Mail Ordering Clothing
Our client is a Columbian direct mail clothing retailer. They primarily use their product catalogue to sell clothes. The clothes are sent to the customers through mail.
However, the postage costs are expected to increase next year; the company has estimated that the average postage costs per catalogue would be $1 next year.
They have hired us to help them understand whether this cost increase would make the business unprofitable. If so, then how should they proceed?
How would you help them?
Suggested case structure
Key question: Would the increase in costs make the business un-profitable?
Below would be the steps to solve the case:
1. Revenue: The candidate should attempt to understand the drivers of revenue and estimate the revenue for the company.
2. Costs: The candidate should try to estimate the projected costs after taking into account the increase in postage costs.
3. Profit: The candidate should then calculate the profit and answer the key question as to whether the business would remain profitable.
4. Sustainability: Based on the profitability analysis, the candidate must lay out the next steps for the client.
The interviewee should at the outset try to list out the drivers for revenue – no. of orders, average revenue per catalog.
1. The profit margin is 20% excluding postage costs
2. There is no other cost information available
3. Information about sales is available
Exhibit 1 – Revenue Estimation Tree
Exhibit 2 – Revenue Drivers
Now the candidate can estimate the revenue per catalogue as follows:
Order Price = Sales from initial orders/ No. of initial orders
Order Price = 300,000$/3000
Order Price = 100$
Sales from repeat orders = No. of repeat orders * Order Price
Sales from repeat orders = 1000 * 100$
Sales from repeat orders = 100,000$
Total Sales = Sales from initial orders + Sales from repeat orders
Total Sales = 300,000$ + 100,000$
Total Sales = 400,000$
Revenue per catalogue = Total Sales/ No. of catalogues sent
Revenue per catalogue = 400,000$/ 100,000$
Revenue per catalogue = 4$
The above calculation will help the candidate arrive at the revenue per catalogue of 4$.
The interviewee should now try to estimate the costs. There is no information available on costs; however the interviewee can use the profit margin shared earlier to calculate the costs as follows:
Costs excluding postage costs = Revenue per catalogue * (1 – Profit margin excl. postage costs)
Costs excluding postage costs = 4$ * (1 – 20%)
Costs excluding postage costs = 4$ * 80%
Costs excluding postage costs = 3.2$
The above calculation will help the candidate arrive at the cost per catalogue excluding postage costs of 3.2$.
The interviewee can now estimate profitability after taking into account the revised postage costs.
Total Cost per catalogue = Costs excluding postage costs + Postage costs
Total Cost per catalogue = 3.2$ + 1$
Total Cost per catalogue = 4.2$
Loss per catalogue = Total Cost per catalogue – Revenue per catalogue
Loss per catalogue = 4.2$ - 4$
Loss per catalogue = 0.2$
With the increased postage costs the company would lose 20 cents on every catalogue that is sent. Hence the current business model would not be sustainable.
The client would like to continue with the clothing business and has asked you to suggest a way forward.
Share the following information with the interviewee if enquired:
- The company segments its sales as Colombian market sales and International sales
- The client primarily operates only in the Columbian market. The market has several strong competitors
- The number of orders via catalogues have been reducing. The number of client orders has also been declining
- A consumer study revealed that the customers are highly price sensitive. An increase in prices is likely to lead to a sharp decline in orders
This part of the case is open-ended and the candidate could structure the solutions is a variety of ways possible.
The industry as well as the distribution channel of the client seems to be under stress in its primary market. The interviewee should suggest a combination of new markets and new distribution channels.
Exhibit 3 – 2x2 Matrix
The client should focus on entering a new market because of the following reasons:
1. The primary market of the client is shrinking. It would not make economic sense to go after increased penetration in a declining market as it would be a short term solution.
2. The market already has several strong competitors and given the thin profit margins it would be hard to take market share away from these competitors.
3. The company should explore new markets and leverage its USP of wide range at a low cost to gain share in emerging markets.
The client should also evaluate using additional distribution channels.
1. The mail order business is declining as a distribution channel.
2. The company should evaluate new distribution channels in its existing market as well as the new markets that it enters
3. The company could explore setting up an e-commerce website to distribute its products as it is likely to be the fastest growing channel given the changing customer preferences.
The client could also evaluate being a B2B/ wholesale business as their competitive advantage is their product.