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 (Expand)
Detailed Solution
The following structure provides an overview of the case:
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.
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
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 contractTaking 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.
