Get Active in Our Amazing Community of Over 448,000 Peers!

Schedule mock interviews on the Meeting Board, join the latest community discussions in our Consulting Q&A and find like-minded Case Partners to connect and practice with!

Average Price Decline Calculation

Espresso Whatelse?
New answer on Jun 23, 2020
3 Answers
2.1 k Views
Ksenia asked on Jun 21, 2020

This is a fantastic case and one of my favourite so far. What is the value add of calculating the weighted average of average price decrease? How will that constribute to figuring out the root cause of the profit margin decline? Thank you.

Overview of answers

Upvotes
  • Upvotes
  • Date ascending
  • Date descending
Best answer
Ian
Expert
Content Creator
replied on Jun 21, 2020
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi there,

The weighted average just gets you the % decline of your total profitability. You need this because otherwise your numbers mean nothing!

The alternative method is to add the absolute price decrease impact across each product to each other. Then divide that number by the total revenues.

^but this is just a weighted average by another name

What I mean is, you can't just say "profits for x product will fall x% and for y product they'll fall z percent". What matters at the end of the day is to the overall business, hence needing to understand total impact :)

Was this answer helpful?
Luca
Expert
Content Creator
replied on Jun 23, 2020
BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached

Hello Ksenia,

First of all thank you for your kind words!
A general profit margin decline can be driven by lower prices or higher costs. ​The aim of calculating the weighted average of the price decrease is to understand the overall impact of this trend on our profit margin.
Let's do a quick example: you have a product A which price is increased by 5% and a product B which price decreased by 10%. In order to understand if overall impact is positive or negative in term of price variation, you have to weight these numbers with revenues of each product.

Is it clear now?
Feel free to PM me if you want to discuss this furher!

Best,
Luca

Was this answer helpful?
Anonymous updated the answer on Jun 21, 2020

I'm seeking clarification on the question;

1) how is value measured (time savings? for example)?

Weighted average gives extra consideration to the highest leverage price/product in this case. So perhaps it could help identify if the weight distribution between the various products needs to be readjusted.

Please advise. Thank you.

(edited)

Was this answer helpful?
2
How likely are you to recommend us to a friend or fellow student?
0
1
2
3
4
5
6
7
8
9
10
0 = Not likely
10 = Very likely