Sprinker

Problem Definition

Your client is Sprinker, a mid-size publishing agency in the US. Their main products are educational materials. There is a rumor that some private schools are going to change their first-grade textbooks. If the rumor is true, they need a publishing agency.

The client wants you to analyse whether they should offer their services.

Comments

This is a profitability case with market sizing.

Since this is a candidate-led case, the candidate should drive the case from start to finish.

The case is split into two parts.

This case is mostly quantitative in nature. In order to solve the questions, the interviewee should perform calculations.

The questions in the big boxes should be read out to the interviewee.

Short Solution

Sprinker should offer their services to private schools.

They should sign a contract with writer #1 and invest money in a marketing campaign. This is due to several reasons:

With the marketing campaign, Sprinker has an 80% chance of winning the contract.
Estimated first-year profit is $2.7 m
Writer #1 has the cheapest per-book royalty. In the long run, this reduces Sprinker’s costs, thus maximizing their long-term profit.

Detailed 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.

The following structure provides an overview of the case:

Case Structure

I. Revenue

To estimate Sprinker’s potential revenue from private schools, the interviewee should come up with the following equation:

Revenue = Volume * Price

The interviewee must now estimate the volume. Since there are several ways to estimate volume, the interviewer can follow the interviewee’s method as long as the interviewee makes reasonable assumptions.

Information that can be shared if inquired by the interviewee:

First-graders are 7 years old
US population this year: 300 m
Over last 7 years US population grew: 10%
25% of students are in private schools
Life expectancy: 70 years
Each first-grader has 1 book
Price of book = $20

Here is a possible approach based on the replacement concept.

Volume estimation

Let’s first assume that the population has been constant during the last 7 years.
If people live for 70 years (life expectancy) and an equal number of children are born each year, 4.3m children are born every year:

However, if the US population grew by 10% over the last 7 years, the number of children born 7 years ago is:

4.3* (1 - 0.1 ) ≈ 3.9 m

We can round this to 4 m. Assuming that all children born 7 years ago go to school, there are 4 m first-graders in school today. 25% of them (1m) go to private schools.

Revenue estimation

Revenue = Volume * Price

1 m * $20 = $20 m

II. Costs

The interviewee should now ask about costs:

Investments
Fixed costs
Variable costs
License costs

Share Table 1 about license costs with the interviewee.

Information that can be shared if inquired by the interviewee:

In order to produce the new textbooks, Sprinker must rent a building.
Rental costs = $3 m / year
Equipment investments = $4 m
Manufacturing costs per book = $5
Sprinker must hire a writer to write the textbooks’ content. When signing contracts with writers, Sprinker usually thinks about long-term relationships with the them.
Sprinker pays writers a base payment (one-time payment) and royalties (paid every time a writer’s book is sold).

Writer Costs

Sprinker can choose from 3 writers.

Payment writer #1:

$350,000 + $1.8 *1,000,000 books = $2.15 m

Payment writer #2:

$50,000 + $2.5 *1,000,000 books = $2.55 m

Payment writer #3:

$50,000 + $2 *1,000,000 books = $2.05 m

Based on the current volume, writer #3 is the cheapest options. However, in the long run, the biggest cost are the writer’s royalty payments.

Thus, if Sprinker wants to have a long-term relationship with the writer as per industry norms, they should choose writer #1, because he has the lowest per-book royalty.

Manufacturing Costs

$5 *1,000,000 books = $5 m

Total Costs Year 1

Rental costs + Equip. costs + Manufacturing costs + Payment

= $3 m + $4 m + $5 m + $2.15 m = $14.15 m

Total Profit Year 1

Revenue – Costs = $20m – $14.15m = $5.85 m

III. Competition

The interviewee should now ask about:

Competitors
Market shares
Competitive advantage
The probability that Sprinker’s competitors will win the contract

Information that can be shared if inquired by the interviewee:

3 other companies are also interested in signing the contract with private schools.
Each company (including our client) has an equal chance of winning the contract --> 25% (100%/4).
If our client invests $2 m in a marketing campaign, our client’s chance of winning the contract increases to 80%.

Taking the probability of winning the contract into account, the interviewee should now recalculate the project’s expected profit.

Expected profit without marketing campaign:

$5.85 m * 25% + $0 * 75% ≈ $1.5 m

Expected profit with marketing campaign:

($5.85 m - $2 m) * 80% - $2 m * 20% ≈ $2.7 m

IV. Conclusion

Sprinker should offer their services to private schools.

They should sign a contract with writer #1 and invest money in a marketing campaign. This is due to several reasons:

With the marketing campaign, Sprinker has an 80% chance of winning the contract.
Estimated first-year profit is $2.7 m
Writer #1 has the cheapest per-book royalty. In the long run, this reduces Sprinker’s costs, thus maximizing their long-term profit.

The interviewee can also state risks and other topics that could be investigated.

Difficult Questions

What possible risks does the company face?

Possible risks:

Competitors can increase their chances to win by different ways, e.g. merging, conspiracy, etc.
The rumour is not yet confirmed. If private schools do not change their first-grad textbooks, the marketing investments will be a waste.
Writer #1 could not have expertise in first-grade textbook writing.
Not all the private schools will use the same textbook (thus driving up costs because the writer needs to write more than one textbook and the factory needs to produce more than one textbook).
The marketing campaign does NOT increase our client’s probability of winning the contract to 80%.

More questions can be added by you!

If the interviewee solves the case very quickly, you can come up with additional challenging questions to ask them.

Problem Definition

Comments

Short Solution