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Basic profitability case structuring question

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New answer on Aug 22, 2020
6 Answers
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Anonymous A asked on Aug 19, 2020

Hey guys,

Let's say I am working on increasing revenues. Quoting Victor Cheng, "Revenues = Volume x Average Price."

So I would need to increase Volume and/or Average Price.

Let's dig deeper into this Average Price concept. Unless we have a flat increase of prices i.e. a real increase of one item's or multiple items' prices, saying "increasing Volume and/or Average Price is not MECE"

Because Average Price can increase by either (i) the increase of items prices as described above or (ii) the increase in the *volume* of sales of the most expensive items.

So as a result of (ii), Average Price can increase simply due to an increase in volume. And that's not MECE because I would have already treated that in the Volume section of my equation.

Do you guys then agree that saying "Revenues = Volume x Average Price so I need to increase one and/or the other" is not MECE ? and that we need to seperate revenues streams before even writing this equation ? if yes, what's the best way to present that in a case without sounding too confusing ?

Thanks

(edited)

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Sidi
Expert
updated an answer on Aug 19, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi!

The solution is simple - don't start your disaggregation by splitting into price and volume, but first do a segmentation! If there are different segments/revenue streams, a decline usually never happens across the board, but is driven by one or two problem segments. This is where you then need to dig deeper and understand whether price or volume has changed (within the segment theat has declined). You can ignore all the other segments!

There you go - your problem has vanished.

Cheers, Sidi

P.S.: It is important that you do the segmentation FIRST! So at the highest level of your tree. Never segment deeper down in the tree - this will lead to a complete mess, sniche you will then need to map multiple sub-branches to each other, which wis a nightmare.

(edited)

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Allen
Expert
replied on Aug 19, 2020
Ex-McK Experienced Hire and EM - I show you how to perform at your best

Hi Raf,

Victor who? Just kidding.

You're asking an interesting question. I agree, technically, that you need to separate revenue streams in order to be 100% MECE. However, the idea of creating a MECE structure is to enable you to develop and test hypotheses. If you try and separate revenue streams, your structure will become unweildly and not useful. So the practice has developed to give a little on MECE-ness and prioritize practicality.

In summary, address this problem by changing volumes or by changing prices. And go through different products where you can do this.

Does that help?

Allen

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Anonymous replied on Aug 19, 2020

Hi,

In general, I would not recommend to use average price. You should always understand the different revenue streams (if more than 1) then dissect the problem from there.

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Anonymous B replied on Aug 19, 2020

Hi,

Good question. How I like to think about is that the bucket "Price" or "Price management" in a revenue growth case means the prices of different products. What I mean is that this is not the average price, but prices for the different segments. So this framework would be mece if you are able to communicate that this is branch is really about increasing the different prices and not the average price.

Another way to tackle it is to add the third bucket "Mix", which basically means changing the product mix. However, I do not think this is necessary as that is covered in the "Volume" part if you, again, effectively communicate that you mean increasing volume of different products (or the relevant segmentation) and not just the total volume.

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raf on Aug 21, 2020

Can you give me an example of a change in mix that is not a change in volume, nor price ? - nor an introduction of a new product

Ian
Expert
Content Creator
replied on Aug 20, 2020
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi there,

You need to remember here that in casing, we often need to look at trends and THEN segment out.

So, the overall trend of Revenues is down. Which leads us to segment out (by product, geography, etc.). At which point we then look again at overall trends across each product split by price and volume.

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Anonymous replied on Aug 22, 2020

Hi,

When I approach a profitability case, and more specifically the revenue piece, I would recommend the following:

(1) think first what changes revenue (excluding factors around you: economy, competitors, customers, etc... simply think of revenue levers/drivers)

a. volume change

b. price change

c. both

(2) in regards to your concern about being MECE, this is MECE as it is, but how you break it further is what matters. The above is the overall structure. Now, what can be done is to break this further into a second layer while being MECE. The second layer could have overlaps, as is the example you mentioned when it comes to product mix.

a. volume change

a1. increase old volume

a2. add new volume

a3. change volume mix

b. price change

b1. change existing price

b2. introduce new product (and obviously its price)

b3. change product mix (which obviously leads to differently priced products to represent more of the revenue)

c. Both - entails combinations of the aforementioned.

(3) the way to go about representing the changes to revenue could be done in a matrix where you have price and volume against the ways of change. But ultimately, they all fall under both.

(4) the creative ways of achieving those points can be saved for later

- increase the usage of the same product

- make non-customers customers (blue ocean strategy)

- acquire

-find new purposes for your product

-etc...

DM me for more about this subject.

Rakan

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
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