[pic] Indian Institute of Management, Kozhikode

|B2B Marketing Case Assignment on Kunst Vacuum Pumps |
| |

Authors (EPGP04-Section A):

Abhishek Kumar Singh (EPGP-04A-005) Vivek Talwar (EPGP-04A-113)

Question

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

Answer:
Value elements ➢ Cost savings since it would not involve changing oil because the Kunst 1600 is an oil-free vacuum pump. ➢ Higher revenues, and therefore profits, due to higher output of the Kunst 1600 in lower pressure settings. These resulting higher profits are only generated in the light commercial refrigerator repair segments because in these segments the technicians can complete more jobs with a faster pump (the Kunst 1600) in comparison to the more traditional pumps.

Price elements ➢ According to the respondents in the focus groups, the anticipated lifetime of their current vacuum pumps is around five years. Though, wholesale managers stipulate that most repair firms do not keep track of their vacuum pump purchases and overestimate pump lifetime. Managers also claimed that they tracked customer firm purchases via their electronic point-of-sale systems leading them to conclude that, with sensible care, the pumps can be used for between two and three years in either setting. ➢ With an expected lifetime of about six years, Kunst 1600 can be used 2-3 times longer than the traditional vacuum pumps. This has a sensible impact on the average price companies spend on the vacuum pumps since these companies need to buy a traditional vacuum pump 2 to 3 times more frequently than the Kunst 1600.

Question

What additional value placeholders, elements not presently quantified, merit consideration in your value model?

Answer:
Value placeholders are value elements that we believe are worth something to customers but either is too difficult to obtain data for or is social elements. Also it is vital to be as inclusive as possible in these elements since leaving out any, mainly those that make the Kunst 1600 seem less favorable than other (more traditional) vacuum pumps, would deliver a value model with little credibility.

➢ The Kunst 1600 is injection-molded which means that there are less working parts in the design. Moreover, the Kunst 1600 is made out of aluminum which makes it more durable since aluminum does not corrode as easily as other metals. ➢ Concerning the weight, the Kunst 1600 is heavier than the more traditional models used in the Home and Light commercial refrigerators repair segments but this is primarily due to the higher pumping speed of the Kunst 1600. Moreover, the Kunst 1600 is lighter than all the traditional pumps used in the Residential AC repair segments. These differences in the weight of the vacuum pumps may affect the preferences of the technicians working with these pumps. ➢ Fines from dumping the oil illegally can be high. These are quite difficult to quantify since it is not easy to predict how often the companies would dump their used oil illegally. If this information was available as an average we could calculate the expected cost of dumping the oil illegally with the following formula:

(Individual fine + company fine) * Probability of getting caught * amount of oil dumped illegally per year (in gallons)

➢ Evan expects that the customers are willing to pay a premium for a product with the Kunst brand name on it but in reality, Kunst actually has little to no brand awareness among the potential customers. This could be a serious problem since a brand name can constitute a potential competitive advantage.

Question

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

Answer:
In building a customer value model for the Kunst 1600 for these segments, it is imperative that we first build the different word equations to reflect the different value and price elements in the model.

1. Cost savings from not having to change oil

We will start with the description of the savings made due to not having to change the oil in the pump. The cost savings are generated per oil change. These savings consist of five elements: the price paid for the oil, the solvent-based scouring soap, the specialized cloth-fiber based towel, the price for recycling the oil and the labor cost.

➢ Price for recycling the oil = recycling charge per gallon of oil * number of gallons recycled

➢ Labor cost = hourly wage of person changing oil * hours required per change

➢ Cost savings oil = [oil price + price of soap + price of towel + (recycling charge per gallon * number of gallons recycled) + (hourly wage of person changing oil * hours required per change)]* number of oil changes per year

In the residential AC repair segment, the companies use a (less expensive) maintenance worker to change the oil of the different pumps. Residential AC repair work is highly seasonal, lasting for about 20 weeks between late April and early September, and the oil of the current vacuum pumps is changed once a week so there are 20 oil changes per year.

