BREATHE -BLUE AIR PURIFIERS

Market entry Medium difficulty

Consumer goods Interviewer-led case

This case discusses a new business idea involving air purification, and considers Beijing as the test
market to enter.

The case has a heavy focus on testing numeracy and judgement & insights, but does not cover creativity
directly.

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Problem definition

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A friend of yours is an entrepreneur, and has designed an air purifier after visiting Beijing and
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experiencing air pollution in the city. The product is called Breathe-Blue and is a relatively small unit
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designed to clean air for a single apartment (or an equivalent-sized space).

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The air purifier is of excellent quality and is able to eliminate a high percentage of PM10 particles in an
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indoor area. PM10 is the main component of smog.

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Your client is specifically looking to understand whether to enter Beijing as the market to launch Breathe-
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How would you approach analyzing this opportunity?

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Additional information
If asked at this stage or later, please share that:
• Beijing’s population is ~ 22.8M
• The typical lifespan of a Breathe-Blue purifier is 5 years
• Air purifiers use filters - these filters are typically replaced every 6 months
• The client is only interested in the residential market at this point

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Question 1 (Structuring)

How would you structure your approach to the question?

Possible answer

1. Market attractiveness:
a. Market size
b. Market growth rate
c. Market profit margins
d. Competitive intensity (i.e., competitor strength and concentration)

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2. Product/market fit:

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a. What do customers want in this market?

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b. How well can our product meet these requirements? To include areas such as:
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• Price point
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• Design
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• Effectiveness
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Branding/Market positioning

3. Execution: Do we have what it takes to enter the market successfully?

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a. Capital required
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b. Access to distribution channels

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c. Capabilities (branding, manufacturing, local language skills, etc.)

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d. Access to regulators / approvers of products in the locality

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Question 2 (Numeracy)

As discussed, your client is considering entering Beijing as their first market for the air purifiers.

What size do you estimate this market to be, in terms of units sold per year?

Guidance for interviewer

• A structure in line with the below can be used; however, the candidate is free to use others
• As a follow-up question, ask the candidate how they would check their answer in a real project.
Suitable answers may include: Buy market reports, conduct expert interviews, review annual reports,
triangulate to sense-check (e.g. perform another market sizing to sense-check the first answer)

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Possible answer

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Assumptions:
Beijing population: 22.8M
Average household size: 2

% households with above average income: 50%

Note: Any proxy to estimate the % of the population capable of spending money on air purification is fine

% households ‘health educated’, i.e. aware of and concerned about health concerns from smog: 45%
Note: Can assume health is still a relatively low concern. Any proxy estimating the number of people
interested in spending money on air purification works equally well.

# air purifiers bought / person / yr: 0.2

Because average lifespan of unit = 5 years = 1 bought every 5 years = 1/5 = 0.2

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Formula:
[Population] * [1/avg household size] * [% households above average income] * [% interested in health] *
(1/avg lifespan of purifier)
= 23M * (1/2) * 50% * 45% * (1/5)
= ~ 500,000 units per year

At half a million units per year, this does appear to be an attractive market size to consider.

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Question 3 (Judgement & Insight)

You now move on to pricing the product, to determine the revenue potential for the business.

In what ways could you price the product?

Guidance for interviewer

There’s no need for a clear right answer at this stage; the candidate simply needs to list alternatives and
explain them logically.

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Possible answer

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There are at least three options to consider:

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1. Cost-based pricing – estimate cost to produce each unit and add a margin for profit
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2. Competitive pricing – consider competitor price points and price accordingly depending on
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market positioning (e.g., low-end mass market, mid-market, high end)

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3. Value-based pricing – estimate the value of the product to the customer in monetary terms and
price based on this
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Question 4 (Judgement & Insight)

The market is growing very fast, and this is attracting both international companies (e.g. Philips, Daikin)
and local Chinese players (Xiaomi, Yuna). Currently more than 600 companies are active in the
residential air purifier market.

Given this information, which of the three pricing strategies would you recommend?

Guidance for interviewer

The candidate does not need to calculate anything for this answer; their response can be entirely
qualitative

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Possible answer

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We should use a value-based pricing approach and position ourselves as a high-end niche player,
because:
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• Our product is very high quality

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• It does not make sense to compete on price with the local Chinese players, since this will lead
to selling at negative margins
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• A value-based approach will allow for the highest profit margin per product, and avoids money
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being ‘left on the table’

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Question 5 (Numeracy)

Your team performs a customer survey in Beijing, based on a sample of 2,000 target consumers. This
test, plus the results of an air quality text, should allow you to calculate a value-based price for the
product. [Share exhibits 1 & 2].

At what price point would you sell the air purifier, based on this information?

Guidance for interviewer

The candidate can assume that there is on average 2 individuals and 1 air-purifier per accommodation.

