Problem Definition
We are a profitable American provider of fire and water remediation services. We are generally hired by insurance companies to provide cleaning services in the wake of burning and flooding damages. We we would like your counsel on whether to enter the growing USA traditional residential cleaning market or not. Traditional housecleaning usually takes place 2-3 times per month.
Comments
The case is designed to be presented to the candidate by an interviewer, who plays the role of a representative of an American provider of fire and water remediation services.
Short Solution (Expand)
Detailed Solution
The interviewee should perform a back-of-envelope calculation which answers two key questions:
- What is the size of the market?
- Should the firm enter the market?
Suggested Case Structure:
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I. Market Size
- The population of US is approximately 320 million and the average household size is 2.5. Therefore we can say that there are approximately 125 million households
- We can split these households according to their annual income. Approximately 50% households earn more than and 50% earn less than $80k per year
- Assuming 35% of households earning more than $80k and 15% earning less than $80k are willing to pay for these services, we get 35% of 125/2 households + 15% of 125/2 households =31.25 or approx. 30 million households will buy the annual service
- Therefore the market size would be $1600 * 30mn or approximately $50 billion
II. Competition
If asked about competition, provide the following information to the candidate:
- National players - 15% of the market
- Local players - 20% of the market
- Independent individuals - 60-70% of the market
III. Customers
If asked about customers, provide the following information to the candidate:
- Customers of national players usually rate quality over price
- Customers of independent individual cleaners usually give more weight to price than quality
- Customers of local players look at a mix of both quality and price
IV. Profitability
If asked about profitability, provide the following information to the candidate:
- The national players charge an average price of $60 per cleaning service (4 hour job)
- $10 per hour worth labor costs would be incurred by the client
- Additionally one job requires $5 worth cleaning materials
V. Synergy/Core competency
Provide the following information, if requested
- The household cleaning market is quite similar to the disaster remediation market
- Even though the sales processes are quite different, the client could leverage its contacts and customer ratings in the cleaning market
VI. Solution
The market is large and looks attractive; the client also has transferable skills and contacts.
We can do a preliminary margin analysis:
[$60 price] - [4 hours * $10 hourly labor costs] - [$5 cleaning materials costs] = $15
Profit margin = 15/60 or 25% profit margin
Important things to do before entering the market:
- Develop a value proposition to the prospective quality-conscious clients
- Research and anticipate likely competitive reactions
VII. Conclusion
The size of the US household cleaning market is $50 billion; it is large and attractive (25% margin). Therefore the client should enter the market.
Difficult Questions
If the interviewee solves the case very quickly, you can come up with more challenging questions.
