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Approach Method: How would an experienced consultant approach a Revenue Decline Problem?

Declining Profitability Case growth analysis Revenue analysis sales
New answer on Sep 01, 2023
2 Answers
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Mike (Mustafa) asked on Oct 24, 2018

Hi all.

A start-up company has been having issues with turning profits for 6 consecutive quarters.

After the company analyzed their performance, they found out the following:

  • Prices might be too high for the average user
  • Lack of user engagement on a regular bases
  • Slow subscriber growth
  • Some products are not visible to the subscribers
  • Platform design contributes to the lack of visibility of the products.

Once these findings were verified, the company began to implement some interesting strategies that helped change the performance dramatically.

Here is what the company did during Q7:

  1. Changes to the platform were introduced based on the analysis to give better visibility to the products
  2. The company began various campaigns to gain new subscribers with offers and discounts
  3. The company began engaging the existing subscribers via different channels and offered Discounts and Promos to get the Subscribers to use the products more

After these solutions were implemented, Q7 growth was significantly higher than the previous periods. Q8 turned a profit.

Here are the outcomes:

  • Subscriber's base grew by 119% by the end of Q8
  • Revenue was positive by the end of Q8 for the first time in 8 quarters
  • Products visibility has improved massively. This is reflected by the sales and revenue of the different products. And by the end of Q8, the products that weren't visible began to sell at the same rate as the other products.

However, this is my assessment of the situation:

This is unsustainable for the long term. Eventually, users will be very fixated on offers and will be waiting for the next offer to buy.

This was proved to be true when Data was presented which showed that Organic sales began to flatline or at the very best began to reach the same volume of sales as the offers and discounts.

Discounts began to cannibalize organic sales.

What's Next?

By Q9, the company began to lose profits. It is not negative, but it is getting closer and closer to breakeven.

Now, My prediction is that the company will need to device a completely new approach: The company will lose money again by Q10. Why? I am not sure. This is done without analysis, whatsoever.

  1. How do we approach the profitability analysis for this case?
  2. How would an experienced consultant break this down into pieces to begin the analysis?

I must say that I am looking at this case: https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/madflixcom-49

I like the way it was broken down. But, I feel like the Madflix case doesn't show the full picture of the analysis.

I appreciate your feedback and input.

Thank you in advance.

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Anonymous updated the answer on Oct 24, 2018

Hi Mike / Mustafa,

interesting case.

On a general note: In any kind of subscription business (like Madflix) an interesting analysis to conduct is a cohort analysis. So how do KPIs (revenue, churn, ...) for customers that became customers at different points in time behave over time. So you compare customers that became customers in Q1 to those that became customers in Q2 and so on. This is instructive to see whether your measures are improving things. It is also instructive because it helps you to separate growth effects (such as Subscriber Acquisition Costs) from the "steady state".

To give you an example: Imagine you sell 2-year mobile phone plans with a gross margin of 20€ a month. Acquiring a subscriber costs you 250€. You add 100 subscribers in Year 1 - you run a loss in this cohort of 100 x (12 x 20 - 250) = -1000. In year 2 you add another 100. Another loss for that cohort. But the first cohort is now hugely profitable. And so on...

Whether such an analysis is relevant to your particular case is hard to tell - from the description it's not evident that this is a subscription business. Some of what you say has me believing that the business is transactional (like eCommerce): "users will be very fixated on offers and will be waiting for the next offer to buy."

Here's what I can see from your description (and my experience as a startup founder):

  • the key problem seems to be user engagement and therefore product. If you only can trigger people to use your product by deeply discounting it, your product is not good enough at the given price. So fix user engagement, which in turn will fix everything else.
  • the discounting / promo strategy seems to be flawed. Any offer should ultimately increase Customer Lifetime Value - if CLV is positive, it doesn't matter if you run a loss during user acquisition, because over time you will recoup that loss. This is where a cohort analysis is very instructive.
  • That being said, I find it odd that in your description the company becomes profitable as soon as it is growing and becomes unprofitable as soon as growth is flatlining. I would expect the reverse effect - growth investments create losses, which are recovered in the steady state.

I would probably focus my efforts on the product - are all products equal or are some products performing better than others? Can we kill unprofitable products? can we upsell users to more valuable offerings? How can we improve the price (by cutting non-essential features for example)? Are there tactics to improve engagement without discounting (i.e. gamification, "hook strategy" (look it up, book by Nir Eyal), ...)?

Next, I would look at the discount strategy: Are discounts/ offers improving user engagement or not? I not, they just improve things in the short term and should be killed. Hw can we design discounts in a way that they ultimately improve engagement and CLV?

I am aware that I am not looking at the full picture here but immediately focus on two topics. This is intentional. In my experience, clients are rarely looking for an end to end analysis of every part of their business. Especially if you come in for the fitst time and if the house is on fire. They need quick results, especially if they are living quarter to quarter. Once you've proven that you can really improve things, you can say:

"Okay, here's what we should do next..."

So, this might not be the most instructive answer for success in an interview, but maybe for success in consulting ;-)

Cheers

Elias

(edited)

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Mike (Mustafa) on Oct 24, 2018

Hi Elias. Thank you very much for the feedback and insights. As always, you're being extremely helpful. I am still a "noob". I believe you're right. This is not a subscription model. It is indeed a transactional business. People buy the product at a specific price and use the product. The product costs the company ($X). So, the approach you're suggesting is basically to look at the profitablity of customers/users acquired in each cohort (Q1, Q2, Q3, .... Qn) and measure the cost (Product, Acquisition, Variable) vs earnings from each group. This way we are analyzing the lifetime value of the customers. Is that right? One thing that comes to mind, what if X number of customers were acquired in Q1. These people made at least one purchase within that period, but have not made any purchases in later periods. How do these customers affect the analysis? What about customers that came onboard and did nothing at all? This helps measure the Churn Rate per Q. Am I making any sense? If this is the case, I would do the following: Take each cohort and segment the customers acquired based on their spending on the various products available, along with the churn. Then compare the cohorts. This way, we will be able to monitor these users and increase the engagement and develop special offers designed for them to encourage them to come back or at least buy one time. and of course, we cannot neglect the other performing segments. As for the steady-state, it is unclear as to how far away is the company from the steady state. I am unable to verify or get some data relevant to this. Regarding the products: Indeed, we should be working on eliminating the products that are not performing or underperforming. But again, my data is insufficient. "Are there tactics to improve engagement without discounting (i.e. gamification, "hook strategy" (look it up, book by Nir Eyal), ...)?" I am currently looking into this issue and trying to develop something here. Thank you for your suggestions. I just want to know, am I making any sense with where I am going with this?

(edited)

Clara
Expert
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replied on Sep 01, 2023
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

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