OT: Business 101 - Help me understand..

[William]

I'm trying to understand just how this works:

A company buys widgets. They don't sell widgets mind you, they "give away" these widgets to a third party to install. After the third party installs the widgets into their customers homes, the customers then finance the cost of the widgets through this company.


How exactly does this work for "The Company"?






William

[pbarry]

Sounds like PV solar "providers". In that case, there are companies that lease the system to the homeowner, providing the equipment and installation up front. I would think the lease would cover a percentage or the company's investment plus interest. Haven't heard anything about this for a while, but know it's out there.

[Delpo]

If I understood the situation correctly it means that the net income generated by the financing of the widget is bigger than the cost of the widget plus the installation cost.

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[distanc3]

I would think there should be additional revenue stream such as monthly subscription or add on fees to sustain on going cashflow.

[93legendti]

Without reading the relevant contracts between all the parties you'd be guessing as to what is going on and how the parties are related.

[crownjewelwl]

It's a financing business...simple

It earns interest on value of the widget sold to the distributor

[tiretrax]

It's a financing business...simple

It earns interest on value of the widget sold to the distributor

Yes - is this solar and are you buying or leasing. Lots of ways to play that game.

[happycampyer]

This is not that different from a phone company "giving" you a $300+ phone for "free" and then requiring a x-year contract—essentially, the cost of the phone (or in your example, the widget) is embedded in the cost of the subscription/financing, etc.

[russd32]

I'm trying to understand just how this works:

Company A buys widgets. They don't sell widgets mind you, they "give away" these widgets to Company B. After Company B installs the widgets into their customers homes, the customers then finance the cost of the widgets through this Company A.

How exactly does this work for Company A?


Let's try this... Did I translate correctly?

If so, it sounds exactly like TV. Company A will recoup any costs through the financing/contract whether they specifically call out that cost or not. More than likely it's rolled into a $$ amount over a period of time. They also bank on upselling, adjusting rates, etc... Company B is more thank likely an independent contractor who is paid by Company A on a per install basis.

[William]

Company A buys widgets. They don't sell widgets mind you, they "give away" these widgets to Company B. After Company B installs the widgets into their customers homes, the customers then finance the cost of the widgets through this Company A.

How exactly does this work for Company A?


That was a better explanation, thanks. I know its obvious but I'm being vague about the specifics on purpose.

I get the phone company example, but in the end the phone is yours to keep and you have likely paid for it throughout the life of the contract. In this example, the end widget is leased to the customer which was given away for "free" at the beginning of the process.





William

[happycampyer]

Except that it isn't "free." Before the market crash, lots of people bought homes with $0 down. They financed the cost of the entire home through the mortgage—the house wasn't "free." In your example, there is no purchase agreement, but I doubt that the installer would install the widget without the lease contract. So the contract embeds the cost of the widget as well as the financing cost, in the same way as the mortgage in my example.

[Hardlyrob]

If it is solar you are referencing, don't forget there is federal money (grants, rebates) and possibly state money involved as well as money from the power company for production in excess of use in addition to any rents on the leased equipment - lots of pockets of money.

[William]

To use the phone analogy:

Let's call company A Famfung.

Famfung has a bunch of phones that they give to contractors BT&T, B-Mobile, and Splint at no cost.

Those contractors install the phones and realize a sale.

Famfung then buys back the equipment and leases it to the end customer. Famfung calls themselves a finance company, but they are leasing the equipment to the end user.


Hope that makes more sense?









William

[paredown]

It's hazy since it is been a lot of years, but the calculation comes down to the Net Present Value (NPV) of the the future stream of payments coming from the customer.

If it is rational, they are building in a margin that covers the cost of money, the expected rate of default, the insurance costs (assuming the liability of repair rests with them and not the homeowner) and the cost of the widgets they are installing. The key variable is of course the 'discount rate'--which is the assumption about what way interest rates will move over the life of the contract.

The advantage for the producer of the widgets is that it keeps units moving out into the field, in the hands of consumers who could not (or would not) purchase the widgets outright, or be able to (or have the expertise) to finance them themselves. Not much different than the $0 down car leases, really, except the term is longer for solar, and AFAIK, the assumption is that the asset depreciates to $0, so no 'residual' or 'buy back' at the lease's end.

[tiretrax]

I just saw another example - free espresso maker (value $199), but you have to buy pods at a minimum monthly rate of $24.95. So, the value of the item is amortized over the life of the contract - from the company's standpoint, the payoff should be much shorter. For example, cost is recovered by month 36 on a 5 year agreement, making months 37-60 all free cash flow.

[Ahneida Ride]

All federal "money" / "grants" is taxpayer "money". Comes from you and me.
Whether by direct taxation or via fed note dilution.

It comes outa our hides, either directly or indirectly.