Profit Margin Formula

There are several common case types that occur in case interviews for management consulting roles. Profitability cases are some of the most frequent ones. These cases require a structured approach, analytical thinking, and a deep understanding of business fundamentals. Let’s take a look at what profitability cases actually are and how you can approach them successfully. Profitability Cases – The Number 1 Reason for Most Consulting ProjectsOne of the most common reasons why firms instruct consulting firms with their projects is that they struggle with their profitability. As a consultant you will have to diagnose the underlying issues, come up with potential solutions and recommend actions to improve profitability.As a candidate in a case interview, the task is pretty much the same, but on a smaller scale. The good news is: Once you have understood the basic structure of profitability cases, you can solve them no matter the industry or concrete business scenario. The underlying concept is always the same and not very difficult.Profitability issues always stem from falling revenues, rising costs, or both. It is as simple as that. Your task will be two-fold: Perform a structured and quantitative analysis of the data to isolate the problem, and then find a promising solution. In most cases, you can use the profitability framework to structure the problem, but make sure to not blindly apply it, but to really understand the problem at hand and make adjustments as needed in the concrete business scenario. The Profitability Framework – A Basic Tool to Structure Your Profitability CaseThe Profitability Framework is a fundamental tool for approaching profitability cases. It is basically an issue tree that breaks down profitability into its key components: revenues and costs.In the first place, this equation is pretty straightforward and not complicated at all. Next, it is your task to understand each side of the equation and identify the cause for declining profitability. There could be three reasons:Revenues have been declining.Costs have been increasing.Revenues have been declining and costs have been increasing.(Always make sure to remember this option. It happens pretty easily that candidates identify either revenue or cost issues as the problem, completely focus on one side of the issue tree and forget to zoom out again, take a look at the big picture and consider the other side of the equation as well.)So, the first question to get an answer to is “Have revenues been declining?”, “Have costs been increasing?”, or “Have revenues been declining and costs been increasing? And if so, which one is the bigger problem?”. Whenever you get the information that something has changed: quantify it! Ask by how much and in what time period. Depending on the answer, you will know on which side of your profitability tree you need to start your analysis. Always start with the most relevant driver (Pareto Principle).💡 Pro Tip: When trying to find out where to start your analysis, keep in mind to communicate like a consultant. A Bainie would not go to the client and bluntly ask “Have your revenues been declining?”, but rather formulate a question like “How have your revenues been developing over the past five years?”. It may be possible that your interviewer will then share an exhibit with you that not only contains revenue information, but also valuable insights on product lines, geographies or other relevant data, which you can use throughout the case. Scenario 1: Revenues Have Been DecliningLet’s assume, the profitability problem stems from declining revenues. There are many potential reasons for this and you need to find out which one applies in order to come up with a solution. Most important for your analysis is to stay structured at all times.1. Understand How the Business Makes RevenueTo structure your analysis of declining revenues, you need to understand the business model of the company you advise. So basically answer the questions:How does this company make revenue?What does the revenue consist of?Which component of the revenue has been declining?Understanding your client’s business model is absolutely crucial for your revenue analysis. Only when you know which products the company sells and which customers it serves, will you be able to give solid advice on how to solve profitability problems.2. Break Down the Revenue into its Single ComponentsOnce you have understood the general business model of your client, you can go on and break down the revenue into its components. Depending on the business model of the company, the equation can differ.Let’s take a look at some examples depending on different industries:Manufacturing and Retail IndustryRevenue = Number of Units Sold × Selling Price per UnitNumber of Units Sold: The total quantity of products manufactured or sold to customers.Selling Price per Unit: The price at which each unit of product is sold to distributors, retailers or customers.Subscription-Based Services (e.g., Streaming Services, Software as a Service)Revenue = Number of Subscribers × Monthly Subscription FeeNumber of Subscribers: The total number of customers who subscribe to the service.Monthly Subscription Fee: The amount charged to each subscriber on a monthly basis.E-commerce IndustryRevenue = Number of Transactions × Average Transaction ValueNumber of Transactions: The total number of orders placed by customers.Average Transaction Value: The average amount spent by customers per transaction.Advertising Industry (e.g., Digital Advertising, Print Media)Revenue = Impressions or Clicks × Cost per Impression or ClickImpressions or Clicks: The total number of times an ad is viewed or clicked by users.Cost per Impression or Click: The cost charged to advertisers for each impression or click generated.Hospitality Industry (e.g., Hotels, Restaurants)Revenue = Number of Rooms or Seats Occupied × Average Room Rate or Meal PriceNumber of Rooms or Seats Occupied: The total number of rooms booked or seats occupied by guests.Average Room Rate or Meal Price: The average price charged per room