Thank you Ian!
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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
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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.)
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My pleasure :)
+1 Luca, kudos, so pedagogical
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Thank you Luca for your kind and clear answer!