Prioritise increasing revenues or decreasing costs in a profit increase case?

Hi there,

You need to understand the industry + company context from the prompt itself to figure this out...cases and case types cannot be memorized...you have to adjust every single time!

Take my "Chinese Airline During Covid" case example. We know that the airline is in trouble due to covid. We can make the deduction that this is caused by a reduction in demand. So, we want to "repair" existing revenue streams as much as possible. So, first let's see what we can do. Then, whatever "gap" is remaining, we want to fill it with alternative revenue streams. Finally, whatever we can't make up for, we have to fix through cost cutting (ideally cutting unused capacity). See the logic here?

And it'll change every time based on the case itself...think critically!

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/chinese-chess-airline-business-during-covid-19-191

General Profitability Logic

Some ways to think/brainstorm of possibilities include:

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

Cutting Costs

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

Increase Sales

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)

Hello,

The answer to this question can vary for each case. Usually you have to consider both strategy in your framweork and according to the case situation you can prioritize one of them.
You can find here a good example for P&L and prioritization:

https://www.preplounge.com/en/management-consulting-cases/interviewer-led-mckinsey-style/advanced/espresso-whatelse-192

Best,
Luca

Hello!

It´s totally impossible to answer this question "in a generic way". It would be, 100%, the wrong answer. 

It totally depends on the case, the industry, the business model in particular... and the key to solve that case would be precisely to ask the right questions and problem-solve with the interviewer to find the key hints. 

Hope it helps!

Cheers, 

Clara

In general, every Dollar / Euro / Yen saved on the side of costs, influences for 100% the profitability. Every additional USD/EUR/Yen earned (increased income) only for a share of it.

Maybe, this is not what your client really wants. Often enough, the clients approach you with an issue and in further discussions and conversations you find out, this is not the underlying problem. Maybe you just talk again to your customer whether he has a particular topic or issue to be resolved under the coverage of profitability improvements.

Hi there,

Good question. There is a simple way to prioritize: benchmarking with competitors. Once done so, you can prioritize the areas where the gap with the competitors is bigger.

Best,

Francesco

Hi there, 

The answer depends on the industry, company, product, and competitors. Any case should be solved individually. 

GB

It depends... typically you would be given some context which will allow you to develop a hypothesis on which one to prioritse. In very general terms, they usually say that it is easier to improve profitability by cutting costs than growing revenues, especially in terms of time and feasibility. 

Ideally both if thats possible and the construct of the case allows. But cost reduction most of the times is the first target area to remove inefficiencies from the business in products, process, support functions (finance, legal etc), supply chain & technology.

But broadly, there are other ways too to increase profits:

• Diversify customer base/segments
• Cross-sells, up-sell
• M&A

I don't think there is a general answer to this. If the case does not provide any context that lets you prefer one over the other, I don't think you should (or can) prefer one. Flip a coin!