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"Additional Revenues" don't add up...?

[Updated] Baby Formula
New answer on Apr 26, 2023
2 Answers
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Anonymous A asked on Apr 25, 2023

Hi, thanks for the great problem!

I have a question, it's probably a simple solution…but I noticed that in the calculation for the “Additional Revenues of BabyformulaCo through Market Share Increase” the market share increase (10%) was multiplied by the number of cans sold, rather than the current value of the market share that BabyformulaCo holds…and because that happened, the total value of the WIC Revenues + Market Share Revenues do not actually add up to the 3% increase in market share that BabyformulaCo acquires, which should be 129M$. 

It would be great to have further explanation on this…

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Hagen
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updated an answer on May 26, 2023
#1 Bain coach | >95% success rate | interviewer for 8+ years | mentor and coach for 7+ years

Hi there,

I would be happy to provide the solution:

  • Given that BabyformulaCo will be provided more shelf space, their market share increases from 30% to 33%. However, out of those 5.16m additional cans of baby formula, they sell 3.00m cans via the WIC.
  • As such, in order to avoid double counting, you need to subtract the WIC cans from the total additional cans sold to arrive at the additional cans through market share increase.

Best,

Hagen

(edited)

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Nikolas on Apr 26, 2023

Thanks for the hints. I think I found where I was confused. In this model we assuming that the volume of products remains constant. In doing this, the total market value will actually decrease. That was confusing for me, because I would have assumed the opposite. •The BFC market share *could* have increased by 3% as a result of putting another 3M cans on the market, OR it *could* have grown 3% as a result of taking over competitors production. In this case, we are assuming it takes over production...although I am not sure the problem explicitly said this. •The difference between my answers and the ones presented indicates that a 3% increase in market share would result in $129M rather than $114M. The difference between these is $15M. Divide this by 3M cans, and you get $5, which is the difference in price between the market average and what we recommend they bid. Voila.

(edited)

Hagen on Apr 26, 2023

Hi Nikolas, exactly, in order not to make the calculation even more complicated, no market growth over this one year is assumed. However, it is described that BabyformulaCo is provided shelf space (from competitors), and the client thus sells more, resulting in a higher market share. Moreover, you are absolutely right about the $5 calculation as a cross-check.

(edited)

Jade on Jul 04, 2023

Hi, thanks for explaining. I understand this logic here, but one thing i don't understand- why do we need to get the 5.16m units? It seems to me that if we know the share is 33% and the market size is fixed at $4.3bn, i will j multiply them out, and that could be reasonable too.

Hagen on Jul 04, 2023

Hi Jade, Thank you very much for this question. I would be happy to share the solution to it: Since you want to understand the additional revenues generated, simply multiplying the new market share and market size will not get you to the desired results. Moreover, you also need to consider the 3m cans sold through the WIC program. If you would like a more detailed discussion on the question at hand, please don't hesitate to contact me directly. Best, Hagen

Ian
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replied on Apr 26, 2023
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Great case indeed! Hagen explained it well, but let me just add one thing to help you for all future cases: Structure

Always make sure you write out the overall concept/layout of the math before you jump in.

Get everything written down and take it step by step. This allows you to have the right logic and not miss things (like the double-counting Hagen pointed out)

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Hagen gave the best answer

Hagen

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