1. What are the major, quantifiable value and price elements associated with the Kunst 1600?

Value Elements - The total cost involved in oil changing and messiness is reduced

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.

2. What additional value placeholders merit consideration in your value model?

• 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.

3. Construct a customer value model for the Kunst 1600 in the residential AC, home refrigerator, and light commercial refrigerator repair market segments.

Exhibits 1 and 2 contain the components needed to construct a customer value model for the Kunst 1600. Exhibit 1 contains the word equations, with substitution of numerical estimates, and summarizes important assumptions from the case study. Word equations are a crucial aspect of building customer value models in that they enforce clarity in the definition of each value element and the assumptions that are made in expressing each element in monetary terms. Word equations benefit supplier managers by compelling them to examine the definition and particularly the assumptions they are making for each element. Word equations benefit customer managers by building up in an easily understandable way exactly how an estimate for each value element was obtained.

Exhibit 2 presents the summary results for the customer value models for the residential air conditioning (AC), home refrigerator repair, and light commercial refrigeration repair market segments. In order to equate the different life times of the competing pumps, the model is presented on a per-pump, per-year basis. Finally, Exhibit 2 contains value placeholders, which are value elements that are not presently expressed in monetary terms. Inclusion of value placeholders conveys that those elements are worth something to the customer, and leaves open the possibility that some specific amount might be ascertained in the future.

Deriving it from “fundamental value equation”,

Fundamental Value Equation: Vk - Pk  Vi - Pi where k = Kunst 1600 and i = incumbent brand

Total Value-in-Useki = (Vk - Vi ) - (Pk - Pi )

4. Using your value model, select a target market segment(s) for commercialization efforts. Justify your choice.

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.

5. Write a value proposition for the Kunst 1600 for the target market(s).

“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.”

Exhibit 1

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.

Exhibit 1 (continued)

Word Equations for Kunst 1600 Value Elements

For Light Commercial Refrigerator:

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

Exhibit 2

Customer Value Models

Kunst 1600 Value (per year)

Element
Residential AC
Repair Segment
Home Refrigerator
Repair Segment
Light Commercial
Repair Segment Oil Change Savings $318.00 $153.30 $207.30 Incremental Profit $ 0 $ 0 $720.00 Total Value $318.00 $153.30 $927.30 Differential Price
(per year) $ 16.67 - $ 33.33 $ 16.67 Total Value-in-use
(per year) $334.67 $119.97 $943.97

Value placeholders:

Weight: the Kunst 1600 weighs 16.5 pounds versus 6 CFM pump (30.0 pounds), 3 CFM pump (20.0 pounds), 1.5 CFM pump (15.0 pounds), 1.0 CFM pump (10.0 pounds). Thus, depending on comparison, weight is an advantage or disadvantage.

Social benefit of not having to do a “dirty little job”. Owner operators will value this the most (i.e., smaller firms.

“Doesn’t look like a vacuum pump” (-)

Environmental stewardship (because pump uses no oil)

“Rule of Seven” (-)