Commercializing the Kunst 1600 Dry Piston Vacuum Pump© James A. Narus James C. Anderson * June 2003 * James A. Narus is Professor of Business Marketing, Babcock Graduate School of Management, Wake Forest University. James C. Anderson is the William L. Ford Distinguished Professor of Marketing and Wholesale Distribution, and Professor of Behavioral Science in Management, Kellogg Graduate School of Management, Northwestern University. He is also the Irwin Gross Distinguished ISBM Research Fellow at the Institute for the Study of Business Markets (ISBM), located at Penn State University, and Visiting Research Professor, School of Technology & Management, University of Twente, the Netherlands. Please note that we prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. We disguised all of the company names and some of the information on marketplace conditions. Send correspondence to: James A. Narus Babcock Graduate School of Management Wake Forest University Suite 150, One Morrocroft Centre 6805 Morrison Boulevard Charlotte, NC 28226-3551 USA +1. 704. 365. 6717 (telephone) jim. [email protected] wfu. edu (e-mail) © 2003, James C. Anderson and James A. Narus. All rights reserved. Commercializing the Kunst 1600 Dry Piston Vacuum Pump Evan Stone, a senior product manager at Kunst Vacuum Pumps, was excited as he lifted the prototype of a dry piston vacuum pump out of its shipping carton. Management of Kunst’s new parent company, Atler GmbH, had decided to test its ability to penetrate new market segments within the United States (U. S. ). Whereas Atler marketed the 1600 under its own name as a platform product to the scientific laboratory and health care segments, Kunst would sell it as a derivative product in previously untapped application segments. The division’s vice president, Will Metz, had named Evan to head up a team charged with finding new segments for and then commercializing the 1600. Evan looked forward to the challenge. Success would bring recognition from Atler’s senior management. As he placed the steel gray device on his desk, Evan recited to Will all the product information he could recall. The Kunst 1600 Dry Piston Vacuum Pump is a fractional horsepower, injection-molded aluminum pump, with a pumping speed of 1. 6 cubic feet per minute (CFM). The pump weighs 16. 5 pounds. The Kunst 1600 is a reconfigured compressor outfitted with a screen over its input nozzle to catch contaminants. Because it is a compressor, the Kunst 1600 can run longer and cooler than conventional vacuum pumps. This enables the Kunst 1600 to function more efficiently at lower pressure levels than competing products. And, the fact that it is injection-molded means that it has fewer working parts than more traditional models. In contrast to conventional pumps, the Kunst 1600 is oil-free. Kunst will sell the 1600 to its network of wholesalers for $400, with a suggested resale price of $500. ” “Will, this product along with the Kunst reputation for precision, reliability, and durability will make us the ‘Mercedes? ’of vacuum pumps in the U. S. ”, Evan confidently predicted. Yet before Evan could begin to market the Kunst 1600, he had to make some critical decisions. First, Evan had to identify and target high potential market segment(s). He planned to do so by determining in which segment(s) the Kunst 1600 stood to deliver the greatest value. Evan speculated that the residential air-conditioning (AC) repair segment would offer the best opportunity. Second, Evan had to develop a value proposition for the Kunst 1600 for each segment targeted. At this point, he wasn’t sure whether to stress the fact that the pump did not require oil changes or that it had a projected lifetime of 6 years. BACKGROUND Based in Minneapolis, Kunst Vacuum Pumps is the recently acquired U. S. Division of Atler GmbH. During the previous fiscal year, Kunst sales soared to a 75-year record of $120 million. The firm manufactures top-end (i. e. 6 or more CFM) vacuum pumps for use in highly demanding laboratory, health care, and industrial applications. For example, in the lab, engineers rely on Kunst pumps in freeze-drying, vacuum oven, and distillation processes. In high tech industries, operations personnel employ Kunst pumps in the production of cathode ray tubes and computer chips. From a technical standpoint, Kunst pumps provide a “deeper draw” (i. e. , they can evacuate chambers down to almost a perfect vacuum) and are more efficient at lower pressure levels than competing models. Scientists, engineers, and health care professionals highly regard the Kunst brand name. Not surprisingly, Kunst holds a 60% market share in laboratory, health care, and industrial applications. Kunst Vacuum Pumps’ parent firm, Atler GmbH, is headquartered in Frankfurt, Germany. Last year, Atler revenues exceeded € 5 billion. Founded in 1875, Atler produces diversified lines of high-quality and high-precision measurement instruments, testing equipment, compressors, and monitoring devices for hospitals and scientific laboratories. The firm has a reputation in Europe for its scientific discovery prowess, its reliable and accurate products, and its competent technical service. Atler acquired Kunst the previous year in order to penetrate new segments in the U. S. market. Importantly, Atler management believed that Kunst product lines and market segments were complementary to their own (e. g. , compressors and pumps rely on similar technologies) and that Kunst shared Atler’s commitment to superior craftsmanship. As a test case, they requested that Kunst take a 1. 