or meal.It becomes obvious that there is no one-size-fits-all-solution for a revenue analysis. You need to adjust your approach according to the client’s business model and needs.3. Analyze the Single Components of the Revenue ModelOnce you have a clear picture of what the revenue of your client is composed of, you can go on with your analysis by focusing on the component of the equation that appears to be the problem. For example, if your client is a manufacturer with declining revenues, you should find out if the number of units sold has been decreasing or the selling price per unit has been lowered (or a combination of both).If the number of units sold has decreased, you go on with a further analysis on the reasons behind. These can be manifold, so make sure to stay structured and use segmentation to get to the root cause of the problem.The segmentation you use needs to be customized to the case at hand. Make sure to let your interviewer know your thoughts and guide him or her through the case. That way, you will usually get valuable hints on which direction to go.Examples for segmentations are:Product segmentation: Product types? Price ranges? Packaging sizes?Customer segmentation: Small / medium-sized / large businesses? Age groups? Sex? Income groups?Market segmentation: Geographies? Industry verticals?Channel segmentation: Distribution channels?If you’ve found the biggest driver of the problem, you oftentimes have to switch to a more qualitative framework (for example the 4 Cs) to find the underlying root cause. For example: when you have less revenue, but the price is the same and units sold dropped, you have to find out why. Is there a new competitor on the market? Do you have quality problems, or did you just stop a marketing initiative that you ran for years prior to this drop?The same procedure applies if pricing seems to be the issue for declining revenues. “Let’s increase prices” might be an easy recommendation to give, but most likely too easy to be valuable. It is crucial to understand first, why prices have decreased and again, the reasons might be diverse. Make sure to use a structured approach in order to pinpoint the exact problem.Possible reasons and forces for decreasing prices may be:Internal:Increased Supply: Overproduction or excess inventory can lead to discounted pricing to clear out stock.Competitive Pricing: Aggressive pricing strategies by competitors can force companies to lower prices to remain competitive.External:Price Sensitivity of Customers: Changes in customer price sensitivity and purchasing behavior can influence demand and pricing strategies.Market Saturation: Increased competition and market saturation can lead to price wars and downward pressure on prices.Economic Conditions: Economic downturns or recessions can impact consumer purchasing power and demand for products.Exchange Rates: Fluctuations in exchange rates can affect import/export prices and overall cost structure. It may not be surprising that when looking out for the reasons of the client’s revenue problem, staying structured is most important. Come up with solid hypotheses and validate or neglect them in the dialogue with your interviewer and based on the data that will be provided to you throughout the conversation. This requires flexibility and spontaneity, so learning frameworks by heart will not help you here. It is important to internalize the way of thinking a consultant uses and solve cases with peers to put it into practice.👉 To find like-minded candidates for mock interviews, take a look at our Meeting Board and simply accept one of the open invitations.

Merger and acquisition (M&A) cases are fairly common in consulting case interviews, especially for candidates targeting consulting firms with a focus on strategy, corporate finance, or mergers and acquisitions. While they may not make up the majority of cases, they are frequently included to assess your ability to think strategically, analyze financial data, and understand the implications of complex business decisions.M&A cases are particularly relevant for consulting roles that involve advising clients on growth strategies, restructuring, or corporate development. Overall, while not every case interview will feature an M&A scenario,we recommend you to be prepared to tackle them effectively as part of your case interview preparation. What Are M&A Cases?In an M&A case you are typically tasked with assessing the feasibility and implications of potential mergers, acquisitions, or divestitures for a client or company. This often involves analyzing market dynamics, financial statements, competitive landscapes, and strategic synergies to provide recommendations on whether to proceed with a deal and how to optimize its value. Success in M&A cases requires a holistic understanding of business strategy, financial analysis, and industry trends, coupled with strong communication and problem-solving skills.Moreover, many growth strategy case studies eventually lead to M&A questions. For instance, companies with excess funds, searching for ways to grow quickly might be interested in acquiring upstream or downstream suppliers (vertical integration), direct competitors (horizontal integration), complementary businesses, or even unrelated businesses to diversify their portfolio. The most important requirement for an M&A is that it must increase the shareholders' value, and it must have a cultural fit even when the decision financially makes sense.An example prompt for a typical M&A case would be the following:"Your client is a mid-sized retail chain considering acquiring a smaller competitor in the same market. They believe this acquisition could expand their market reach and increase profitability. Your task is to evaluate the strategic rationale behind the acquisition, assess the financial implications, and provide recommendations on whether the client should proceed with the deal. What factors would you consider in making your recommendation?" How Can You Approach an M&A Case – Key Areas to AnalyzeFirst of all, there is no standard approach or pre-thought out