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Possible answer

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Willingness to pay (WTP) for Breathe-Blue product
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= Number of individuals in household x Expected increase in life expectancy x Willingness to pay for
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additional year of life expectancy / Number of air-purifier to purchase in remaining of life
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Expected increase in life expectancy

= [% PM10 removed] x [average PM10] x [lifespan increase / 100µg decrease in PM10]
= 91% x 150 µg x [2.1/100µg PM10]
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= ~2.9 years increase in expected lifespan

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Willingness to pay for additional year of life expectancy

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= $5,125
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Number of air-purifiers to purchase in remaining of life

= Average remaining life expectancy in household / Lifespan of a unit
= 40 / 5
= 8 units

WTP for Breathe-Blue product

= 2 x 2.9 x $5,125 / 8
= $3,715 per unit

We should price the purifier at $3,715 per unit. To provide a broader assessment, there are other
perspectives we should consider, such as the relative lifetime of our product compared to others.

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Exhibit 1: Average % of PM10 particles removed after 2 hours in 40m² accommodation

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Exhibit 2: Customer survey results, n = 2.000

Average willingness to pay (WTP) for 1 year life expectancy $5,125 per individual
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Average remaining life expectancy in household 40 years

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Increase in life expectancy for every 100 microgram (µg) /m³ PM10 2.1 yrs
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Average PM10 levels in Beijing 150 µg / m³

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Question 6 (Numeracy)

Your client is nervous about the projected sales over the next 3 years and asks you to calculate the
expected revenue for year 3 to check for viability of the product.

You know that each air purifier sold will need replacement filters every 6 months, which cost $450 per
filter. The expected market growth is estimated at 10% per year.

What is the estimated revenue in year 3?

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Guidance for interviewer

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• The candidate can assume a 5% market share for Breathe-Blue in year 1

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• To answer this question successfully, it’s key for the candidate to realize she/he should calculate

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the full installed volume of air purifiers before obtaining the revenues from filters during year 3.
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Possible answer
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Revenues Year 3 = Revenue (filters) + Revenue (air purifiers)

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Revenue (filters) = ([installed purifiers at end of year 2] * [2 filters] * [price/filter]) + ([additional installed
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purifiers in year 3] * [average of 1 filter * price/filter])

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Installed purifiers by end of year 2 = [sales of purifiers in year 1] + [sales of purifiers in year 2]
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= 0.5M*5% + 0.5M*5%*1.1
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= 0.025M + 0.0275M = 0.0525M

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Purifiers sold in year 3 = 0.5M * 5% * 1.1² = 0.03M

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Revenue (filters) = (0.0525M*2*$450) + (0.03M*1*$450)

= $47M + $13.5M = $60.5M

Revenue (air purifiers) = 0.5M * 1.1² * 0.05 * $3,715 = $112.4M

Total sales = $60.5M + $112.4M = $173M

This feels like a substantial estimated revenue. However, to really know whether the business is viable, I
would also need to look at the costs and profit margin.

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Question 7 (Judgement & Insight)

Your team member does some research into pollution trends and buying behavior in the Chinese market
and shares the following charts with you [share exhibits 3 and 4].

What do these charts suggest about future customer purchasing behavior for air purifiers in
China?

Possible answer

Key insights:

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• There is strong seasonality in smog levels and sales – e.g., closed window season, allergy

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season

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• Sales are a direct response to increase in smog, suggesting high ‘impulsiveness’ of the

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purchase. This could be mitigated by:
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- Targeting specific groups who are less prone to this impulsiveness effect - e.g., allergy
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sufferers, asthma patients, new parents
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- Partnering with influencers to reach these markets - e.g., doctors, new family support groups
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In the long term, the smog problem in China will very likely improve due to governmental effort. However,
penetration rates are still extremely low compared with peer countries. This suggests substantial
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potential to grow, which will likely offset this potential “negative growth”.
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Exhibit 3: Penetration rate of air purifiers in selected markets

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Exhibit 3: Air purifier sales vs SMOG levels

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Question 8 (Synthesis)

What recommendation would you put forward to your client?

Possible answer

We were asked whether to enter Beijing with the Breathe-Blue air purifier product. Based on the
research so far, the Chinese air purifier business is a highly attractive market and I would recommend
Breathe-Blue enters it for the following reasons:
• We can expect strong growth in an already big market of 0.5M units per year in Beijing
• Penetration of air purifiers in China is still nascent compared to peer countries, and revenue is

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expected to be over $150m by year 3

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• China as a whole shows potential to grow in air purifier sales. Beyond Beijing, the Chinese

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market has significant potential

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However, there are a few risks associated with entering this market, including the fact that there is a lot
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of competition already selling air purifiers, and a positive market outlook will likely attract more entrants.
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As next steps, I would want to analyze and optimize the costs of the Breathe-Blue air purifier and ensure
the market can be entered in a profitable way.
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Puzzled by some case interview charts?

Practice on your own with the Exhibit Drills in the
Interview Prep Course

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