Solution
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.
I. Market size
Interviewee should outline his approach to calculate market size and then ask for the data. Interviewee should not start assuming the data, but specifically ask for it.
The interviewee should ask for the following information:
- Which target market is the client after?
- How many segments are we dealing with and what is the proper breakdown?
- What is the expected conversion rate that will purchase the book for each target segment?
Interviewee should use the profit framework to calculate market size, revenue, cost and profit. Additionally, interviewee can use the customer branch of the Business framework to determine data needs on customer segments and conversion rates.
Share Table 1 (Target segment breakdown) if the interviewee inquires additional information.
Information that can be shared on the interviewee’s inquiry:
Target market are young kinds ranging from 10-15 years of age.
Focus lies on high-end segment of that target market due to book's pricing.
Total population of target market is 140 m kids.
We have three target segments.
We expect a conversion rate of 5% who will purchase the book.
Calculating total market size
The interviewee should now calculate total market size:
- Segment A: 10%*40 m = 4 m.
- Segment B: 8%*50 m = 4 m.
- Segment C: 12%*50 m = 6 m.
- Total market size is 14 m of which 5% will be purchasing the book so our commercial market size is 5%*14 m=700.000 people.
II. Profit
Interviewee should now calculate profit by outlining that profit=revenue-cost.
Information that can be shared on the interviewee’s inquiry:
The book will be sold through hardcopy & digital format.
Hardcopy will be priced at CNY180 and digital copy at CNY150.
We expect a 50% equal split in sales between both options.
Cost per unit is CNY25 for physical copy and CNY19 for digital copy.
Calculating revenue
Interviewee should calculate revenue first:
- Segment A: ((4 m*5%)*50%*CNY180) + ((4 m*5%)*50%*CNY150)=33 m.
- Segment B: ((4 m*5%)*50%*CNY180) + ((4 m*5%)*50%*CNY150)=33 m.
- Segment C: ((6 m*5%)*50%*CNY180) + ((6 m*5%)*50%*CNY150))=49.5 m.
- Total revenue is 115.5 m.
Calculating cost
Interviewee should then calculate cost:
- Segment A: ((4 m*5%)*50%*CNY25) + ((4 m*5%)*50%*CNY19)=4.4 m.
- Segment B: ((4 m*5%)*50%*CNY25) + ((4 m*5%)*50%*CNY19)=4.4 m.
- Segment C: ((6 m*5%)*50%*CNY25) + ((6 m*5%)*50%*CNY19)=6.6 m.
- Total cost is 15.4 m.
Calculating profit:
Interviewee should now calculate profit:
Potential profit is: CNY115.5 m– CNY15.4 m = CNY100.1 m.
III. Go/No-Go on investment
Interviewee should ask for client's profit target to determine final decision.
Information that can be shared on the interviewee’s inquiry:
Target is CNY75 m.
Profit of CNY100.1 m > target of CNY75 m, so client should go ahead & invest.
