AltaVia Elevators

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Additional information, if needed: Contribution is revenue less directly attributable costs; new equipment costs include the expected cost of the two free-maintenance years. 

Basic observations (expected from every candidate)

• Service carries all group profit. Service contributes EUR 480M at a 50% margin, while new equipment loses EUR 80M. 100% of group profit, and more, comes from the service base.
• New equipment sells at a loss per unit, and the loss grows with volume. Contribution per unit is about EUR -4,000 (EUR -80M / 20,000 units). The record year deepened the reported loss from EUR 68M to EUR 80M.
• The decline splits cleanly. Operating profit fell EUR 24M while overhead stayed flat: EUR 12M from a shrinking service base (10,000 fewer units x EUR 1,200 contribution per unit) and EUR 12M from deeper installation losses (3,000 more units x EUR 4,000 loss per unit).
• Both leading indicators deteriorated. Conversion at expiry fell from 90% to 70%, and churn rose from 3.0% to 4.5%. Both feed the same service base, in the same direction.

Advanced observations (distinguish outstanding candidates)

• Deteriorating conversion and churn raise concern about future service growth. Use the forward-planning inputs to quantify the risk; historical financials alone do not determine the trajectory.
• The equipment loss may be justified by future service contribution. The next calculation tests this; the financial exhibit alone does not establish intent or lifetime value.
• LiftServ targets units aged 5 to 15 years. This identifies a segment for retention analysis, but does not establish that it has the highest profit or lowest risk.

Sample verbal answer

“Three reads. First, the profit pool: service earns EUR 480M at a 50% margin while new equipment loses EUR 80M, so the entire company is carried by the service base. Second, the EUR 24M decline splits cleanly: EUR 12M from 10,000 fewer units under contract, and EUR 12M from selling 3,000 more units at a EUR 4,000 loss each; overhead is unchanged. Third, and this is what I would put on the CEO’s desk: the two numbers that predict the future both moved the wrong way. Conversion is down from 90% to 70% and churn is up from 3.0% to 4.5%. The P&L is only showing the beginning of what those rates imply. Next, I would want the unit economics, because whether a EUR 4,000 installation loss is an investment or a write-off depends on the value of the contract behind it.”

The 15-year expected tenure already reflects customer departures and unit retirement; do not apply annual churn to it again. Use undiscounted figures; non-converting units generate no service contribution. Figures are stylized for case use.

Step 1 - Installation loss

• EUR 80,000 price - EUR 84,000 direct cost = EUR -4,000 per unit sold.

Step 2 - Expected service contribution of a converted unit

• Service contribution: EUR 2,400 x 50% = EUR 1,200 per unit per year.
• Over 15 expected paid years: 15 x EUR 1,200 = EUR 18,000.
• Net of the installation loss: EUR 18,000 - EUR 4,000 = EUR 14,000 per converted unit.

Step 3 - Payback time

• EUR 4,000 / EUR 1,200 = about 3.3 paid service years to recover the installation loss (about 5.3 years from installation, including the two free-maintenance years). On an undiscounted contribution basis, the expected service stream is 4.5 times the loss.

Step 4 - Expected value per installation

• The loss is paid on every unit sold; the service contribution is earned only on units that convert.
• Expected value = conversion rate x EUR 18,000 - EUR 4,000.
• At 90%: 0.9 x 18,000 - 4,000 = EUR 12,200.
• At 70%: 0.7 x 18,000 - 4,000 = EUR 8,600.
• The 20-point conversion slide destroys EUR 3,600 per unit, or about EUR 72M of expected lifetime contribution per 20,000-unit annual cohort, an impact that is not fully visible in any single year’s profit.

Business implication: On these assumptions, selling at a loss is rational: it is a customer acquisition cost for a multi-year service annuity, and expected contribution stays positive even at 70% conversion. But the conversion slide is silently destroying EUR 72M of expected value per cohort. New equipment pricing and sales incentives should be governed by expected annuity capture, not by hardware margin alone. This is an undiscounted contribution test, not a full investment NPV; discounting and cash timing would come before a final investment decision.

Common Mistakes: Candidates may net the installation loss against a single year of service and conclude the model is broken, apply the full EUR 18,000 to all 20,000 installations, forgetting that only converted units earn it, or apply churn on top of the 15-year tenure, which already reflects departures.

Sample verbal answer

“The machine loses EUR 4,000: we sell at EUR 80,000 what costs us EUR 84,000 in direct cost. The contract behind it earns EUR 1,200 a year at a 50% margin, so over 15 expected paid years that is EUR 18,000, and net of the installation loss a converted unit is worth about EUR 14,000 undiscounted. The loss pays back after roughly 3.3 paid years. So on these assumptions, selling the machine at a loss is rational. But we pay the EUR 4,000 on every unit and earn the service stream only on the ones that convert. At 90% conversion an installation is worth EUR 12,200 in expectation; at today’s 70% it is worth EUR 8,600. That slide costs EUR 3,600 on every one of 20,000 units, about EUR 72M of expected lifetime contribution per year of sales, and only a fraction of it is visible in any single year’s profit. Conversion and churn are the two numbers I would put on the CEO’s dashboard, and I would check what improving each of them actually costs before choosing where to invest.”

