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GAINING A FOOTHOLD IN THE RESIDENTIAL AIR CONDITIONING

REPAIR MARKET WITH THE KUNST 3500 DRY PISTON VACUUM


PUMP

James A. Narus James C. Anderson *

October 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, J. L. Kellogg Graduate School of Management,
Northwestern University. He is also the AT&T ISBM Research Fellow at the Institute for
the Study of Business Markets (ISBM), located at Penn State University.

Please note that we prepared this case as the basis for class discussion rather than to
illustrate either effective 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.narus@mba.wfu.edu (e-mail)
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2003, James C. Anderson and James A. Narus. All rights reserved.


GAINING A FOOTHOLD IN THE RESIDENTIAL AIR CONDITIONING
REPAIR MARKET WITH THE KUNST 3500 DRY PISTON VACUUM
PUMP

Senior managers at Atler Gmbh were delighted with the successful


introduction of the Kunst 1600 into the United States (U.S.) marketplace. They
requested that vice president Will Metz and senior product manager Evan Stone of
Atlers U.S. subsidiary, Kunst Vacuum Pumps, now turn their attention to the
introduction of a related product, the Kunst 3500. Atler managers were particularly
intrigued by the glowing research reports Metz and Stone presented that indicated
significant growth opportunity in the residential air conditioning (AC) repairs
segment. They believed that penetrating this segment would be essential for long-
term Atler success in the U.S. Thus, they instructed Metz and Stone to target the
Kunst 3500 exclusively toward the residential AC repairs segment.

Buoyed by the vote of confidence Atler senior management had provided,


Will and Evan were excited about the chance to deliver another success story. To
capitalize on all of the institutional and market learning that they had gained from
the previous venture, Will asked Evan to manage all marketing efforts related to the
Kunst 3500. Methodically, Evan summarized all relevant product information on the
Kunst 3500.

The Kunst 3500 Dry Piston Vacuum Pump is a 1/3 horse power,
injection-molded aluminum pump, with a gas-drawing capacity of 3.5 cubic feet per
minute (CFM). It achieves an ultimate pressure of 9 Torr.1 The pump weighs 22.5
pounds. The Kunst 3500 is a reconfigured compressor outfitted with a screen over
its input nozzle to catch contaminants. Because it is a compressor, the Kunst 3500
can run longer and cooler than conventional vacuum pumps. And, the fact that it is
injection-molded means that it has fewer working parts than competitive models.
In contrast to the majority of conventional pumps, the Kunst 3500 is oil-free. Kunst
will market the 3500 through its network of heating, ventilation, and air
conditioning (HVAC) wholesalers.

Evan noted that the marketing task this time would be somewhat different.
Atler management had already selected the target market segment residential AC
repairs. Evan wanted to conduct a more detailed value assessment to identify
possible sub-segments and the major value elements that he could use to craft a
potent, value proposition. At this point, he was not certain what sub-segments
existed and what a winning value proposition would entail. During the launch of
the Kunst 1600, Evan learned the importance of pricing to commercial success.
Although senior management had proposed a suggested resale price of $900 per
unit, Evan decided to collect pricing data from a variety of sources and develop a
value-based price for the Kunst 3500. He was not certain at all how much of a
premium, if any, that residential AC contractors would pay for the Kunst 3500.

1
A Torr is a measure of the atmospheric pressure in a system. One Torr equals 1
mm (.039 inches) of mercury (Hg). At sea level, about 800 mm of Hg is considered
a perfect vacuum.
2

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 well-known Kunst brand
name. Not surprisingly, Kunst holds a 60% or greater 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 DM9 billion (U.S.$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 commands 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, Alter 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 Atlers commitment to
superior craftsmanship. Based on the successful introduction of the Kunst 1600,
Atler management decided to transfer other Alter products to Kunst for marketing.
As with the Kunst 1600, they requested that Kunst take a 3.5 CFM Atler compressor,
reconfigure it as a vacuum pump, and market it aggressively under the Kunst brand
name to the previously untapped residential AC repair market segment.

Evan and Will saw this as a golden opportunity for Kunst to increase sales
and profits by penetrating a rapidly growing market segment. As contrasted with
traditional Kunst segments, technicians used vacuum pumps in these applications
to dehydrate a residential AC 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 3500, the acid vapors are directly exhausted into the
atmosphere. Third, vacuuming indicates whether or not there is a leak in the
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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 residential AC system failure.

In deciding what size of vacuum pump is needed for a given repair job,
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. Using the rule of seven, most
experts recommend that technicians use a 3-4 CFM pump for residential AC system
repairs. As a 3.5 CFM vacuum pump, the Kunst 3500 meets this industry rule of
thumb and can be used as a substitute for any conventional, 3-4 CFM pump.

