Grow a Pune equipment maintenance firm
Before the decision
Service callouts are profitable but arrive unpredictably across the city. Customers ask for predictable annual service bills after expensive emergency visits. The owner has repair histories for some machines but limited data for equipment serviced by competitors.
The problem
Should the team choose Annual contracts or Pay-per-visit expansion for the next 12 months?
Decision owner: The business unit lead.
Annual contracts can pull high-failure assets into the customer pool.
Option economics
Scroll the table to see all figures.
| Option | Volume (visits) | ₹ per unit | Fixed cost | Net contribution |
|---|---|---|---|---|
| Annual contracts | 34,000 | 620 | ₹158 lakh | ₹52.8 lakh |
| Pay-per-visit expansion | 29,500 | 790 | ₹157 lakh | ₹76.05 lakh |
Make the call
- Calculate net contribution for Annual contracts and Pay-per-visit expansion. Which assumption makes the comparison most fragile?
- If the leading option delivers 10% fewer visits, does your recommendation change?
- What evidence would you ask for before the team makes an irreversible commitment?
Reveal the worked solution
Start by validating Pay-per-visit expansion. It contributes ₹76.05 lakh after fixed costs and leads by ₹23.25 lakh. Treat that gap as the amount of unmodelled cost or lost contribution the option can absorb before the ranking reverses.
- Frame the decision
Separate sales that are incremental from sales shifted out of an existing channel. Include the support and fulfilment needed to keep new customers.
- Calculate both options
Annual contracts: 34,000 visits × ₹620 less ₹158 lakh in fixed costs gives ₹52.8 lakh. Pay-per-visit expansion: 29,500 visits × ₹790 less ₹157 lakh in fixed costs gives ₹76.05 lakh.
- Stress-test the forecast
Pay-per-visit expansion leads by ₹23.25 lakh in the base case. If Pay-per-visit expansion delivers 10% fewer visits (26,550) at the same margin and fixed cost, it contributes ₹52.75 lakh. Holding the other option constant, the stressed result falls behind. This isolates volume risk. Check whether both options would respond to the same change in demand.
- Set a decision threshold
Holding the other option’s result fixed, Pay-per-visit expansion needs at least 26,557 visits to match or beat it under the model. Inspect equipment age and failure rates before comparing contract bids.
Annual contracts can pull high-failure assets into the customer pool. Compare the cost of a limited test with the loss the business would face if the full commitment failed. Ask the team to agree the decision criterion before collecting more evidence.
Check whether your answer names the trade-off, cites a number from the exhibit and specifies a reversal condition.
What if the whole market moves?
The worked solution tests a change to one option at a time. Here, both options gain or lose the same percentage of volume. Unit contribution and fixed costs stay constant.
| Volume scenario | Annual contracts | Pay-per-visit expansion | Higher contribution |
|---|---|---|---|
| Both lose 10% of volume | ₹31.72 lakh | ₹52.75 lakh | Pay-per-visit expansion |
| Base assumptions | ₹52.8 lakh | ₹76.05 lakh | Pay-per-visit expansion |
| Both gain 10% of volume | ₹73.88 lakh | ₹99.36 lakh | Pay-per-visit expansion |
Explain which option you would take forward. Check whether capacity, price or customer mix would also change as the market moves.
Practise this case as an interview