Sample of Technical and Strategic Projects

Goal: Reposition The Company's Business Model To Cost-Effectively Scale

‍Project Overview:

A leading IoT company's business model involves an initial hardware purchase and then recurring monthly costs for software and cellular data. However, the Company wanted to consider a hardware-as-a-service (HAAS) model that would subsidize the user's initial costs and increase the monthly subscription costs, similar to the way cell phone contracts work. 

From the customer's perspective, this could be beneficial because it would: 

• Turn the customer's Capex expenditure into Opex, usually to smoothen expenditure over time for easier budgeting and more predictable spending
• Reduce the initial expenditure for the customer
• Reduce or eliminate the operational burden associated with managing infrastructure of a certain scale or complexity, e.g., depreciation
• Allow the customer to match revenue and cost cash flows- our customers often charge their customers a subscription fee so they want to pay us a subscription fee too to balance the cashflows

From the Company's perspective, this could provide a competitive advantage and shorten the time for the deal to close.

Problem: 

The Company has the following pricing structure:

• $50 hardware price
• $30 hardware cost to produce, respectively
• $ 2-month average fees for cellular and software
• $1/month average cost for cellular data and software
•  3-month contract with unguaranteed renewal

They wanted to know how to transition into a HAAS model, specifically, 

1. What gross margin would the Company make on the contracted deal (% and $)?
2. What should be the price to match the current margin?
3. How could the Company improve its current margins? 
4. How would the payback period for your proposed pricing from #2 and #3?
5. What benefits, costs, and risks would there be to the Company if it adopted this model?
6. Would you suggest that the Company do this, and if so, how would you roll it out?

Solution:

I conducted a sensitivity analysis where I noted that under the current pricing plan (Default - 3 Months Contract), the payback period > contract duration and if the customer does not renew the contract, then the Company would lose out by $10 per device.

Gross Margins ( $7.67) * Contract Duration (3) = $23. Production Costs = $33. Difference = $33 - $23 = $10

As a result, the optimal case would be to have a payback period = contract duration. This situation happens depending on price point and contract duration.

In the Sensitivity Analysis tab, the Payback Period table cells marked in green will give the sellers an overview of the price point and contract length they can use to sell the product to the customers. For a 3-month contract, the combined price of hardware and software would start at $66. You can see at which point the payback period = contract duration as you go down and across.

By using the Sensitivity Analysis options with contract duration and price, the Company can test and optimize the best-selling strategy for its customers and provide sellers with additional options to best serve the customers' needs.

‍

Note: This exercise was completed as part of a Udemy data analysis course in 2019