Revenue Frameworks

Question

What is the best way to come up with a structure for cases such as 'A local Supermarket has seen its revenue decrease from its Fresh Fruit business over the past 12 months. They have helped you to determine hte cause of this trend'?

As it's a revenue question, I would ideally look at a structure such as the following

Revenue = Price x Volume

Volume = # of Customer x Average # of Purchases per Customers

One of my hypothesis would be that we are getting less customers into the store because we there has been a new store opened up nearby. Ideally I would another bucket to my framework, which is External Factors. But them I an unsure where I would put my hypothesis about a new store opening up, as it could go into both the # of Customers bucket or External Factors - so I'm having a hard time being MECE.

My other option is just to focus on the profit tree, and then brainstorm all possible ideas under Price and Volume, but then it just becomes a bit messy.

Any help would be much appreciated?

Answer 1

Hello!

This is a usual, simple type of stucture.

As you very well say, the first node of the tree is easy:

Price
Quantity

Then is when you can really showcase your ability to deep-dive and think in an original and creative way.

Price:
- Product mix
- Changes in princing due to:
  - Tax
  - Regulation
  - Demand supply of raw materials
  - etc.
Volume:
- Product mix -are we selling the sale volume overall but less from the more profitble categories?-.
- Changes in volume due to:
  - Changes in our customer base
  - Changes in the industry overall
  - New players
  - etc

Hope it helps!

Cheers,

Clara

Answer 2

Hi Nin,

I would suggest the following structure to the breakdown revenue.

Let’s draw the table:

Columns: Client Journey stage, Impact on number of clients, Impact on average bill
Lines (Client Journey stages): Planning to buy fruit, Being aware of your shop, Considering to visit your shop, Visiting your shop, Visiting fresh food section, Buying fresh food

The next step is to fill this table:

Planning to buy fruit (total number of potential customers 2nd column, average budget for buying fruit for each potential customer 3rd column)
Being aware of your shop (% of total number of potential customers who are aware of your shop 2nd column, average budget for buying fruit for each potential customers who are aware of your shop 3rd column)
Considering to visit your shop (% of total number of potential customers who want to visit your shop 2nd column, average budget for buying fruit for each potential customer who wants your shop 3rd column)
Visiting your shop (% of total number of potential customers who visit your shop 2nd column, average budget for buying fruit for each potential customer who visits your shop 3rd column)
Visiting fresh food section (% of total number of potential customers who visit fresh food section 2nd column, average budget for buying fruit for each potential customer who visits fresh food section 3rd column)
Buying fresh food (% of total number of potential customers who buy fresh food 2nd column, average bill for buying fruit 3rd column)

Once you identify bottlenecks (e.g. by comparing your current client journey with the one that your shop had 12 month ago) you can develop a hypothesis structure for each stage of client journey.

Note that this structure accounts for all possible reasons for a revenue decrease. For example a decreasing % of total number of potential customers who want to visit your shop could be a signal that a new competitor has entered the market. In this case you will have to identify why your client prefers this competitor). Another example: % of total number of potential customers who are aware of your shop has decreased - it could have happened because you stopped your marketing campaign).

Have a look at my post about brainstorming- it can help you to brainstorm recommendations for this case. Here is the link:

https://www.preplounge.com/en/consulting-forum/hello-how-should-i-approach-brainstorming-questions-during-mck-interviewer-led-cases-6745

Also you may find useful my post on how to evaluate an impact on revenue/market share coming from a new market entrant. Here is the link:

https://www.preplounge.com/en/consulting-forum/i-am-preparing-for-an-interview-at-mckinsey-6736

Let me know your thoughts!

