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Value Elements:
• Cost savings due to the elimination of oil change expenses
and messiness -- Most owners and technicians trivialize oil change
related costs.
• Incremental revenue and profits –Incremental revenue and
profits refers to new income that can be attributed to greater
product efficiency. In this case study, this occurs in only one
segment – light commercial refrigerator repairs. In all other
segments, repair firm revenues remain the same regardless of
which pumps are used.
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! In the economic sense, there is no
incremental profit merely greater price.
II. Value Placeholders For the most part, there are few differences
among conventional pumps and the Kunst 1600. Here are a few
placeholders.
• 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.
• Expected value of oil dumping fines – You can either treat this as a placeholder or
include the expected probability of fines into your cost savings category for the Kunst
1600 in the value model. You would calculate the expected value as “the sum of
company and individual fines times probability of being caught times the amount of
oil dumped per year.” There is limited case information that enables you to do such
calculations, but this will be difficult to pin down in that any calculation will involve
assumptions about how often the contractor illegally dumps the oil.
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
Oil disposal cost = recycling charge per gallon of oil x number of gallons
recycled
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
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
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
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.
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.
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).
Value Proposition