H2O Industries

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Water Purification Business Plan

Strategy and Implementation Summary

Besides direct sales effort to large users of H20 Industries, a major element of the company's marketing efforts will be to develop a distributor network through existing local water service companies. These companies provide local water service to small companies and homes throughout Northern California. Most of their business takes the form of water filtering, water softening, reverse osmosis maintenance, swimming pool service, etc. The best of these will be recruited to add H20 Industries service to their product line.

5.1 Value Proposition

H20 Industries will offer segregated resin regeneration to customers wanting the highest levels of water purity. Segregated regeneration is not offered by any other company in Northern California and indications are, based on present pre-start-up sales, that users of H20 Industries are willing to pay a substantial premium for it. It represents a form of peace of mind which dialysis units, laboratories, etc. feel is important.

The second most important value proposition is service response. When H20 Industries tanks need changing customers insist on, and will receive, an immediate response.

5.2 Competitive Edge

H20 Industries's ability to segregate a customer's resin and return it to him regenerated to the maximum limit, should put the company in a strong competitive position.

Approximately all of H20 Industries's business will be directed at the portable service DI market. This market emphasis should quickly be noticed by users of H20 Industries, who at present rely on US Filter. US Filter's product range growth through acquisition and buy-outs has de-emphasized the importance of its H20 Industries exchange service.

Hence, the two major aspects of the firm's competitive advantage would be high quality segregated resin regeneration and fast service response. It will be important to stress these advantages in the sales literature.

5.3 Marketing Strategy

H20 Industries's marketing strategy will be to execute and communicate its value proposition of service and market segmentation advantage in providing segregated regeneration of customers' resin.

5.3.1 Distribution Strategy

Wherever H20 Industries cannot economically sell directly, due to distance or quantities, it will utilize a network of water service companies. These companies will be carefully chosen for their quality of service. An arrangement will be set up whereby the distributor will offer DI exchange service along with its other water services. The installations can easily be handled by them. They would tag the tanks and return and pick up from the H20 Industries plant. Being able to offer this service increases the image of the local water service company. It fosters a feeling a one-stop shopping. A 33% discount off the retail price should be adequate to satisfy the distributors.

5.3.2 Positioning Statement

H20 Industries's ability to regenerate resin on a segregated basis, rather than only bulk, is a capability that should provide quick and easy entry into the user market where the highest water purity is needed. These users, blood analysis, hemodialysis units, and medical laboratories for example, are especially sensitive to contamination risks. Simply pointing out to these users that bulk regeneration involves the co-mingling of their resin with resin used in the metal-finishing and car wash industries usually is quite convincing. Segregated regeneration results in the further advantage of achieving a higher DI capacity per cubic foot as greater quantities of chemicals are used during a longer regeneration period.

The second most important position statement is H20 Industries's concentration on the DI exchange business. This concentration will force H20 Industries to provide a higher level of service, and more quickly, too. It must be remembered that the cost for H20 Industries in the market for the highest level of water purity is not a significant cost element in the overall cost structure. However, a service shutdown, for quality or for service reasons, would be very costly to high technology users of H20 Industries.

5.3.3 Pricing Strategy

In line with the conclusions drawn in the positioning statements, H20 Industries can charge a higher price for its segregated regenerated resin. There is virtually no competition for this product in the Northern California market.

Charging $63 per cubic foot (mixed bed), as used in the sales projections, is more than a 65% increase over the price for US Filter's bulk resin price for mixed bed. H20 Industries is currently successfully charging in excess of $70 for this product. It is essential that H20 Industries place a premium price consistent with its superior product.

Wholesale prices have been established to encourage the quick formation of a dealership network. Dealers are afforded a 33% discount.

5.3.4 Promotion Strategy

The main focus of promotion will be two-pronged: promotion to H20 Industries end users, and promotion to wholesalers.

