PRICING STRATEGY WATERLESS WASHING MACHINE

- Amitabh Misra- Harshal Pimphalkhute- Shreyas Murthi - Tapan Kamdar

Context- There is growing awareness for ‘reduce-reuse-recycle’ of energy and water

¨ Energy¤ By 2030 electricity usage growth of 40%¤ Limited resources, cost will continue to rise in future¤ Washer-Drier units leading consumers of electricity at home

¨ Water¤ 22% of US water usage is for washing purposes1

¤ Typically 1.2B gallons a day is used for washing1

¨ Environment awareness for reduce-reuse-recycle¤ Waterless car washes, urinals, low water sprinklers¤ Energy star appliances

1 – American water works association estimates

Context

2

The waterless washing machine- New patented ‘nylon beads’ technology saves 90% water and 30% electricity

¨

¤ R&D partnership with University of Leeds (UK)

¤ Currently in stealth mode

¨ Key product features¤ No dryer unit required¤ 90% less water¤ 30% less electricity¤ Uses patented nylon beads – stains

get attracted and get diffused in nylon beads, beads are recycled

¤ Currently in prototype, first product available in end of 2010

Context

Note: See appendix for details on how the Xeros washer works

3

Context

Customers- Commercial cleaners & hotels will derive most benefit from Xeros’ offering

Custom

er Segments

à

Value driversà

Xeros Value proposition

Note: Quantification of these value drivers and market size for each segment done later in pricing and value creation sectionCommercial cleaners = professional dry cleaners who have significant volume of regular laundry cleaning

4

Traditional Washer/Dryer Air washers Dry Cleaning Natural Air

drying

Advantages

• Mature technology• Many strong

companies• Huge market share• Established

channels and manufacturing process

• New technology• Uses recycled

water• Can be used for

delicate washing

• Mature technology• High quality• Preserves delicate

fabric

• Very low total cost

Disadvantages

• Significant Energy consumption and water usage (~30% of utility bill)

• Uses ozone• Only removes bio-

degradable stains• Newer unproven

technology

• Expensive• Need special skills

and equipments• Use of abrasive

chemicals

• Time consuming

• Low quality

Context

Competitors- Key direct competitors are traditional washer/dryers and ‘air washers’

Primary Competition Secondary Competition

5

Context

Collaborators/Channels- Xeros should partner with some existing players like GE in both segments

Production Branding Promotion Distribution Channels

Commercial product

License technology for production to established player like GE

Brand as ‘XEROS’ washer

Use Direct Sales Force for promotion commercial outlets

Existing retail (e.g. Sears) and online (Amazon) channels

Residential product

License technology for production to established player like GE

Brand as GE washer + ‘Powered by XEROS’

Let GE take care of promotion

Existing retail (e.g. Sears) and online (Amazon) channels

Motivation / Decision Drivers

• Startup company needs good cash flow to sustain

• Xeros’ patent is on nylon beads technology, it can take advantage of GE’s expertise in production and distribution

• Xeros needs to maintain its brand recognition as innovation leader in commercial segment

• Residential customers are very fragmented and need a wide distribution network – requires deep pockets

• For commercial space, Xeros’ sales force is in best position to demonstrate the new technology and value proposition

This project is pricing only for the commercial washer product (not residential product) and will cover pricing for (1) washer unit (2)

nylon beads refills (3) service contracts

Note: The collaboration assumes that the license agreement drafted between GE and Xeros take care of no-compete clauses and restricts the freedom of use for certain allowed fields only (e.g. commercial, residential etc..)

6

Pricing strategy pyramid- Framework used for pricing the new washer units + beads

PriceLevel

Product value

Pricing Policy

Cash flow, Market Share

Value CreationEconomic Value, Offering Design, Segmentation

Value CommunicationEconomic Benefit, Positioning

Price StructureBundling, Fencing, Services

7

Value Creation- Savings come from lower operational costs, space reduction & lack of dryer unit

Operational cost reduction

Space savings due to lack of

dryer

Dryer machine Savings+ + =

Total value creation

(relative to current costs for customer)

