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)

© 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 Atler’s 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.

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,

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

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 Atler’s 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 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
 3

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 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 I’ve 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
 4

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 Evan’s 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 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.
 5

 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 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 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
 6

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 firm’s product and the next-best alternative product.
Evan’s instructor had given this formula for determining the value-in-use price:
Value-in-Use Pricef = Pricea + (Valuef - Valuea)
where, f = the supplier’s 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.