Identifying major issues:

The purpose of this report is to analyse the alternative market segments of Kunst Vacuum Pump
Company and give suggestions for their next move. 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. Evan Stone, a senior product manager at Kunst Vacuum Pumps 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 by penetrating new market segments, such as AC and refrigerator
repairs.

Identifying Value Elements:

1. Cost savings per oil change = Oil price + Labor cost + Clean-up supplies+ Oil disposal cost

2. Labor cost = Hourly rate of individual changing oil x Hours of time required per change

3. Clean-up supplies = monetary amount of scouring soap used + price of cloth towel

4. 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 Numberof 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 Numberof 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

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 theKunst 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 MODEL

Factors Residential AC Repair Home Refrigerator Light Commercial

Segment Repair Segment Repair Segment
Oil Change Savings $318 $153.30 $207.30
Incremental Profit $0 $0 $720
Total Value $318 $153.30 $927.30
Differential Price $16.67 -$33.33 $16.67
Justification of choice of target segment(s) for the Kunst 1600.

Given Kunst’s 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 Light commercial refrigerator
repair. This is the only segment where all three value elements (incremental profit, cost savings from oil changes,
and durability) come into play for the Kunst1600. 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.

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).