Profit = Revenue - Costs

Revenue
Revenue (or top line): the total
income generated by normal
business activities
Profitability cases are the most
common type of question to be
asked in interviews – and that’s
because it’s the most common case
for consultants to be on in real life!

Profit - You can be asked to diagnose a

Costs: The total expenditures made
in order to run a business
profit problem, improve a profit
problem or both.
In all cases, it is crucial to have a
thorough understanding of all the
concepts in this guide.

Costs

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 Revenue = Volume x Price
Revenue can be broken down in a number of ways which can be useful when analysing the profitability of different types of
businesses. Here are some examples to get you thinking! # last year’s customers
+
# new customers
-
# units # customers # leaving customers

R x R x
price spend/customer av. spend/month
X
# months
• The most common breakdown
• The focus is on increasing the # sold + unit price • Works well with subscriptions and memberships e.g. TV/Phone/Internet
• Uncover more insights by further segmenting # units by product subscriptions and gym memberships
type/region/customer type/factory etc. • The focus is on retaining current customers, gaining new customers and
increasing spend

# customers
X # paying
# sales # sales/customer # users X

R x R x Paying
avg. spend/ visitor

price/sale # items/sale revenue/user # non – paying

Non - Paying
X X
avg. price/item ad revenue/ user
• Works well with retail stores e.g. supermarkets • Works well with websites or apps
• Focus here is on increasing the number of customers, the • Focus here is on increasing the number of paying customers, the average
frequency of purchases, the number of items they buy and spend per customer and the ad revenue from non-paying customers
the average price per item.
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 Growth strategies (i.e. increasing
revenue)
 current • Loyalty schemes
customers • Discounts /  price

Who? Customers • Rebrand

 new
•  marketing
customers
• Acquisition
• New products
What? Products
• Complementary products
 # units
sold
Brainstorming ways to increase revenue, or growth strategies, is a common
Enter new
Where? question in case interviews.
markets

It can be a lot to remember and organise, so if you get stuck, you can use the
‘question words’ (left) to help generate ideas in a structured way.
Distribution
How? channels
How to We’ve included 2 additional MECE approaches along with some generic
increase examples, but they are not exhaustive. Practise using the breakdown that
revenue? makes the most logical sense to you (or create your own!)
Don’t present this
thought process to Remember when you present your answers to be as specific as possible and
the interviewer! not use generic terms - e.g. instead of saying “we could enter new markets”
you should say “we could enter France or Germany as they have great growth
potential”

 price Also, when running the interviewer through your ideas, remember to assess
the implications of an option (i.e. success vs risk) and at the end, proactively
offer the option you think would be the most viable and the next things you
would want to consider before pursuing it.

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 Growth strategies
•  marketing/ loyalty schemes
• Discounts /  price Organic growth: growth from expanding internal
 in existing
markets • New distribution channel activities (or primary investment)
• Expand product portfolio Inorganic growth: growth from another business
 revenue
through a merger, acquisition or joint venture.
organically Enter new • New product lines
How to markets • New locations
Vertical integration: when a company acquires a
increase business in the same industry but at a different stage
sales? Joint venture of the supply chain
 revenue /partnership
inorganically Supply chain: the entire process of making and
• With competitor selling a product – from supply of the raw materials,
M&A
• With supplier/ buyer to delivery of the final good to the customers
(vertical integration)

•  marketing/ loyalty schemes

• Discounts /  price
 in existing • New distribution channel
markets • Acquire competitor

 # units sold
• New location
 in new
• Rebrand Joint venture: When 2 firms remain separate entities
 revenue from markets
but have shared ownership over a commercial
existing products
• Offer  premium products enterprise
How to  price
• Bundle products together Merger/ Acquisition: When 2 firms completely
increase integrate to become 1 firm
sales?  in existing • Complementary goods
 revenue from markets • New product line Complementary goods: goods or services used in
new products conjunction with another
• Joint venture
Enter new
• Merger/ acquisition
markets Distribution channel: the way in which a product
• Organic
travels from producer to customer

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 Diagnostic cases
Diagnostic cases are profitability cases where the client is experiencing a problem (declining profits or
declining revenues) and wants you to find out the root cause. The issue is always quantitative (e.g. our
 in revenue decline in profits is due to an  % decline in market share) but the root cause is always qualitative (e.g.
Why have we are losing market share because our customers prefer our competitor’s shopping experience
profits because the customer service is better). The second part of the case will likely be brainstorming
declined? solutions.
 in costs • Competitor has better prices?
• Competitor has better products?
 in market share • Competitor has better customer service?
• Competitor has more brand awareness?
• Any issues with our capacity to supply?
 in # units
sold • Have cheaper/better substitutes come to market?
Why has • Was this just a fad?
 in market size
revenue • Has there been any bad PR?
• Any other external factors? E.g. decline in economy?
declined?
• Due to company strategy? e.g. to gain market share
 in price • In response to competition? e.g. price war started by new entrant
• Decrease in customers willingness to pay e.g. if cheaper substitute has come to market

• More defected/ lower quality products?

 # units produced
Why have
costs •  in productivity?
 in fixed costs •  in labour/utilities/admin costs?
increased?
•
 in cost/unit
• Change in product mix?
 in variable costs •  in supplier/distribution/ prices
•  in efficiency of process?

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 Costs = Fixed + Variable Costs

Fixed costs are costs which remain the same as the number of units produced increases e.g. labour salaries, utilities,
marketing, administration, rent, research & development, maintenance, depreciation, insurance, IT systems etc.

Industries with high fixed costs often have a high level of automation and capital e.g. mining, airlines, oil & gas,
pharmaceuticals etc.
Fixed costs High fixed costs can be a barrier to entry which means they require high volumes of sales to make a profit, another way
to look at it is that factories and machinery are expensive to run and need to produce a certain number of units to not
run at a loss (or at a certain % utilisation), which is dependent on demand. There is therefore high risk from demand
volatility.

Industries with low fixed costs have a much lower risk with demand volatility but there will often be much more
competition due to the low barriers to entry.

Variable costs are costs which increase as production or output increases. This often includes raw materials of
the items (COGS), fuel, payment fees, commission, shipping costs etc. Variable costs
In a case interview, you might be asked to brainstorm ways in which
you can reduce costs. This is a very high-level approach to help you
think and answer the question in a structured way.
• Eliminate waste/  efficiency
 # units • Eliminate need i.e. stop producing
Ensure you make your answers specific to the problem and avoid the
How to • Reduce need i.e. produce less
use of generic terms when presenting to the interviewer.
decrease
• Renegotiate with current suppliers
costs? In some cases where fixed/variable costs may not apply, segment the
• Change suppliers
 cost/unit • Downgrade
business or organisation by value chain or processes and think of the
• Move to in-house
costs involved to make, support & sell the product at each part (if you
don’t know what the process is, offer your guess first and then cross
check with the interviewer).
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