating active in this segment. As can be seen in figure 16, most of the customers (47) appear in segment II. Segment II has low current value and high potential value. X owns a relative small part of the value of these customers and has not yet succeeded in taking a large share of this value and therefore this segment has opportunities for selling-up activities. 0,0 50,0 100,0 150,0 200,0 250,0 300,0 0,0 50,0 100,0 150,0 200,0 250,0 T h o u sa n d s Thousands Current v alue P o te n ti al v al u e st il l to c at ch

Figure 16: Current/potential value framework

I

II

Segment III has high current value and low potential value. X currently has 12 customers in this segment. These customers have low up-selling possibilities. The last segment, segment IV, is the most valuable segment. Currently 10 customers of X appear in this segment. These customers are already valuable for X and still have a significant amount of value to catch. Losing this group of customers will have a considerable impact on the profitability of X and relating growing possibilities.

6.9 Conclusion

The platinum accounts are the most valuable accounts. Despite the high current value, is the potential value still to catch also of a considerable amount. The fact that the average potential value still to catch is x euros makes them the most attractive of all the categories. The iron accounts on the other hand have relatively the lowest amount of possible growth possibilities, making these accounts in growth perspective the least attractive.

7. Current customer values

7.1 Introduction

In this chapter the items that customers currently value are discussed. First the values on general level are discussed based on image, service, relationship, product and price. Then the values more specific on product, sales, and service level are taken into consideration. The specific definition of each located attribute can be found in appendix 13.

7.2 General level

As can be seen in table 10, the results of what customers value and think is important when they have to choose between suppliers is based on five main themes. According to Hoisington et al. (2003) in business to business situations customers use only 5 evaluation criteria: (1) product quality (2) service quality, (3) Quality of relationship, (4) image and (5) price perceptions. This differentiation in given answers can also be made in the answers given in the interviews.

General level Theme Internal value meeting Interviews Focus group Multi-disciplinary equipment Product x

Completeness reagents offer x

High service level Service x x x

Organization events x

On-time delivery x x

Long-term vision Image x

Innovative x x

Knowledge supplier x x

Strong market position x

Use of equipment colleagues x x

Continuity Relationship x x x

Needs recognition x x x

Flexibility x

In depth relationship x x

Appointments punctuality x x

Low price Price x x x

Table 10: General level customer values 7.3.1 Product level

The interviews showed that when a customer has to choose between competitor offerings, the completeness of the reagents offer is considered to be important. Almost al the participants told that they are looking for a supplier who can offer the broad spectrum of available tests. During the internal value meeting the importance of multi-disciplinary equipment was discussed. During the interviews, this was not the first thing they mentioned, but after asking if this is an important issue, most considered it to be.

7.3.2 Service level