6 CFM compressor, reconfigure it as a vacuum pump, and market it under the Kunst brand name to previously untapped market segments. If this approach was successful, Atler would begin to transfer a broad range of products to Kunst for marketing. On the other hand, failure might cause Atler management to doubt the wisdom of the Kunst acquisition. Evan and Will saw this as a golden opportunity for Kunst to grow sales and profits by penetrating new market segments, such as AC and refrigerator repairs. As contrasted with existing Kunst segments, technicians used vacuum pumps in these applications to “dehydrate” a refrigerant system during repairs. Rather than “sucking out” moisture from coils, valves, and motors, a vacuum pump actually lowered the pressure of the system so that water particles would “boil off” and then be exhausted. The process had three major benefits. First, it eliminated water droplets that could freeze into ice crystals. The accumulation of ice retards the flow of refrigerants, ultimately slowing and stopping the cooling process. Second, moisture over time combines with refrigerants to form hydrochloric and hydrofluoric acids. These acids quickly corrode copper coils, valves, and motors. Vacuuming vaporizes these acids. In a traditional vacuum pump, system oil traps the acids. When a technician changes the oil, he or she removes these acids. In an oil-free pump like the Kunst 1600, the acid vapors are directly exhausted into the atmosphere. Third, vacuuming indicates whether or not there is a leak in the system. If a technician cannot draw down the pressure of a system, then there is a high probability that there is a crack, often small in size, in a coil or valve. Cracked coils are perhaps the most common cause of AC and refrigeration system failure. In deciding what size of vacuum pump is needed for a given repair job, residential AC and refrigerator repair contractors adhere to an industry heuristic known as the Rule of Seven that links vacuum pump and refrigeration system capacities. The rule specifies that pump “CFM times seven” yields the maximum refrigeration system capacity (in tons of air) on which a given vacuum pump should be used. In this way, the rule of seven provides rough demarcations for market segments. For example, experts recommend a 1-1. 5 CFM pump for home and light commercial refrigerator repairs (e. g. , small restaurants, bakeries, and ice cream shops). For residential AC repairs, technicians suggest a 3-4 CFM pump. In his preliminary investigations, though, Evan was unable to find any documented scientific support for the rule. Market research indicates that the annual U. S. sales potential for vacuum pumps in each of these market segments to be as follows: home refrigerator repairs (60,000 units), light commercial refrigerator repairs (40,000 units), and residential AC repairs (125,000 units). About 15 vacuum pump manufacturers actively pursue business in these segments. Most firms are small in size (i. e. , less than $50 million in annual sales) and limit their efforts to one or two market segments. In recent years, several German and Japanese manufacturers have entered the U. S. arketplace. The leading producers of 1-6 CFM vacuum pumps include AirMaster, Pump Wizard, Toledo Pump and Valve, and Vacuum Technologies. Pictures of the Kunst 1600 and AirMaster vacuum pumps appear in Exhibit 1. Manufacturers use heating, ventilation and AC (HVAC) wholesalers to reach residential AC firms, and AC and refrigeration (AR) wholesalers to sell to refrigerator repair firms. MARKET RESEARCH STUDY In order to prepare for the introduction of the Kunst 1600 and acquaint himself with new applications segments, Evan decided to initiate a market research study. He began by summarizing his initial beliefs about the marketplace. Evan was certain that the research would validate them. •I feel confident that the residential AC repair market offers the greatest opportunity for the Kunst 1600. Annual sales have topped 125,000 units and are growing at 15% per year as the population expands, particularly to the “Sun Belt. ” Furthermore, I predict that AC contractors stand to gain the greatest value from the Kunst 1600. •Although most residential AC contractors use anywhere from 3 to 6 CFM vacuum pumps for repairs, I believe that we can make a convincing argument for the Kunst 1600. Most AC system nozzles and vacuum pump hoses are one-quarter inch in diameter. At that diameter, “resistance” retards the vacuuming process to the point where a 1. 6 CFM pump takes about the same length of time to evacuate a system as does a 6 CFM pump. •The most important benefit that the Kunst 1600 provides in all potential market segments is that technicians will not have to change the oil! All vacuum pump manuals recommend that technicians change the oil after each repair job. Each oil change typically takes a quart. At $8 per quart for specialty oil, that can be quite costly on an annual basis. Furthermore, it takes a technician around 30 minutes to change the oil on a 3 CFM pump. Given that the typical AC repair technician is paid a rate of $30 per hour, the labor costs associated with changing oil must be staggering. •Changing oil is a messy nuisance for every technician. Each time a repair technician has to clean up this oily mess, he or she uses $. 