Best,

Anton

Answer 3

Hi,

Rule no 1 - never structure a retail case with price * qty. It's always:

Number of customers * average check

Rule no 2 - always segment the stores. Different stores may have different performance depending on location, format, new openings, etc

I would look at the following:

1) Average check

If you need you can split even further:

Length of the check
Prices and product mix in the check

2) Number of customers

Traffic
Conversion - important in fashion and consumer electronics. less relevant for grocery

Key drivers influencing check / traffic (I'm not splitting since many of them are impacting both):

1) Macro factors

Brand awareness
Format (assortment, quality of goods, prices)

2) Local

Location
Working hours
Parking
Signage, displays, etc

3) Instore experience

Look and feel (Cleanliness, smell, etc)
Additional experiences (e.g. cafe, kids room in hypermarkets)
Checkouts, queues to the checkouts
Carts, packaging, navigation, etc

4) Sales

Promo (Discounts, free trial, value pack, buy 2 get 1 for free, etc)
Sales (personal sales, upselling, cross-selling) - again less relevant for grocery
Loyalty programs
Merchandising
Stock availability

Best

Answer 4

Hi Nin,

I think the main problem here is Revenue. So, let's just focus on that.

Hypothesis: more stores' competitors nearby the client's presences (following yours)

Structure I:

Quantity
- How is the overall trend in the past 12 months?
- What is the product mix?
- How has the mix changed in the past 12 months? Specifically for the top 5 products
- How is our goods-sold number compared to the market?
- Where are we right now in terms of the goods sold compared to competitors/market?
Price
- Is there any change in the overall pricing in the past 12 months?
- How is the pricing for the top 5 products change in the past 12 months?
- How is the pricing compared to market practice?

From these 2 factors alone, then we can understand the high-level root cause from quantity or pricing or both, and a little bit of why from the 2nd layer.

You can use that, but you might need to be creative and have to come up with the next structure once you know the high-level issues (example: if pricing is the issue, then you need to ask on why there is change, is the customer price sensitive, etc).

This could be used in a candidate led interview, as it will just appear to be more conversational. You identify the high-level problem, then you go deeper only to the main issue.

Structure 2:

Market
- How is the overall fruit market condition in the past 12 months?
- Who are their customers currently (age, income, location)?
- Did the client have any defined segmentation?
- Did the client change direction of segmentation in the past 12 months?
- How is the performance of each segmentation in the past 12 months?
Product Mix
- What are their top 5 products in the past 12 months? and how much each product allocates to revenue?
- How is the performance of those products in the past 12 months?
- How are the products being priced? Is there any change to this?
- What is the pricing component? Is there any change?
Competitor
- Who are the competitors? Is there any change in the past 12 months?
- Where is our market share, and how does it change in the past 12 months?
- Is there any new entrant? how has it performed?
Operations
- Is there any change to organization int the past 12 months
- Did we change any personnel in the past 12 months?
- How is the process starting from customer searches to checks out? Is there any change to that?

Now, the 2nd structure might appear to be more MECE, but putting this into a conversational kind of interview (candidate led) might sound a bit unnatural.

However, it is extremely recommended using 2nd structure in an interviewer led setup.

Hope that helps!

Answer 5

In general when looking ad profit I would brek down the problem in the classif revenues-costs, and I would additionally break down those as follow, simple and mece solution:

Revenues:

- volumes

- price

- mix

Costs:

- variable

- fix

I hope this is useful, best,

Matteo

Answer 6

Hey there,

First, besides price and volume, you should ask about product mix and see whether there is change, i.e. are they selling more volume of cheaper fruit and less more expensive fruits, compared to before?

For competition e.g. new store opened, it doesn't have to be at the same level as # of customers in your framework. It can go under (or after) # of customers. # of customers (if indeed in this case has problem) answers the question of "what/where goes wrong". Once you identify the what, you need to switch to the "why it goes wrong" before you can further proceed to the "how to fix it". External factor answers the question of "why".

Hope it helps,

Emily

Answer 7

Hi there Nin,

The previous answers are very thorough and I have nothing to add. However, take a look at the below Q&As that talk more in dept about profitability overall.

https://www.preplounge.com/en/consulting-forum/profitability-case-unable-to-identify-root-cause-6196

https://www.preplounge.com/en/consulting-forum/how-to-structure-and-choose-framework-for-profitability-case-3957

Answer 8

Hi there, and thanks for asking, Indeed, setting up the framework for a profitability case can be a bit confusing, ho... (read entire answer)

Hi there, and thanks for asking, Indeed, setting up the framework for a profitability case can be a bit confusing, however, I would advise you not to think of “THE” framework wh... (read entire answer)