## 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 (Ausklappen)

## Detaillierte Lösung

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

**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.