An online travel agency earns a 10% commission on all of its bookings. Currently, their profits before taxes are $1 m, while the industry average is around $2.5 m. The client wants to know why they're making less than the industry average?
Next, the candidate should want to understand the revenue breakdown and business segments as well as their profit contribution. With the information given, the candidate should calculate the profit contribution for each segment.
The candidate should calculate profit per transaction for both segments to see how profits are structured and where the problem lies.
40% of total revenues of $10 m with a transaction cost of $9
It seems that the agency is earning less in absolute profit from the leisure segment which makes up for the majority of its revenue, whereas the business segment has a higher absolute profit per transaction.
The agency should benchmark its competitors and mimic them in terms of cost structures & revenue structures.
The agency should focus more on the business traveler since they make more money on those bookings.
The agency can also see if they can renegotiate transaction costs for the business traveler since those travelers travel a lot and could thus earn a discount for the agency.
The agency can also choose to offer the leisure traveler more products to increase the revenue and profit per transaction.
What are some quick-win & short-term solutions the client can implement to increase profit margins?
Do you think airlines would offer lower transaction costs to business travellers? How can the agency make that pitch strong?
Do you have questions on this case? Ask our community!
Learn how to use the Pareto Principle to prioritize issues in cases and sort out areas where the highest impact is created
Cookie and Privacy Settings
Data processing in the USA: By clicking on "I accept", you also consent, in accordance with article 49 paragraph 1 sentence 1 lit. a GDPR, to your data being processed in the USA. The USA is not considered to have adequate data protection legislation. Your data could be accessed by law enforcement without prior public trial in court. If you need more information please view the individual settings.