Promotion to wholesalers should receive primary stress due to the extended reach made possible by the wholesaler network with its existing customer base. The sales force of these wholesale distributors needs to be educated on H20 Industries's positioning statement so that they all understand the important sales advantages of segregated resin. Being able to offer DI exchange service to a distributor's customer list is a great advantage to the distributor, and this fact needs to be clearly spelled out to them. Therefore, the H20 Industries relationship with a dealership network is one in which both sides benefit.

H20 Industries should strive to create a small-town, friendly relationship with its customers. Company brochures will show a map with all the H20 Industries locations, including each newly acquired distributor. The distributor trucks, as well as H20 Industries vehicles, would carry the H20 Industries logo, helping all to achieve name recognition. Cost savings would result through sharing literature, leads (by territory and/or industry), co-op marketing costs, and the sharing of technical expertise.

Direct marketing to customers within easy reach of H20 Industries should stress service. As a major supplier of resin stated: "US Filter is a huge concern that closes down at 5 P.M. on Friday." Customers for H20 Industries need to feel that they can get service after hours, and even on a Saturday if need be. These customers feel much more comfortable dealing with an exchange service that is closer in size to the customer, and where the exchange service is an important portion of total sales revenue of the supplier. Prompt deliveries, trouble-free installations, good technical advise, etc. are main building blocks of the promotion strategy.

5.4 Sales Strategy

The sales strategy is to concentrate on that segment of the market most easily captured by the following sales feature: segregated regeneration of portable resin. In addition, the fastest way to reach the sales goal for the first several years is by actively working to develop a dealership network for H20 Industries.

5.4.1 Sales Forecast

Sales Projections:

Sales (July 1999) are running at less than 15% capacity monthly, exclusive of rental revenue. This approximates 285 cubic ft per month. The plant capacity will be 100 cu ft per day, on a one-shift basis. Based on the potential market outlined in the Marketing Section of this plan, growth in sales of regenerated segregated resin should reach 433 cu ft per month by October (equals 20 cu ft/day) which is this plan's starting point, and growing steadily each month until 80 cu ft per day is reached (80% capacity) by the end of the first year. Total production of segregated resin is assumed to be split into equal quantities of anion, cation, and mixed bed.

Once the 80% capacity utilization level is reached (October 2000), unit sales will grow modestly in year two and year three. This growth can be achieved within the capacity limits of 100 cu ft daily (26,000 cu ft per annum) without increases in production labor. Further increases in segregated regeneration would require overtime labor charges. Also, for the projection purposes, direct unit costs for years two and three remain at the level of year one.

The bulk regeneration pad will have a capacity of 20 cu ft and can handle two batches during an eight-hour shift, totaling 40 cu ft/day. We will assume sales for bulk regeneration will grow at the rate of 5 cu ft/day in the first month reaching capacity of 40 cu ft/day after eight months. Sales are split between mixed bed (50%), 25% anion, and 25% cation. Sales of bulk resin will grow 15% each of the first three years. As the bulk regeneration, unlike the segregated regeneration, is not labor intensive, this 15% growth can be achieved without increases in production labor.

In projecting unit prices per ten cu ft. Prices will be assumed at:

  • $630/10 cu ft for mixed bed (segregated)
  • $570/10 cu ft for anion or cation (segregated)
  • $430/10 cu ft for mixed bed (bulk)
  • $320/10 cu ft for cation or anion (bulk)

The above prices will be reduced for dealers who will deliver and pick up at the factory to:

  • $422/10 cu ft for mixed bed (segregated)
  • $382/10 cu ft for anion or cation (segregated)
  • $288/10 cu ft for mixed bed (bulk)
  • $215/10 cu ft for cation or anion (bulk)

We will assume that 50% of all sales will go through dealers, so the unit price weighted average of the retail and dealer prices will be:

  • $526/10 cu ft for mixed bed (segregated)
  • $476/10 cu ft for anion or cation (segregated)
  • $359/10 cu ft for mixed bed (bulk)
  • $267.50/10 cu ft for cation or anion (bulk)

Variable Unit Costs:

The costs connected with one cubic foot of segregated anion treatment involve the cost of:

