If you have an upcoming profitability case interview and are feeling stressed, overwhelmed, or unsure what to do, we have you covered.

 

Profitability case interviews are the most common types of cases in consulting interviews given by firms such as McKinsey, BCG, and Bain. You are almost guaranteed to see at least one profitability case interview across your multiple rounds of interviews.

 

Depending on the consulting firm, profitability cases can make up as high as 50% of the cases you’ll see in your first round interview! Therefore, it is an essential type of consulting case interview to prepare for.

 

Fortunately, profitability case interviews are one of the most straight forward types of case interview questions. They are very predictable and all cases generally follow a similar sequence of steps.

 

Additionally, a lot of the strategies and techniques used to solve profitability cases can be applied to other types of cases, such as market entry case interviews, growth strategy case interviews, M&A case interviews, pricing case interviews, operations case interviews, marketing case interviews, and private equity case interviews.

 

In this comprehensive article, we’ll cover:

 

• What is a profitability case interview?

 

• Why do consulting firms give profitability case interviews?

 

• How to solve a profitability case interview

 

• Profitability case interview framework

 

• Profitability case interview examples

 

• Profitability case interview vs. profit case interview

 

• Recommended profitability case interview resources

 

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What is a Profitability Case Interview?

 

A case interview, also known as a “case” for short, is a 30 to 45-minute exercise in which you and the interviewer work together to develop a recommendation or answer to a business problem.

 

A profitability case interview is a specific type of case interview in which you will be asked to help a company identify its profitability issue (e.g., decline in revenue, increase in costs) and propose a recommendation to improve profitability.

 

A profitability case interview may look something like the following:

 

• A domestic airline has been experiencing declining profitability over the past five years. What is causing this decline in profitability and what can they do to reverse this trend?

 

• An internet service provider has seen consistent growth in profits over the past decade. However, this past year, profits have remained flat. Why have profits remained flat this past year?

 

• A large retail conglomerate that manufacturers cleaning and beauty products is looking to increase their overall profit margins to 40%. What can they do to achieve this?

 

• A portfolio company of a private equity firm needs to achieve an annual profit of $500M in order to achieve a valuation that would give investors an annualized return of at least 20%. They are currently on track for $450M this year. What can be done to help this portfolio company achieve their annual profit goal?

 

By the way, we’ll walk through exactly how to solve each of these different profitability cases later on in this article.

 

Why do consulting firms give profitability case interviews?

 

Profitability case interviews are used by consulting firms because they are the best way for firms to predict which candidates will make the best consultants. Case interviews do not predict this perfectly, but they come quite close.

 

Since case interviews simulate the consulting job by placing you in a hypothetical business situation, interviewers use profitability case interviews to see how you would perform as a hypothetical consultant.

 

Many of the skills and qualities needed to successfully complete a case interview are the same skills and qualities needed to successfully finish a consulting case project. These skills and qualities include:

 

• Logical, structured thinking: Consultants need to be organized and methodical in order to work efficiently

 

• Analytical problem solving: Consultants work with a tremendous amount of data and information in order to develop recommendations to complex problems

 

• Business acumen: A strong business instinct helps consultants make the right decisions and develop the right recommendations

 

• Communication skills: Consultants need strong communication skills to collaborate with teammates and clients effectively

 

• Personality and cultural fit: Consultants spend a lot of time working closely in small teams. Having a personality and attitude that fits with the team makes the whole team work better together

 

Case interviews also give you a sense of whether you would like the consulting job. If you find them interesting and exciting, you’ll likely enjoy consulting. If you find case interviews dull and boring, consulting may not be the best profession for you.

 

Profitability case interviews are the most common type of business problem that consultants encounter. They are a consultant’s bread and butter, so they should give you a good sense of what the consulting job will be like.

 

Profitability Case Interview vs. Profit Case Interview

 

It is important to make a distinction between profitability case interviews and profit case interviews.

 

While profitability and profit are related financial concepts, but they represent different aspects of a company's financial performance.

 

Profit definition

 

Profit refers to the financial gain that a company makes after deducting all expenses from its total revenue.

 

It's the amount of money that remains after subtracting costs such as production, operating expenses, taxes, interest, and other financial obligations.

 

In other words, profit is the surplus amount that a business has earned from its operations during a specific period, typically a quarter or a fiscal year.

 

Profit is a specific monetary value and is often expressed in currency units (e.g., dollars, euros, etc.).

