Try a practice case

Want to walk through a real world example of a case you might see during our interview process?

Background Information

You are a manager at a marketing and publishing company that is looking to diversify.

You receive some information indicating magazine publishing might be interesting.

You are considering developing a new magazine, but are not sure how profitable it might be.

What are some of the issues you might consider when evaluating an entry into the magazine industry?

Things to Consider

• External Factors
• Customer demographics and desire
• Competition (number of competitors, fragmentation, brand name)
• Barriers to entry

• Internal Factors
• Alignment with existing business strengths
• Marketing channels and effectiveness
• Opportunity cost
• Production costs and supply chain structure
• Revenue sources

What do you think are the components that contribute to profits for a magazine?

Things to Consider

• Revenue Sources
• Subscriptions
• Newsstand sales
• Advertising
• Customer lists

• Costs
• Printing
• Distribution
• Content development
• Marketing/promotions

Which do you think are the largest profit drivers?

Math!

Through some initial research you have been able to determine the following:

• You can charge $25 for an annual subscription of 50 issues.
• You can generate $1 in advertising revenue for each physical copy printed.
• Printing and distribution costs are $1 for each physical copy printed.
• Content development costs run $1 million per year.

Let's ignore newsstand sales and other revenue sources. Let's also ignore marketing expenses and other costs for now.

Ignoring content development costs, what is the incremental profit of a subscription?

Let's figure this out together

Incremental subscription profit:

• Subscription revenue per year = $25
• Advertising revenue per year = $50
• $1 / issue X 50 issues
• Yearly production and distribution costs = $50
• $1 / issue X 50 issues
• Profit from one incremental subscription = $25
• $25 + $50 - $50

How many subscriptions would we need to sell in order to break even on this venture?

Let's figure this out together

Breakeven subscription volume:

• Incremental profit = $25 per subscription
• Magazine content development = $1 million per year
• Breakeven = $1 million / $25 = 40,000 subscriptions

What else would you want to consider to determine whether this was a worthwhile venture?

More Math!

Your company has expertise in direct mail solicitation so you decide to use that method to market your new magazine.

You know that each piece of mail costs $0.50.

After some testing, you're pretty certain you'll be able to achieve a 2% response rate.

How much will it cost you to sign up a subscriber?

Let's figure this out together

Marketing cost per new subscriber:

• Cost of mailing / response rate = cost to sign up one subscriber
• $0.50 / 2% = $25 per subscriber

• Another way to calculate cost per subscriber:
• Assume you mail the offer to 100 people
• Costs = $50 ($0.50 x 100 people)
• Responders = 2 (2% of 100)
• Cost per responder = $50 / 2 = $25

How will this affect your breakeven calculation?

Let's figure this out together

New break even calculation:

• Previous incremental profit - marketing costs = new incremental profit
• New incremental profit = $25 - $25 = $0

OUCH! What are some ways we could improve profitability?

Things to Consider

Some possible ways to improve profitability:

• Raise subscription prices
• Raise price charged to advertisers
• Reduce production costs
• Increase response rate
• Include lifetime subscription value (renewals and multi-year subscriptions), not just single year
• Increase advertising volume

Renewals seem promising, as the cost to get an existing customer to renew may be lower than the cost to acquire a new customer. How might you encourage renewals?

Things to Consider

Some possible ways to encourage renewals:

• Price promotion
• Competitions
• Marketing
• Free gifts

Preliminary research shows probable outcomes of two possible options:

• Do nothing: 50% of existing subscribers will renew each year
• Offer a free second year subscription: 100% of existing subscribers will stay for the second year, 70% will renew in year 3

Assuming a $1 million initial marketing budget, which is the best option over a three year time horizon?

Let's figure this out together

Let's model the profits for Option 1:

Assumptions you can make from previous sections:

• With a $1 million initial marketing budget, assume 40,000 customers in year 1
• $25 net revenue per customer per year (excluding fixed and marketing costs)
• 50% renewal rate per year

Over three years, net profit for Option 1 is:

• $25 * (Customers in yr 1 + Customers in yr 2 + Customers in yr 3) - (Initial marketing cost)
• $25 * (40,000 + 40,000 * 50% + 40,000 * 50% * 50%) - ($1 million) = $750,000

What about option 2?

Let's figure this out together

Let's model the profits for Option 2:

You can make the same assumptions as Option 1, except:

• Second year is offered free of charge to subscribers
• 100% of existing subscribers will stay for the second year, 70% will renew in year 3

Over three years, net profit for Option 2 is:

• $25 * (Customers in yr 1 + Customers in yr 2 + Customers in yr 3) - (Cost of free subscriptions) - (Initial marketing cost)
• $25 * (40,000 + 40,000 + 40,000 * 70%) - ($25 * 40,000) - ($1 million) = $700,000

So which option would you go with?

Which is the best option?

Option 1 = $750,000
vs.
Option 2 = $700,000

Option 1 seems to be the better option.

Are you sure?

Which is the best option?

Option 1 may not necessarily be the stronger choice. Here are some things you might consider:

Would the initial marketing response rate be higher than 2% if you advertised a two year subscription instead of a one year subscription?

However, even if profit were notably higher for Option 2 (corresponding to a higher response rate):

• How would investors react to volatile revenues?
• Can the cost of free subscriptions in year 2 be better used in a different marketing campaign, perhaps attracting new customers?
• Is profit next year as good as profit today?

What next steps would you recommend the team exploring a magazine business pursue?

Some Tips

Stay confident and stay cool. Show enthusiasm, not frustration. Be thorough. Ask questions. Show your stuff!