Bank envelope

The following structure is used as approach for the problem:

Information that can be shared on the interviewee’s inquiry: 

• Customlope only sells ONE type of product Price: $1/unit.
• This year, Customlope sold 50 million units.
• Costs have already been reduced as much as possible.
• Customlope has excess capacity. It can produce at least double the amount of units per year at similar or lower unit costs.
• Customlope’s products are similar in quality and price to their competitors’ products.
• This year, 100 million secure envelopes will be sold. Next year, this total will shrink by 25%.

Initially, the interviewee should outline the profitability equation:

Profit = Revenue – Costs

The interviewee should ask for the following information:

• Type of products sold
• Number of units sold
• Price of units sold
• Cost breadkdown

The candidate should calculate the costs per envelope and the candidate should calculate last year’s profit because the client wants to maintain profit at that level.

Information that you can share on the interviewee’s inquiry:

• Since competitors do NOT benefit from Customlope’s economies of scale, their unit cost this year is $0.90 per envelope (Customlope’s is $0.70).
• Competitors CANNOT further decrease their unit cost.

The interviewee should ask for the following information:

• Main competitors
• Competitor’s size
• Competitor’s cost structure
• Competitor’s products

Key insights

Now that the interviewee knows more about the client and the client’s competitors, the interviewee should consider ways to help the client maintain his current profit level.

Since costs are already optimized, the only way to maintain the current profit level is to increase revenue.

Increase price

• This will probably NOT work because the product is commodity-like.
• Now that a new substitute has appeared, it is even more unrealistic to raise prices.

Increase market share

• Customlope could decrease its price to steal market share from its competitors.
• We assume that competitors will leave the market if they cannot be profitable. Thus, if Customlope decreases its price to $0.90 (their competitor’s per-unit manufacturing costs), Customlope should obtain 100% market share.

Key insights

Customlope can maintain its current profit level by reducing its per-unit price. The market share and revenue gained is greater than the loss from lower profit margins.

Although there is no right answer, it seems that the client could benefit from a short-term price war because its costs are lower than its competitor’s costs.

Possible answer:

The client should initiate a price war and decrease the price of the customized envelopes to $0.90 or to slightly less than that.

Key insights

• Increasing the price is NOT an option because the envelope is a commoditized good.
• Decreasing costs is NOT an option because costs are already optimized.
• The only way to maintain current profit levels (without investing in the new technology) is to increase market share by decreasing per-unit price.
• By taking advantage of its lower costs, Customlope can push other competitors out of the market because the competitors cannot make a profit on their envelopes.
• The objective of maintaining the current profits would be met, as proved previously.

Further considerations

Before implementing this strategy, the following points should be taken into consideration:

• There could be market regulations against a monopoly. However, since the company would not be selling their products at a loss, competitors cannot accuse Customlope of price dumping.
• Some competitors might remain active in this market even if they have to sell at a loss. For example, they might use their market presence to cross-sell different products to banks.
• Thus, Customlope may not obtain 100% market share.
• In the long run, the client should invest in and implement the new technology. The client can do this via R&D or by acquiring one of the new competitors and its technology.