Guidance: The flow calculation is core. The price-match extension below is optional and outside the 40-minute target; do not announce it in advance.

Solution 1: Is the base growing?

• Inflow: 20,000 expiries x 70% conversion = 14,000 units entering the paid base in the planning year.
• Outflow: 400,000 opening units x 4.5% churn = 18,000 units leaving the base.
• Net: -4,000 units, so the base ends the planning year at about 396,000 units. It is shrinking despite record installations, and the CEO’s intuition is backwards.
• In money: at EUR 1,200 per unit, the closing base supports about EUR 475M of annualized contribution versus EUR 480M today, and the drain compounds every year the rates stay where they are.
• To hold the base flat, AltaVia needs either conversion back at 90% (18,000 in = 18,000 out) or churn down to 3.5% (14,000 out = 14,000 in), or a combination such as 80% and 4.0% (16,000 = 16,000). Note the leverage: one point of churn holds 20 times the units of one point of conversion, because churn works on the 400,000-unit stock while conversion works on the 20,000-unit flow. But the two fights differ in cost and feasibility: churn is defended unit by unit against a cheaper attacker, while conversion is decided once, at expiry, where AltaVia still owns the relationship. Neither is automatically the better investment without cost estimates.

Optional extension: The price match

Ask, if time allows: “The head of sales proposes matching LiftServ’s price across the entire base to stop churn. How do you react?”

• Matching LiftServ means cutting the service price by 30%: EUR 2,400 x 30% = EUR 720 per unit per year.
• Across the whole base: EUR 720 x 400,000 = EUR 288M given away per year, mostly to customers who were not leaving.
• The entire churn bleed is 18,000 units x EUR 1,200 = EUR 21.6M of contribution per year.
• The annualized price concession is about 13 times the contribution associated with one year’s departures at the old price. This is an initial screening comparison, not a complete multi-year valuation. It argues strongly against a blanket cut under the stated assumptions; precise incremental profit also depends on departure timing and the lower margin on retained contracts.
• Price still has a role, but targeted: tiered offers and retention pricing only where LiftServ is actually bidding, never on the posted price of the whole base.

Common Mistakes: Candidates may project the base linearly without computing both flows, or evaluate the price match on intuition (“we must react”) without computing the giveaway against the bleed.

Sample verbal answer

“The planning year adds 14,000 paid units and loses 18,000, ending at 396,000. Holding the base flat requires 90% conversion, 3.5% churn, or a combination. One percentage point of churn affects 20 times as many units as a point of conversion, but the better investment depends on cost and feasibility.”

AltaVia should stop measuring itself by installations and start measuring itself by net service base growth, because the base is where all the profit lives. Concretely, three moves:

Win the annuity at the point of sale: bundle multi-year service contracts into every new equipment sale and pay the sales force on converted units, not installed units, to bring conversion back from 70% toward 90%.

Defend the 5-to-15-year core, where LiftServ actually hunts, with remote monitoring, uptime guarantees and a dedicated retention program, targeting churn back at 3.5% or below.

Answer tenders with tiered offers and targeted pricing, and explicitly refuse the blanket price match.

Key arguments

• Service contributes EUR 480M while hardware loses EUR 80M under the case assumptions; a converted unit is worth about EUR 14,000 net over its expected paid life, undiscounted.
• The base is draining: 14,000 units flow in against 18,000 flowing out in the planning year, despite record installations.
• Either lever alone holds the base: conversion at 90% or churn at 3.5%.
• The price match would give away EUR 288M a year to cure a EUR 22M bleed (figures from the optional extension in Question 4; if it was not run, share these two numbers before asking for the recommendation).

Key risks

• LiftServ, with a PE owner, can escalate on price: compete on availability and OEM data rather than price.
• Sales incentives may create unintended behavior. Pilot changes and monitor equipment sales, conversion by expiry cohort and service contribution before wider adoption.
• Cannibalization from the entry tier: fence tiers by service level, not just by price.

Sample verbal answer

“I recommend managing equipment sales together with the service relationships they generate. Profit fell EUR 24M, split equally between additional equipment losses and lower service contribution. The planning base loses 4,000 units net. Pilot conversion and retention improvements and compare their cost and impact on service quality. The simplified lifetime calculation remains positive at EUR 8,600 per installation at 70% conversion; validate tenure and cash timing before scaling.”

If annual additions remain 14,000 and annual departures remain 4.5% of the opening base, the simplified model stabilizes at 14,000 / 0.045 = about 311,000 units. Annualized service contribution would be about EUR 373M, approximately EUR 107M below the 400,000-unit baseline. This is a conditional scenario, not a guaranteed loss.

The EUR 4,000 installation loss requires EUR 4,000 / EUR 1,200 = about 3.3 paid service years to recover. Adding the two free-maintenance years, simple payback is about 5.3 years from installation, assuming the unit converts and stays. This is conditional on conversion and retention, not guaranteed for every installation, which is exactly why those two rates deserve management attention.

LiftServ may be profitable, but its costs are not supplied. Investigate service scope, technician productivity, route density, parts access and overhead. A lower price alone does not establish a sustainable cost advantage.