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

Profit decline with increase in revenue

If profit has declined, but revenue has increased, would you only look at costs? I think there is still a case in which revenue growth may have declined although costs grew at the same (higher) rate as before and hence, the problem is actually slow growth of revenue because costs were growing at the same rate as before. So, we'll need to look at both, even though revenue has grown and in fact, will need to focus on growing revenue, instead of lowering costs. Is my understanding correct?

5
3.4k
28
Be the first to answer!
Nobody has responded to this question yet.
Top answer
on Jun 04, 2021
#1 Coach for Sessions (4.500+) | 1.500+ 5-Star Reviews | Proven Success: ➡ interviewoffers.com | Ex BCG | 10Y+ Coaching

Hi there,

If profits declined and revenues increased you should NOT only look at costs (although you may have a hypothesis that the problem is there and prioritize that area).

The problem could well be on revenues, mainly for two possible reasons:

  1. Multiple revenue streams. Revenues of A (low margin) went up, bringing overall revenues up. But Revenues of B (high margin) declined, leading to overall lower profits. The problem thus is the decline in revenues of B
  2. Revenues went up due to a decrease in price. This led to higher revenues, but lower margins thus lower profits. The problem thus is the decrease in price

Hope this helps,

Francesco

on Jun 04, 2021
McKinsey | NASA | top 10 FT MBA professor for consulting interviews | 6+ years of coaching

Hi, I confirm it is not only a matter of total revenue and total cost, but the mix is important. About revenues, you should understand the major revenue streams and how they are changing (e.g. if I'm selling my least profitable product more than before, my profit is in decline even if I'm growing in revenue and market share)

Best,
Antonello

Deleted user
on Jun 04, 2021

This sounds like a mix shift. If the growth in revenue is driven by a product with lower margins, the revenue goes up, but total costs grow faster. Key is to look at breakdown of revenue and costs by product in the portfolio.

If that doesn't explain the profit decline, you might also look at a number of other things

  • Pricing & discounting (did the client buy the increase in market share with lower prices or higher discounts)
  • Cost of sales (how many sales people are driving the revenue increase, if you hire an army of sales people your revenue will go up, but also the costs)
  • Increased administrative costs (unlikely because boring for an interview case ;)
14
Ian
Coach
on Jun 04, 2021
Top US BCG / MBB Coach - 5,000 sessions |Tech, Platinion, Big 4 | 9/9 personal interviews passed | 95% candidate success

Hi there,

You're partially there.

Really, you need to look at Total Contribution Margin. This is a more sophisticated way of breaking out Profits by spliting it by Fixed Costs and Contribution Margins (i.e. # units and unit contribution margin...with unit contribution margin equalling price minus associated variable costs).

This will help you understand if the product mix has changed, or if fixed costs were the problem, or if variable costs were the problem.

Deleted user
on Jun 04, 2021

Draw out the classic profitability tree and work through each branch carefully & systematically. You should have the following hypothesis:

  • Increase sales by reducing price (discounting) at smaller or low margin
  • Increased expenses (e.g one time investment or higher salaries etc) to meet the increase in sales
  • Increasing costs (fixed and/or variable) to increase production for higher sales
11
Similar Questions
Consulting
Just did the Mckinsey Solve Game (January 2025) - got some questions/insights
on Apr 24, 2025
Global
5
3.3k
Top answer by
Hagen
Coach
#1 recommended coach | >95% success rate | 8+ years consulting, 8+ years coaching and 7+ years interviewing experience
38
5 Answers
3.3k Views
+2
Consulting
Employment Gap on Resume and How to talk about it during Interview
on Apr 14, 2025
Global
9
8.0k
Top answer by
Ariadna
Coach
BCG | Project Leader and Experienced Interviewer | MBA at London Business School
110
9 Answers
8.0k Views
+6
Consulting
Invited for internship but rejected for fulltime
on May 09, 2024
Global
8
2.2k
Top answer by
Hagen
Coach
#1 recommended coach | >95% success rate | 8+ years consulting, 8+ years coaching and 7+ years interviewing experience
56
8 Answers
2.2k Views
+5
How likely are you to recommend us to a friend or fellow student?
0 = Not likely
10 = Very likely
Thanks for your feedback! Your opinion helps us make PrepLounge even better.