In May 2017, Matthew Druzcz was contemplating expanding his deck restoration business. Master Decker was entering its fourth year of operations, and Druzcz thought it was the right time to focus on growth. He was considering three expansion alternatives: offering deck building, marketing an exclusive line of stains, and manufacturing deck cleaning chemicals.
Service Expansion: Deck-building
Druzcz had started thinking about expanding Master Decker's offerings to include building decks, as this would be in line with the company's current service offerings. Many of Master Decker's customers would inquire as to whether the company built decks, and Druzcz had noticed a sharp increase in client requests for the company to expand its existing service offerings. Though Master Decker's perceived expert status in deck restoration could possibly be compromised, Druzcz was not convinced this risk was real. Based on Druzcz's conservative projections, Master Decker could build at least 10 decks over the course of the fiscal year. Considering the market demand and the willingness to pay for quality builds, Druzcz figured that he would have no trouble charging CA$10,000per deck. Decks were to be sold on credit with the same terms as his existing service offering of net 9 days.
The deck-building season in Southwestern Ontario lasted around eight months, and Druzcz knew that he would have to hire an additional experienced carpenter. He planned to pay a competitive rate of $40 per hour, and expected that he would need the carpenter for 20 hours per week for the first half of the season, and 40 hours per week for the second half of the season. This carpenter would be accompanied by one of Druzcz's existing and previously trained employees, who was currently paid a salary of $600 per week. Druzcz estimated that lost referrals resulting from moving into the deck-building business would cost him about $2,500 in foregone restoration sales. He also calculated that he would need $15,000 worth of building materials to construct 10 decks. Master Decker kept 80 days' worth of inventory on hand at all times. 2 Druzcz knew that if this option were pursued, he would have to purchase insurance costing $2,000 annually. He was also considering opening a line of credit for $20,000 at an annual interest rate of 4 per cent to help finance his expansion plans.
Exclusive Master Decker Stains
Master Decker used top-of-the-line deck stains manufactured by a supplier called DFM. These stains were not widely available to DIYers through the big-box retailers, and Druzcz saw an opportunity to market and sell his stains to these consumers. He thought that having exclusive stains would add to the company's value proposition and selling them would diversify Master Decker's revenue stream. Druzcz estimated that Master Decker would be able to sell 500 gallons of stain each year at $71 per gallon, and planned to keep 60 days of inventory on hand at all times. The stain wholesale business was one of thin margins; Master Decker would have to purchase the stains from the supplier at $41 per gallon. Master Decker would purchase the stains on credit, with terms of net 30 days. The credit terms also applied to the packaging, which cost an additional $3 for each gallon of stain.
Druzcz thought that the most convenient sales channel, at least at the beginning, would be online sales through Amazon. This would allow Master Decker to send inventory to one destination at Amazon, and then Amazon would take care of shipping the stains to individual buyers. The average deck-owner would need between one and two gallons of stain for one deck. Shipping fees on Amazon were based on weight, so an order of one gallon would cost Master Decker $6.75 to ship, and an order of two gallons would cost
$9.90. Druzcz estimated that 100 people would purchase one gallon of stain in a single order, and 200 people would purchase two gallons. To deal with the supplier purchasing and shipping to Amazon, Druzcz figured that it would take 10 per cent of his time. He did not plan to hire any additional workers for this option.
To ensure a viable stream of revenue, Druzcz would require an exclusivity agreement with DFM, ensuring that Master Decker would be the only company able to purchase these particular stains at wholesale prices. Druzcz had nurtured a good working relationship with DFM and did not expect any difficulty in coming to an agreement. However, the initial agreement, drawn up by a lawyer, would cost an estimated $1,800
Manufactured Cleaning Chemicals
Over the course of a couple months, working out to about $4,000 worth of his salary, Druzcz had figured out how to mix chemicals to create his own deck cleaning formulas. This formula ensured Master Decker had the highest quality cleaning chemicals for the lowest possible cost. Druzcz estimated that he could easily sell this chemical formula to consumers through the existing website for $30 per chemical package. He anticipated selling 400 packages per year and calculated that, at current rates, the raw material cost would be $7.50 per package. Master Decker would not incur any additional labour costs for this option. Company employees already mixed the chemicals for Master Decker's own use, and additional time dedicated to packaging and shipping would be negligible.
Since Druzcz would be buying the chemicals in much greater quantities, Master Decker would benefit from a 10 per cent purchasing discount from the supplier, applicable to these additional quantities only. Master Decker would incur a $6 packing cost, a $2 labelling cost, and a $5 shipping cost per cleaning package. The company had to keep 60 days of inventory on hand at all times.
This option would be easy for Druzcz to execute and would cause little disruption to Master Decker's current operations. However, he did not think this option would provide significant revenue for the business
Question: Druzcz wondered which option would provide the best return on investment.