Your client is a newly founded protein company. Its owners are two brothers. One of them is a chemist and the other one is a very famous fitness model and personal trainer on YouTube. They intend to enter the nutrition supplements industry where they want to focus on protein supplementation for bodybuilding. The chemist has the capabilities to produce protein products for this industry. He has used this knowledge and a substantial loan to build a factory in Germany that would allow the brothers to mass produce their protein products.
The brothers have approached you to advise them on how they can use their capabilities to profitably sell their product using their factory in Germany. They request very practical advice on how to get their product from their factory into the hands of the consumer at a profit.
A lot of information has been included in this case to help both the interviewer and the interviewee to get a better conceptual understanding of the industry in case no prior knowledge exists. Not all the information available is necessary to arrive at the solution. The interviewer should read all available information to help guide the interviewee towards the solution.
The goal of this case is to practice handling a large amount of information and not getting overwhelmed by it but proactively identifying which information is necessary to solve the case in a timely manner and which information does not help the interviewee getting closer to the solution.
The interviewee should be able to structure the case into three distinct phases to give very practical advice to the client:
Phase 1 (viability analysis) should be about verifying that the product the client is willing to enter the protein supplement market with is actually a product that customers would be willing to buy. The competition, customers, product and company of the client should all be evaluated to test if entering the market is at all a good idea.
Phase 2 (determination of the product mix) is about coming up with the right product mix to serve the needs of all customers and to prevent overserving or underserving any potential customer segment to maximize efficiency. During the case, the interviewee will learn that there are 4 major products on the protein market with varying demand so a logical way to determine the product mix would be to find the demand for each product individually and supply exactly the market demand.
Phase 3 (determination of the distribution channel) is about determining which of the available distribution channels will give the client access to the largest demand possible.
Short Solution (Expand) (Collapse)
I. Understanding the Case & Structure
As this might be an industry unfamiliar to the interviewee the following information can be shared with the interviewee verbally as the interviewee draws out the 3C&P (Company, Customer, Competitor, Product) framework (you should read this information carefully beforehand to familiarize yourself with the available information on this industry).
1) The client only has 50,000€ remaining in their bank account. This money must not be spent completely. At the end of any month, the balance on that account must be larger than 2,000€ otherwise your client can be considered bankrupt. You have the remaining 48,000€ available to spend and you need to ensure that monthly revenue exceeds monthly costs before the 48,000€ run out.
2) The client has to pay 10,000€ each month as loan payments.
3) The fitness model has a YouTube-channel. The channel is mainly about training programs, the correct execution of strength building exercises and nutritional advice to maximize muscle gain while at the same time losing as much fat as possible.
He has a huge following of teenagers and young adults which happens to be the target demographic that consumes the largest amount of protein supplements amongst all other demographics.
The fitness model is one of the 3 big YouTubers on the topic of nutrition and fitness programs and is known by roughly 33% of all people within that target demographic of teenagers and young adults. He is especially well known for his unbiased supplement reviews and his general honesty and trustworthiness.
4) The chemist has developed new and healthy artificial flavors as well as a new amino acid compound that happens to be 3 times as efficient as the usual amino acids found in protein products of the competition (Let us just assume such a substance could exist). He owns patents on all of these. For more details look at the information available on “Product” below.
5) The client has received an offer from one of the biggest YouTube-specific advertisement agencies. This agency is a specialist when it comes to helping YouTube-personalities start marketing products to their audience.
They suggested that they could help our client gain a 20% market share leveraging the fact that the fitness model is already well known by 33% of the entire customer base. This 20% share will be evenly distributed across all products within the protein supplement industry. You will later see that there are 3 distinct product lines sold within this industry. The advertising campaign will allow the brothers to capture 20% market share for each of the 3 product lines.
For this service, the agency will charge our client 10,000€ a month as a fixed rate. This deal would last for 2 years and there is no way to exit the contract early.
