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. Background
The key information that is known about the North American market is that it is fragmented. There is no information about market leaders or trends. OnlineGo plans to gain 10 million subscribers, subscriptions will cost $20 a month. The average OnlineGo user purchases $1,800 of goods on the internet yearly and OnlineGo charges 3% commission on each transaction. Fixed costs are $1 billion annually, variable costs are $110 per subscriber annually.
II. Quantitative Analysis
Please share the Industry Information in Exhibit 1
1. Calculate the annual net income in North America, given the current model and all assumptions. What is the annual gross mark-up, measured as a percentage?
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Revenue each year is $2.4B from subscriptions (10 million subscribers x $20 per month x 12 months) and commission will be $540M (10 million subscribers x $1,800 per year x 3% commission), for a total revenue of $2.94B .
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Fixed costs are equal to $1B annually, and variable costs are $1.1B (10 million subscribers x $110/year).
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Therefore, profits are $840 million and the annual profit margin is 28.6%.
Interviewee might calculate the total revenues for OnlineGo and then subtract the total annual costs
2. OnlineGo found that a new entrant is charging $10 per month to gain market share. Can our client do the same?
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If this was done, yearly revenues from subscription would drop to $1.2B (10 million subscribers X $10/month X 12 months), and commission would remain unchanged. The new revenue would be $1.74B, therefore OnlineGo would make a loss of $0.36B.
3. What is the elasticity of demand for this market?
4. Due to high market elasticity, OnlineGo will charge only $10/month. What would be the amount of online purchases that have to be made by each customer to maintain the same level of profit as at $20/month?
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As costs remain unchanged at $2.1B, revenue will also be held constant at $2.94B. With $10/subscription, revenue from subscriptions would be $1.2B. To remain at $2.94B revenue, commissions must be $1.74B . With 10 million subscribers each one needs to generate $174/year of commission. To keep profits at $840M, subscribers need to purchase $5,800/year.
Ask the candidate whether this is a realistic idea - the answer is clearly no.
5. How much would each subscriber have to buy to allow the firm to break even (in the $10/month scenario)?
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Annually, each subscriber would have to purchase $3,000 worth of products online, which is also unrealistic.
6. How many subscribers would OnlineGo need to gain in order to break even (in the $10/month scenario, $1,800 in purchases)?
A lot of people tend to omit the variable costs when completing this case.
III. Quantitative Analysis
7. How can the fixed costs of investment be reduced?
8. Is there any reason to continue with an investment even if it will lose money?
- Potentially, OnlineGo could do this to enter the internet retailing market and increase its number of subscribers, but it is not a long-term solution based on the calculations.
IV. Conclusion
9. How would you summarize the situation and what are your recommendations?
- There is not one definitive answer, everything is reliant on the interviewee's own ability to explain themselves and their reasoning. Initially, this seems like an attractive market to enter - but if OnlineGo are to expand into North America, they need to find a way to gain much more subscribers or differentiate its product.
In a stellar case interview the quantitative part will be executed solidly with an intuitive understanding of the questions posed. A very good interviewee will display a solid business acumen with an overview of the implications and costs of the venture, and will deliver strong, verified arguments to invest or not invest.
