Upon request, the interviewer can propose two dimensions that the interviewee can use to structure the problem. For example:

Who?

• Who is the target customer of the business model?

What?

• What is the content of the potential business model?

Potential categories in these two dimensions are the following:

Customer, e.g.:

• B2C: Customers are Mercedes-Benz customers, that also bought the vehicle
• B2B: These customers include fleet customers, but also third parties that have no direct connection to our vehicles

Hardware/Software:

• Software: Business models that are related to software products and/or data
• Hardware: Business models that imply the use of hardware

A potential framework to structure the problem is a 2x2 matrix. All other frameworks are also permissible, the interviewee’s creativity is welcome here. However, it is important that all combinations between customer types and product/service are covered.

You shall focus your investigation on optional equipment for private users. The client wants you to explore two trends that are currently generating new business models in other industries and that shall be evaluated for monetization potential for the C-Class: Subscription business models and connectivity.

One possible example are heated seats. Cars could be equipped with heating pads in the seats by default, the heating pads could be activated on-demand, conditioned on a monthly subscription. Other examples are also valid.

Possible answer categories are:

Functionally: Equipment options need to have a functionality that can be activated/deactivated through software. Trim elements (upholstery, dashboard elements, etc.) and exterior design elements (wheels, spoilers, paint, etc.), among others, do not apply.

Installed hardware: The necessary hardware that enables the functionality needs to be installed by default. For example, if you want to offer a subscription model for a parking assistant, the vehicle needs to be equipped with sensors, control units, motors in the steering wheel etc.

Order and payment ecosystem: A functioning, well designed and programmed ecosystem has to exist, that allows “shopping” and paying for equipment options in a highly convenient way. This requires additional development costs, and programming competence.

A potential description of the automotive value chain of an OEM may look as follows:

Note that only the main value adding steps are depicted, support processes as IT, HR or finance can be disregarded at that point.

In the following, we are detailing examples for opportunities and challenges along the entire value chain. If your time for conducting the interview is restricted, you can concentrate on only two of the elements of the value chain.

Opportunities:

• By analyzing customer usage of equipment options, developers can gain a deeper understanding of the customer’s needs and develop solutions that fulfil those needs more precisely.
• As the variance of equipment is reduced (from the hardware point of view, all vehicles are equipped with the same equipment), less development and testing effort is needed.
• …

Challenges:

• A functioning, well-designed ecosystem has to be developed, that allows for “shopping” and paying for equipment options in a highly convenient way. This requires additional development costs, and programming competence.
• Car-IT security also has to guarantee that customer’s private and banking data have to be protected.
• …

Opportunities:

• The installation by default results in a reduction of complexity which offers multiple opportunities at the production level: a lower variance of parts has to be stocked, less storage area is needed, the complexity of parts provision declines, training effort for manufacturing workers declines.
• …

Challenges:

• As cars and parts have a higher average cost due to the default installation of special equipment, inventories are more costly and financing costs rise.
• …

Opportunities:

• The shift from a “one-time” sales pitch to an ongoing conversation can transform our relation to the customer. We will be able to understand our customer’s needs on a deeper level and we will be able to adapt to those needs more fittingly.
• New communication channels offer new possibilities of customer interactions. The benefits of special equipment can be communicated via the car’s infotainment system or the customer’s smartphone for example. Equipment options can be offered based on external conditions. For instance, heated seats or a heated steering wheel can be offered when temperatures are dropping or when the customer drives to the mountains.
• Through experiential marketing, customers can have a first-hand experience of different equipment options, for example through a free trial period, and decide if the option is valuable for them.
• …

Challenges:

• The way we communicate with the customer will change substantially. The importance of well-trained sales reps who inform the customer in the dealership about optional equipment will diminish in favor of an ongoing communication through new channels.
• …

Opportunities:

• Lower complexity also results in better parts provision and lower storage needs at warehouses and workshops.
• New communication channels may allow for remote diagnosis and may increase efficiency in workshops and improve the customer experience.
• In the used car market, second- and third-hand customers may adapt the vehicle more specifically to their needs, resulting in higher customer satisfaction and price stability of used vehicles.
• …

Challenges:

• New skills have to be implemented in the aftersales process. If a customer faces challenges with the order and payment ecosystem, he may not want to go to a traditional workshop but rather seek help through a call-center, an online-chat or through social media.
• …

There are unlimited possible ways to approach this business case. In the following, we depict one possible approach, other approaches are also valid. However, it is important that customer willingness to pay and default installation costs are considered.

