www.preplounge.

com

Bodybuilding Made
Easy
Topic Difficulty Style
Market analysis Advanced Candidate-led (usual style)
Market entry
Market sizing
New product
Operations strategy

Your client is a newly founded protein company. Its owners are two brothers.
One of them is a chemist and the other one is a very famous fitness model
and personal trainer on YouTube. They intend to enter the nutrition
supplements industry where they want to focus on protein supplementation
for bodybuilding. The chemist has the capabilities to produce protein products
for this industry. He has used this knowledge and a substantial loan to build a
factory in Germany that would allow the brothers to mass produce their
protein products.

The brothers have approached you to advise them on how they can use their
capabilities to profitably sell their product using their factory in Germany.
They request very practical advice on how to get their product from their
factory into the hands of the consumer at a profit.

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Comments

A lot of information has been included in this case to help both the interviewer
and the interviewee to get a better conceptual understanding of the industry
in case no prior knowledge exists. Not all the information available is
necessary to arrive at the solution. The interviewer should read all available
information to help guide the interviewee towards the solution.

The goal of this case is to practice handling a large amount of information and
not getting overwhelmed by it but proactively identifying which information is
necessary to solve the case in a timely manner and which information does
not help the interviewee getting closer to the solution.

The interviewee should be able to structure the case into three distinct phases
to give very practical advice to the client:

Phase 1 (viability analysis) should be about verifying that the product the
client is willing to enter the protein supplement market with is actually a
product that customers would be willing to buy. The competition, customers,
product and company of the client should all be evaluated to test if entering
the market is at all a good idea.

Phase 2 (determination of the product mix) is about coming up with the right
product mix to serve the needs of all customers and to prevent overserving or
underserving any potential customer segment to maximize efficiency. During
the case, the interviewee will learn that there are 4 major products on the
protein market with varying demand so a logical way to determine the
product mix would be to find the demand for each product individually and
supply exactly the market demand.

Phase 3 (determination of the distribution channel) is about determining

which of the available distribution channels will give the client access to the
largest demand possible.

Short Solution

The products the brothers have to offer are incredibly profitable and a
great fit for the market they intend to enter for 2 reasons:

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1. Taste is one of the differentiation factors customers look for and due to

newly patented and healthy artificial flavors our client’s product is the
best tasting on the market by far.
2. Our client’s product range contains the cheapest protein on a per gram

basis on the market at the same quality as the competition providing the
best possible value to customers.

The fitness model has a large enough following that in fact, a 3rd of all
potential customers know him already and trust his brand. This allows
easy access to a large market share very quickly. The right product mix
is 20% bars, 10% cereal, 49% common powder and 21% MX3.
The right distribution channel is using an online shop initially as the only
way to sell the product as that would allow global reach giving access to
the largest number of potential customers.

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 Paragraphs highlighted in green indicate diagrams or tables that can be
shared in the “Case exhibits” section.

Paragraphs highlighted in blue can be verbally communicated to the

interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the
interviewee through the case.

I. Understanding the Case & Structure

Once the interviewee has clarified terms and the objective of the case and
explained their structure you can share with them Diagram 1 assuming
their structure is not the same as outlined in Diagram 1 to help the
interviewee start off correctly. If the interviewee asks for a financial goal or
any other more quantified client objective you can refer to the blue box
below where the constraints on the client are listed under “Company”.
There is no financial objective to be reached, any positive profit is sufficient.

Share Diagram 1 with the interviewee if their structure is very different

from the structure outlined on Diagram 1.

As this might be an industry unfamiliar to the interviewee the following

information can be shared with the interviewee verbally as the interviewee
draws out the 3C&P (Company, Customer, Competitor, Product) framework
(you should read this information carefully beforehand to familiarize yourself
with the available information on this industry).

Information to be revealed to the interviewee upon request structured in

the 3C&P framework for your convenience:

Company:

1) The client only has 50,000€ remaining in their bank account. This money
must not be spent completely. At the end of any month, the balance on
that account must be larger than 2,000€ otherwise your client can be

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considered bankrupt. You have the remaining 48,000€ available to spend
and you need to ensure that monthly revenue exceeds monthly costs
before the 48,000€ run out.

2) The client has to pay 10,000€ each month as loan payments.

3) The fitness model has a YouTube-channel. The channel is mainly about

training programs, the correct execution of strength building exercises and
nutritional advice to maximize muscle gain while at the same time losing
as much fat as possible.

He has a huge following of teenagers and young adults which happens to

be the target demographic that consumes the largest amount of protein
supplements amongst all other demographics.

The fitness model is one of the 3 big YouTubers on the topic of nutrition
and fitness programs and is known by roughly 33% of all people within that
target demographic of teenagers and young adults. He is especially well
known for his unbiased supplement reviews and his general honesty and
trustworthiness.

4) The chemist has developed new and healthy artificial flavors as well as a
new amino acid compound that happens to be 3 times as efficient as the
usual amino acids found in protein products of the competition (Let us just
assume such a substance could exist). He owns patents on all of these. For
more details look at the information available on “Product” below.

5) The client has received an offer from one of the biggest YouTube-specific
advertisement agencies. This agency is a specialist when it comes to
helping YouTube-personalities start marketing products to their audience.

They suggested that they could help our client gain a 20% market share
leveraging the fact that the fitness model is already well known by 33% of
the entire customer base. This 20% share will be evenly distributed across
all products within the protein supplement industry. You will later see that
there are 3 distinct product lines sold within this industry. The advertising
campaign will allow the brothers to capture 20% market share for each of
the 3 product lines.

