INTRODUCTION

As I was searching for case study exercises that allowed me to apply various growth principles and devise strategies for growth, I found the case study “Managed by Q” in the Teaching Resources Library of MIT Sloan Management School.  The present article is my solution to the Growth problem that faced the company in 2015.

Industry Analysis

Commercial cleaning services is part of the On-demand services sector which was seeing considerable increase in VC funding since 2008. The case states that VC investment in 2014 was more than $4 billion increasing by more than 500% over previous year.

Workspace segment received the highest funding (only one player in this space), startups Uber and Lyft were not far behind receiving close to $1bn in funding. These investments in on-demand startups signaled high investor expectations and huge growth potential of this sector. Furthermore, the company Q had already raised $15mn in a recent Series A round of funding and had just expanded into newer markets.

Janitorial Industry of the On-demand cleaning services sector was a highly fragmented industry with more than 800K players and the top 3 players making up around 10% of the industry revenue. Moreover, 96% of the firms had less than 5 employees.

The industry revenue was around $50bn, nearly 3/4^th of which came from janitorial services at offices, educational facilities and retail complexes. The Janitorial industry had multiple segments with Standard Commercial and Residential cleaning services contributing to nearly 70% of the industry revenue.

Labor was the largest operational expense (>50%) and most players followed the contractor model and the average annual wage was only around $15,000. There was no increase in average wages in 2013 and 2014.

MANAGED BY Q – CURRENT SITUATION

Managed by Q was launched in 2014 in New York as primarily an office cleaning company that also provided maintenance and cleaning supplies.

By 2015, the company had its presence in 3 cities – Chicago and San Francisco in addition to New York, with 70% of its revenue from Cleaning Services, the rest from Maintenance and Supplies. Target customers of the firm were smaller companies occupying 6,000 – 20,000 square feet space in Class B and C commercial buildings.

The firm generally received positive customer feedback and had a phenomenal 90% customer retention rate.

The high customer retention rate was not only indicative of high customer satisfaction with the quality of service received but was also probably influenced by the firm’s constant efforts to ensure complete transparency. This, it achieved through its iPad and Operator App which allowed the office managers to request and monitor cleaning or maintenance tasks and provide immediate feedback. The app also allowed the managers to request office supplies that did not fall in the basic list of supplies provided by Q. While cleaning and maintenance services wer paid by the hour, office and cleaning supplies were refilled in accordance with a monthly subscription. If the work fell out of the scope of those offered, then Q would refer the job to an external vendor.

Q’s employment model was completely different from the prevailing model in the industry where most players employed contractors for the on-demand jobs.

Though Q initial started with a subcontractor model, the company immediately realized that the model would not suit their needs in the long term. They decided to hire employees paying them above industry average and ensuring that they feel part of the firm and committed to its success. The positive customer feedback and high retention were testimonies to this commitment.

recommended growth strategy

By June 2015, the company had raised a total of $17.4 million since its launch in 2014. Teran, the CEO, wanted to ensure that Q keeps growing. There are three options (not mutually exclusive) in front of the firm:

1. Acquire customers in the existing markets
2. Increase revenue from customers by selling more services
3. Expand geographically into newer markets

Q’s foray into new markets (Chicago and San Francisco) , though it was able to win customers and receive good customer feedback, was not without challenges. The two cities had completely different markets. While Chicago had more managed properties and fewer Class B and C commercial buildings which suited Q’s model, San Francisco had a quite a few on-demand startups which meant the labor market was considerably different from that of New York. So, though new geographies had attractive demand, the move has high risk of failure.

As the current market share of Q in the existing markets is only around 1%, there is definitely scope for growth in New York, Chicago and San Francisco. The existing labor connections and positive customer sentiment in these markets will allow Q expand its offerings and grow with minimal risk.

In a Series A pitch during Spring 2015, Teran stated, “… We have a copycat in Berlin. They’re literally using the graphics from our website; they’re using the language that we use—they’re clones.” At present, Q does not have a competitive advantage that is sustainable and which cannot be easily replicated by copycats. Before expanding into other geographics, Q should first strengthen its current business model and make it difficult for new comers to imitate and dilute its market share.

So, at this point in its journey, growing its customer base in the current markets and selling more services to existing and new customers in the current markets should be its 3-5 year growth strategy.

Another growth option is enhancing the QApp by adding marketplace features which bring with it the following advantages. Already 5% of the firm’s revenue was from marketplace usage of its app where office managers used the app to find third-party workers for work outside Q’s current offerings. The platform business is easily scalable and has numerous advantages.

The strategy has three components

1. Focus on Customer Acquisition: Acquire more customers in the current markets (New York, Chicago and San Francisco)
2. Expand the services offered: Increase revenue from new and existing customers by expanding the services offered
3. Invest in the platform business by adding marketplace features and onboarding more carefully vetted vendors

Estimated impact of these growth investments

1. Expand Services offered
   • Year 2: 10% of revenue
   • Year 3 onwards: 30% YoY increase in revenue from the new services
2. Build Q platform as a service with marketplace features
   • 25% YoY increase in revenue from platform as a service

Below is the 5-year revenue projection if the company implemented the recommended growth strategy.

Ref: Case Exihibit 7: Financial Performance