1. Case Background Information
Interviewer: Your friend is considering launching an on-demand electric scooter rental business in a mid-sized metropolitan area. Should they proceed with this investment?
As the interviewer reads the case information, take notes to ensure a clear understanding of the objective.
2. Synthesize Information and Verify the Objective
You: To confirm, our friend is evaluating whether to invest in launching an on-demand electric scooter rental business. The goal is to determine if the investment is financially viable.
Interviewer: Correct.
3. Ask Clarifying Questions
- What are the expected pricing structures for scooter rentals (per-minute rate, unlocking fee, etc.)?
- What are the expected customer adoption rates and market demand in the targeted city?
- What are the key operational costs, such as scooter maintenance, charging infrastructure, and fleet management?
- What is the desired profit target for year one?
Interviewer: Your friend aims to achieve at least $200,000 in profit in the first year.
4. Create a Framework
To determine whether the business is viable, we need to calculate expected revenues and costs:
Revenues:
- Number of expected rides per month
- Average duration of each ride
- Pricing structure (unlocking fee + per-minute charge)
Costs:
- Fixed costs (Scooter acquisition, operational expenses, permits, etc.)
- Variable costs per ride (charging, maintenance, insurance, municipal fees)
- Fleet distribution and rebalancing costs
5. Data Provided by the Interviewer
Interviewer: Here is some data to help with your calculations:
- The company expects to have 500 scooters deployed.
- Each scooter is expected to be used 5 times per day.
- The average ride duration is 15 minutes.
- Pricing structure:
- Unlocking fee: $1 per ride
- Per-minute charge: $0.30 per minute
- Scooter purchase cost: $500 per scooter
- Scooter lifespan: 1 year
- Fixed costs:
- Maintenance and charging cost per scooter per month: $50
- Fleet distribution and rebalancing cost per month: $20,000
- Operational expenses, including insurance, marketing, and permits: $150,000 per year
- Variable cost per ride: $0.50 (includes charging, wear & tear, and operational expenses per ride)
6. Perform Calculations
Revenue Calculation
- Daily Revenue per Scooter:
- Average revenue per ride: $1 unlock fee + (15 minutes × $0.30) = $5.50
- Daily revenue per scooter: 5 rides × $5.50 = $27.50
- Monthly and Annual Revenue:
- Monthly revenue per scooter: $27.50 × 30 = $825
- Total monthly revenue: 500 scooters × $825 = $412,500
- Annual revenue: $412,500 × 12 = $4,950,000
Cost Calculation
- Fixed Costs:
- Scooter acquisition: 500 × $500 = $250,000
- Maintenance and charging: 500 × $50 × 12 = $300,000
- Fleet distribution and rebalancing: $20,000 × 12 = $240,000
- Operational expenses: $150,000
- Total Fixed Costs: $250,000 + $300,000 + $240,000 + $150,000 = $940,000
- Variable Costs:
- Total number of annual rides = 500 scooters × 5 rides/day × 360 days = 900,000 rides
- Total variable costs = $0.50 × 900,000 rides = $450,000
- Total Costs:
- Fixed costs + Variable costs = $940,000 + $450,000 = $1,390,000
Profit Calculation
Annual Profit = Annual Revenue – Total Costs = $4,950,000 – $1,390,000 = $3,560,000
7. Adjusting the Business Model
Interviewer: This looks like it will be very profitable. Your friend now considers experimenting with the business model. They want to test a subscription model, but they want to ensure that they maintain the same annual profit they are earning with the current model.
Based on some research:
- Half the Scooters will be dedicated to subscribers
- Subscribers get unlimited rides (unlocking fee and per-minute charge are waived)
- Subscription costs $100/month
How many subscribers are needed to maintain the same $3.56M profit?
Calculations:
Solving for Y:
Per-Ride Revenue + Subscription Revenue – Per-Ride Var Costs – Subscription Var costs – Fixed Costs = Annual Profit
Per-ride customers
- Revenue from half of per-ride customers: $4,950,000 / 2 = $2,475,000
- Variable costs from half of per-ride customers: $450,000 / 2 = $225,000
Subscription
- Revenue from subscribers: Y subscribers × $100 × 12 = 1200Y
- Variable costs from subscribers: …
You: I realize I’m missing the expected number of rides the scooters dedicated to subscribers would take.
Interviewer: Why is that needed?
You: I need that information to calculate the variable costs for subscribers.
Interviewer: Got it. You can assume they take 10 rides/day.
- Variable costs from subscribers: 10 rides/day × 360 days × $0.50 × 250 = $450,000
Annual Profit = $3,560,000
$3,560,000 = $2,475,000 + 1200Y – $225,000 – $450,000 – $940,000
$2,700,000 = 1200Y
Y = 2,250
Thus, at least 2,250 subscribers are needed to maintain the $3.56M profit target.