 

There are different types of profit, including:

 

• Gross Profit: This is the difference between a company's total revenue and its cost of goods sold (COGS). It represents the basic profitability from core operations without factoring in other expenses

 

• Operating Profit: Also known as operating income or operating earnings, this is the profit remaining after deducting operating expenses from gross profit. It reflects the profitability of a company's primary business activities

 

• Net Profit: This is the final profit figure after subtracting all expenses, including operating expenses, taxes, interest, and other non-operating costs, from the total revenue

 

The goal of a profit case interview is determine what is causing profits to be so low and what should be done to turn this around.

 

Profitability definition

 

Profitability refers to the overall ability of a company to generate profit from its operations. It's a measure of how effectively a company can use its resources to generate earnings.

 

Profitability takes into account the relationship between a company's revenues and its expenses, and it's often expressed as a percentage.

 

Profitability can be assessed using various financial ratios and metrics, including:

 

• Gross Profit Margin: This is the ratio of gross profit to total revenue, expressed as a percentage. It indicates how efficiently a company produces goods and services relative to its revenue

 

• Operating Profit Margin: This is the ratio of operating profit to total revenue, expressed as a percentage. It measures how efficiently a company manages its operating expenses

 

• Net Profit Margin: This is the ratio of net profit to total revenue, expressed as a percentage. It provides insight into a company's overall profit-generating ability after all expenses are considered

 

• Return on Assets (ROA): This ratio measures a company's ability to generate profit relative to its total assets

 

• Return on Equity (ROE): This ratio measures a company's ability to generate profit relative to its shareholders' equity

 

In summary, profit is the actual monetary amount left over after deducting all expenses from total revenue, while profitability is a measure of how efficiently a company generates profit in relation to its revenue and expenses.

 

The goal of a profitability case interview is to determine what is causing profitability to be so low and what should be done to turn this around.

 

How to Solve Profitability Case Interviews

 

There are four steps to solve any profitability case interview or profit case interview. To illustrate these steps, let’s take a look at a hypothetical profitability case:

 

An electric car manufacturer has recently been experiencing a decline in profits.

 

1. Determine quantitative driver of profitability issue

 

First, you want to understand quantitatively, what is the driver that is causing the decline in profits?

 

As you may already know, Profits = Revenue – Costs. So, have revenues gone down? Or have costs gone up?

 

Let’s say that in this example, profits have declined by $100M over the past year. Let’s consider a simple case in which costs have been flat and revenues have decreased by $100M over the past year.

 

In this example, the answer is simple. A decline in revenues has driven a decline in profits.

 

In more complicated cases, perhaps both revenues have gone down and costs have gone up.

 

Suppose costs have increased by $20M and revenues have declined by $80M.

 

From this, we can conclude that 80% of the decline in profits is due to a decline in revenue.

 

Therefore, you probably want to prioritize determining how to increase revenues. Costs would be a secondary priority.

 

Let’s continue this example further.

 

Let’s say that you look closer into the $80M decline in revenue and discover that the company has three different products: compact cars, mid-size cars, and full-size cars.

 

Over the past year, compact car sales have increased by $20M, mid-size car sales have decreased by $10M, and full-size car sales have decreased by $90M.

 

You now know the primary driver responsible for the decline in profits: a decline in full-size car sales.

 

You’ll likely want to prioritize determining how to reverse the decline in full-size car sales.

 

2. Determine qualitative driver of profitability issue

 

Now that you know the quantitative driver for the decline in profits, you can move onto the second step, understanding qualitatively why this is happening.

 

In this step, you will look into areas such as customer needs and preferences, competitors, and electric car market trends.

 

Looking at customers have customer needs changed? Have customers changed their purchasing habits? Do customers view the company differently? Any of these could be reasons why full-size car sales have declined.

 

Looking at competitors, have new competitors entered the market? Have existing competitors made any recent strategic moves, such as lowering prices or offering additional car features? Any of these reasons could also explain the decline.

 

Looking at the electric car market, are there new technologies impacting the market? Are there new regulations impacting the market? These trends can affect sales.

 

In this example, let’s say that you determine that competitors have drastically decreased the price of their full-size vehicles. Now that you know this, you can move onto step three.

3. Brainstorm solutions

 

In step three, you’ll brainstorm ideas or recommendations to address the profit issue.

 

We now know that the company’s decline in profits is due to a decline in sales of full-size vehicles because competitors have decreased the prices of their full-size vehicles.

 

Therefore, you can begin to investigate different options.