50 worth of a solvent-based scouring soap and $. 15 of a specialized cloth-fiber based towel. •To protect the environment, most U. S. ities require proper disposal and recycling of all oil-based liquids. The average charge for recycling used oil is around $5 per gallon. •The Kunst 1600 is made from injection-molded aluminum. It won’t rust like vacuum pumps made of steel. Furthermore, the Kunst 1600 has far fewer internal parts than competitive models. I predict that the Kunst 1600 will take more physical abuse (e. g. , being tossed into trucks and getting rained on) and be far more durable than traditional vacuum pumps. Our research engineers tell me that it should last at least 6 years in the field. Because it is constructed from aluminum, the Kunst 1600 will weigh 5 to 10 pounds less than competing products. Technicians will appreciate the weight savings. •Potential customers will be willing to pay a price premium to obtain a vacuum pump with the Kunst brand name on it. In order to gain “hands on” experience in these markets, Evan decided to test his beliefs with an extensive research study. The study would feature a series of 2 focus groups with AC and refrigerator repair firm owners or managers and field in-depth interviews with several repair technicians in each of three cities. A private marketing research firm would run the focus groups in Philadelphia, Atlanta, and Los Angeles. Evan selected these cities to reflect differing regional repair environments across the U. S. In each of the focus groups, participants would get the opportunity to examine the Kunst 1600 prototype and product literature. Evan planned to spend a day with each repair technician making repair calls. On each job site, Evan would encourage the repair technician to run a “side-by-side” test of the Kunst 1600 and their own pump. If other segments emerged, Evan would repeat the process for each. RESEARCH FINDINGS When the research had been completed, Evan reviewed the major findings with division vice president, Will Metz. “Will, the most important thing that I discovered is that AC and refrigerator repair is an art that technicians practice rather than a science that engineers meticulously execute. Many repair technicians have never completed rigorous training programs and few states certify technicians. Personal opinions, preferences, and ‘rules of thumb’ dictate how repair work is completed. Let’s review the research findings. ” Residential AC Repair Segment The size of the AC repair firms participating in the research study ranged from single owner-operators who worked out of the backs of their pick-up or panel trucks to operations that employed 25 technicians and maintain 15 trucks in the field. On average, participating firms had three trucks. Contractors assigned one vacuum pump per truck and kept one or two extra pumps back at the office in case of pump failure. All residential repair contractors owned vacuum pumps between 3 and 6 CFM in capacity. The 3 CFM models were the most popular. They reported that 3 CFM vacuum pumps sell for around $250 while 6 CFM pumps cost about $320. Participants estimated that a pump typically lasts 5 years. Participants report that AC repair work is highly seasonal, lasting for about 20 weeks between late April and early September. In the Southern U. S. the season is longer and in the Northern states shorter. The typical repair technician completes 10 jobs a day, 5 days a week, for an average of 1000 jobs per season. In the peak of the season, they may work seven days a week. Job revenue and completion time varies widely; however, the average revenue per job is $350 with a net profit before taxes of $70. The typical job takes about an hour to complete. Contractors pay repair technicians an average of $30 per hour. Because technicians had to carry the pumps to unusual locations at job sites, they felt that the lighter the pump the better. They stated that the typical 6 CFM pump weighed around 30 pounds and the typical 3 CFM pump 20 pounds. They thought it was great that the aluminum body of the Kunst 1600 made it lighter than competitive models, however, they wondered if the aluminum would make it more vulnerable to breakage. Others thought that the acids exhausted from the Kunst 1600 would accumulate causing the aluminum housing to corrode rapidly. Focus group and field interviews confirmed that a vacuum pump is used for around 30 minutes in the typical repair job. Technicians maintained pumping time is not “idle” time in that they use it to complete other repair tasks, load equipment on their trucks, write up customer invoices, and develop a personal relationship with the homeowner. Thus, reducing vacuuming time would not necessarily reduce total job time. Additionally, technicians stated that vacuum pumps rarely failed on the job and if they did, they would radio the office and a manager would drive another pump out to the job site. Lost time due to pump failure was seen as negligible. The focus groups and interviews revealed that owners and technicians were not concerned about vacuuming precision. In the words of one technician, “As long as the needle on the pressure gauge is close to zero, I feel that I’ve done a reasonable job. ” They also asserted that even if a technician failed to draw pressure down to an acceptable level, that the AC system would probably work acceptably for a few more months if not the entire cooling season. When the system broke down again, no one would be able to link the failure to a poor vacuum pumping job. Evan was surprised to learn that most repair firm owners considered vacuum pumps to be “disposable operating supplies”. Many did not even keep track of pump purchases. As one owner put it, “At $250 apiece, a vacuum pump is equivalent to the revenue from one repair job. ” Another operator put it this way. “If a pump lasts 5 years and my repair person uses it to complete 5000 jobs, then a 3 CFM vacuum pump costs me around $. 