Profitability Framework

Profitability Framework is a special-designed issue tree to solve Profit problems in consulting

Case Interview. The framework starts with a math equation: PROFIT = REVENUE – COST then
consequently breaking down each branch (REVENUE and COST) down into smaller components
such as: Price x Quantity or Cost/Unit x Quantity. The consultant’s job is to analyze the
situation, identify the root-cause, and propose solutions.

Profitability Framework Example: Frozen Heaven Ice Cream

Case Introduction:

Our client, Frozen Heaven, makes small-batch ice cream. They serve the ice cream in the
company’s restaurants as well as selling pints and quarts to go. Frozen Heaven has been
experiencing a decline in profits and wants to turn this trend around.
What should they do?

Analysis:

We would start by exploring revenues.

Question: How have revenues been trending over time?

-Revenues are down by 5% versus the prior year.

Question: I’d like to understand what’s going on with revenue by looking at price and the
quantity of ice cream sold. First, has the price of Frozen Heaven’s ice cream changed?

-There’s been no significant change in either the pricing of either the packaged ice cream or the
ice cream served in the restaurants.

Question: So the problem has been with the quantity of ice cream sold.

-Yes, the quantity of ice cream sold is down 5%. The decline has been about the same across
both the packaged and restaurant-served products.

Question: I’m interested in understanding possible causes for the decline in ice cream sales. Are
there any new competitors in the market?

No.

Question: Have existing competitors changed anything about their business? Price, advertising,
opening new restaurants?

Both our client and the competitors have added new stores over the last 12 months at about
the same rate. Pricing and advertising haven’t changed.

Question: Has our client’s product changed?

The client hired a new head of operations 15 months ago. She has over ten years of experience
with one of the biggest mass-market ice cream manufacturers in North America. She was given
latitude to make changes to improve the company’s efficiency and profitability. In fact, she’s
reduced costs but 3%. Unfortunately, that’s not enough to offset the reduction in revenue.

Question: I’d like to understand the change in costs. Was the cost reduction in fixed costs,
variable costs, or both.

-Variable costs.

Question: Was the reduction in labor, the cost of ingredients, or something else?
-The cost of ingredients.

Question: What ingredient costs went down?

Dollars spend on milk have been in line with the reduced quantity of ice cream sold, as were
the costs of flavorings like chocolate, vanilla, etc.

The biggest change has been in the cost of mix-ins to the ice cream. The client creates specialty
flavors by adding in things like chocolate chips, caramel, and crushed up Oreos and Heath Bar,
etc. These costs are down 30%.

Question: Has the reduction in mix-ins made a difference to the client’s customers?

-That’s a good question. We haven’t studied this, but a quick review of the client’s reviews on
Yelp shows there are comments from customers suggesting that they’ve noticed the reduction
in mix-ins and don’t like the change.

Conclusion/Recommendation:

Frozen Heaven has seen a decrease in profitability resulting from a reduction in the quantity of
ice cream it sells both in packages and served to customers in its restaurants. Frozen Heaven’s
variable costs have gone down. That would seem to be good for profitability at first glance, but
the cost reduction resulted from smaller quantities of mix-ins being used in the ice cream.

From a quick scan of Yelp, it sounds like the customers don’t like the changes to Frozen Heaven
ice cream. I’d recommend using customer focus groups to gain a deeper understanding of what
Frozen Heaven’s customers want in their ice cream. If it turns out that the mix-ins are
important to their customers’ buying decision, they should return to former mix-in levels even
if it means spending more money. It will be worth it in terms of increased sales.

It’s possible the client’s head of operations won’t like this recommendation because she made
the change to the amount of mix-ins used, probably because she thought that it would increase
profitability. But the results of focus groups will persuade her that this recommendation will
improve profitability.

References-

https://www.b2bframeworks.com/profitability-framework

https://www.myconsultingoffer.org/case-study-interview-prep/profitability-framework/