Cost savings = [$8 + $0.50 + $0.15 + ($5 * 0.25) + ($12 * 0.5)] * 20 = $15.90 * 20 = $318

In the Home refrigerator repair segment, home repair technicians change the oil on their vacuum pumps typically once a month, so there are 12 oil changes per year.

Cost savings = [$4 + $0.50 + $0.15 + ($5 * 0.125) + ($15 * 0.5)] * 12 = $12.775 * 12 = $153.30
In the Light commercial refrigerator repair segment, light commercial refrigerator repair technicians change the oil on their vacuum pumps typically once a month, so there are 12 oil changes per year.

Cost savings = [$4 + $0.50 + $0.15 + ($5 * 0.125) + ($24 * 0.5)] * 12 = $17.275 * 12 = $207.30

2. Increased revenues and profits
The higher increased revenues and profits due to a higher efficiency of the Kunst 1600 is only generated in de Light commercial refrigerator repair segments since there are lower pressure levels in which the Kunst 1600 can work more efficiently than other vacuum pumps thus reducing the time of one job by 10 minutes. This enables the technician to perform more jobs than normally and this implies higher revenues and profits. These extra jobs will be performed during the 12 hectic weeks in the summer.

Extra profit per year = (number of extra jobs per week * net profit of one job) * 12 = (2 * $30) * 12 = $720

3. Differences in lifetime and hence prices between Kunst 1600 and traditional pumps
In the two previous sections we discussed the value part of the Kunst 1600. But to reach at a total value-in-use we also need to consider the price of the Kunst 1600 in comparison to the more traditional vacuum pumps. Simply put, the value-in-use is represented by the following equation:

Value-in-use = Value – Price

The value-in-use, so the difference between value and price of the Kunst 1600 is actually the incentive of the customer to buy the Kunst 1600.

The expected lives of the Kunst 1600 and the more traditional vacuum pumps differ, so we can take this into account by using the differential price of the pumps and express this per year. If this differential is positive, this indicates that the Kunst 1600 is more favorable than the traditional pumps, all other things being equal. The reverse is true for a negative differential.

Differential price per year= (Traditional pump price/Expected lifetime of traditional pump) – (Kunst 1600 price/Expected lifetime of Kunst 1600) * Residential AC repair segment.

In this particular segment, we compare the Kunst 1600 price and lifetime to that of a 3 CFM traditional vacuum pump since the Kunst 1600 can only compete with this particular pump and not with the 6 CFM traditional vacuum pump, as indicated by all the focus group members and the inconclusive side-by-side tests. The price and lifetime of the 3 CFM pump are $250 and 2.5 years respectively.

Differential price per year = ($250 / 2.5 years) – ($500 / 6 years) = $100 - $83.33 = $16.67

In the home refrigerator repair segment, technicians usually use a 1 CFM traditional vacuum pump so we will compare the Kunst 1600 price and lifetime to those of this kind of vacuum pump. The price and lifetime of a 1 CFM pump are $150 and 3 years respectively.
Differential price per year = ($150 / 3 years) – ($500 / 6 years) = $50 - $83.33 = ($33.33) In the Light commercial refrigerator repair segment, technicians working the light commercial refrigerator repair segment normally use a 1.5 CFM traditional vacuum pump to complete their jobs so we will compare the Kunst 1600 price and lifetime to the price and lifetime of this kind of pump. The price and lifetime of a 1.5 CFM pump are $200 and 2 years respectively.