  1. City water.

  2. City sewer disposal.

  3. Cost of carbon filtering and converting city water to H20 Industries.

  4. Cost of heating water.

  5. Cost of Sodium Hydroxide.

  6. Cost of replacing small amounts of lost resin.

  7. City water is supplied by Newark, at $2.70 per 100 cu ft, which works out to (7.48 gallons in one cubic foot) $0.0036 per gallon. It requires one gallon per minute for 45 minutes to regenerate one cubic foot of anion, which comes to 45 gallons. The slow rinse needs one gallon/minute for 20 minutes, and the fast rinse needs five gallons/min for 40 minutes. This comes to 220 gallons. Finally, testing takes another 12.5 gallons. Total water consumption per cubic foot of anion resin is 277.5 gallons, or $1.00.

  8. All water used eventually passes to the sewer which is metered at $2.45 per 100 cubic feet or $0.0032 per gallon. Cost per cubic foot of anion serviced is $0.91.

  9. Cost of carbon filtering and converting city surface-sourced water to H20 Industries is arrived at by assuming that one cu ft of regenerated resin has the capability of producing sufficient H20 Industries to regenerate five cu ft of spent resin. The costs of regenerating one cu ft of anion resin without H20 Industries costs are approximately $8.96. Dividing this amount by five comes to approximately $1.80 for the H20 Industries per gallon of anion resin serviced.

  10. Gas to heat incoming city water (average temp 40 degrees) up to 100 degrees goes by a formula (8.34 X number of gallons X temp rise) or 500.4 BTU's per gallon. 277.5 gallons would need 138,610 BTU's which, when divided by 104,000 BTU's per thermal unit, comes to 1.3352 therms. One therm (assume G41 rate class) is billed at $.81 by Essexgas, so 1.3352 therms will cost $1.08.

  11. Sodium hydroxide is a caustic chemical supplied in a 55-gallon drum containing 50% solution. The regeneration process requires one drum to regenerate 12 anion tanks of each two cu ft. Therefore, one cubic foot of anion requires 2.2917 gallons, or .04167, of a drum. One 55-gallon drum costs $80.50 (Hubbard-Hall Inc.). Cost per cubic foot of anion servicing is $3.35.

Experience indicates that with each regeneration it is necessary to replace approximately two percent of the resin. Anion resin costs $130 per cu ft. Cost is $2.60 per cu ft of anion serviced.

Summary of Anion servicing costs:

  • City Water: $1.00
  • City Sewer: $0.91
  • Carbon filtering and DI: $1.80.
  • Gas to heat water: $1.08
  • Sodium Hydroxide: $3.35
  • Resin replacement: $2.60

Total for anion servicing: $10.74

The costs connected with servicing one cubic foot of segregated cation treatment involve the cost of:

  1. City water.

  2. City sewer disposal.

  3. Cost of carbon filtering and converting city water to H20 Industries.

  4. Cost of heating water (not needed for cation treatment).

  5. Cost of Hydrochloric acid.

Cost of replacing small amounts of lost resin.

  1. City water is supplied by Newark at $2.70 per 100 cubic feet which works out to (7.48 gallons in one cubic foot) $0.0036 per gallon. It requires one gallon per minute for 20 minutes to regenerate one cubic foot of cation, which comes to 20 gallons. The slow rinse needs one gallon/minute for 20 minutes, and the fast rinse needs five gallons/minute for 30 minutes. This comes to 170 gallons. Finally, testing takes another 12.5 gallons. Total water consumption per cubic foot of cation resin is 202.5 gallons, or $0.73.

  2. All water used eventually passes to the sewer, which is metered at $2.45 per 100 cubic feet, or $0.0032 per gallon. Cost per cubic foot of anion serviced is $0.66.

  3. Cost of carbon filtering and converting city water to H20 Industries is estimated at $1.46 per cu ft of cation serviced based on experience that one cu ft of regenerated cation resin has the ability to produce enough H20 Industries to regenerate five cu ft of cation resin. ($7.32 divided by five equals $1.46)

  4. No cost to heat water.

  5. Hydrochloric acid is supplied in 55-gallon drums containing 30% solution. The regeneration process requires two drums to regenerate 12 tanks of each two cubic feet, using an eight to ten percent solution. Therefore, one cubic foot of cation requires 4.6 gallons or .08363 of a drum. One 55 gallon drum costs $63.70 (Hubbard-Hall Inc.). Cost per cubic foot of anion servicing is $5.33.

