Client: Private Equity-backed Automotive Diagnostics and Technology Company
Our client develops and markets advanced aftermarket diagnostics tools, providing OEM-level capabilities to customers in 120 countries. The company sells a growing mix of hardware, software and technical support services to thousands of repair garages across the world via a variety of distribution channels, including regional distributors, direct sales and sales agents in many markets. However, the dizzying array of hardware and software package prices, discounts, sales commissions, and support fees made the business planning a complex and cumbersome process.
As part of continued product innovation and market expansion, targeted at untapped segments of the market, new products and service ideas were being conceived by the management team to accelerate growth. However, this created an additional challenge for the management as a host of decision options and trade-offs had to be made — not only to develop an innovative new product, but also to define the best route-to-market and at the right price — including assessing possible sales cannibalisation and the revenue/profit impact from the new products.
To address these challenges and support the management team, the CFO needed robust decision support and business modelling expertise to develop a functional model, integrating the current and future business realities. These include modelling for:
- Income by transaction type – largely a mix of capital sale and finance lease, but with subscription and pay-as-you-go fees considered for the new products
- Variable pricing for all new sales and upgrades across the product mix
- Cost of sale arising from distributor and sales agent commissions, shipping costs, and any applicable discounts for multi-buys and sales promotions
- Recurrent fee income from technical support contract renewals, which is split by type of package (i.e. gold, silver, bronze). This fee is chargeable annually (amortised by month) with up to five years advance payment option but free in the first year.
Discovery & Analysis:
Intuitrics worked closely with the CFO, finance controller and sales team to gather detailed requirements and better frame the problem by understanding priorities and defining boundaries and exclusions as necessary.
We started by developing a detailed influence diagram to visualise the problem by mapping out the input and output parameters, as well as identifying relationships with other decision variables.
Following this detailed mapping, we proceeded to the complex and iterative spreadsheet modelling phase using Excel. The model building, as ever, involved using lots of formulas — from basic to the advanced — and parameterising all decision variables and assumptions.
Outcome & Impact:
We developed a robust financial and portfolio pricing model to forecast the revenue and profitability upside of different go-to-market scenarios, fees and transaction income type, and new product categories.
The new model introduced flexibility and robustness into the business planning process, allowing managers to assess the revenue and profit impact of different decision scenarios and trade-offs by varying different input variables (i.e. growth rates, list prices, transaction mix, discount rates, sales commissions, etc.) by product type and technical support package for each market region and time period.
The model also quantifies the cross-price elasticity of demand between the new and current product range to forecast any cannibalisation impact.