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

4. Final customer value models for the different segments for the Kunst 1600:

| |Price |Value |Oil Change |Extra Profits (Value – |Differential price |Value-in-use (Value– |
| | | |Savings |Oil Change Savings) |per year |Price) |

Light Commercial refrigerator |$83.33 |$927.30 |$207.30 |$720 |$16.67 |$843.97 | |

Question

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

Answer:
The segment to target is the Light commercial refrigerator repair segment. This has several reasons which will be discussed hereafter. The choice of targeting only one segment is made because Atler uses the Kunst 1600 as a trial to test whether Kunst is actually a worthy acquisition. This implies that Atler will only provide limited resources to Kunst for the commercialization of this product and in our opinion it will generate the most success if Evan and Will focus these resources on just one segment.

The most important reason to choose the Light commercial refrigerator repair segment is that in this segment every element in our value model gives some extra value-in-use to the customer. In the other segments, not all elements are relevant. Also, the total value-in-use is way higher in this segment ($843.97) than in any other segment. This is primarily due to the higher profits that can be realized through the extra jobs in the peak season.
Furthermore, the incentive to buy or the value-in-use is also way higher in the Light refrigerator repair segment than in the other two segments. The value-in-use amount up to $843.97 in comparison to $234.67 for the Residential AC repair segment and $69.97 for the Home refrigerator repair segment.

The Kunst 1600 also provides the technicians in the Light refrigerator repair segment with an advantage so that they can reduce the time they work on a job by 10 minutes. This decrease in working time per job results in at least 2 extra jobs per week during the peak season in the summer.

The Kunst 1600 will not be targeted at the Residential AC repair market segment because the Kunst 1600 is actually not powerful enough in terms of cubic feet per minute (CFM) for this segment. More precisely, the Kunst 1600 can only work on a rate of 1.6 CFM while the minimum requirement in this segment is almost twice as high (3 CFM). Then again, the nozzles and vacuum pump hoses for the usual products (3 to 6 CFM vacuum pumps) in the Residential AC repair market are one-quarter inch in diameter and thus have a higher resistance than a 1.6 CFM pump like the Kunst 1600, which implies that the Kunst 1600 will take about the same length of time to evacuate a system as these traditional vacuum pumps. Unfortunately, the focus group members seem to be reluctant to believe this important point of parity and say that “none in the industry is going to believe us”, so it will be nearly impossible to influence the entire Residential AC repair market that the Kunst 1600 will do the trick.

In the home refrigerator repair segment, the Kunst 1600 has a power actually too high since it can evacuate at 1.6 cubic feet per minute (CFM) and the technicians in this segment normally use a 1 cubic feet per minute (CFM) pump. Also, in this segment, the Kunst 1600 does not create any significant extra time to do more jobs. The Kunst 1600 will thus not be targeted at the home refrigerator repair segment.

With the above stated considerations in mind, we conclude that the Kunst 1600 should be primarily targeted at the light commercial refrigerator repair market.

Question

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

Answer:
The target market is, as we already mentioned, the Light commercial refrigerator repair segment. Evan and Will Metz would approach this segment with a resonating focus value proposition. We choose this kind of value proposition because we think it is important to stress the points of difference that are actually very relevant to the customer and not just to sum up all points of difference, whether they are relevant or not. We know how the Kunst 1600 delivers superior value to the customers, compared with the next best alternative, so we are capable of constructing a resonating focus value proposition.

We can think of two points of difference that are most relevant to the customers. In first place, we stress the fact that, due to a higher efficiency of the Kunst 1600, our targeted customers will experience increased revenues and profits. This is due to the lower pressure levels in which the Kunst 1600 can work more efficiently than other vacuum pumps. As previously mentioned, the Kunst 1600 would generate the customers 720 dollars of extra revenue.

A second point of difference that we would like to stress in the value proposition concerns the oil change savings. This point of difference is very relevant since the competitor’s offerings need oil changes and these changes can be quite expensive (our targeted customers would save 207.3 dollars a year by not changing oil). That’s why we definitely should mention this in the value proposition.

Considering all of the above, our value proposition for the Kunst 1600 is as follows:

“The higher performing Kunst 1600 will empower your company to finish more jobs during the peak season and hence earn more, while eliminating all the fuss of changing the oil time after time.”