Revenues

Willingness to pay: Some customers may have a higher willingness to pay for a low monthly subscription than for a one-time price. Other customers may feel discomfort with the fact that they should pay for a pre-installed hardware item.

Costs

Costs of default installation: The default installation of equipment options, compared to the installation on demand, leads to higher production costs. The total payments over lifetime have to offset the costs of installation and a desired margin. The higher installation costs could be partially compensated by charging a price for the possibility to activate additional equipment options at the time of the purchase of the car.

Willingness to pay: The most reliable source for customer willingness to pay are actual sales figures. As this business model is new in the automotive industry, there is no specific data available. Market research data can be used instead.

Table 4: Price Elasticity for Subscription Models – Heated Front Seats
Note: All prices are net prices

Additional information necessary to calculate the business case: Market studies suggest that customers are willing to pay for optional equipment during the first 8 years of the vehicle’s useful life.

Costs of default installation: The procurement or research and development department has detailed information about the costs of equipment options. As you do not have access to these data sources at the moment, a quick web research should help you to assess potential costs.

The web research shows that an installable front seat heating pad costs € 100 each on the independent after-market.

Only the material cost has to be considered, installation costs can be neglected at that point.

The C-Class model responsible lets you know that she aspires a mark-up of 20% based on the installed costs of the seat heating.

A devaluation for the present value of the money does not have to be considered in the calculation.

To simplify the calculation, all costs of development and costs for maintaining the order and payment ecosystem, as well as fees payable to payment service providers can be neglected at that point.

Based on the information that you have at hand, please calculate which one of the two Price Points A or B is economically more attractive.

Particularity of the heated seats: During summer months, customers are not willing to pay a subscription for heated seats. Consequently, you can only expect at the most half of the possible payments. Further, not all sales of Mercedes-Benz cars are in regions with cold climates. The customer willingness to pay, depicted in the price elasticity, relates only to the regions with cold climates and during winter months. So you have to adjust the resulting value for these factors.

Deducted from the sales table, about 80 percent of sales are in regions that have a cold season (Europe, China, USA).

Taking into consideration that only “cold” countries will buy heated seats during winter months, the average earnings amount to € 672 * 80% * 50% = € 268,80

Conclusion

As heating pads cost € 100 each = € 200 for both front seats, and the desired mark-up is 20 %, the minimum average earning has to amount to € 240. In conclusion, price point A would result in a negative contribution margin and price point B is the recommended price.

At price point A, an increase of € 1 leads to the loss of about 1 – 2% of customers. At price point B, an increase of € 1 leads to a loss of about 10% of customers, so at point B we lose more customers in case of a marginal price increase.

Increase willingness to pay

One potential option to increase the profitability is to increase the customer’s willingness to pay. This may be achieved through dedicated marketing campaigns that are based on the analysis of the customer’s data. You could for example offer dynamic pricing models based on the customer’s geolocation, exterior temperature and the presence of a front passenger. You can also use the car’s infotainment system to communicate not only with the driver but also with the passenger in order to incentivize the activation of the special equipment.

Reduce costs

Costs could be reduced by broadening the scope of the equipment, meaning that you install the same type of equipment on further models and thus realize higher economies of scale. This improves your negotiating power with the supplier and economies of scale for the supplier or opens up the possibility of multiple sourcing.

Now this is your time to shine! As there is no right or wrong answer at this point, we do not want to give you a proposal for a solution. However, we recommend you to be creative and to put as much of your own personality as possible into you elevator pitch. We wish you the best of luck!