You may assume that without this deal no market share can be gained against the competition and that if our client agrees to the terms of the agency that a 20% market share can be achieved instantaneously to make calculations easier.
You may also assume that the advertising campaign will allow the client to capture 20% of all customers regardless of what distribution channel will be used. So, 20% of all potential customers for a given distribution channel will be captured by the campaign.
6) The client has looked at 2 possible distribution channels:
A) An online shop: The website for this will cost 5,000€ as a one-off fee. 50% of all customers globally prefer to buy their supplements online. The online shop will be accessible globally and we can ignore shipment costs when sending our products abroad (You may assume that the brothers are actually children of Jeff Bezos the CEO of Amazon).
B) A local shop in Germany: The shop could be bought for 500,000€ as a one-off fee or the client could rent and operate a shop for 9,000€ a month. 50% of all customers globally prefer to go to their local shops and buy their supplements in person. Such local shops attract customers in a 10km radius around the shop.
1) In general, the daily dose of protein necessary to achieve maximum muscle growth is 40g (g stands for grams) per day. This is true for all products on the market except for one product that our client can produce.
2) there are 4 products available that the client’s factory can produce being protein bars (like a Snickers or Mars-Bar), protein cereal (Literal cornflakes cereal with protein powder within the flakes) and 2 types of protein powder (powder is dissolved in water to create a protein drink). One powder is very similar to the powder the competition produces. The other powder is called MX3 which is a new amino acid compound that is 3 times as “concentrated” as the normal protein powder on the market. This means 13.33g of MX3 are equivalent to a single daily dose of protein instead of the 40g you would need with powder that the competition produces.
3) All our client’s products taste better than the products of our competition. This is because our client is the only one able to produce the artificial flavors that differentiate our client’s products from the rest.
5) The factory of your client contains 4 separate machines. One for each product line so all products have to be produced in order to not lose efficiency. The question is just how much should be produced of each product.
6) Substitute products to protein supplements are meat and dairy products. They tend to have a much higher fat content though which is why protein supplements are preferred by customers.
1) Customers can be segmented by product line:
20% buy bars.
70% buy powder.
10% buy cereal.
2) Customers do not change their preferences so for example, those that eat protein bars will not use powder or cereal.
3) The overall market is growing at 1% and that is uniform growth across all 3 segments.
4) Almost all customers use protein supplements daily so you may assume that all customers consume one dose of protein per day with supplements every day.
5) The fitness model has sent MX3 to about 10,000 fans and has then done a survey to determine how many people would prefer to buy MX3 instead of normal powder.
The results of that survey were that 70% were amazed by MX3 and would never buy anything else once it becomes available. 30% claimed they would never buy MX3 because it is simply too expensive.
The reason why the 30% think that MX3 is too expensive seems to be that they kept using their 40g measuring spoons that they are used to using when consuming normal protein powder instead of the 13.33g spoon that is included in the packaging of the MX3 product. Thus they consume an entire box of MX3 in a single month instead of the 3 month period it is meant for.
6) Customers determine which product they buy based on the taste of the product and based on any loyalty bonus (discounts) they can expect if they continue to purchase from the same supplier.
7) Whenever a customer buys a product the customer will buy a month worth of product. For bars, this means a box of 30 bars, for cereal a box with 30 portions in it and for powder a single 1,200g box. They buy once a month, every month.
1) There are 4 big competitors on the market each holding about 25% market share.
2) No competitor is able to create a product like our MX3 and MX3 is the cheapest product on the market on a per gram basis.
3) No competitor is able to improve the taste of their products to match the taste of our client’s products. This is because artificial flavors take a long time to be approved for consumption and the artificial flavors used by your client are patented.
4) Competitors all employ loyalty schemes to hold on to any customers they get. New customers have to pay very high fees for their first product and get a loyalty card. If the same customer returns the month after to buy the same product again then lower prices will be available for the product. The more you buy from any of the competitors the cheaper the products get. (The prices your client has chosen for each product are based on the initial prices a customer would have to pay when buying a new product from a new supplier. Once your client has built a customer base discounting prices to hold on to those customers is something the brothers will have to do to match the competition).