framework you can use for all M&A cases (or cases in general). It is absolutely crucial that you understand the unique situation of your client and develop a customized solution for the task you were assigned.To help you with your preparation, we have summarized key areas to analyze in an M&A case. However, it is very unlikely that you will be asked to cover all of them. It is simply too much for a 30-40 minute case interview, so usually the interviewer will put the focus on one or two aspects of the analysis and guide you to dive deeper.It is also possible that your M&A case does not resolve the question if a deal should be aimed for or not, but rather focuses on issues in the post merger integration process. Therefore, it is absolutely crucial that you listen carefully during the case prompt, reassure yourself that you understand the problem and objective of the client correctly and adjust your approach accordingly.1. Understand Your Client’s CompanyBefore you dive into your M&A analysis, you must understand your client’s company first. In which industry does the client operate? What is the product or service they offer? What are key customer segments and how is the company structured? Does the client possess other businesses that may offer potential for synergies for an M&A deal?If you have truly understood your client’s business model, it will come much easier to you to develop a structure for your M&A analysis. Already the question of if you are advising a manufacturer or a service provider, will help you to come up with solid hypotheses on the objectives of the deal. For a service company, access to talent may be an obvious goal for the acquisition while a manufacturer may be more interested in creating cost synergies through vertical integration. But be careful and don’t jump to these kinds of conclusions too easily. You must understand the individual situation of your client in order to give valuable individual advice. 2. Understand the Objectives of the M&A DealBegin by clarifying the objectives of the M&A deal. Analogous to making a purchase at a grocery store, M&A can generally be viewed as a "buying decision". We know that a consumer first determines the "need" to buy a product. There are various objectives that a company may have for pursuing an M&A deal and understanding the strategic rationale behind the acquisition is crucial. Let’s take a look at potential reasons for M&A deals:Strategic acquisitions generally aim at improving the market position and realizing growth opportunities. Entering new geographic markets or industries, diversifying into new product lines, or reaching new customer segments are common ways to broaden market reach and strengthen the market position.Defensive acquisitions, also known as "defensive mergers" or "defensive takeovers," refer to strategic actions taken by a company to proactively protect itself against potential threats or risks. These acquisitions are typically pursued to secure the company's competitive position and reduce specific vulnerabilities. An example for a defensive acquisition would be purchasing or merging with competitors in the industry to consolidate market share and increase barriers to entry. By eliminating rivals or reducing competitive pressures, the acquiring company can protect its market dominance and pricing power.Synergies and value creation are a common reason for M&A deals as well. Combining operations, reducing duplicative functions, and streamlining processes can lead to cost savings and operational efficiencies. This also includes integrating suppliers or distributors into the value chain to improve supply chain efficiency, benefit from economies of scale, and capture additional margins. Additional value may also arise when strong brands are merged and brand relevance in the market is increased.Whilst most mergers and acquisitions are evaluated with mid- to long-term objectives, opportunity-driven M&A deals are also an option. If a company is undervalued due to ineffective management or an unfavorable market, it may become an attractive acquisition target for a buyer with the power to bring it back to its potential value.It becomes clear that the reasons for M&A deals are diverse and it is impossible to list them all. So, when identifying the objectives of your client, start at a high level, dig deeper when you receive the feedback from your interviewer that you are on the right track and communicate your hypothesis and logical thinking very clearly.💡 Prep Tip: When you apply for an M&A consultancy, it is very likely that you will receive an M&A case. As these cases are not as standardized as for example market sizing cases or profitability cases, developing a very good business acumen is even more important. M&A deals are reported regularly in business news, so following these, will help you to develop a better understanding for the reasons behind M&A deals and the challenges that follow. 3. Analyze the Target IndustryOnce it's clear why the client is interested in acquiring a particular company, start by looking at the industry the client wants to buy. This analysis is crucial since the outlook of the industry might overshadow the target's ability to play in it. For instance, small/unprofitable targets in a growing market can be attractive in the same way as great targets can be unattractive in a dying market.Potential questions to assess are:How big is the market?What are the market’s growth figures?Can the market be segmented, and does the target only play in one of the segments of the market?What is the focus? Is it a high volume/low margin or a low volume/high margin market?Are there barriers to entry?Who are the key competitors in the market?How profitable are the competitors?What are possible threats?Porter's Five Forces can be a good starting point for a structured market analysis, but don’t use this framework as it is (and absolutely never mention its name in the interview; just think of what would happen if a company paid McKinsey for a market analysis and the $4,000 daily rate consultant came back with Porter’s Five Forces). Understand the framework as a helpful tool and adjust it to the individual scenario and market conditions your client is facing. 