Conventional cleaning

Xeros cleaning

8

9

Value Creation- The highest value add from Xeros’ washer is in Hotels segment

Loads Loads LoadsWeight (lbs) 10,000,000 Weight (lbs) 15,000,000 Weight (lbs) 5,000,000 / Weight/load 150 / Weight/load 150 / Weight/load 150= Annual Loads 66,667 = Annual Loads 100,000 = Annual Loads 33,333

Operational Savings Operational Savings Operational SavingsLabor 2.50 Labor 2.50 Labor 2.50+ Water 0.10 + Water 0.10 + Water 0.10+ Electricty 0.10 + Electricty 0.10 + Electricty 0.10+ Detergent 0.25 + Detergent 0.25 + Detergent 0.25- Beads (0.40) - Beads (0.40) - Beads (0.40)= VC/load 2.55 = VC/load 2.55 = VC/load 2.55* Annual Loads 66,667 * Annual Loads 100,000 * Annual Loads 33,333= Savings 170,001$ = Savings 255,000$ = Savings 84,999$

Space savings Space savings Space savingsLaundry (sq ft) 1000 Laundry (sq ft) 3000 Laundry (sq ft) 2000* Annual Rent $36 * Annual Rent $12 * Annual Rent $24* Utilization 25% * Utilization 80% * Utilization 80%= Savings 9,000$ = Savings 28,800$ = Savings 38,400$

Savings Savings SavingsOperational 170,001 Operational 255,000 Operational 84,999+ Space 9,000 + Space 28,800 + Space 38,400= Net Savings 179,001$ = Net Savings 283,800$ = Net Savings 123,399$ / # Machines 30 / # Machines 30 / # Machines 10= Value Created 5,967$ = Value Created 9,460$ = Value Created 12,340$

Commercial HotelsHopitals

+Dryer

machine Savings(~$15K)

Value created by Xeros washer is in addition to the savings from not buying the dryer

units

Note: Refer to appendix for more details on calculations, data sources and assumptions

Market Sizing and Targeting- The hotels and hospital segments also have the highest market potential

Commercial Hospitals Hotels

No. of cities in USA 100 100 100x No. of accounts/city 2 3 10= Total accounts 200 300 1,000

Value created per machine $5,967 $9,460 $12,340x No. of machine per account 30 30 10x Total accounts 200 300 1000 = Total value for segment 35,800,170$ 85,140,000$ 123,399,150$

Ease of converting to Xeros High Low HighFragmentation of segment DMU High Low LowExpected share 3% 6% 6%

Exp value 1,074,005$ 5,108,400$ 7,403,949$

Commercial segment has a lower expected

market potential

Expected share is a function of the Decision Making

Process by customers

Hotel segment is the best starting target segment with

highest expected market potential

10

Xeros should only look at targets in

cities/metros since sales/marketing

cost are significant in rural areas for a startup company

Note: Number of commercial accounts per city is assumed based on central cleaners who collect laundry from multiple locationsHotel segmented is assumed to be less fragmented due to centralized decision making by hotel chains / groups

11

Price Structure- Revenue will come from washer unit, beads and service are secondary sources

¨ Washer machine unit will be priced as per value provided to customer - see next section for price level

¨ Fences could potentially be created for Hospital segments by creating some product differentiation (e.g. anti-bacterial lining for washers etc..) – phase 2

Washer unit

¨ Beads will be sold at 10 % margin per load – sold in 20 pound packs

¨ Cost to customer = 40 cents (20 cents manufacturing cost + 10cents for distributors + 10 cents margin)

¨ For higher bead profits, warranty could be written such that Xeros beads are used exclusively

Beads

¨ Pricing based on industry benchmark for conventional washing systems – 10-20% machine of sale price

¨ A contract agreement based on hours of operation, would be an additional tool in endorsing product quality

¨ SLA structured to deliver service within promised period of request

Service

¨ Use ‘Economic Value Communication’ Strategyn Communication to focus on justifying price based on value of each

differentiating value driver.

