Bus Manufacturing Company

C: Okay so to confirm my understanding of the problem I would like to state it again, our client is a bus manufacturer who already has one product in the market by the name “speed” and they are planning to bring in another product called “Velocity”. The consumers are majorly long-distance transportation companies. We have to figure out that should we bring this product in the market and if yes how will we do that. Also, what will be the product proposition?

I: Yes, that is correct.

C: So, what kind of markets are we dealing with, is it domestic or international? Are we dealing in the premium segment or the non-premium segment?

I: Consider domestic markets for now and “Speed” is a luxury passenger vehicle.

C: Okay, and why are we planning to introduce new product in the market. Is there a threat from the competition or is there any technological shift?

I: So, we just have a better product, and we want to introduce it in the market. The feasibility of it has to be figured out by you. As far as competition is concerned, we are the market leaders and we set the trends.

C: Sure, I would like to know about our product more and what differentiates Velocity from Speed. I would like to divide the factors of comparison in two major parts – Monetary factors and Non-monetary factors. The Monetary Factors will include the Cost and Revenue part. The Non- Monetary factor will include Performance factors, Comfort factors. In performance factors I would like to look at Capacity of seating, Speed, Milage and fuel tank capacity. Do we have any information about it?

I: Yes, so top speed, capacity of seating and fuel tanks for both the products is same. Although there is a difference in the mileage of both the products. While, “Speed” provides 10 miles/gallon, “Velocity” gives you 12 miles/gallon.

C: Okay so to confirm my understanding of the problem I would like to state it again, our client is a bus manufacturer who already has one product in the market by the name “speed” and they are planning to bring in another product called “Velocity”. The consumers are majorly long-distance transportation companies. We have to figure out that should we bring this product in the market and if yes how will we do that. Also, what will be the product proposition?

I: Yes, that is correct.

C: So, what kind of markets are we dealing with, is it domestic or international? Are we dealing in the premium segment or the non-premium segment?

I: Consider domestic markets for now and “Speed” is a luxury passenger vehicle.

C: Okay, and why are we planning to introduce new product in the market. Is there a threat from the competition or is there any technological shift?

I: So, we just have a better product, and we want to introduce it in the market. The feasibility of it has to be figured out by you. As far as competition is concerned, we are the market leaders and we set the trends.

C: Sure, I would like to know about our product more and what differentiates Velocity from Speed. I would like to divide the factors of comparison in two major parts – Monetary factors and Non-monetary factors. The Monetary Factors will include the Cost and Revenue part. The Non- Monetary factor will include Performance factors, Comfort factors. In performance factors I would like to look at Capacity of seating, Speed, Milage and fuel tank capacity. Do we have any information about it?

I: Yes, so top speed, capacity of seating and fuel tanks for both the products is same. Although there is a difference in the mileage of both the products. While, “Speed” provides 10 miles/gallon, “Velocity” gives you 12 miles/gallon.

I: So, the seating capacity is 40 passengers, and the operations happen at different load factors for both the products. For Speed it is 80% and for Velocity it is 85%.

C: Got it, now do we have the data about how many miles per day we are plying and how many days a year we are operational. Also, can I know about the life of both the products?

I: Yeah sure, we are travelling for 600 miles/day on an average with ply for 250 days a year. The life of both the products is assumed to be 3 years.

C: And do we have any data regarding the price of fuel they are running on?

I: Take it as $25/gallon

C: Sure, now we have the data so I would like to do the calculations and find out the difference between the cost incurred and the revenue generated. Can I proceed with that?

I: Yeah, go ahead with that. Do the calculations loudly.

C: Sure, so first I would like to find out the cost incurred in maintenance and fuel for both the products. For that I would like to find out the total miles plied by our vehicles i.e., 600 miles/day * 250 days/ year * 3 years. That gives us 450000 miles. Now we know that for Speed the cost of maintenance is $6000 for 20000 miles. This gives us 6000*450000/20000 i.e., $135000. Similarly, for Velocity it comes out to be $144000. 

I: Correct!

C: Now calculating the fuel cost, we need to calculate the gallons of fuel used i.e., 450000/mileage. So, for Speed it is 450000/10 = 45000 gallons and for Velocity it will be 450000/12 = 37500 gallons. The cost comes out to be (gallons * 25) i.e., $1125000 and $937500 for Speed and Velocity respectively. Adding up to the maintenance cost the total cost comes out to be $1260000 and $1081500. 

I: Okay, that is correct.

C: Now moving on to the revenue calculation. We have a seating capacity of 40 with 80% and 85% load factors for Speed and Velocity respectively. Do we have some knowledge about per ticket charge?

I: You can assume it.

C: Okay so taking per ticket charge to be $60 we get - 0.8*40*60 dollars for a single trip for Speed. That comes out to be $1920. Now total trips = 250*3 = 750. That gives us the total charges = 1920*750 = $1440000. Similarly, for Velocity we get = $1530000. Now the overall difference comes to be:

For speed it is $180000 and for Velocity it is $448500. Since we are making more profits from Velocity, we can charge up to $200000 higher here for the product. So, the cost of Velocity will be around $3,07,000

I: That is great. Now what would you suggest the risks can be here?

C: So, I think the biggest risk is of cannibalization of the older product as velocity is providing better comfort at the same price. Secondly the price of the ticket can be capped by the government regulations and thus the analysis may come to a different calculation.

I: That is right. We can wrap the case here. Thank you.