Case

# OnlineGo

## Problemdefinition

The client, OnlineGo, is a European Internet Service Provider (ISP) that is contemplating entering the North American market. Currently, they hold a dominant position in the European market with two streams of income; a subscription fee and taking a percentage of all e-commerce transactions done by subscribers. After studying the North American market, OnlineGo has concluded that the market is very divided and it is the perfect time to enter. You have been asked to calculate some figures to determine the potential profitability of entering the North American market.

## Kommentare

In this interviewer-led case the interviewee should be guided through the case by the interviewer.

## Kurzlösung

• The annual net income will be \$840 million constituting a yearly profit margin of 28,6%.
• OnlineGo cannot lower the subscription fee as total costs are constant and this would result in an annual loss of \$0.36B.
• The demand is highly elastic, which means that OnlineGo will not capture enough market share if it charges \$20/month.
• To cover the expenses, each subscriber would have to purchase \$3,000 worth of products online, annually.
• An additional 15.62 million customers need to be acquired to break even.

## 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.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

### I. Background

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.

### II. Quantitative Analysis

Please share the Industry Information in Exhibit 1

#### 1. Calculate the annual net income in North America, given the current model and all assumptions. What is the annual gross mark-up, measured as a percentage?

• 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%.

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

#### 2. OnlineGo found that a new entrant is charging \$10 per month to gain market share. Can our client do the same?

• 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.

#### 3. What is the elasticity of demand for this market?

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

#### 4. Due to high market elasticity, OnlineGo will charge only \$10/month. What would be the amount of online purchases that have to be made by each customer to maintain the same level of profit as at \$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.

Ask the candidate whether this is a realistic idea - the answer is clearly no.

#### 5. How much would each subscriber have to buy to allow the firm to break even (in the \$10/month scenario)?

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

#### 6. How many subscribers would OnlineGo need to gain in order to break even (in the \$10/month scenario, \$1,800 in purchases)?

• 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.

A lot of people tend to omit the variable costs when completing this case.

### III. Quantitative Analysis

#### 7. How can the fixed costs of investment be reduced?

• Outsourcing capacity

• Leasing networks

• Working in particular geographical areas

• Many other acceptable responses

#### 8. Is there any reason to continue with an investment even if it will lose money?

• 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.

### IV. Conclusion

#### 9. How would you summarize the situation and what are your recommendations?

• 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 are 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.

## Schwierige Fragen

#### Are there any other risks or benefits the client should consider?

Very open-ended question based on the candidates own ability to brainstorm ideas.

Verwandte Consulting-Fragen
Bisher beste Antwort von 3 Antworten:

Two frameworks here: 4 Ps (= price, place, product, promotion), or the Ansoff Matrix (grow with existing or new products in existing or new markets). Both are quite MECE. Word of caution however --... (mehr)

As you describe it, this is the longest version of this case format; normally too long for an oral interview, so it's super important to listen whether the question is about if (the client should ente... (mehr)

Hi there, I would start by asking some general questions to have a better feeling on the case: 1) Does our client provides this new service elsewhere? If not, does our client already has the cap... (mehr)

Beste Antwort bisher:

Hi, 1) You proactively 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)

Bisher beste Antwort von 2 Antworten:

If I understand your questions correctly, you are trying to figure out the difference between analyzing the overall market (or an industry), vs. the subsections of the market that a particular company... (mehr)

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Case-Exhibits

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

1. Calculate the annual net income in North America, given the current model and all assumptions. What is the annual gross mark-up, measured as a percentage?

2. OnlineGo found that a new entrant is charging \$10 per month to gain market share. Can our client do the same?

3. What is the elasticity of demand for this market?

4. Due to high market elasticity, OnlineGo will charge less than \$10/month. What would the amount of online purchases have to be made by each customer to maintain the same level of profit as at \$20/month?

5. How much would each subscriber have to buy to allow the firm to break even?

6. How many subscribers would OnlineGo need to gain in order to break even?

7. How can the fixed costs of investment be reduced?

8. Is there any reason to continue with an investment even if it will lose money?

9. How would you summarize the situation and what are your recommendations?