Help needed on structuring for specific category profitability

Hi there! I think with a case prompt like this, the best structure is a simple one based on breaking down profitability into its components. We want to know why profitability (likely more specifically “contribution margin/profit”) is lower than expected and then how we can increase it.

• Profitability = Contribution Margin x Volume (verify we're ignoring fixed costs for the purpose of the analysis or ask if there are any that we should investigate e.g., licensing agreements)
  • Volume
    • How many units are sold per year?
    • Are there different SKUs or sub-categories that we have data on?
    • Do we know what our retail market share is (by SKU or sub-category if available)? 
  • Contribution Margin = Price less Variable costs
    • Price
      • What is the average price per unit?
      • Are there different SKUs or sub-categories with difference prices that we have price data on?
      • Are prices benchmarked against similar SKUs sold at competitor retailers?
    • Variable Cost
      • What is the average variable cost per unit (what is it by SKU or sub-category if we have data?) 
      • Who are our suppliers? Do we have agreements with them?

Once you start, make sure to calculate total contribution profit of the category. Identify why it's lower than expected (or at least make a guess) and ask where we want profitability to be.

At that point, you should have a clear idea of which driver will be most likely to increase profitability for your client.

As with all cases, you never know where the interviewer will lead you, so give it your best shot and stay flexible!

Good luck!

Andrew

GENERAL PROFIT DRIVERS

Volume Down: Competition reduced prices or improved their product (outcompeting you), competition just launched effective marketing, regulation has slowed you down, economic decline, environmental disaster, tarrifs, suppliers disrupting your production, your product no longer applies to the customer (i.e. decline has been happening for a while)...and so on and so forth...

Price Down: We're in a price war, costs have gone down so we're realising this, regulation has created a price cap, we ran a discount program

Variable Costs Up: Raw materials costing more, inefficient contracts, ageing workforce, deteriorating workforce, regulations, quality control

Fixed Costs Up: Recent large investments

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REVENUE ISSUES/IMPROVEMENTS
 

Remember, you need to apply your revenue improvement ideas to the specific case at hand. You cannot be generic.

That said, some major ways companies boost sales include:

• SAAS (software as a service)
• (Relatedly) Subscription revenue
  • Get people onot subscription plans (i.e. Netflix)
• Behavior-changing "memberships" - i.e. Amazon Prime
  • When people enter Prime membership, they actually actively spend more than they did before
• Bundling
  • I.e. sell a few things together
• Radiation
  • Sell products similar to the current one
• Low-price entry
  • Get someone in with a super cheap/good deal, then, now that you have them as a customer, sell additional, higher-margin products (insurance companies do this, for example)

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COST ISSUES
 

In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.

How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:

1. What's the biggest? (i.e. largest piece of the pie...most likely to change the end result)
2. What's changing the most? (I.e. could be driving the most and most likely to be fixable)
3. What's the easiest to answer/eliminate? (i.e. quick win. Yes/No type of question that eliminates a lot of other things)
4. What's the most different? (differences between companies, business units, products, geographies etc....difference = oopportunity)
5. What's the most likely? (self-explanatory)

https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963

https://www.preplounge.com/en/consulting-forum/inventory-costs-how-to-segment-6861

https://www.preplounge.com/en/consulting-forum/direct-and-indirect-instead-of-fixed-and-variable-6272

https://www.preplounge.com/en/consulting-forum/when-should-i-break-down-costs-as-fixed-and-variable-as-opposed-to-over-the-value-chain-5990

Major Costs - Areas to Cut

FC

• Rent
• Labour (salaried employees)
• Transport (if we own the trucks, etc.)
• Capex
• Utilities (for the office, warehouse, etc.)
• Cbsolescence (wrong word...this is amortization/depreciation)
• Stolen objects (but shocked you heard this in a case)

VC

• Labour (hourly employees)
• Transport (if we pay a company per load)
• Fuel/truckers (if we own our own trucks etc. for transport)
• Utilities (if you need more energy to make more widgets)
• Raw Materials (why wasn't this included? Big one to miss)