Market demand analyses indicate that annual sales of vacuum pumps to


residential AC repair firms tops 125,000 and are growing at 15% per year. About 5
vacuum pump manufacturers actively pursue business in these segments. Most
firms are small in size (i.e., less than $50 million annual sales). In recent years,
several German and Japanese manufacturers have entered the U.S. marketplace.
The leading producer of 3-6 CFM vacuum pumps for use in residential AC repairs is
Pump Wizard. They have been in business for over 40 years and have achieved high
customer satisfaction levels. Pump manufacturers market their vacuum pumps
exclusively through HVAC wholesalers to residential AC repair contractors.

A REVIEW OF PREVIOUS RESEARCH

Before beginning work on the Kunst 3500, Will and Evan took the time to
review the major insights from the residential AC repairs segment that they had
learned while commercializing the Kunst 1600. The size of the AC repair firms
ranges from single owner-operators who worked out of the backs of their pick-up
trucks to operations that employed 25 technicians and maintain 15 trucks in the
field. On average, firms have three trucks. Contractors assign one vacuum pump
per truck and keep one or two extra pumps back at the office in case of pump
failure. All residential repair contractors own vacuum pumps between 3 and 6 CFM
in capacity.

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.
Contractors pay repair technicians an average of $70 per hour during the cooling
season.

Technicians take about one hour to complete the typical residential AC repair
job. They use a vacuum pump for around 30 minutes during each job. Technicians
maintained that this 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
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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.

Repair firm owners and technicians are 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 Ive done a reasonable job. They also assert that
even if a technician fails 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
system. When the system broke down again, no one would be able to link the
failure to a poor vacuum pumping job.

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 3500 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
3500 would accumulate causing the aluminum housing to corrode rapidly.
Reassuring Will, Evan emphatically stated, Since the introduction of the Kunst
1600, our research laboratory has demonstrated that Kunst 3500 is less vulnerable
to breakage and that exhaust fumes do not corrode the housing. They are
confident that the Kunst 3500 will work effectively in the field for at least six years!

No one in the residential AC repair business likes changing pump oil. It takes
about 30 minutes to change the oil in a 3 to 6 CFM vacuum pump. Most firms pay a
part-time maintenance workers $12.00 per hour to do so. Specialty pump oil costs
$8 per quart. Technicians use one quart of oil per oil change for 3-6 CFM pumps. To
clean up after changing the oil, a technician uses $.50 worth of a solvent-based
scouring soap and $.15 worth of cloth-fiber based towels. Repair firms also had to
pay $5 per gallon to dispose or recycle used oil.

Most residential AC repair firm owners consider a vacuum pump to be an


insignificant operating supply item. Some owners perceived the prices of 3-6 CFM
vacuum pumps ($250 to $320) to be equivalent to the revenue from one repair job.
Others thought the cost per job of using a 3 CFM pump to be $.05 and a 6 CFM
pump to be $.06. Very few repair firms kept track of their vacuum pump purchases.

Repair firm owners and technicians appear to be satisfied with the


performance of conventional 3-6 CFM vacuum pumps. None of the residential AC
repair firm owners or technicians to whom Evan spoke knew the Kunst name and its
product lines. Participants in Evans previous research study all said that the Kunst
1600 (the Kunst 3500 looks similar) did not look like a vacuum pump.

New Research

In order to gain a better understanding of sub-segments within the residential


AC repair market as well as gather more detailed information for his Kunst 3500
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value model, Evan decided to conduct a follow on marketing research survey.


Previously, Evan learned that most residential AC repair firms did not keep track of
their vacuum pump purchases. HVAC wholesalers, on the other hand, used their
electronic point-of-purchase information systems to monitor acquisitions on a
customer firm by customer firm basis. As a result, Evan commissioned a marketing
research firm to conduct telephone interviews with a randomly selected sample of
250 vacuum pump product managers from HVAC wholesalers located across the
U.S. Given the time constraints that these product managers faced, Evan
instructed the research firm to ask a handful of questions and limit each interview
to 10-minutes. Specifically, Evan wanted to learn more about link between oil
changes and pump lifetime, uncover any perceptual obstacles that Kunst would face
in this new market segment, and identify and relevant trends in the marketing of
vacuum pumps.

Evan and Will also wanted to gather relevant cost and profit information as
well as competitive prices. He would use these insights in assigning a value-based
price to the Kunst 3500. To do so, Evan hired the consulting firm of Lockhart &
Sanders (L&S). L&S had a reputation for being the most knowledgeable and
experienced consulting firm in the U.S. air conditioning industry.

