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Luca

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# How did you caluculate the % of clients that must buy the warranty with the new price to maintain profits constant? Thx

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Ciao Chiara,

I'll try to make this point of the business case clear for you. Let's consider the following data for Model 300:

• Original price: 51,000€
• New price: 50,000€
• Price decline: 50,000€-51,000€ = 1,000€

This means that, in order to keep the same profits, the additional warranty service has to generate 1,000€ per client (on average).

Let's consider the economic KPI of the warranty service:

• Price: 2,350€
• Cost of the service: 1,100€ (Expected value of the replacement costs, 5,500€ for 22% of the customers)
• Profits= Price - cost = 1,250€

Now, you have to calculate what is the percentage of your clients that has to buy something that generates profits 1,250€ to cover for the 1,000€ decline for each client (calculated before). You can set up the following equation:

1,250€ x Y = 1,000€ --> Y=80%

I hope that now everything is clear, otherwise do not hesitate to contact me to discuss this further.

Best,
Luca

Ciao Chiara,

I'll try to make this point of the business case clear for you. Let's consider the following data for Model 300:

• Original price: 51,000€
• New price: 50,000€
• Price decline: 50,000€-51,000€ = 1,000€

This means that, in order to keep the same profits, the additional warranty service has to generate 1,000€ per client (on average).

Let's consider the economic KPI of the warranty service:

• Price: 2,350€
• Cost of the service: 1,100€ (Expected value of the replacement costs, 5,500€ for 22% of the customers)
• Profits= Price - cost = 1,250€

Now, you have to calculate what is the percentage of your clients that has to buy something that generates profits 1,250€ to cover for the 1,000€ decline for each client (calculated before). You can set up the following equation:

1,250€ x Y = 1,000€ --> Y=80%

I hope that now everything is clear, otherwise do not hesitate to contact me to discuss this further.

Best,
Luca

Thank you Luca for your kind and clear answer! — Chiara on Feb 02, 2021

Hi Chiara,

Luca has done a great job answering specifically for this case.

Remember, this is a breakeven....something which you need to be really familiar with in a range of scenarios! (i.e. solve for price, quantity, cost, investment amount, # of years, etc.)

https://www.freshbooks.com/hub/accounting/calculate-break-even-point#:~:text=To%20calculate%20the%20break%2Deven%20point%20in%20units%20use%20the,Fixed%20Costs%20%C3%B7%20Contribution%20Margin.

Hi Chiara,

Luca has done a great job answering specifically for this case.

Remember, this is a breakeven....something which you need to be really familiar with in a range of scenarios! (i.e. solve for price, quantity, cost, investment amount, # of years, etc.)

https://www.freshbooks.com/hub/accounting/calculate-break-even-point#:~:text=To%20calculate%20the%20break%2Deven%20point%20in%20units%20use%20the,Fixed%20Costs%20%C3%B7%20Contribution%20Margin.

Thank you Ian! — Chiara on Feb 03, 2021

My pleasure :) — Ian on Feb 03, 2021

+1 Luca, kudos, so pedagogical

+1 Luca, kudos, so pedagogical