II. Determining the right product mix:
To determine the right product mix we need to calculate the total demand for all products our client has to offer. We know we can capture 20% of the total market through our advertising campaign and that the 20% will be uniformly distributed across the product lines giving us 20% of the total market share in each of the 3 product lines. This means that we should have the same output proportions as the market demands so:
However, as we know from our powder-customer survey that 70% of those customers will buy MX3 and 30% will buy our normal powder we can calculate that we should produce:
MX3% = 70% (powder market) * 70% (interested in MX3) = 49%
Normal powder% = 70% (powder market) * 30% (not interested in MX3) = 21%
So our client should produce:
21% normal powder,
III. Choosing the right Distribution channel:
Calculation of the average earnings per customer:
To determine which distribution channel to use of the two available options (online shop or local shop) we first need to calculate the average monthly profit (from product sales) made per customer. (We look at monthly profits because all costs are given to us as monthly costs to make it easier to compare costs to profits of selling the product, notice profit per product is really just profit before overhead, not total profit):
Cereal: [15€ price per portion – 10€ cost per portion] * 30 portions per month
<=> 150€ of monthly profit for cereal sales before overhead.
Bar: [7€ price per bar – 5€ cost per bar] * 30 bars per month
<=> 60€ of monthly profit for bar sales before overhead.
Normal powder: [50€ price per box – 30€ cost per box] * 1 box per month
<=> 20€ of monthly profit for normal powder sales before overhead.
MX3: [70€ price per box – 50€ cost per box] * 1/3 of a box per month
<=> 6.67€ of monthly profit for normal powder sales before overhead.
Taking into consideration that we have a mix of customers and we know the ratios at which we can sell each product to them then for a single customer selected at random there is a 10% chance that cereal will be bought, a 20% chance that bars will be bought, a 21% chance that normal powder will be bought and a 49% chance that MX3 will be bought so the probability-weighted average will give us the expected profit our client will make on average on a single customer:
Average profits per customer = (monthly profit of cereal) * (probability that the customer prefers cereal) + (monthly profit of bar) * (probability that the customer prefers bar) + (monthly profit of normal powder) * (probability that the customer prefers normal powder) + (monthly profit of MX3) * (probability that the customer prefers MX3)
<=> Average profits per customer = 150€ * 10% + 60€ * 20% + 20€ * 21% + 6.67€ * 49%
<=> Average profits per customer = 34.47€ (per month).
So if we had, for example, a group of 10,000 customers we would expect to earn 34.47€ * 10,000 = 344,700€ every month.
A very good interviewee will instead first calculate the total overhead cost for each distribution channel and then divide that by the average profits per customer (34.47€) to calculate how many customers must be reached to at least cover total monthly overhead costs. This is more efficient as the interviewee will quickly realize that the number of customers necessary to cover total overhead is very low when using the online store distribution channel. This makes the guesstimation of the exact number of customers and the total profits before overheads irrelevant to perform.
Calculation of overhead costs for the online store distribution channel and the number of customers needed to at least break even:
Let us first investigate the total overhead if the client decides to use the online store as the only distribution channel:
Overhead = Advertising costs + Loan repayments + Online store specific costs
Overhead = 10,000€ (monthly) + 10,000€ (monthly) + 5,000€ (one-off payment).
So overhead will be 25,000€ in the first month and then only 20,000€ for every month to follow. As we have 48,000€ to spend on our first month we can ignore the one-off payment of 5,000€ as a first simplification to keep calculations simple. (You could include it by assuming that you only have 48,000€ - 5,000€ = 43,000€ available at the start if you wanted to.)
