Case interviews allow you to demonstrate how you think - your ability to understand a problem, break it down into its requisite parts, analyse them and communicate a solution. In this series, we give you ten case studies to give you an idea of how to approach the case and how to walk through it with your interviewer.
You may want to consider the case question first and think about how you might structure a response before looking at the ‘answer’. Of course, bear in mind there are many ways to answer a case, so this is just one example!
For the purposes of these examples, we will only look at market sizing and business cases.
A travel agency makes 10 per cent commission on all of its travel bookings. Their current profit before tax is $1 million. However, the industry average ranges from $2 million to $3.5 million. Why are they making less than the industry average?
It is important to understand the revenue stream and cost structure of the travel agency and how each transaction contributes to its profit or bottom line. In order to do so, we will look at the types of customers the agency services and how each type relates to profitability. In particular, we will look at business versus leisure customers.
Let’s go!
You: What is the total gross revenue for the agency every year?
Interviewer: $10 million
You: Ok, and how does this compare to agencies that are of a similar size?
Interviewer: They are about the same.
You: What about the product line? Does the agency handle any bookings other than travel tickets?
Interviewer: No. They just book tickets for their customers.
You: What are the different customer segments that the agency services?
Interviewer: There’s the business traveller, which makes up about 40 per cent of total revenue and the leisure traveller, which makes up the remaining 60 per cent.
You: How many transactions does the agency process and what is the breakdown for each customer segment?
Interviewer: The total number of transactions is around one million per year. On average about 300K goes to the business segment and 700K to the leisure segment.
You: Is there a cost associated with each transaction?Interviewer: Yes, each transaction, regardless of segment, costs about $9.
(You now have enough information to calculate the profitability of each segment)
You: Interesting. It looks like the leisure travellers are draining the profitability. Either the cost per transaction is too high or the revenue per transaction made on the leisure segment is too low.
Interviewer: That sounds about right. What now?
You: We need to benchmark the cost structure to other agencies.
I recommend the agency negotiate with the airlines on the possibility of charging a premium for leisure tickets or capture a larger commission through cost charged to the customer. We should also look into the possibility of reducing the cost per transaction for the leisure travellers. Plus, we should consider offering the leisure traveller other products to increase revenue per transaction such as hotel bookings and travel packages. Another option is to become a niche player and focus only on the business traveller.