## Problemdefinition

Your client is **Sprinker**, a **mid-size publishing** agency in the **US**. Their main products are **educational materials**. There is a rumor that some **private schools** are going to change their first-grade textbooks. If the rumor is true, they need a publishing agency.

The client wants you to analyse whether they should offer their services.

## Kommentare

This is a **profitability** **case** with **market** **sizing**.

Since this is a **candidate-led case**, the candidate should drive the case from start to finish.

The case is split into **two parts**.

This case is mostly **quantitative** in nature. In order to solve the questions, the interviewee should perform calculations.

The questions in the big boxes should be read out to the interviewee.

## Kurzlösung

Sprinker should offer their services to private schools.

They should sign a **contract** with **writer #1** and **invest money** in a **marketing** campaign. This is due to **several reasons**:

- With the
**marketing** **campaign**, Sprinker has an **80% chance **of **winning** the contract.
- Estimated
**first-year** **profit** is **$2.7 m**
**Writer #1** has the **cheapest per-book royalty**. In the **long ru**n, this **reduces** Sprinker’s **costs**, thus **maximizing** their long-term **profit**.

## Detaillierte Lösung

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

The following structure provides an overview of the case:

### I. Revenue

To estimate Sprinker’s potential revenue from private schools, the interviewee should come up with the following equation:

**Revenue = Volume * Price**

The interviewee must now **estimate the volume**. Since there are **several ways** to estimate volume, the **interviewer** can **follow** the interviewee’s **method** as long as the interviewee makes **reasonable** **assumptions**.

**Information** that can be shared if inquired by the interviewee:

- First-graders are
**7 years old**
- US
**population** this year: **300 ****m**
- Over last 7 years US
**population grew**: **10%**
**25**% of students are in private schools
- Life expectancy:
**70 years**
- Each first-grader has
**1 book**
- Price of book =
**$20**

Here is a possible approach based on the replacement concept.

**Volume estimation**

Let’s first assume that the **population** has been **constant** during the last 7 years.

If people live for **70 years** (life expectancy) and an equal number of children are born each year, 4.3m children are born every year:

However, if the US population grew by 10% over the last 7 years, the number of children born 7 years ago is:

4.3* (1 - 0.1 ) ≈ **3.9 m**

We can round this to **4 m**. Assuming that all children born 7 years ago go to school, there are **4 m** first-graders in school today. **25%** of them (1m) go to **private schools**.

**Revenue estimation**

**Revenue = Volume * Price**

1 m * $20** = $20 m**

### II. Costs

The interviewee should now ask about costs:

**Investments**
**Fixed** costs
**Variable** costs
**License** costs

Share **Table 1 **about license costs with the interviewee.

**Information** that can be shared if inquired by the interviewee:

- In order to produce the new textbooks, Sprinker must rent a building.
**Rental **costs =** $3 m / year**
**Equipment investments **=** $4 m**
**Manufacturing **costs per book = **$5**
- Sprinker must
**hire** a **writer** to write the textbooks’ **content**. When signing contracts with writers, Sprinker usually thinks about **long-term relationships** with the them.
- Sprinker pays writers a
**base payment** (**one-time** payment) and **royalties** (paid every time a writer’s book is sold).

**Writer Costs**

Sprinker can choose from 3 writers.

**Payment writer #1:**

$350,000 + $1.8 *1,000,000 books = $2.15 m

**Payment writer #2:**

$50,000 + $2.5 *1,000,000 books = $2.55 m

**Payment writer #3:**

$50,000 + $2 *1,000,000 books = $2.05 m

Based on the current volume, **writer #3** is the **cheapest** options. However, in the long run, the **biggest cost **are the writer’s **royalty payments.**

Thus, if Sprinker wants to have a **long-term relationship** with the writer as per industry norms, they should **choose** **writer #1**, because he has the **lowest per-book royalty**.

**Manufacturing Costs**

$5 *1,000,000 books = $5 m

**Total Costs Year 1**

Rental costs + Equip. costs + Manufacturing costs + Payment

= $3 m + $4 m + $5 m + $2.15 m = $14.15 m

**Total Profit Year 1**

Revenue – Costs = $20m – $14.15m = **$5.85 m**

### III. Competition

The interviewee should now ask about:

**Competitors**
**Market shares**
**Competitive advantage**
- The probability that
**Sprinker’s competitors** will **win** the **contract**

**Information** that can be shared if inquired by the interviewee:

**3 other companies** are also interested in signing the contract with private schools.
- Each company (including our client) has an equal
**chance of winning the contract** --> **25% **(100%/4).
- If our client invests
**$2 m** in a **marketing campaign**, our client’s **chance **of winning the **contract** increases to **80%**.

Taking the probability of winning the contract into account, the interviewee should now recalculate the **project’s expected profit**.

**Expected profit without marketing campaign:**

$5.85 m * 25% + $0 * 75% ≈ $1.5 m

**Expected profit with marketing campaign**:

($5.85 m - $2 m) * 80% - $2 m * 20% ≈ $2.7 m

### IV. Conclusion

Sprinker should offer their services to private schools.

They should sign a **contract** with **writer #1** and **invest money** in a **marketing** campaign. This is due to **several reasons**:

- With the
**marketing** **campaign**, Sprinker has an **80% chance **of **winning** the contract.
- Estimated
**first-year** **profit** is **$2.7 m**
**Writer #1** has the **cheapest per-book royalty**. In the **long ru**n, this **reduces** Sprinker’s **costs**, thus **maximizing** their long-term **profit**.

The interviewee can also state **risks** and **other topics **that could be investigated.

## Schwierige Fragen

### What possible risks does the company face?

**Possible risks:**

- Competitors can
**increase** their **chances** to win by **different ways**, e.g. **merging**, **conspiracy**, etc.
- The
**rumour** is not yet **confirmed. **If private schools do not change their first-grad textbooks, the **marketing** **investments** will be a waste.
**Writer #1 **could not have **expertise** in **first-grade textbook** writing.
**Not all** the **private** **schools** will use the **same** **textbook** (thus **driving** up **costs** because the writer needs to write **more than one** **textbook** and the factory needs to produce more than one textbook).
- The
**marketing campaign** does **NOT** increase our client’s **probability** of winning the contract **to 80%.**

**More questions can be added by you!**

If the interviewee solves the case very quickly, you can come up with additional challenging questions to ask them.