Case

Madflix.com

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Problemdefinition

Our client is madflix.com, a website similar to Netflix. The biggest difference is however that Madflix targets mainly men and provides a majority of “mad movies”, such as action, horror or science-fiction movies.

Clients sign up online, order online, receive the movie and mail it back. They are not satisfied with the profit margin, as it has declined over the last two years.

The CEO has hired us to recommend a solution.


Kommentare

A unique feature of this case is that the variable costs of Madflix do not depend on sales volume, but on other drivers (e.g. average number of movies returned each month).

The interviewee should understand the revenue and cost structure, identify the increase in cost and recommend a solution.


Kurzlösung

Madflix has to increase the profitability of subscription model 1 as it has negative earnings from it.


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 topics can be discussed:

Case Structure

I. Revenues

Information that can be shared with the interviewee on his/her inquiry:

  • Subscription models:
    • S1: 1 movie at a time / $9.99/month
    • S2: 2 movies at a time / $14.99/month
    • S3: 3 movies at a time / $19.99/month
  • Key revenue drivers:
    • Price
    • Subscription mix
    • # of customers
  • Subscription model 1 introduced 2 years ago.
  • Growing number of customers and revenues
  • Unchanged prices

Share Diagram 1 if the interviewee requires information about the revenues.

II. Costs

Information that can be shared if inquired:

  • Key cost drivers:
    • Fixed costs (administrative)
    • Variable costs
  • Components of variable cost:
    • Distribution: Primarily mailing costs
    • Content amortization: Usable life of movies is 30 rentals.
    • Allowances: allowance for movies to be lost in mail
    • Other: DVD cases repair, etc.
  • Insignificant fixed costs
  • DVD amortization is variable
  • Distribution cost on a per unit basis

Share Diagram 2 if the interviewee requires information about the costs.

Main conclusion:

  • Revenues are growing for all subscription models.
  • Variable costs depend on number of movies rented per month (not subscription volume). Distribution costs and amortization make up the biggest share of the variable costs.
  • 2 key gross profit drivers are:
    • Subscription mix
    • Average rentals per month

III. Competition

Information that can be shared if inquired:

  • Possible key issues:
    • New competitors
    • More rivalry
    • Studios sell fewer movies
  • No other competitor in Madflix’s niche.
  • Margins for competitors are not decreasing.
  • Studios are expected to sell the same amount of movies.

IV. Market

Information that can be shared if inquired:

  • There were no changes in demand from target audience.
  • There were no changes in customer preferences.

Tasks

After discussing these topics ask the candidate to solve two tasks.

Share Table 1-3 if the interviewee requires information about the market and customers.

Analyse the gross profit margin for subscription type 3 (in 2012)

Revenue per month and customer

Average rentals per month

= 8 (Table 3)

Revenue per month and rental

For each rental of a customer Madflix receives revenues of $2.50.

Costs per rental

= $1.75 (Diagram 2)

Gross profit margin

Calculate the required price for subscription type 1 & 2 in order for Madflix to have a 30% profit margin.

Average rentals per month

= 6 (Table 3)

Costs per rental

= $1.75 (Diagram 2)

Required price related to required gross profit margin

Current gross profit margin

Subscription 2

Average rentals per month

= 7.5 (Table 3)

Required price

Current gross profit margin

Main Conclusion

The main conclusions here should be:

  • S3 is more profitable than the other models.
  • S2 is still profitable, but S1 is a loss.
  • Madflix is subsidizing its own growth (sells at a loss).

V. Conclusion

The final recommendation should include:

  • Madflix increased its revenues by adding customers in S1 and S2. It has subsidized S1 with S2 and S3 as S1 is generating negative margins.
  • Madflix needs to restructure S1 to make it profitable.
  • Possible ways to increase profitability:
    • Adjusting the price
    • Rationalize costs (focus on distribution cost and amortization)
    • Enter other market niches (women, children, etc.)
    • Targeted advertising to increase customer base
  • Possible risks:
    • Adjusting prices could lead to switching of customers (from S3 to S2 and from S2 to new restructured S1)
    • Madflix needs to identify premium offering of S2 and S3
    • Madflix needs to be cautious not to lose customers while restructuring S3
  • Next tasks:
    • Analyse the price elasticity of the customers to find suitable price for each subscription
    • Renegotiate contracts

Schwierige Fragen

What possibilities would you suggest in order to reduce the costs (cost rationalization)?

Possible answers:

  • Renegotiate volume discounts to decrease distribution costs.
  • Encourage S2 & S3 customers to order more than one movie together.
  • Promote (with discounts, etc.) rentals of older movies that have lower amortization costs.
  • Renegotiations with film studios in order to reduce DVD costs.

More questions to be added by you, interviewer!

At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).

Verwandte Consulting-Fragen
Beste Antwort bisher:
McKinsey / Accenture / More than 300 real MBB cases / Collected all Big 3 offers / Harvard Business School

Hi, 1) Youproactively ask in the beginning, even before drawing the structure (something like "What kind of products / revenue sources do we have) and then split the structure into price, qty,... (mehr)

Beste Antwort bisher:
McKinsey / Accenture / More than 300 real MBB cases / Collected all Big 3 offers / Harvard Business School

Hi, The general framework for pricing is: Cost base - Value based - Competitor based - pricing strategy 1. Cost based - you actually check what are the costs and apply standard industry / target... (mehr)

Bisher beste Antwort von 2 Antworten:
Ex-BCG Consultant / Interviewed 80+ applicants at BCG / Received offers from McK (US) and BCG (DE)

Hi Anonymous! Both are valid approaches. As a rule of thumb, 1) is more suitable for a quantitative assessment (e.g. "By how much has profit declined?"), while 2) seems like a good approach for a... (mehr)

Bisher beste Antwort von 3 Antworten:
Sara
Experte
MBA Candidate at INSEAD / Ex McKinsey / Here to guide you from your very first steps

Dear Alice, the most important points in laying out your structure are: be MECE, be quick, be sensible.The breakdown that you are suggesting is a deeper layer that might not even be evident at the... (mehr)

Bisher beste Antwort von 3 Antworten:
Sara
Experte
MBA Candidate at INSEAD / Ex McKinsey / Here to guide you from your very first steps

Dear Kevin, Your objectives are - to make the transition between the two frameworks fluent - to facilitate your work by gathering before information that will be useful later At this scope... (mehr)

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Case-Exhibits





Average rentals per customer