Overview

The case interview is a joint problem-solving exercise, in which you will be presented with a sample business problem and asked to guide your interviewer through the development of a logical solution. Your success in this exercise depends on your ability to structure your thoughts in a concise manner, support your ideas and incorporate new information when appropriate. Although the answers are important, equally important are your approach and insights to solving the problem.

This sample case is structured as a dialogue in order to give you a sense of how a case interview might proceed. The suggested response is only one of many “correct” solutions. Please keep in mind that cases often have multiple approaches, each leading to a logical and correct answer. Your evaluation will be based as much on the approach you describe as the sensibility of your proposed solution.

You will be asked to think about a specific business problem. You will want to:

• Quickly and quantitatively analyze the problem
• Use logic
• Develop hypotheses
• Use your business judgment and common sense
• Call upon any experience that is relevant
• Utilize diagrams and drawings to emphasize your points

Case Background

Our client, the vice president of marketing at a leading U.S. confectionery company, has brought us in to help him grow the sales of his most important product line: cough drops. Our client has the leading brand of cough drops, with 50% share, but sales have been flat for the last few years. Although share has increased a few points, the overall market has shrunk.

The next largest competitor is private label, which has 25% share, with the remainder divided among other brands. Our client needs to show progress this year towards achieving his goals (increased revenue and profit), even if the bulk of the benefits don’t materialize until after this year. He is very detail oriented and wants specifics, not generalities, wherever possible.

Question 1: How would you approach this problem? This is an opportunity to show that you think in a logical, structured manner and are familiar with basic marketing concepts. It is also an opportunity to probe and learn more about the client’s business situation. This is a good time to take a minute and think about the problem, ask clarifying questions and then describe your approach.

Based upon the direction you go in and the questions you ask, you would be provided additional background information.

Additional Background Information

Based on this information, you may have concluded that price is the primary (only) avenue for further focus:

• Product is already market leader and they continue to innovate
• Placement is already about as high as it can get
• Promotion is already heavy

The following are clues that price is out of whack:

• Haven’t raised price in 10 years
• Market leader with high brand loyalty but product is lowest price
• Pricing structure is creating problems with some key customers
• Price elasticity is below 1 (meaning demand is inelastic and total revenue would increase if price were increased)
• Infrequent purchase cycle reduces ability for consumers to compare/reference prices
• Promotion, which is primary based on price, not effective in driving long term gains

If you have not focused solely on price: What do you conclude from the price elasticity being $0.71? (If you are not familiar with price elasticity, it is the ratio of a percentage change in price to the expected percentage change in volume. So, in this case, if price went up by 10%, volume would be expected to fall by 7.1%.)

• What do you think they could be doing more of with respect to product? Placement? Promotion? Price?
• What do you think of the fact that they are not as profitable as other products and are therefore losing shelf space? Do you think this is related to the fact that the wholesale (and, therefore, retail) price hasn’t changed in 10 years?
• What do you think of their promotion approach (e.g., what kind of behavior they are trying to motivate)? If you changed it, how might it impact the other components?

Question 2: What is the optimal retail price and expected revenue (at retail)?

The client wants us to tell him what the suggested retail price should be and what the total revenue (at retail) would be at that price point.

For simplicity, assume that there is only one SKU: a basic bag of 30 cough drops. The client sells them to the trade for $0.80 per bag, and the average retail price is $1.00. Last year the client sold 280 MM bags

There are three major avenues for solving this problem (in increasing order of sophistication):

• Brute force (multiplication): calculate the total revenue (price x quantity) for each price point and pick the highest number
• Point elasticity (algebra): calculate (or ask for) the point elasticity for each price point and pick the price where the point elasticity is equal to 1 (indicating that any movement to raise or lower price from that point would reduce total revenue)
• Marginal revenue (calculus): calculate the marginal revenue function from the demand curve and determine the quantity where marginal revenue = 0 (indicating that there is no benefit from deviating from that quantity, so it is optimal)

Hint: You may go through one or more of these approaches or start by asking for data. If you are stuck, you might probe on price elasticity and/or the demand curve.

Demand curve: Q (quantity, in millions of bags) = 480 – 200P (price, per bag at retail)

Price elasticity: Elasticity can be calculated in different ways depending on what the starting and ending prices are, whether averages are used to equalize the elasticities from moving in both directions between prices (i.e., going from $1.00 to $1.10 = going from $1.10 to $1.00), and whether the point elasticity is used (which measures tiny deviations from a single price point).

• Between $1.00 and other prices (“arc price elasticity” or “midpoint price elasticity”), direction of price movement doesn’t matter – see table below.
• From $1.00 to other prices (“point price elasticity” at the current price) – this is $0.71, regardless of the new price.
• At specific price points (“point price elasticity” at different prices) – see table below.
• Between this product and other products (“cross-elasticity”) – cross-elasticities are negligible

Question 3: What reactions would you expect from the trade in response to this price increase, and how would you address them?

Please comment on the following:

Will the trade like/dislike/not care about the price increase?

• How might this vary by class of trade (mass merchandisers vs. drug stores, for example)?
• How might this vary within a class of trade (i.e., why would some convenience stores like this vs. not?)?
• How might Walmart’s competitors react vs. Walmart?

How will the trade pass on this price increase?

• Raise retail price the full $.20
• Raise retail price less than $.20
• Raise retail price more than $.20

How will the competitors react to this price increase?

• Match with their own price increases
• Cut price/increase discount in response
• Do nothing

How might the trade “retaliate” against this price increase, if they do not support it?

• De-list some SKUs
• Cut promotion
• Refuse new products
• Ignore price increase (i.e., keep paying the previous wholesale price)
• Substitute their own private label products instead

Additional discussion points may include:

• Increasing the piece count to partially offset the price increase
• Offering exclusivity for a new flavor
• Offering exclusivity for a new size or configuration
• Creating customized packaging for a customer or class of trade
• Bundling products in new ways to spur additional trial/purchase
• Investing in customer-specific marketing programs (e.g., Walmart TV)
• Leading or linking to a broader upper respiratory program or display (e.g., in-store allergy display)
• Offering profit protection on unit decline

Question 4: What is the net financial impact, assuming the wholesale price increase tracks the anticipated retail price increase of $.20?

Hint: Decide if the costs are fixed or variable. Assume marketing cost is fully variable (i.e., same percent of revenue), 100% price pass-through and no punitive actions. Below are current costs.

Costs (% of revenue)

Please calculate the new costs and profit (see sample answer below)