Cookie and Privacy Settings

This website uses cookies to enable essential functions like the user login and sessions. We also use cookies and third-party tools to improve your surfing experience on preplounge.com. You can choose to activate only essential cookies or all cookies. You can always change your preference in the cookie and privacy settings. This link can also be found in the footer of the site. If you need more information, please visit our privacy policy.

Data processing in the USA: By clicking on "I accept", you also consent, in accordance with article 49 paragraph 1 sentence 1 lit. GDPR, to your data being processed in the USA (by Google LLC, Facebook Inc., LinkedIn Inc., Stripe, Paypal).

Manage settings individually I accept
expert
Expert with best answer

Francesco

100% Recommendation Rate

3,537 Meetings

18,708 Q&A Upvotes

USD 479 / Coaching

5

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?

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 answers

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Book a coaching with Francesco

100% Recommendation Rate

3,537 Meetings

18,708 Q&A Upvotes

USD 479 / 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

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

Book a coaching with Antonello

98% Recommendation Rate

175 Meetings

6,901 Q&A Upvotes

USD 219 / 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

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

Book a coaching with Henning

100% Recommendation Rate

187 Meetings

6,342 Q&A Upvotes

USD 189 / Coaching

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 ;)

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 ;)
Book a coaching with Adi

100% Recommendation Rate

97 Meetings

9,185 Q&A Upvotes

USD 169 / Coaching

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

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
Book a coaching with Ian

100% Recommendation Rate

328 Meetings

29,158 Q&A Upvotes

USD 289 / Coaching

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.

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.

Related case(s)

Bain case: Asian lubricants producer

Solved 168.7k times
Bain case: Asian lubricants producer LubricantsCo, a very successful Asian premium producer of lubricants in their native region, would like to further increase their revenue and profit. The product range ranges from lubricants in the automotive sector (e.g. motor and gear oil) to industrial applications (e.g. fats, heavy-duty oils). According to preliminary examinations, further growth potentials in the Asian core market are rather limited. Thus, LubricantsCo would like to investigate options to internationalize in the passenger car business – also outside the premium segment which is given priority. Therefore, your consulting firm was instructed to elaborate a market entry strategy for the European market.  
4.6 5 29725
| Rating: (4.6 / 5.0)

LubricantsCo, a very successful Asian premium producer of lubricants in their native region, would like to further increase their revenue and profit. The product range ranges from lubricants in the automotive sector (e.g. motor and gear oil) to industrial applications (e.g. fats, heavy-duty oils). ... Open whole case

Bain Case: Old Winery

Solved 73.3k times
Bain Case: Old Winery You have inherited the “Old Winery” from your grandfather, a winery that has been family-owned for five generations and can be dated back to the 16th century. Half of the eleven hectares are used to grow white grapes, the other half to grow red grapes. They are grown in a conventional way, i.e. they are not organically farmed and certified. The vine stocks are in a good condition regarding age and care. Overall, the only ¼ of the harvest is made into wine by the winery itself; the rest is sold. Your grandfather never wanted to change the image of the winery and left the managerial and administrative task to a young and energetic wine-maker. Due to the not so well-known brand, the demand for the “Old Winery” wine is currently rather low. You do not intent to run the winery operatively, given your limited knowledge of winemaking, but find the idea of owning a winery exciting. Your plan is to give the winery some fresh impetus.
4.4 5 1952
| Rating: (4.4 / 5.0)

You have inherited the “Old Winery” from your grandfather, a winery that has been family-owned for five generations and can be dated back to the 16th century. Half of the eleven hectares are used to grow white grapes, the other half to grow red grapes. They are grown in a conventional way, i.e. the ... Open whole case

McKinsey Questions

Solved 40.3k times
McKinsey Questions Tell me of a situation where you had an opinion and no one seemed to agree with you. What was your goal when you decided to join university / work / clubs / a sports team? Did you have a goal that you were not able to reach? What did you do? What do you want to be remembered for and how are you achieving it? What is your typical way of dealing with conflict?
4.5 5 865
| Rating: (4.5 / 5.0) |
Difficulty: Intermediate | Style: Fit Interview | Topics: Personal fit

Tell me of a situation where you had an opinion and no one seemed to agree with you. What was your goal when you decided to join university / work / clubs / a sports team? Did you have a goal that you were not able to reach? What did you do? What do you want to be remembered for and how are you ... Open whole case

BCG Questions

Solved 27.8k times
BCG Questions What arouses your interest when you are working / studying / doing another activity (from the CV)? Tell me of a time where you had no idea what you were doing. When did you use an uncommon approach to do something? Have you ever had responsibility for other people? Tell me of a situation where you were not the official leader.
4.5 5 213
| Rating: (4.5 / 5.0) |
Difficulty: Intermediate | Style: Fit Interview | Topics: Personal fit

What arouses your interest when you are working / studying / doing another activity (from the CV)? Tell me of a time where you had no idea what you were doing. When did you use an uncommon approach to do something? Have you ever had responsibility for other people? Tell me of a situation where ... Open whole case

Bain Questions

Solved 25.2k times
Bain Questions Tell me about a difficult situation you had to cope with. Tell me of a task which you didn’t like doing and explain why you performed it nevertheless. Why do you do things? What do you like doing most / What is your favorite hobby? Walk me through a situation where you showed leadership skills.
4.5 5 297
| Rating: (4.5 / 5.0) |
Difficulty: Intermediate | Style: Fit Interview | Topics: Personal fit

Tell me about a difficult situation you had to cope with. Tell me of a task which you didn’t like doing and explain why you performed it nevertheless. Why do you do things? What do you like doing most / What is your favorite hobby? Walk me through a situation where you showed leadership skills ... Open whole case