Experience indicates that in the process of regeneration about 2% of the resin needs to be replaced. Cation resin costs $30 per cu ft. Cost is $.60 per cu ft of cation serviced.

Summary of Cation servicing costs:

  • City Water: $0.73.
  • City Sewer: $0.66.
  • Carbon filtering and DI: $1.46.
  • Gas to heat water: $0.00.
  • Hydrochloric acid: $5.33.
  • Resin replacement: $0.60.

Total: $8.78 for cation servicing.

Costs of servicing one cubic foot of mixed bed:

A mixed bed tank is more time-consuming as it requires a separation stage prior to regeneration. City water (not DI) is mixed with salt. This solution is used to bathe the anion and cation resin in a cone until the two resins separate, at which point the cation and anion are treated in the regeneration stage in the same manner as the single bed anion and cation. One mixed bed contains twice as much anion as cation. This aspect results in a weighted cost of $10.09 per cu ft Salt consumption: every cubic foot of mixed bed needs 1.5 cu ft of brine solution. There are 7.48 gallons per cu ft This comes to 11 gallons of brine needs. A 22% salt solution in this quantity of water would amount to amount two pounds. Salt is supplied by Hubbard-Hall Inc. at $.095 per pound. Adding the cost of the two pounds of salt to the weighted average cost of $10.09 comes to $10.28.

Total cost of mixed bed serving: $10.28 per cu ft.

  1. Bulk Regeneration Variable costs:
    • Water. According to the spec sheet, 2,459 gallons are needed for 20 cu ft of mixed bed. At $0.0036 per gallon, this comes to $8.87, or $0.444 per cu ft of resin serviced.
    • Sewer. Assuming all the water goes down the sewer with a minimal need for balancing chemicals, at $0.0032 per gallon, this comes to $0.4027 per cu ft of resin serviced.
    • Per cu ft of mixed bed. $1.39 of acid and $1.10 of caustic soda.
    • Salt. $0.07 per cu ft.
    • H20 Industries and filtering/softening assume the same costs as in the production of segregated resin (i.e. $1.80 for anion and $1.46 for cation).
    • Loss of resin. Assume two percent. At $130 for anion and $30 per cu ft of cation (ratio 2:3 cation to anion), a blended cost of $90 at two percent comes to $1.80 per cu ft.
    • Heat for water. 3.2 therm at $.081 divided by 20 cu ft comes to $0.13 per cu ft.
  2. Total bulk anion: $7.25, or $72.50 for 10 cu ft.

  3. Total bulk cation $6.14, or $61.40 for 10 cu ft.

  4. Total bulk mixed bed: $6.95, or $69.50 for 10 cu ft.

Tank Rental Income:

Because of the high costs of purchasing tanks, many new customers opt for renting tanks on a monthly basis. For purposes of these projections we will assume that:

  1. Dealership-generated sales resulting in tank rentals will be handled by them (i.e. ignored in these projections).

  2. Half of all directly-generated sales will involve rental tanks (i.e. total unit sales for October amount to 534 cu ft of which half will be dealer-generated. Total direct sales in October = 267 cu ft of which half (133 cu ft) will need rental tanks.

  3. Assume, for simplification of projections, all rentals will be in 12 inch tanks holding 3.6 cu ft with rental price of $40 per tank. October will see rental income of $1,480 (133 cu ft divided by 3.6 cu ft/tank times $40 rental per tank).

Tank Sales:

It is assumed that those customers who do not opt to rent their tanks will already have their own tanks or will purchase tanks from H20 Industries. Sales of tanks is assumed at only five percent of the number of monthly rental tanks. Sales price is $1,200. Cost equals $450.

