OnlineGo

The key information that is known about the North American market is that it is fragmented. There is no information about market leaders or trends. OnlineGo plans to gain 10 million subscribers, subscriptions will cost $20 a month. The average OnlineGo user purchases $1,800 of goods on the internet yearly and OnlineGo charges 3% commission on each transaction. Fixed costs are $1 billion annually, variable costs are $110 per subscriber annually.

Exhibit 1

Industry Information

• 10 million subscribers
• $20/month subscription fee
• $1,800/year of online spending at 3% commission
• Fixed costs - $1 billion
• Variable cost - $110/year per subscriber

Revenue each year is $2.4B from subscriptions (10 million subscribers x $20 per month x 12 months) and commission will be $540M (10 million subscribers x $1,800 per year x 3% commission), for a total revenue of $2.94B .

Fixed costs are equal to $1B annually, and variable costs are $1.1B (10 million subscribers x $110/year).

Therefore, profits are $840 million and the annual profit margin is 28.6%.

The interviewee might calculate the total revenues for OnlineGo and then subtract the total annual costs

If this was done, yearly revenues from subscription would drop to $1.2B (10 million subscribers X $10/month X 12 months), and commission would remain unchanged. The new revenue would be $1.74B, therefore OnlineGo would make a loss of $0.36B.

The elasticity is highly elastic, which means that OnlineGo will not capture enough market share if it charges $20/month.

As costs remain unchanged at $2.1B, revenue will also be held constant at $2.94B. With $10/subscription, revenue from subscriptions would be $1.2B. To remain at $2.94B revenue, commissions must be $1.74B. With 10 million subscribers each one needs to generate $174/year of commission. To keep profits at $840M, subscribers need to purchase $5,800/year.

Annually, each subscriber would have to purchase $3,000 worth of products online, which is also unrealistic.

Each subscriber brings in $174/year and a profit of $64. These profits must cover the fixed costs of $1B/year so 15.62 million customers must be brought in.

• Outsourcing capacity
• Leasing networks
• Working in particular geographical areas
• Many other acceptable responses

• Potentially, OnlineGo could do this to enter the internet retailing market and increase its number of subscribers, but it is not a long-term solution based on the calculations.

• There is not one definitive answer, everything is reliant on the interviewee's own ability to explain themselves and their reasoning. Initially, this seems like an attractive market to enter - but if OnlineGo is to expand into North America, they need to find a way to gain much more subscribers or differentiate its product.

In a stellar case interview, the quantitative part will be executed solidly with an intuitive understanding of the questions posed. A very good interviewee will display a solid business acumen with an overview of the implications and costs of the venture and will deliver strong, verified arguments to invest or not invest.