So considering a monthly overhead of 20,000€ we would need a monthly profit of 20,000€ from our product sails to break even and not lose money on a monthly basis. As our average monthly profits of sales per customer are 34.47€ we can calculate how many customers we need each month to cover the 20,000€ overhead:
#Customers = Overhead / Profit per customer
#Customers = 20,000€ / 34.47€
<=> #Customers = 580.21 => 581 Customers per month.
Considering the fact that we have access to 20% of all customers globally a crude estimation of the number of possible customers could be at least in the thousands:
Guesstimation of the number of customers globally as a crude sanity check: Bodybuilding can be assumed to be done only by males, let us further assume only by males between the ages of 16-25. Assuming that the average life expectancy is 80 years and that the age of people is equally distributed then 1/8 of all people are within the 10-year wide age group of 16-25. Only half of those are male so 1/8 *1/2= 1/16 of the population might be customers. Let us assume that only 0.01% of those actually use protein daily then 1/160,000 of the entire population might be potential customers. So, with 8b People, we get 8b/160k = 50,000 potential customers of which we could get 20% so 10,000 customers and only 50% of those buy from online shops so 5,000 customers would be available to us. This estimate is very crude but shows that the expected number is still roughly 10 times what is needed to break even. The online shop is thus most likely a profitable way to distribute our client’s products.
Calculation of overhead costs for the local shop distribution channel and the number of customers needed to at least break even:
Following the same steps again now for the local shop distribution channel gives:
Overhead = Advertising costs + Loan repayments + Local shop specific costs
Overhead = 10,000€ (monthly) + 10,000€ (monthly) + 9,000€ (monthly).
So, overhead will be 29,000€. The minimum number of monthly customers to break even is:
#Customers = Overhead / Profit per customer
#Customers = 29,000€ / 34.47€
<=> #Customers = 841.31 => 842 Customers per month.
As this shop would be in Germany it is questionable to assume that our client can get 842 customers within only a 10km radius around their shop considering that they would only expect to get 20% of all customers in that region. For this reason, it seems unlikely that the local shop will be as profitable as the online shop as more customers are needed to break even and fewer customers are available overall.
The client should hire the advertising agency and enter the protein market with a product mix of 20% bars, 10% cereal, 49% MX3 and 21% normal powder. The best distribution channel to use would be an online shop. There are 3 reasons why this is the right way to proceed:
1) The products of our client are the best tasting on the market due to patented flavorings. MX3 is the cheapest powder on the market (ignoring loyalty discounts and assuming only 13.33g per day are being consumed). These unique product features will give our client an edge in this market and attract customers to their brand.
2) The advertising campaign will allow the client to gain 20% market share instantaneously so demand is large and predictable in this industry right from the start. The suggested product mix is based on the natural segmentation of the customers and will exactly meet demand without over- or underproducing any of the products available.
3) The online distribution channel should be used as only about 581 customers are needed to break even and due to the global reach of the online shop, the fact that 50% of all customers globally buy their protein online and that we can transport our products globally at negligible transportation costs means that the online store gives our client access to the maximum amount of potential customers while also being the cheapest distribution channel available.
V. Next steps
To increase certainty in this recommendation or advise on a more specific recommendation we could:
1) Do a more thorough analysis of the planned advertising campaign. Is a 20% market share achievable? If yes, then how long will it take to actually reach 20%? We assumed that 20% will be achieved by day one but how will the market share actually look like as a function of time between day one and the day we finally reach 20%? What will the graph of that function look like and what does that mean for the breakeven analysis of our client? Are 581 customers in the first month really achievable under more realistic conditions or could the brothers end up bankrupt?
2) Could the client leverage the popularity of the fitness model by selling products directly to fans instead of just opening an online store and hiring an advertising agency for marketing purposes? How large is the fan base of the fitness model? What proportion of fans would be interested in buying products monthly? Are those more than 581 already?
- Can you plot the graph of the market share as it grows from 0% to 20% under more realistic conditions then instantaneous growth from 0% to 20%?
- Under what circumstances would opening one or more local shops be beneficial to our client?