Sales Forecast
Year 1 Year 2 Year 3
Unit Sales
Segregated Anion Service 10 cu ft 445 728 764
Segregated Cation Service 10 cu ft 445 728 764
Segregated Mixed Bed 10 cu ft 445 728 764
Bulk Regen 10 cu ft (MB) 367 598 687
Bulk Regen 10 cu ft (Cat) 183 299 344
Bulk Regen 10 cu ft (An) 183 299 344
Tank Rentals (each 3.6 cu ft): 1,436 2,347 2,546
Tank Sales: 67 117 127
Other 0 0 0
Total Unit Sales 3,572 5,844 6,340
Unit Prices Year 1 Year 2 Year 3
Segregated Anion Service 10 cu ft $476.00 $476.00 $476.00
Segregated Cation Service 10 cu ft $476.00 $476.00 $476.00
Segregated Mixed Bed 10 cu ft $526.00 $526.00 $526.00
Bulk Regen 10 cu ft (MB) $359.00 $359.00 $359.00
Bulk Regen 10 cu ft (Cat) $267.50 $267.50 $267.50
Bulk Regen 10 cu ft (An) $267.50 $267.50 $267.50
Tank Rentals (each 3.6 cu ft): $40.00 $40.00 $40.00
Tank Sales: $1,200.00 $1,200.00 $1,200.00
Other $0.00 $0.00 $0.00
Sales
Segregated Anion Service 10 cu ft $211,820 $346,528 $363,664
Segregated Cation Service 10 cu ft $211,820 $346,528 $363,664
Segregated Mixed Bed 10 cu ft $234,070 $382,928 $401,864
Bulk Regen 10 cu ft (MB) $131,753 $214,682 $246,633
Bulk Regen 10 cu ft (Cat) $49,080 $79,983 $92,020
Bulk Regen 10 cu ft (An) $49,080 $79,983 $92,020
Tank Rentals (each 3.6 cu ft): $57,440 $93,880 $101,840
Tank Sales: $80,400 $140,400 $152,400
Other $0 $0 $0
Total Sales $1,025,462 $1,684,911 $1,814,105
Direct Unit Costs Year 1 Year 2 Year 3
Segregated Anion Service 10 cu ft $107.40 $107.40 $107.40
Segregated Cation Service 10 cu ft $87.80 $87.80 $87.80
Segregated Mixed Bed 10 cu ft $102.80 $102.80 $102.80
Bulk Regen 10 cu ft (MB) $61.40 $61.40 $61.40
Bulk Regen 10 cu ft (Cat) $69.50 $69.50 $69.50
Bulk Regen 10 cu ft (An) $72.50 $72.50 $72.50
Tank Rentals (each 3.6 cu ft): $0.00 $0.00 $0.00
Tank Sales: $450.00 $450.00 $450.00
Other $0.00 $0.00 $0.00
Direct Cost of Sales
Segregated Anion Service 10 cu ft $47,793 $78,187 $82,054
Segregated Cation Service 10 cu ft $39,071 $63,918 $67,079
Segregated Mixed Bed 10 cu ft $45,746 $74,838 $78,539
Bulk Regen 10 cu ft (MB) $22,534 $36,717 $42,182
Bulk Regen 10 cu ft (Cat) $12,752 $20,781 $23,908
Bulk Regen 10 cu ft (An) $13,302 $21,678 $24,940
Tank Rentals (each 3.6 cu ft): $0 $0 $0
Tank Sales: $30,150 $52,650 $57,150
Other $0 $0 $0
Subtotal Direct Cost of Sales $211,347 $348,769 $375,852

5.5 Strategic Alliances

The relationship between dealerships and H20 Industries could be called a strategic alliance. These water service companies have an extensive customer base. Most of the customers have needs such as water softening, filtration, reverse osmosis maintenance, swimming pool maintenance, etc., however, many dealership customers have H20 Industries needs as well. At present, these water service companies must direct their customers to US Filter or supply the customer through US Filter. Forming a relationship between H20 Industries and these dealerships would quickly result in substantial sales increases for H20 Industries and would result in increased prestige and profits for the dealerships.