Element Mobile expands into refurbished phones (MBB 2nd round)

1. Market assessment

1. Trends. What is the market size, growth, and profitability of the refurbished devices?
2. Customers. Who is the typical customer of refurbished phones? What sort of features and services are relevant for them? How often do they change phones? Would customers pay a higher price to buy a second-hand device from a business? Which payment terms are attractive to customers?
3. Competitors. Who are our main competitors? How has their size, growth, and profitability changed over the past 5 years? Do they offer refurbished devices?
4. Product. How would we grade devices fairly? Which sort of grades do customers buy most often? Which brands and models are the most sought-after?

2. Client assessment

1. Capabilities. Can we train our staff to test devices? Can we use our current distribution network to collect and ship devices? Do we have staff trained to repair devices, or do we need to hire them? Do we have the ability to get spare parts for brands like Apple?
2. Financials.
   1. Budget. What is the budget planned and secured for this project and the timeline?
   2. Profitability analysis. How will this impact our revenues (new customers, higher margin per handset sold, possibility of upselling new customers to our other offerings)? How will this impact our costs (initial investment costs in refurbishing facility, ongoing refurbishing costs, training staff, sunken costs (devices that can’t be repaired)?

3. Risk assessment

• Financial. Will this investment yield more than other improvements, or lowering prices? Can we afford to pay more due to unforeseen delays/challenges?
• Operational. Can we repair every phone that we buy? Would our stores become too busy if we start collecting devices? Would we risk cannibalising our new device sales?
• Supply chain. Will we weaken our negotiating power due to buying less phones from retailers? Can we convince phone manufacturers to supply spare parts for refurbishment?
• Implementation. Would our supply chain get disrupted in the implementation phase? What about our stores?

In performing the calculation for this exercise, candidates should use a top-down approach, taking into account the average replacement of a device. It is essential to remember that there is no right or wrong answer to market sizing questions; instead, it is a matter of being able to justify your assumptions. See the Exhibit for an example approach. 

For instance, candidates should assert that the additional 3 million customers who purchase refurbished phones could increase our customer base by approximately 15%. While this appears to be an excellent opportunity for us to capture a portion of the nearly €600 million in revenues, we should also consider whether this move would end up cannibalising sales of new devices and whether we can cross-sell these customers on other products and services.

This market analysis uses a top-down methodology to estimate a given product's potential quantity and price. Developing reasonable filters to support your hypotheses when estimating the quantity is essential. In this particular instance, few filters are available because smartphone penetration is high in developed nations such as Germany.

Upon performing the calculations, candidates should identify that:

• Given that the product has an average lifecycle of two years, we need to attract 400k distinct customers over the two years.
• An increase of 400,000 customers over two years would represent 2% of our current customer base (20m, given in the prompt), which sounds reasonable.

As a next step, we should compare the margins on refurbished phones to the margins on new phones and account for the possibility that refurbished phones could cannibalise sales of new phones.

Some potential solutions you could have considered as part of this question:

Increase the number of sales

• Increase foot traffic. Invest in advertising, design attractive store prompts, offer free community tech classes, offer free device diagnostics.
• Increase the conversion. Offer limited-time deals, in-store set-up, better purchase terms, better warranty, train customer advisors.
• Open more stores. In Germany by identifying underserved locations or locations where we operate at max capacity. Or abroad, by identifying opportunities based on market size, growth, and profitability.

Increase the average ticket size

• Number of products sold. Offer bundling deals, family discounts, loyalty schemes. 
• Price of items. Increase price or move customers to items with higher margins.

Utilise assets to create new revenue streams

• Mobile network. “Sublet” network to smaller operators. Offer mobile broadband devices.
• Brand. Use brand to start white labelling of cases and chargers, launch online tech courses.
• Stores. Rent stores for events / we work, offer luggage storage, offer ID verification.
• Customer data. Sell data to third parties or utilise data to sell third party products to our customers (affiliate marketing)

Based on the current analysis, I advise Element Mobile to invest in the refurbishing business, and offer payment plans for refurbished phones, for three reasons:

• First, the market size for refurbished phones in Germany is very attractive at around €600 million per year.
• Secondly, with just a 2% growth in customer base, the client may expect to break even on their expenditure within two years.

Some of the risks involved with this endeavour could be related to our ability to train employees to only purchase easily repairable phones, as well as our ability to obtain components for Apple phones. 

Regarding next steps, I would like to perform a more in-depth review of the anticipated profitability of implementing some of the suggested revenue-enhancing options, such as white labelling phone accessories or subleasing our network to smaller operators.