05 per job while a 6 CFM pump costs $. 06. Frankly, I’m more concerned about having to pay $30 per hour for labor. And, I can’t find enough trained repair persons at that wage to keep up with all the jobs I have coming in! ” Discussion of oil changes yielded contradictory and confusing results. Owners and technicians alike agreed that vacuum pump instructions called for oil to be changed after every job. However, to a person they stated that changing oil that frequently was unnecessary and that in fact, no one ever did. Instead, they estimated that the average technician changed the oil once a week. Some technicians even claimed to change the oil only once a season. At this point, disagreements between owners and technicians surfaced. Owners contended that it was the responsibility of each technician to check his or her equipment out each day and make sure it was in good operating order. However, they emphatically stated that they would never pay someone $30 per hour to change the oil. Instead, owners felt that the technicians should do the work “on their own time”. If worse came to worse, owners said they would assign the task to a part-time, maintenance worker ($12. 00 per hour). The contractors agreed that $8 per quart of oil, $. 0 for scouring soap, and $. 15 for towels were reasonable estimates. Repair technicians saw changing the oil as a “dirty little job”. It took about 30 minutes to complete. Many felt that it was up to the owners to get the oil changed. As one technician put it, “I show up for work each day on time and do first rate work. It’s up to the owner to provide equipment and tools in good working order. They should have the oil changed for me. ” Technicians said that when they did change the oil they used about one quart of oil for 3-6 CFM pumps. They agreed that they used plenty of soap and paper towels cleaning up the mess after an oil change. Most residential AC repair firms contracted with disposal firms to recycle oil. Importantly, the fact that the Kunst 1600 did not require oil and oil changes caught and sustained both owner and technician interest. That is, until either the focus group moderator or Evan informed them that the Kunst 1600 had a 1. 6 CFM rating. Citing the Rule of Seven for support, every participant stated that the Kunst 1600 was “too small” to handle residential AC repair jobs. The typical technician commented, “It would take me 2-3 hours to complete a job with a 1. 6 CFM pump. If I wanted to get done in a half hour, I would have to use 3-4 of them simultaneously. ” When informed that the quarter inch nozzle on most AC systems would create resistance and equate the time it took a 1. 6 CFM and a 6 CFM pump to evacuate a system, none of the focus group participants were convinced. In the words of one contractor, “This runs counter to my 25 years of experience, not to mention the Rule of Seven. No one in the industry will believe you. To Evan’s further disappointment, the side-by-side tests of his resistance theory proved to be inconclusive. Study respondents identified Pump Wizard as the top brand in the industry for over 40 years. They volunteered the fact that Pump Wizard had designed its vacuum pumps exclusively for the residential AC repair marketplace. No one expressed any dissatisfaction with any aspect of Pump Wizard vacuum pumps. Participants said that AirMaster and Vacuum Technologies currently offered competitive models of equal quality. All three firms priced their 3 CFM pumps at around $250 and their 6 CFM pumps at $320. When the moderator or Evan showed study participants the prototype of the Kunst 1600, they universally stated, “Why this doesn’t look like a vacuum pump at all. ” In fact, most competing models resembled hand-held vacuum cleaners that most families had around the house. And, when asked what their overall opinion of the Kunst brand was, the vast majority of respondents said that they had never heard of the name. Participants overwhelmingly concluded, “This pump would be better suited for home and light commercial refrigerator repairs. ” Home and Light Commercial Refrigerator Repair Segments Following up on the residential AC participants’ suggestion, Evan repeated the market research procedure for the home and light commercial repair segments. He gathered the following information. An individual owner-operator runs the typical home or light commercial refrigerator repair firm, working out of the back of a pick-up or panel truck. Firms tend to specialize in either home or light commercial repairs. Larger firms that do contract work for appliance retailer chains may have up to 15 repair technicians working for them. A refrigerator repair technician uses a 1 to 1. 5 CFM vacuum pump. Participants in the study thought that a 1 to 1. 