Case Study: Best Buy: Creating a Winning Customer Experience in Consumer Electronics

Consider the RTO model. Calculate income for years 1, 2 and 3, considering the following scenarios.

-scenario 1: phone is bought

-scenario 2: phone is returned

- scenario 3: phone is leased for 24 months

3. Innovating on the Business Model (Rent-to-Own Model) Millenial customers were increasingly shifting from a product ownership to a produet sharing mindset. The desire for convenience and lower disposable income fueled the rental cultare exemplificd by the emergence of services such as Zipcar (car-renting), Spotify (music), Uber (ride- sharing). AirBnb (ome rentals), Rent-the-Runway (fashion, and Diy Bike (bike-sharing). Millennials liked the rental model because it made the latest products and gadgets more affordable and allowed them to try out a product before committing to a purchase. Best Buy saw an opportunity to create a rent-to-own (RTO) model that would take advantage of its extensive physical presence and would be difficult for Amazon to replicate. It could rent consumer electronics, specifically smartphones. With service providers such as Verizon and AT&T looking to move away from phone subsidies and leaving customers to independently acquire their own devices, Best Buy could step into the void. It could offer the latest, most popular smartphones for a monthly rental fee, with an option to buy the phone at any time during or after the rental period. The RTO arrangement would involve leasing an electronics product to a customer, who would make monchly payments in exchange for immediate access to the product. The RTO lease would also include a purchase provision that would allow the customer to own the product after a predetermined number of payments had been made to the retailer. The RTO model would be particularly attractive to customers with poor credit, because credit checks were not required for an RTO lease. It would also benefis customers on tight budgets who could not afford to pay upfront for high-end smartphones The smartphone such as the Apple iPhone 6 or the Samsung Galaxy S6 (with a retail price of $649) for a monthly fee of $30 with a minimum term of 12 months. After the minimum term, customers would have three options: (I) buy the leased phone for $499; (2) continue leasing the phone for $30fmonth: or (3) retun the leased phone to Best Buy. It was estimated that 25 percent of customers would buy the phone, 25 percent would recurn the phone, and the remaining 50 percent would keep leasing the phone for an average of 24 months, after which they would return the phone to Best Buy. Best Buy would sell the reurned used phones in the secondary market at che depreciated price. The new phones would cost Best Buy an average of $599 to acquire. The depreciated value of the phones that Best Buy could realize was estlmated at $449 a the end of 12 months and $249 at the end of 18 months. Due to the risky narure of the customers who would be atcracted to the RTO arrangement, it was estimated that 20 percenr of the phones rented under this arrangement would be lost to defaults. In the case of a default, Best Buy would need to write off the entire cost of buying the phone. Best Buy estimated that 0.5 million customers would si up for the RTO model in the first year, 1 million in the second year, and 2 million in the third year. Best Buy would apply an annual discount rate of 12 percent to calculate the net present value of the cash flows from the RTO model. RTO model for smartphones would work as foilows: Customers could lease a high-end