McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 50+ candidates secure MBB offers
Book a coaching

What is the difference between profit and profitability

Martin

Hey guys,

I have been watching a case video on the chewing gum manufacturer (https://www.youtube.com/watch?v=DamZmMbp5eM) and tried to completely follow all the steps and explanations. Right in the beginning the interviewer says that profits have gone up, while profitability declined. I don't understand this point. In my understanding profitability = profit/revenue

This means, however, that when profits go up profitability will also go up. The easiest explanation I can think of is that the interviewer wanted to say that revenues have increased while profitability decreased.

I would highly appreciate any clarification on this.

Thanks a lot

Martin

  • Upvotes
  • Date ascending
  • Date descending
Sidi replied on 03/13/2018
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 50+ candidates secure MBB offers

As highlighted several times, absolute profits are clearly defined as Revenues - Cost.

Profitability however, even though always expressed as a ratio/percentage, is not universally defined. It can be measured differently (and it IS measured differently, depending on industry and context). Broadly speaking, profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its turnover OR expenses OR asset base OR other points of reference during a specific period of time.

So whenever asked about profitablitly in a case, it is IMPERATIVE to clarify the exact metric which defines profitability in this situation.

Andrea
Expert
replied on 03/13/2018
Former BCG decision round interviewer with 300+ real interviews in 8 years

Profit is a currency figure (e.g. USD), profitability is a % figure. It is possible for profits to go up while profitability going down. As an example: let's assume a company sells cars at average price of $100k with an average profit of $10k each (10% profitability). And let's assume they sell on average 1,000 cars each year. This year they decide to run a limited time promotion and sell their cars at $95k each, this brings additional 200 car sales but with only $0.5k profit each (5%) profitability. The new blended profitability of company is ($10k*1,000 + $0.5k*200)/($100k*1,000 + $95k*200)=8.5%. 8.5% is less than 10% however their profits went up from $10M to $10.1M

Hope this helps.

Andrea

Andrea
Expert
replied on 03/14/2018
Former BCG decision round interviewer with 300+ real interviews in 8 years

During an engagement with an actual client I agree with Sidi that profitability needs to be defined. During a case interview candidates are not required nor expected to know he technical differences between different profitability metrics. Therefore the question seems superfluous to me.

Achot replied on 03/13/2018

Hi Martin,
Profitability is indeed Profits/Revenue
From this profitability going down just means the increase in profits has been less significant than the increase in revenue (for ex +20% in revenue that only translated in +10% profits will give you "New Profitability" = 1.1* Profits / 1.2* Revenue = (1.1/1.2) * old profitability, which is < to old profitability as 1.1/1.2 < 1.

A smarter way to see this is that revenues have increased costs have increased with a higher %.

Hope it helps,
Achot

Currently non-active expert
Expert
replied on 03/13/2018

Hey Martin,

Despite the fact that both terms are often used with the same meaning, they actually mean different things:

  • Profit = Revenues - Costs
  • Profitability is a relative/percentage number = ratio between profits and revenue

Hope this helps clarifying your question

Best

Bruno

Related BootCamp article(s)

Profitability Case

Learn to crack Profitability Framework Consulting Cases, which are the number 1 reason for real consulting projects and hence are an important case type.

7 Comment(s)

Related case(s)

DHL Consulting case: Bike Shop

Solved 29.2k times
4.3 5 10338
| Rating: (4.3 / 5.0)

You have been hired to support the owner of a bike-shop as a business consultant. The bike-shop has suffered a significant revenue decline during the last year, and now the owner would like you to assess the situation and options for the way forward. They want to know last year’s profit, i.e. how i ... Open whole case

zeb case: Quo vadis, customer?

Solved 25.5k times
4.7 5 3241
| Rating: (4.7 / 5.0)

The bank "His Earlship Charles", a domestic retail and private bank is in a difficult situation. Profits have been declining over the past years due to the ongoing low interest rates set by the central bank. Additionally, the bank is suffering from a decreasing number of customers. The boa ... Open whole case

DHL Consulting case: Books & Codes

Solved 24.5k times
4.8 5 2968
| Rating: (4.8 / 5.0)

A friend of yours recently got promoted to the position of director of a university library. Yesterday, your friend received a call from the Ministry of Education, who offered him to be part of a national RFID pilot with his library. As your friend is unsure if he should pursue this option, he asks ... Open whole case

Oliver Wyman case: Setting up a Wine Cellar

Solved 22.9k times
4.3 5 3127
| Rating: (4.3 / 5.0)

I’m thinking about setting up a wine cellar in my basement. The way I see it, shelf space would be divided into two sections: (1) a “drinking” section where I store bottles for my own consumption and (2) an “investment” section where I store bottles that I intend to sell at a profit after they appre ... Open whole case

Oliver Wyman case: On the Right Track

Solved 18.8k times
4.6 5 3633
| Rating: (4.6 / 5.0)

TrainCo is a manufacturer of rolling stock, or trains, with production sites in three European countries. The company has seen declining profitability over the past years; however, they are currently in a very good position to bid for and win a big contract for regional trains for a Swiss national r ... Open whole case