Your client is a direct mail clothing retailer. They primarily sell clothes through their product catalog. Next year, postage costs will increase to 40 cents per catalog. Your client wants to know whether his current business model is still profitable.
This case is divided into two parts:
In the first part, the candidate should use the profitability analysis framework to evaluate whether the client’s current business model can sustain this new cost.
In the second part, the candidate should use another framework to evaluate potential new markets and distribution channels.
The interviewee should calculate the profitability of the current business model under the new cost structure (it now costs 40 cents to mail one catalog).
Profit = Revenue – Costs
Suggested structure:
First we need to calculate the revenue, because we have no information on the cost side.
Thus, excluding the mailing costs, the remaining costs are 85% of revenue. If the 40-cent mailing cost is greater than the 15% profit per order, the business is unprofitable.
Below is the structure of the revenue calculation:
The average repeat order price (some customers buy more than once from the retailer) is the same as the average price of the initial orders.
Once the structure is ready, we need to calculate the nodes of our tree. We will start from the leaves (nodes at the bottom of the tree) and use them to calculate higher-level nodes until we reach the top of the tree.
Each catalogue generates $2.50 in revenue.
With the new 40-cent mailing cost, our client’s business model is now unprofitable.
On average, our client loses 2.5 cents for every catalog they send.
The client wants to continue his clothing business. Ask the interviewee to suggest potential solutions.
Since catalog orders in Europe seems like a declining industry, the interviewee could develop a 2x2 matrix with market and distribution channel as variables. It is similar to the Ansoff matrix. However, in this case, changing products makes little sense.
The interviewee can offer a variety of solutions. Challenge the interviewee and let him or her come up with as many channels and new markets as possible.
Lead the interviewee to a new market entry. It can be justified with the following reasoning:
Possible reasons for using new distribution channels:
Since our client has a huge variety of low-cost clothes, they could become a wholesaler and sell clothes in bulk to smaller clothing retailers.
Suggested answer:
The revenue per catalog is proportional to the average order price. To break even, the business needs a per-catalog revenue of $2.525. That is a 1% increase from $2.5.
More questions to be added by you, interviewer!
If the interviewee solves the case very quickly, you can come up with more challenging questions to ask them.
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The average repeat order price (some customers buy more than once from the retailer) is the same as the average price of the initial orders.
*Orders received within 2 weeks of sending the catalog are counted as initial orders.