 

Should the company also decrease their prices? Should the company keep prices the same, but add additional features to their cars to justify a higher selling price?

4. Evaluate solutions and propose a recommendation

 

In this step, you’ll evaluate the advantages and disadvantages of different ideas and ultimately pick one as your final recommendation.

 

You can evaluate solutions based on several factors:

 

• Impact: Which solution will have the greatest impact on improving profit or profitability?

 

• East of implementation: Which solution is easiest to implement?

 

• Cost: Which solution costs the least amount of money or time?

 

After you select the best solution, you’ll also want to think through what potential next steps could be.

 

These could include addressing open questions that you still have, determining how to best test the solution, or whether additional solutions need to be evaluated.

 

Profitability Case Interview Framework

 

You can use the following profitability case interview framework to help think through all of the possible ways of increasing profitability.

 

We’ve organized the framework into two major sections: quantitative drivers of profitability and qualitative drivers of profitability.

 

Under quantitative drivers of profitability, we have revenue drivers and cost drivers.

 

Revenue drivers include price, quantity sold, and sales mix.

 

Sales mix is the proportion of different products a company sells relative to its total sales. Remember that if a company is selling more of lower margin products, then its overall profitability could decline.

 

Cost drivers include variable costs and fixed costs.

 

Under qualitative drivers of profitability for revenue, we have:

 

• Change in customer: Have customer needs or preferences changed? Have customer purchasing behaviors changed?

 

• Change in company: Has our company undergone significant changes recently?

 

• Change in market: Are there any significant market trends or changes?

 

• Change in competitor: Have competitors made significant major moves recently?

 

Under qualitative drivers of profitability for cost, we have:

 

• Change in supplier: Have we changed suppliers? Have suppliers increased their prices?

 

• Change in manufacturer: Have we changed manufacturers? Have manufacturers increased their prices? Have manufacturing defects increased?

 

• Change in distributor: Have we changed distributors? Have distributors increased their prices?

 

• Change in retailer: Have we changed retailers? Have retailers increased what they are charging?

 

Profitability Case Interview Examples

 

Example #1: A domestic airline has been experiencing declining profitability over the past five years. What is causing this decline in profitability and what can they do to reverse this trend?

 

A decline in profitability is driven by a decrease in revenue for the same level of costs, an increase in costs for the same level of revenue, or a combination of the two.

 

The first step is to identify what is the quantitative driver of the profitability issue. Is it a revenue issue, a cost issue, or both?

 

Next, you’ll want to drill-down further into this issue and identify the underlying root cause.

 

Finally, once the root cause has been identified, you’ll want to brainstorm a list of potential solutions, and evaluate the pros and cons of each.

 

Select the best solution and propose that as a recommendation, making sure to also mention what additional next steps you’d want to take before implementing the solution.

 

Example #2: An internet service provider has seen consistent growth in profits over the past decade. However, this past year, profits have remained flat. Why have profits remained flat this past year?

 

The first step to solving this profit case interview is to determine what is the quantitative driver behind flat profits.

 

Flat profits is driven by revenue and costs staying the same or revenue increasing while costs also increase at the same rate.

 

Then, you’ll drill-down deeper into the issue to identify the underlying root cause, brainstorm potential solutions, evaluate the potential solutions, and then propose a recommendation.

 

Example #3: A large retail conglomerate that manufacturers cleaning and beauty products is looking to increase their overall profit margins to 40%. What can they do to achieve this?

 

Similar to the previous profitability case interview examples, the first step is to identify how the company can drive an increase to 40% profit margins.

 

This can be done by keeping costs the same and increasing revenue (e.g., increasing price), keeping revenue the same but decreasing costs, or a combination of the two.

 

You’ll need to determine which drivers of profit margin the company will most likely be able to change.

 

Afterwards, you’ll brainstorm potential solutions, evaluate them, and propose a recommendation.

 

Example #4: A portfolio company of a private equity firm needs to achieve an annual profit of $500M in order to achieve a valuation that would give investors an annualized return of at least 20%. They are currently on track for $450M this year. What can be done to help this portfolio company achieve their annual profit goal?

 

For this profit case, the private equity firm is $50M short on their profit goal. 

 

To generate $50M, the firm needs to decrease costs, increase revenues, or do a combination of both.

 

Similar to the previous example, you’ll need to determine which drivers of profit the company will most likely be able to change.

 

As always, you’ll brainstorm potential solutions, evaluate them, and propose a recommendation.

 

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