4. Analyze the Target CompanyAfter analyzing the target industry, understand the target company. Try to determine its strengths and weaknesses (see SWOT analysis) and perform a financial valuation to determine the attractiveness of the potential target. You are technically calculating the NPV of the company, but this calculation is most likely not going to be asked for in the case interview. However, having the knowledge of when it is used (e.g., financial valuation) is crucial. The following information can be analyzed to determine the target attractiveness:The company’s market shareThe company’s growth figures as compared to that of competitorsThe company’s profitability as compared to that of competitorsHow can current businesses from the client leverage revenues and profitability from the business to be acquired (keyword synergies)?Does the company possess any relevant patents or other useful intangibles?Which parts of the company to be acquired can benefit from synergies?The company’s key customersValuationHow much is the target company asking for its purchase price & is it fair (see cost-benefit analysis)?Can the acquiring company afford to pay the valuation?Financial valuation will generally include industry & company analysis. 5. Analyze the Feasibility of the M&AFinally, make sure to investigate the feasibility of the acquisition. Take a look at the challenges and risks associated with the deal and get a clearer picture of the concrete conditions for a potential acquisition or merger.Important questions here are:Is the target open for an acquisition or merger in the first place? If not, can the competition acquire it?Are there enough funds available (have a look at the balance sheet or cash flow statement)? Is there a chance of raising funds in the case of insufficient funds through loans etc.?Is the client experienced in the integration of acquired companies? Could a merger pose organizational/management problems for the client?Are there other risks associated with a merger? (For example, think of political implications and risks of failure, like with the failed merger of Daimler and Chrysler.) 6. Give a RecommendationAt the end of your analysis, give your client a solid recommendation of what to do. Start with your answer first: Should the client acquire the target company or not? Should a merger be pursued or not? Then go on with the reasons behind and structure your recommendation logically. In most cases, three arguments to support your recommendation will be a good number. Prioritize them and communicate them on point.But note: Even though you want to give a clear recommendation at the end of your case, answers to M&A questions are usually more complex than a simple “yes” or “no”. If you want to shine in your interview, demonstrate that you are aware of the risks and challenges the decision of your client may entail. Mention them shortly and give an outlook on further analysis you would conduct to confirm your recommendation. Key Takeaways – M&A Cases in Consulting Case InterviewsM&A cases are not the most common ones in consulting case interviews, but nevertheless important to prepare for. There is no standard framework to solve them, but with our top five tips in mind, you will have a good basis for cracking your M&A case.Understand the Strategic Rationale: Clarify the objectives of the acquisition, whether it's for revenue growth, cost synergies, market expansion, talent acquisition, or other strategic reasons. This understanding will guide your analysis and recommendations throughout the case.Conduct Comprehensive Analysis: Approach the case with a structured and comprehensive analysis. Gather relevant information by asking relevant questions about market dynamics, competitive landscape, financials, synergies, integration challenges, and potential risks. Frameworks such as a SWOT analysis, Porter's Five Forces, or McKinsey's 7S Framework can help you, but should always be customized to the case at hand.Evaluate Financial Implications: Assess the financial implications of the M&A deal by conducting a detailed financial analysis. Analyze the target company's financial statements, perform valuation techniques (e.g., discounted cash flow analysis), and evaluate key financial metrics (e.g., ROI, NVP, or payback period). Especially if you are applying for financial consulting, consider the impact of financing options, such as debt, equity, or cash, on the deal's financial feasibility.Consider Integration Challenges: Address post-merger integration challenges in your analysis. Identify potential integration risks, such as cultural differences, organizational structure alignment, IT systems integration, and employee retention. Note the importance of a structured integration plan to ensure a smooth transition and maximize synergies between the two organizations.Communicate Clearly and Structurally: Present your analysis and recommendations in a clear, structured manner. Use concise and logical reasoning to support your recommendations, and be prepared to defend your approach with thought-through arguments.💡 Bonus Tip: Practice makes perfect. M&A cases are complex and not easy to prepare for – especially if you study them by yourself. We recommend connecting with peers and practicing together. Conduct 1:1 mock interviews with other candidates to not only get more confidence in developing individualized and structured case approaches, but also receive feedback on your communication and professional appearance (you can find peers on our Meeting Board). Especially for M&A cases, it may also be helpful to seek the support of a coach who can help you with finishing touches on your performance. You are looking for M&A cases to practice with?Check out our recommended resources or browse the Case Library for all cases on this topic.👉 Company Case by TKMC: Portfolio optimization of a holding company👉 Expert Case by Casper: Merger of two beer manufacturers👉 PrepLounge Case: Chip equity