Strategic Management - Case study week 1

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Blackstone Services: the VIP Program

As Dave Biggs, owner of Blackstone Services, studied monthly sales figures for the last three months. Last year, sales increased by 12% over the past year but the annual increases in sales were slowing down. He wondered if his idea of promoting a VIP customer base would be accepted and help build sales.

Background

Dave Biggs began Blackstone Services eleven years ago in a medium-sized southern city. The company's service offerings included plumbing, and HVAC (heating, ventilation, and air conditioning) services. They sold and serviced residential and commercial heating and air conditioning units as well as plumbing services for existing homes

Sales History

Blackstone Services grew from a sales volume of less than $100,000 in the first year to over $900,000 a year within a period of four years. Years six through nine showed sales figures holding consistent at around 1 million dollars; however, as the state's economy faltered, sales volume declined.

The VIP Program

The idea for Blackstone Services to increase sales through a VIP (very important people) program, came from a conversation with another company at a national trade convention. This contractor explained to Dave Biggs that his firm had doubled its sales volume within four years by offering a maintenance program to homeowners. The maintenance program provided: (a) two maintenance calls on each home to check out the plumbing, central heating, and air conditioning system; (b) adding refrigerant, if needed; (c) oil motors; (d) clean, or replace, filters; and (e) check for leaks and potential problems. The customer paid for any additional supplies, or parts required to make repairs separately upon the customer's approval to perform the work.

The company salesperson said that he sold the annual maintenance program for $199.00 that covered the cost of providing the service. However, he had doubled his sales volume because of additional services identified through the maintenance service as well as repeat business on other requested services and favorable "word-of-mouth" advertising. The contractor told Dave that the average maintenance customer would also generate an additional $600 in business and $300 in profits for the company.

Dave Biggs thought about what approach he might use to evaluate the opportunity to expand his business by offering maintenance services. He remembered that he had recently met a local university marketing professor during a golf scramble tournament for his church. Dave found the business card for the professor and contacted him to bounce his idea off of the instructor. He was delighted to find that the professor was looking for a student project for the upcoming semester and agreed to take on the challenge of gathering some information that could be used by Biggs to make the decision about offering maintenance contracts. The professor used a team of senior-level marketing students to conduct a survey to determine consumer interest in the idea of a maintenance program. The results were very encouraging.

Market Survey Results

The survey of 100 area residents screened out non-homeowners and homeowners with homes valued at less than $175,000 to make sure the information represented above-average-income consumers. Dave felt the higher income segment was most likely to respond favorably to such a program. It turned out that those respondents who were extremely interested or somewhat interested, were higher-income males with at least a college education and expected a price of less than $300 as shown in Exhibits 1 and 2.

Market Area Data

The market area served by Blackstone Services included a population of 500,000 people and approximately 112,428 homes. Information from the tax assessor's office on the value of homes for tax assessments. Dave estimated that twenty percent of these homes were rental properties, however, he was certain that the rental homes were valued under $175,000. Dave believed this left a large market potential for the maintenance program even with the under-$75,000 homes factored out.

Pricing Strategy Options

Dave believed that two alternative pricing strategies were available. The first was an annual price of under $150. This low price, though, would generate very little, if any, contribution to profit. However, higher penetration of homes should achieve greater exposure for the company that might lead to additional revenue from other services.

The other strategy would offer a monthly fee of $20 per customer generating between $100 and $125 contribution per customer. The trade-off would be getting the fees upfront versus getting monthly fees from each customer over a period of a year.

Dave felt that time was running out on choosing the right strategy. He had to call the printer so the price could be included in the brochure that was to be mailed to previous customers. One activity that he considered involved the direct mailing of brochures to customers that had used Blackstone Services in the past. The brochure cost $1500 for 1000 copies and represented one-tenth of his promotion budget for the coming year. Dave was undecided how best to promote the service to other homeowners. He knew that he could incorporate social media in his plans, but he was unfamiliar with what digital approaches he might utilize and how to execute them. This might require further refinement of his customer database beyond mere names and addresses. In addition to selecting the media and the message, Dave also had to decide how long to run the promotional campaign.

Resident Survey Results

Exhibit 1 shows the results of the consumer survey done by the marketing students. Based on these findings, it appeared that there was enough interest in the maintenance program to justify starting the program. The findings show that over 60% of those surveyed were extremely or somewhat interested in the program. Since the students had used a random sample from the telephone book to conduct their telephone survey, Dave felt these results were representative of the population surveyed.

Exhibit 1

Level of Consumer Interest in Maintenance Program

Response Percentage

Extremely Interested 11.1 Somewhat Interested 50.0 Not at all Interested 26.4 Don't Know/Not Sure 12.5

Students also questioned respondents on their expectations for a price for the program. These results are shown in Exhibit 2. The results indicate that most customers expected to pay less than what Dave wanted to charge. Dave felt that the reduction in service calls fees and discounts on labor would be an incentive for customers to pay more for the membership.

Exhibit 2

Expected Price for a Maintenance Agreement

Expected Annual Price Percentage

$150 or less 21.5 151 to 175 26.9 176 to 200 29.3 201 to 225 16.2 226 to 250 4.6 over 250 1.5

The VIP Program

Dave’s idea of a VIP program membership would be to provide two inspections per year for plumbing and another two for HVAC inspections. These inspections for plumbing would consist of a check of sink drainage, toilet bowls/seals, hot water heaters, and any types of leakage/dripping inside and outside the home. The HVAC inspections would focus on heating and ventilation for the late summer/early fall inspection and air conditioning for the winter/early spring inspections including air filters, refrigerant levels, and thermostat settings. Any issues found during the inspections would be completed upon the customer approval with a 10% discount on labor costs.

In addition, VIP members would only pay $39.95 for service calls to deal with plumbing/HVAC problems that arose instead of the usual $79.95 service call fee. They would also receive a 10% discount on labor costs associated with the services provided for resolving these issues. This would provide an incentive for these customers to rely on Blackstone for all their plumbing/HVAC needs instead of using other companies.

The key to having a successful VIP program would be the level of market penetration of the program in the area. Dave wondered what various levels of penetration would contribute to revenues and costs of the program. This was going to need to be studied carefully with some financial analysis based on different assumptions of market penetration. He also had to consider the impact on operating costs if the program was successful.