KUNST 1600 CASE ANNALYSIS NOTE by Raghavendra Swamy Anna

IIM - Kozhikode EEPM 04 - 028

CELLCAST INTERACTIVE INDIA PVT. LTD.

COMMERCIALIZING THE KUNST 1600 DRY PISTON VACUUM PUMP Major Issues:

To penetrate into Vacuum pump market segment with Kunst 1600 To identify new market segments for and then commercializing Kunst 1600 To develop a value proposition for the Kunst 1600 for each segment targeted To compete with existing alternative within the same segments Brand name was not created in the top of them mind as expected Most of the technicians who use these vacuum pumps were not trained To make technicians and contractors aware of Kunst 1600

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 Repair Segment $318.00 $0 $318.00 $ 16.67 Home Refrigerator Repair Segment $153.30 $0 $153.30 - $ 33.33 Light Commercial Repair Segment $207.30 $720.00 $927.30 $ 16.67

Element Oil Change Savings Incremental Profit Total Value Differential Price (per year)

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