Question

PROBLEM 1:RANIS Enterprise Solutions is the provider of hosted customer relationship management (CRM) solutions for Small to Medium Enterprises (SMEs). The headquarters are in Toronto, ON, and they have clients across the globe. Currently, they are charging a $400 monthly fee for their CRM services that they offer to 400 of their clients. They have recently been contacted by their software vendor and been told that with a $160,000 upgrade on their hardware and CRM software platform, they can substantially improve their direct marketing offerings. The new system will cost them nothing beyond the initial cost, but they will have to increase the number of their maintenance and support staff from 10 to 13 to be able to comply with their service level agreements. The maintenance staff is paid $750 weekly. Using the what-if analysis feature of MS Excel, answer the following questions:

A. If the management thinks the upgrade will cause the demand (# of clients) to grow uniformly (same percentage every month) until it doubles at the end of the third year (144 weeks), what will be the average weekly demand growth (percentage) for their service? Note: assume 1 month is 4 weeks.

B. Assuming this demand growth (from question 1) is achievable, should they invest in this upgrade if they want to break even (reach the status quo profit levels) within 1 year? Why? Hint: Consider the average client size for the 144 weeks while dealing with the proposed change.

C. What level of weekly demand increase (percentage) would justify the investment if RANIS wants to break even (reach the status quo profit levels) after 2 years?

D. If the demand will stay the way it is, however, there is an opportunity for RANIS to charge more for this new service, to maintain current profitability, what should the new monthly fee for this service be?

Answer 1

In the given problem we have been given that RANIS Enterprise Solutions is the provider of hosted customer relationship management (CRM) solutions for Small to Medium Enterprises (SMEs). Its headquarters is in Toronto, ON, and they have clients across the globe. Currently, they are charging a $400 monthly fee for their CRM services that they offer to 400 of their clients. The organisation is looking forward to find out if it is worth to spend $160,000 on upgradation of their hardware and CRM software platform, to substantially improve their direct marketing offerings. The problems also mentioned that new system will cost them nothing beyond the initial cost, but they will have to increase the number of their maintenance and support staff from 10 to 13 to be able to comply with their service level agreements. The maintenance staff is paid $750 weekly.

On the basis of given information we will solve
the following parts

A. If the management thinks the upgrade will cause the demand (# of clients) to grow uniformly (same percentage every month) until it doubles at the end of the third year (144 weeks) then the average weekly demand growth (percentage) for their service 400/144 = 2.77 that 278% average weekly demand growth (percentage) for their service.

B. One year means 52 weeks, so the cost will be =
Number of supports staffs*Number of weeks*Amount paid to support staff thus, 3*52*750 = $117,000 given this the revenue will be 400*2.78*52 = $56,160 thus even if the demand growth is achievable it makes no sense that organisation upgraded if it want to break even (reach the status quo profit levels) within 1 year.

C. If the Ranis want to break even (reach the status quo profit levels) after 2 years that means 104 weeks then the expenditure in this case would be 3*750*104 = $234000 thus, the weekly demand increase in this case should be $234000/(104*400) = 5.625 or 563%

D. If the demand will stay the way it is, however, there is an opportunity for RANIS to charge more for this new service, to maintain current profitability, which is price*number of customers - (support staff*amount paid to wages) = 400*400 - (10*750) = 152500, to maintain this current profitability we need to make sure the new expenditure on the support staff should not influence the profit thus
750*3 - 2.77*x = 0
2250 = 2.77x
Thus, x = 2250/2.77 = $810

Hence $810 should be the new price to be charged.