Communication PositioningBenefits and Relative Cost to find Value

LowSimple “Search” Goods

HighComplex “Experience” Goods

Econ

omic

Ben

efit

Psyc

holo

gica

l B

enef

it

WaterlessWashingMachine

Positioning Factors

• Relatively Low cost to determine benefits because:• Hotels and Commercial cleaners

are EXPERT customers• Product expenditure is HIGH.• Purchases likely to be in BULK• Some benefits such as no water,

less power and no dryer are obvious

• Limited psychological benefits:• Less detergent, water and

electricity• But business has to be

competitive.

12

Value Communication Strategy- Justify price based on value of each differentiating value driver.

Traditional washers

Air Dryers

Dry Cleaners

Customer Economic Value Comparison• Create a customer economic value comparison

sheet for primary competition.• Include top differentiating value drivers – water

electricity, space and time.

Value Based Model• Create customizable value model software that

takes basic data from buyer as input and calculates net savings specific to customer.

• Include inputs such as area used, operation hours, labor, machine utilization & throughput.

• Calculate cost savings, new throughput, labor savings, reduced space requirements etc.

Address concerns about New Product and Switching Costs• Expert opinions from industry analysts such as

JD Powers in form of reports and videos• Customer testimonials• Demonstration videos focusing on simplicity of

use in washing and bead removal.• Offer free installation and trials

Other Promotional Material• Product demonstration video• Reports on impact of current processes on

environment.• Product warranty• Reference prices from all other alternative

washing products.

- Communicate Economic Value- Use Direct Sales medium

13

Value Communication Method- Use Direct Sales Force to communicate differentiation and value

¨ Give discounts for non-credit purchases (i.e. encourage shorter A/R period)

Manage cash flow effectively

Pricing Policy- Manage Cash flow and generate long term customers

¨ Allow for volume discounts for big accounts (this is required to manage customer expectations and can also be used as case studies for other customers)

¨ Appropriately incentivize sales force to target big accounts and give them 10% pricing flexibility

Win large volume from big accounts

¨ Bundle annual supply of beads (discounted price) with initial sale of washer unit

¨ Maintain 10% margin on beads sales later, once the customer is locked in

Promote beads sales with initial product

Objectives Tactics

14

15

Price Level- Skim the market (Hotels segment) with $34K, and allow hospitals to self select

PositiveDifferentiation

• Savings in labor and space

• Reduced operational costs

• Dryer machine costs

Reference Value

Conventional Conventional Washing m/c Washing m/c

Negative Diff•Cost of beads•User Training

Value returned to Customer

Dryer Cost + 25% of value created

Hotels – Price Skimming$52 K

$34 K

$25 K

PositiveDifferentiation

• Savings in labor and space

• Reduced operational costs

• Dryer machine costs

Reference Value

Conventional Conventional Washing m/c Washing m/c

Negative DiffNegative Diff•Cost of beads•User Training

Value returned to Customer

Dryer Cost + 25% of value created

Hospitals - Penetration

$49 K

$32 K

$25 K

Skimming

Price

TimePenetration Patent Expiry

$34K$32K

$25-28K

16

Price Timing Graph- Start with skimming and then move to penetration pricing

Skimming• Differentiated Product• Convey Long term value• Build Brand Image• Guard against competition• Consumer feedback and

buzz

Penetration• Price reduction to increase

adoption rates• Motivate volume purchases• Increase Market Share• Build Service revenue

stream

Patent Expiry• Price on par with

commercial washers• Value to customer = No

need for dryer• Launch non-commercial

model for residential market

$31K $29K $25-27K

17

Price Timing- Start with skimming and then move to penetration pricing

Appendix18

19

Illustration of washing

process using Xeros washer

Value Creation- Calculations, data sources and assumptions

Price/unit Usage /load Cost/load Savings (%)

Savingsper load

Water (gallons) $0.003 39 $0.11 90% $0.10

Detergent $0.27 1 $0.27 90% $0.25

Washer Energy (KwH) $0.25 0.12 $0.03 30% $0.01

Energy Dryer (KwH) $0.25 0.36 $0.09 100% $0.09

Sources and Assumptions:

http://michaelbluejay.com/electricity/laundry.html

http://timeswv.com/local/x681690753/WVUH-laundry-load-growing-to-15-million-pounds-annually

Xeros website and product specifications (for savings estimates)

Assumptions for space and operational savings informed through interviews with commercial washer owners

20