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What is the best way to include the mix (product, channels, geography etc.)in the profitability case

Hi Experts,

What is the best approach to include the mix in profitability case. Is it better to include it within quantity sold (Q/Product, Q/Channel, Q/Location, Q/Customer..etc) and/or price (price/product). Or is it better to add a separate revenue branche for each element of the mix and then analyze it? In other words can we consider the mix as the sources of different revenue streams?

Thanks

Hi Experts,

What is the best approach to include the mix in profitability case. Is it better to include it within quantity sold (Q/Product, Q/Channel, Q/Location, Q/Customer..etc) and/or price (price/product). Or is it better to add a separate revenue branche for each element of the mix and then analyze it? In other words can we consider the mix as the sources of different revenue streams?

Thanks

3 answers

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Best Answer

A profitability case is, in the end, an operations case. If you are too quick to jump to the R=P*V equation, you show signs of a data junky who doesn't try to get a better feel of the "environment" this case lives in.

I STRONGLY prefer that candidates do NOT jump into the R=P*V game too quick. Ask a few overarching questions, find out who you are selling to and how that's changed, find out who you are competing against and are they fragmented/big, find out if your industry has seen a regulatory shift if relevant (e.g. shipping), find out more about HOW you sell (online, retail, reseller, etc), etc.

Hemant

A profitability case is, in the end, an operations case. If you are too quick to jump to the R=P*V equation, you show signs of a data junky who doesn't try to get a better feel of the "environment" this case lives in.

I STRONGLY prefer that candidates do NOT jump into the R=P*V game too quick. Ask a few overarching questions, find out who you are selling to and how that's changed, find out who you are competing against and are they fragmented/big, find out if your industry has seen a regulatory shift if relevant (e.g. shipping), find out more about HOW you sell (online, retail, reseller, etc), etc.

Hemant

Hemant, thanks a lot for your answer. It is definitely answering my question very well — Stephane on Mar 05, 2018

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Hi,

I recommend using two tools here:

  1. I recommend asking the clarifying question at the beginning of the case: How does the business work and what are the revenue streams? Why do you need to know the revenue streams? Because it's one of the most critical pieces in understanding the business model. An example is Oil&Gas with up-, mid- and down- streams that are completely different businesses. And downstream basically generates 50% of revenues selling snacks on the gas stations. This is the most common pitfall in profitability cases (the 2nd pitfall is the Mix)
  2. While you do your structure and split revenues into price and quantity - add proactively the 3rd box with the "Mix". Thus you show your business sense and demonstrate that you know the most common case traps.

    While presenting the structure, provide some examples of what can be under the Mix bucket - geography, customer, product, etc.

    Good luck!

Hi,

I recommend using two tools here:

  1. I recommend asking the clarifying question at the beginning of the case: How does the business work and what are the revenue streams? Why do you need to know the revenue streams? Because it's one of the most critical pieces in understanding the business model. An example is Oil&Gas with up-, mid- and down- streams that are completely different businesses. And downstream basically generates 50% of revenues selling snacks on the gas stations. This is the most common pitfall in profitability cases (the 2nd pitfall is the Mix)
  2. While you do your structure and split revenues into price and quantity - add proactively the 3rd box with the "Mix". Thus you show your business sense and demonstrate that you know the most common case traps.

    While presenting the structure, provide some examples of what can be under the Mix bucket - geography, customer, product, etc.

    Good luck!

Vlad, thanks a lot for your hint. It is definitely answering my question very well. — Stephane on Mar 05, 2018

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Hi Stephane,

I would personally go for neither the volume or the price classification. The ideal thing would be to first ask for the mix, then perform an analysis of the problematic segment only. The steps to follow thus would be the following:

  1. Segment by profitability/revenue channels. Ask the interviewer how the client segments its profitability channels (products, customers, distribution channels, etc.).
  2. Identify which channel is the priority. Ask for the change in profitability for each channel. Then start from the one that had the biggest decline in profits.
  3. Identify whether it is a revenue or cost issue. Ask how revenues and costs changed for the channel that you have identified. Start from the area which has the major negative change in absolute amount
  4. Analyse the components of revenues and/or costs. According to what you found in step 3, you should further segment revenues in price and volume or costs using fix or variable costs

Best,

Francesco

Hi Stephane,

I would personally go for neither the volume or the price classification. The ideal thing would be to first ask for the mix, then perform an analysis of the problematic segment only. The steps to follow thus would be the following:

  1. Segment by profitability/revenue channels. Ask the interviewer how the client segments its profitability channels (products, customers, distribution channels, etc.).
  2. Identify which channel is the priority. Ask for the change in profitability for each channel. Then start from the one that had the biggest decline in profits.
  3. Identify whether it is a revenue or cost issue. Ask how revenues and costs changed for the channel that you have identified. Start from the area which has the major negative change in absolute amount
  4. Analyse the components of revenues and/or costs. According to what you found in step 3, you should further segment revenues in price and volume or costs using fix or variable costs

Best,

Francesco

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