How to compare profitability

profitability
New answer on Jan 31, 2021
3 Answers
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R (Mck Final round)
Skilled
asked on Jan 03, 2020
Been through Bain Final Round

In market assessment, it is often necessary to compare the profitability of different markets. Other than, concluding from level of competition, what are the other common ways to determine the relative profitability level of different markets?

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Tan
Expert
Content Creator
replied on Jan 04, 2020
Ex BCG | 4+ years experience as interviewer

Hi Ronnie,

Competition is one important factor which affects revenue, but there are at least 2 other factors to consider when it comes to profitability.

One is market affordability or customer willingness to pay. This would set the cap for pricing and thus affect revenue.

Another important factor is the cost structure in the different markets. Here you need to go deeper into the cost structure and evaluate the major cost components, how they compare in the different markets.

Cheers,

Emily

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Luca
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replied on Jan 03, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello Ronnie,

Competition is important but sometimes it can be a bit misleading. There are industries that have high margins nevertheless competition (e.g. fashion and luxury).

The most important data that you can have to compare the profitability is the final price of each market, taking into acccount the different business landscape (g.e. workforce in India is cheaper than in America, so you can still have higher margins with lower prices).

Another good drive to estimate the profitability is the "complexity" of the product. High-end product have usually higher margins than basic products (as for the specialties of the case "light on" that we were discussing).

Hope it helps,
Luca

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R (Mck Final round) on Jan 03, 2020

Thanks Luca very much for the detailed responses. Agree the final profit numbers are the most 'correct' benchmark. Qualitative benchmarks involves competition and the 'complexity' (but think most complex product might have higher entry barrier, thus lower competition)

Ian
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replied on Jan 31, 2021
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

I'm going to take a step back and answer the question you're really asking: How do I use frameworks in a case?

If there's anything to remember in this process, is that cases don't exist just because. They have come about because of a real need to simulate the world you will be in when you are hopefully hired. As such, remember that they are a simplified version of what we do, and they test you in those areas.

As such, remember that a framework is a guide, not a mandate. In the real-world, we do not go into a client and say "right, we have a framework that says we need to look at x, y, and z and that's exactly what we're going to do". Rather, we come in with a view, a hypothesis, a plan of attack. The moment this view is created, it's wrong! Same with your framework. The point is that it gives us and you a starting point. We can say "right, part 1 of framework is around this. Let's dig around and see if it helps us get to the answer". If it does, great, we go further (but specific elements of it will certainly be wrong). If it doesn't, we move on.

So, in summary, learn your frameworks, use the ones you like, add/remove to them if the specific case calls for it, and always be prepared to be wrong. Focus rather on having a view, refering back to the initial view to see what is still there and where you need to dive into next to solve the problem.

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