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COMMERCIALIZING THE KUNST 1600 DRY PISTON VACUUM

PUMP©

I. From a quantitative perspective, the superior value and price of the


Kunst 1600 can be attributed to these three elements.

Value Elements:
• Cost savings due to the elimination of oil change expenses
and messiness -- Most owners and technicians trivialize oil change
related costs.
• Incremental revenue and profits –Incremental revenue and
profits refers to new income that can be attributed to greater
product efficiency. In this case study, this occurs in only one
segment – light commercial refrigerator repairs. In all other
segments, repair firm revenues remain the same regardless of
which pumps are used.

Price Element:
• Increased pump durability -- The Kunst 1600 lasts 2 to 3 times
longer than the incumbents in most segments. This means that
repair firms will have to buy more conventional pumps than Kunst
1600s. This impacts the price a repair firm has to pay for
conventional pumps (i.e., 2 to 3 times greater) and not the number
of jobs it can complete! In the economic sense, there is no
incremental profit merely greater price.

II. Value Placeholders For the most part, there are few differences
among conventional pumps and the Kunst 1600. Here are a few
placeholders.
• Weight differential – The Kunst 1600 is lighter than pumps
currently used in residential AC repairs and heavier than those used
in home refrigerator and light commercial refrigerator repairs.
These weight differences may impact technician preferences.
• Durability of parts – As the Kunst 1600 is constructed of molded
aluminum, its parts may be subject to less corrosion and thus last
longer.
• Brand equity – Currently, Kunst and Atler have little brand equity
in the potential market segments. This may put them at a
competitive disadvantage with long-established rivals.
• Expected value of oil dumping fines – You can either treat this as a placeholder or
include the expected probability of fines into your cost savings category for the Kunst
1600 in the value model. You would calculate the expected value as “the sum of
company and individual fines times probability of being caught times the amount of
oil dumped per year.” There is limited case information that enables you to do such
calculations, but this will be difficult to pin down in that any calculation will involve
assumptions about how often the contractor illegally dumps the oil.
Word Equations for Kunst 1600

Value Elements

Cost savings per oil change = Oil price + Labor cost + Clean-up supplies
+ Oil disposal cost

Labor cost = Hourly rate of individual changing oil x Hours of time required
per change

Clean-up supplies = monetary amount of scouring soap used + price of cloth


towel

Oil disposal cost = recycling charge per gallon of oil x number of gallons
recycled

For Residential AC Repair segment (using maintenance worker):

Cost savings per oil change = $8 + ($12 x .5) + (.15 + .50) + ($5 x .25)
= $15.90

Cost savings per year for oil changes = Cost savings per oil change x Number
of oil changes per year
= $15.90 x 20
= $318

For Home Refrigerator Repair segment:

Cost savings per oil change = $4 + ($15 x .5) + (.50 + .15) +($5 x .125)
= $12.775

Cost savings per year for oil change = Cost savings per oil change x Number
of oil changes per year
= $12.775 x 12
= $153.30

For Light Commercial Refrigerator:

Cost savings per oil change = $4 + ($24 x .5) + (.50 + .15) + ($5 x .125)
= $17.275

Cost savings per year for oil change = Cost savings per oil change x Number
of oil changes per year
= $17.275 x 12
= $207.30

Incremental profit per year = (Number of additional jobs per week x


Average profit per job) x Weeks per busy season

The Kunst 1600 would not enable the contractors to perform any additional
jobs in either the residential AC repair or home refrigerator repair segments.
Only for the light commercial refrigerator repair segment was it found
that using the Kunst 1600 would enable the contractor to perform additional
jobs.

Incremental profit per year = (2 x $30) x 12


= $60 x 12
= $720

To move from the total value of the Kunst 1600, given by the preceding two
word equations, to the value-in-use of the Kunst 1600, we must also include
the price of the alternative pumps. Value-in-use is an economic term that
equals the theoretical maximum price that a customer would be willing to
pay. When the expected lives of the offering differ, this must be taken into
account, and can be expressed as the differential price per year.

Differential price per year = (Incumbent pump price/Expected number of


years) –
(Kunst 1600 price/Expected number of years)

An assumption to question here is the given expected life of 6 years for the
Kunst 1600. A point to make is that this estimate was likely obtained from
accelerated use lab tests. Estimates obtained in this way can be problematic
when one or more assumptions made in the accelerated use lab tests do not
hold in the actual use of the Kunst 1600 in the given applications (e.g.,
careless handling, throwing the pump into the back of the truck).

For Residential AC:

Differential price per year = ($250/2.5) – ($500/6)


= $100 - $83.33
= $16.67

For Home Refrigerator:

Differential price per year = ($150/3) – ($500/6)


= $50 - $83.33
= - $33.33

For Light Commercial Refrigerator:


Differential price per year = ($200/2) – ($500/6)
= $100 - $83.33
= $16.67

Customer Value Models

Kunst 1600 Value (per year)

Residential AC Home Light


Element Repair Segment Refrigerato Commercia
r l
Repair Segment Repair Segment

Oil Change $318.00 $153.30 $207.30


Savings

Incremental Profit $0 $0 $720.00

Total Value $318.00 $153.30 $927.30

Differential Price $ 16.67 - $ 33.33 $ 16.67


(per year)

Justification of choice of target segment(s) for the Kunst 1600.


• Given Kunst’s status as a new acquisition, Evan and Will should
target a single segment at this time. Given that this is a small firm,
they should focus their limited resources on the segment that offers
the most feasible chances of success. They can use this segment as a
“foothold” to penetrate other segments later on perhaps with other
Atler products.
• Of the four segments, the one offering the greatest potential is a
light commercial refrigerator repair. This is the only segment
where all three value/price elements (incremental profit, cost
savings from oil changes, and durability) come into play for the Kunst
1600. The fact that the Kunst 1600 enables firms to do more jobs per
week is the pivotal factor in that owners and technicians trivialize
changing the oil and overestimate the lifetimes of conventional pumps.
 The value-in-use per year (i.e., $943.97) and value created per
year ($927.30) are significant and far greater than that created in
the other three segments.
 The incentive to buy the Kunst 1600 in this segment is
significant (i.e., around $844 per year).
 The Kunst 1600 reduces repair job time by 10 minutes and
increases the number of job possible by 2 per week during the
summer months.
 The Kunst 1600 eliminates the hassle of oil changes for these
largely independent operators.
 There is no likelihood of fines due to illegal dumping of oil.
 The competition will probably not be as strong in this segment
as it will in other segments, namely residential AC repairs.
• Although it is highly attractive in terms of size, the residential
AC repair segment is not feasible because of perceptual barriers and
the fact that the Kunst 1600 may be underspecified (1.6 CFM pump
in a 3-6 CFM application). Target another Atler product at this
segment!
• The home refrigerator repair market may be viable long-term
however, the Kunst 1600 may be overspecified for the application
(1.6 CFM pump in a 1 CFM application). The Kunst 1600 does not
create incremental jobs here and pumping only takes 15 minutes.

Value Proposition

Stress that value propositions do not have to cover all points-of-


difference, and instead should focus only on the most significant
ones.

“The faster draw-down performance of the Kunst 1600


enables your firm to complete more jobs in the busy
season and earn more, while eliminating the oil change
mess and hassle.”