Major Findings

HVAC Wholesaler Survey

Evan gleaned three insights from the telephone survey of HVAC wholesaler
product-managers.

Overwhelmingly, the product managers concluded that the more often


technicians changed pump oil and undertook preventative maintenance, the
longer a vacuum pump would last. Although most vacuum pump manufacturers
recommended that a technician change pump oil after every use, almost no one
did. Based on their in-house data, survey respondents estimated that if a
technician changed the oil once a day, a 3-4 CFM pump would last 4 years. If
they change it once a week, the pump would last 2.5 years. If they do it once a
month, a 3-4 CFM vacuum pump would work for 1.5 year. Finally, if they change
it only once a season, it will last one season. The wholesaler managers
estimated that only 5% of technicians change the oil once a day, 50% once a
week, and 20% once a month, and 25% once a season.
Product managers stated that conventional pump manufacturers are increasingly
encouraging HVAC wholesalers to up-sell customers to higher CFM rated
pumps. For example, manufacturers are urging wholesalers to sell 6 CFM pumps
to residential AC repair firms instead of the more common 3-4 CFM units. Why?
As illustrated in the chart below, manufacturer profit margins are positively
correlated to pump size. And, 6 CFM pumps are more than twice as profitable as
4 CFM pumps.
Many research participants believed that because it is a reconfigured
compressor, the Kunst 3500 would be considerably louder than vacuum pumps.
As one manager put it, My customers primarily service upscale neighborhoods.
If this device is too loud, people will call the police on them. Evan reassured
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Will, Our lab tests show the noise levels of a Kunst 3500 are equal to those of a
3-4 CFM vacuum pump. However, I guess we will have to convince repair
technicians that there will be no noise problem with the Kunst 3500.

Lockhart & Sanders Study

L&S consultants prepared the following chart on competitive vacuum pump


weights, prices, and profit margins to provide benchmarks for Evan.

Average Weight, Prices, and Profits of Vacuum Pumps by CFMs

Price Wholesaler Price


Manufacturer
Pump Repair Firms Net Profit Wholesalers Net Profit
CFM Weight Pay Before Taxes Pay Before
Taxes
1.0 10 lbs $100 $1.50 $70
$2.00
1.5 15 lbs $150 $3.00 $105
$3.50
3.0 20 lbs $250 $5.00 $175
$6.00
4.0 25 lbs $275 $5.50 $195
$7.00
6.0 30 lbs $320 $6.40 $225
$15.00
9.0 50 lbs $1,800 $36.00 $1,260
$125.00
11.0 120 lbs $3,000 $60.00 $2,100
$230.00

After reviewing Kunst internal financial data, L&S consultants projected that
the total costs that the firm would incur from the production, marketing, and
distribution of the Kunst 3500 to be $180 per unit. On average in the industry, a
manufacturer would earn a net profit before taxes of 3.5% on the price that
wholesalers paid for 3-4 CFM. Wholesalers received a trade discount of 30% off the
suggested resale price for a given pump. Due to high demand, suggested resale
prices closely corresponded to the price that repair firms paid.

CONCLUSION

Speculating on the implications of the new research data, Evan asked Will, I
wonder how the value the Kunst 3500 creates varies based on the frequency with
which technicians change oil and resulting pump lifetime? If so, should we have to
create separate value propositions for each of these sub-segments?

As for determining a value-based price for the Kunst 3500, Evan realized that
he now had four useful pricing benchmarks. For starters, senior management had
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proposed a suggested resale price of $900 for the Kunst 3500 in order to maintain
consistency with the prices of the Kunst 1600 and other vacuum pumps Kunst
markets. Evan also knew the average prices of equivalent, conventional vacuum
pumps. With internal cost and industry profit margin estimates, Evan could readily
estimate a cost-plus price. And, with data from his value model, Evan could
determine the value-in-use price of the Kunst 3500. As he recalled from a
seminar on business marketing, value-in-use price or the indifference price is the
maximum price a customer would theoretically pay for a product or service. At that
price, the customer would have no preference between the firms product and the
next-best alternative product. Evans instructor had given this formula for
determining the value-in-use price:
Value-in-Use Pricef = Pricea + (Valuef - Valuea)
where, f = the suppliers product or service and a = the next-best alternative
product or service.

Turning to Will, Evan inquired, How can we best use the resulting benchmarks to
set an equitable value-based price for the Kunst 3500?

Pointing out that neither owners nor technicians in residential AC repair firms
seemed to be familiar with the Kunst name and its product lines, Evan wondered,
How can we create strong brand equity for a new product that is based on an
unconventional technology in a market segment previously untapped by Kunst?
Evan relished this opportunity to test his marketing skills.