5 CFM pump might have a five-year lifetime. On home refrigerator jobs, technicians typically use a 1 CFM vacuum pump for around 15 minutes. Participants did not see any benefit to reducing this meager amount of vacuuming time. Home repairs generate an average of $90 in revenue, with a net profit before taxes of $10. The typical technician completes 7 jobs a day. Work is spread out evenly across the year. Repair firms pay technicians about $15 per hour. Light commercial work might entail fixing a refrigerated dessert carousel at a restaurant or a refrigerated display case at a bakery or ice cream shop. Each job brings in an average of $200 in revenue, with a net profit before taxes of $30. Technicians do about 5 jobs per day and receive $24 per hour in wages. Light commercial work occurs throughout the year; however, emergency repairs skyrocket during the summer and there are often more jobs available than a given repair firm can handle. A light commercial refrigerator-repair technician typically uses a 1. CFM vacuum pump for 30 minutes. Repair firm owners consider this to be “idle time” as there are fewer tasks to perform in refrigerator repairs and technicians must complete them sequentially. In this application, Evan’s side-by-side tests revealed an unexpected finding. The Kunst 1600’s ability to work more efficiently at lower pressure levels enabled technicians to reduce vacuuming time by 10 minutes on the typical job. During the 12 hectic weeks of summer, technicians would be able to convert the time saved into revenue by completing at least two more jobs per week. Home and light commercial refrigerator-repair technicians change the oil on their vacuum pumps typically once a month. They use one pint or $4 of oil per change. As most of these firms are owner-operated out of the back of a pick-up or panel truck, they find changing oil to be an annoyance. On average it takes a technician 30 minutes to change the oil on a 1 to 1. 5 CFM pump. Technicians change the oil during working hours between jobs. Participants found the $. 50 cost of scouring soap and $. 15 of towels per clean-up to be reasonable estimates. Due to their small size, refrigerator repair firms rarely contract with oil disposal firms and are more likely to pay the $5 per gallon disposal charge at municipal recycling centers. Allegedly, refrigerator repair technicians are more likely to “toss used oil in deserted dumpsters” than counterparts in other segments. Evan noted that the fines for dumping a gallon of oil average around $150 for the individual plus $2000 for his or her company. According to an environmental action committee study, only about 10% of these violators are caught and successfully prosecuted. Respondents named AirMaster as the number one brand of 1 to 1. 5 CFM pumps. An AirMaster 1 CFM pump costs $150 and weighs 10 pounds and a 1. 5 CFM pump $200 and 15 pounds. None of the refrigerator owners or technicians was familiar with the Kunst brand. Resolving an Inconsistency in the Findings Evan was perplexed by one major inconsistency in market research findings. If respondent predictions of vacuum pump lifetimes were correct, annual sales of vacuum pumps would never be so high. To resolve this discrepancy, Evan interviewed 9 managers from HVAC and AR wholesalers that market vacuum pumps. According to wholesaler managers, most repair firms do not keep track of their vacuum pump purchases and overestimate pump lifetime. On the other hand, wholesaler managers claimed that they meticulously tracked customer firm purchases via their electronic point-of-sale systems. They stated that with “reasonable care” and frequent oil changes a 3-6 CFM vacuum pump used in residential AC repair work might last an average of 2. 5 years. A 1 CFM pump used in home refrigerator repair lasts about 3 years. And, a 1. CFM vacuum pump employed in light commercial refrigerator repairs lasts about 2 years. However, as one wholesaler manager sagely observed, “Many repair technicians do not take good care of their pumps and change the oil as often as they should. Acid build up corrodes internal parts and physical abuse causes the pumps to fail prematurely. But hey, that’s fine with me – I get to sell more pumps! ” CONCLUSION “Those are the major findings, Will,” Evan said. “The market research certainly hasn’t supported my initial beliefs, yet there still may be an opportunity for the Kunst 1600. Given what we know now, what segment(s) do you think we should target? ” As for devising a value proposition, Evan thought that one contractor’s comment summed up the challenge, “If you can’t show me how your vacuum pump is going to increase the number of jobs I can do per week or cut my operating costs, I don’t want to hear about it! ” As he stared at the minimalist painting of a windmill on his office wall, Evan wondered how he could best convey the superior value of the Kunst 1600 to targeted prospective customers. DISCUSSION QUESTIONS 1. What are the major, quantifiable value and price elements associated with the Kunst 1600? 2. What additional value placeholders, elements not presently quantified, merit consideration in your value model? 3. Construct a customer value model for the Kunst 1600 in the residential AC, home refrigerator, and light commercial refrigerator repair market segments. 4. Using your value model, select a target market segment(s) for commercialization efforts. Justify your choice. 5. Write a value proposition for the Kunst 1600 for the target market(s).
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