“Theranos, Inc.: Pivoting Consumer Health Care” Case Study

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The term “disruptive innovation” was first coined in the pages of Harvard Business Review to signify those innovative products and services that allow small firms to challenge larger established firms with greater market share, resources and assets (Christensen, Raynor, and McDonald). According to Christian et al., the process of disruptive innovation involves a small firm targeting ignored market segments and attaining some market share – often through lower-priced offerings. The authors contend that often larger firms tend to respond tepidly to this encroachment. The smaller firm then uses its footing to successfully target the typical consumers of the larger firms. When the larger firms’ consumers have become consumers of the smaller firm, disruptive innovation has occurred (Christian et al.).

Given this definition of “disruptive innovation,” Theranos is a firm that has the potential to become a disruptive innovator in the medical laboratory diagnostics industry. Theranos began by targeting “pharmaceutical companies that were farming out the testing of blood samples collected during clinical trials” (Chandrasekhar 4), until it was able to develop the internal capacity to provide one million tests annually, raise $400 million in angel investments, and build a staff of over 800 experts to drive research and development. Further, it was able to refine its service offering to afford consumers a significant price discount over established competitors (Chandrasekhar 5). Given that Theranos’ end-goal, as per its founder and CEO Elizabeth Holmes, is wide-spread consumer consumption (Chandrasekhar 1), not only are its products designed towards that end, but its direct-to-consumer outreach (rather than primarily through physician-ordered testing, which is the industry norm), will target, by default, the consumers of established players, such as Quest Diagnostics and Laboratory Corporation of America, in the medical laboratory diagnostics industry. As the case study notes, Theranos has largely been ignored by these established firms (Chandrasekhar 6). However, if Theranos is able to peel away significant market share from these firms, it can be rightfully deemed a disruptive innovator.

As the case notes, the technology adoption life cycle results in disparate levels of consumer penetration of products and services involving a significant technology component (Chandrasekhar 6), among four segments of consumers: “early adopters, early majority, late majority and laggards” (Chandrasekhar 6). These segments, as well as the disparate levels of consumer penetration of each segment, are encapsulated in Diffusion of Innovation Theory, a model of consumer behavior first introduced in 1943, and popularized in 1957 (Kaminski). The technology adoption cycle and Diffusion of Innovation Theory have implications for how Theranos plans to expand or reorient its direct-to-consumer strategy, begun in its Wellness Centers, to attract each segment of consumer.

The case further notes that different unique selling propositions are necessary for each segment (Chandrasekhar 6). Early adopters are often consumers who seek out or possess more significant industry information about the industry and/or product than the average consumer, while early majority consumers are more pragmatic more likely to be influenced by conventional arguments like convenience and reliability (Kaminski). Late majority consumers are more likely to be swayed by the bandwagon effect, while laggards are likely to shift away from established testing conventions to Theranos’ model only out of necessity (Kaminski).

Understanding these different segments is critical to how Theranos markets its product to consumers. For example, an early adopter consumer might find a unique selling proposition of an acutely reduced error rate compared to blood tests performed in a conventional lab to be significant selling point, while a member of the early majority might be swayed by the convenience of being able to obtain blood tests for a fixed price in a Walgreens in a couple of hours. Late majority consumers might only adopt Theranos’ services after Theranos achieved significant mass market penetration. Moreover, laggards may only switch if Theranos manages to disrupt enough of the existing physician-requested-test model that laggards must engage in Theranos DIY model.

Theranos should first identify the consumer segments that are most likely to contain significant numbers of early adopters. These may include consumers with certain types of acute medical conditions, athletes, health and fitness enthusiasts, tech-savvy celebrities, caregivers and home health aides, frequent travelers to Third World countries, and other groups who would directly benefit from Theranos’ blood-testing services.

The firm should analyze which segments would likely be both the most profitable and attract the largest amount of consumer interest in the short-term; it must also concurrently assess the ability of these initial segments to influence other consumer segments over the long-term. For example, celebrity athletes who adopt the product may not only influence other professional athletes, but also middle-aged health-conscious male sports enthusiasts; however, if the firm is not careful, the product’s adoption could stagnate among this demographic. Pitching the product to those with acute medical conditions may attract the attention of adults who serve as caregivers. By contrast, adult parents in the latter category, who, through caring for their own parents, may have an above average knowledge of the kinds of conditions for which early and/or regular blood testing can serve as a benefit, may then promote Theranos’ services among peers or their own adult children as a preventative measure. This segment then may lead to more widespread product adoption - though the author cedes further research is critical to making this determination. Indeed, whichever segment(s) Theranos begins with, its management and marketing departments should draw extensively on existing consumer data, as well as engage in significant market testing and primary marketing research, to analyze how early adopter consumers might promote product adoption of Theranos’ blood testing services in the short-term and in the long-term among mainstream consumers.

As per the vision of the firm’s founder, Theranos should promote its blood testing as a component of preventative care, widely believed to save both consumers, and the larger healthcare system, significant costs in the long-run. Research concerning the cost-savings of preventative medicine as a whole indicates that it can actually be expensive for the industry when healthy individuals are screened, but that early detection and treatment of disease among at-risk populations can help reduce overall healthcare costs significantly (Jones).

Using existing data, market testing, and analysis, Theranos should examine whether a launch strategy involving targeting at-risk populations to demonstrate the cost-savings – among healthcare providers and individual consumers – that its services are able to achieve, or one involving targeting its services to the consumer segment of health-conscious Americans who adopt preventative care services believing that long-term cost-savings may outweigh short-term additional costs, is one that leads to mainstream adoption more rapidly.

Moreover, Theranos should work actively to reduce consumer healthcare costs through strategic alliances with other stakeholders in the health community – alliances that also increase Theranos’ visibility and reach among mainstream consumers. For example, Theranos could pursue an alliance with a larger insurer that would allow a patient who use Theranos’ blood testing services to receive a discount in their health insurance premiums. Or a patient, whose screening has shown that the individual is at-risk for illness and who requires to follow up blood-testing, may receive a discount on their premiums so long as they are completing blood-testing; the insurer would market Theranos’ services to the patient. An insurer, satisfied by this measure of patient health, might conclude that it will cost less to ensure a patient who has undergone this testing consistently and had no issue, and thus be amenable to this sort of arrangement.

Works Cited

Chandrasekhar, R. “Theranos, Inc.: Pivoting Consumer Health Care.” Ivey Publishing. (2015). Pages 1-10. Web. Accessed 27 December 2017.

Christensen, Clayton M., Michael E. Raynor, and Rory McDonald. “What is Disruptive Innovation?” Harvard Business Review, December 2015, pp. 44-53. Web. Accessed 27 December 2017.

Kaminski, June. “Diffusion of Innovation Theory.” Canadian Journal of Nursing Informatics, Volume 6, Issue 2, 2011. Web. Accessed 27 December 2017.

Jones, Kyle. “Does Prevention Save Money? That's the Wrong Question.” American Academy of Family Physicians. 12. April 26. Web. Accessed 27 December 2017.