For this service, the agency will charge our client 10,000€ a month as a
fixed rate. This deal would last for 2 years and there is no way to exit the

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contract early.

You may assume that without this deal no market share can be gained
against the competition and that if our client agrees to the terms of the
agency that a 20% market share can be achieved instantaneously to make
calculations easier.

You may also assume that the advertising campaign will allow the client to
capture 20% of all customers regardless of what distribution channel will be
used. So, 20% of all potential customers for a given distribution channel
will be captured by the campaign.

6) The client has looked at 2 possible distribution channels:

A) An online shop: The website for this will cost 5,000€ as a one-off fee.
50% of all customers globally prefer to buy their supplements online. The
online shop will be accessible globally and we can ignore shipment costs
when sending our products abroad (You may assume that the brothers are
actually children of Jeff Bezos the CEO of Amazon).

B) A local shop in Germany: The shop could be bought for 500,000€ as a

one-off fee or the client could rent and operate a shop for 9,000€ a month.
50% of all customers globally prefer to go to their local shops and buy their
supplements in person. Such local shops attract customers in a 10km
radius around the shop.

Product:

1) In general, the daily dose of protein necessary to achieve maximum

muscle growth is 40g (g stands for grams) per day. This is true for all
products on the market except for one product that our client can produce.

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2) there are 4 products available that the client’s factory can produce being
protein bars (like a Snickers or Mars-Bar), protein cereal (Literal cornflakes
cereal with protein powder within the flakes) and 2 types of protein powder
(powder is dissolved in water to create a protein drink). One powder is very
similar to the powder the competition produces. The other powder is called
MX3 which is a new amino acid compound that is 3 times as“concentrated”
as the normal protein powder on the market. This means13.33g of MX3 are
equivalent to a single daily dose of protein instead ofthe 40g you would
need with powder that the competition produces.

3) All our client’s products taste better than the products of our
competition. This is because our client is the only one able to produce the
artificial flavors that differentiate our client’s products from the rest.

Next to the qualitative information available on the product you may give
the interviewee (upon request) access to Table 1 which contains the prices
the client wants to sell each product for as well as the production costs for
each product. You may assume that all costs of production are included in
the per unit cost given in the table. The only costs to consider are
advertisement costs, production costs, distribution channel costs and loan
payments.

Ask the interviewee to interpret the data provided in Table 1 and to

calculate how much each product would generate in profits if they were
sold to customers that consume supplements daily to ensure maximum
muscle growth throughout the year. For this, you can tell the interviewee
that the 2 kinds of protein powder can be assumed to be 100% protein
(ignoring artificial flavors) so that 40g of normal powder are one daily dose
and 13.33g of MX3 are also 1 daily dose.

4) The MX3 is in a 1,200g box because the industry standard for powder is
a 1,200g box-size which is 30 day’s worth of 40g portions. The same size
has been chosen for MX3 just to keep the sizes that customers are used to
already.

5) The factory of your client contains 4 separate machines. One for each

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product line so all products have to be produced in order to not lose
efficiency. The question is just how much should be produced of each
product.

6) Substitute products to protein supplements are meat and dairy products.

They tend to have a much higher fat content though which is why protein
supplements are preferred by customers.

Customer:

1) Customers can be segmented by product line:

20% buy bars.

70% buy powder.

10% buy cereal.

2) Customers do not change their preferences so for example, those that

eat protein bars will not use powder or cereal.

3) The overall market is growing at 1% and that is uniform growth across

all 3 segments.

4) Almost all customers use protein supplements daily so you may assume
that all customers consume one dose of protein per day with supplements
every day.

5) The fitness model has sent MX3 to about 10,000 fans and has then done
a survey to determine how many people would prefer to buy MX3 instead
of normal powder.

The results of that survey were that 70% were amazed by MX3 and would
never buy anything else once it becomes available. 30% claimed they
would never buy MX3 because it is simply too expensive.

The reason why the 30% think that MX3 is too expensive seems to be that
they kept using their 40g measuring spoons that they are used to using
when consuming normal protein powder instead of the 13.33g spoon that is
included in the packaging of the MX3 product. Thus they consume an entire
box of MX3 in a single month instead of the 3 month period it is meant for.

6) Customers determine which product they buy based on the taste of the

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 product and based on any loyalty bonus (discounts) they can expect if they
continue to purchase from the same supplier.

7) Whenever a customer buys a product the customer will buy a month

worth of product. For bars, this means a box of 30 bars, for cereal a box
with 30 portions in it and for powder a single 1,200g box. They buy once a
month, every month.

Competition:

1) There are 4 big competitors on the market each holding about 25%
market share.

2) No competitor is able to create a product like our MX3 and MX3 is the
cheapest product on the market on a per gram basis.

3) No competitor is able to improve the taste of their products to match the

taste of our client’s products. This is because artificial flavors take a long
time to be approved for consumption and the artificial flavors used by your
client are patented.

4) Competitors all employ loyalty schemes to hold on to any customers

they get. New customers have to pay very high fees for their first product
and get a loyalty card. If the same customer returns the month after to buy
the same product again then lower prices will be available for the product.
The more you buy from any of the competitors the cheaper the products
get. (The prices your client has chosen for each product are based on the
initial prices a customer would have to pay when buying a new product
from a new supplier. Once your client has built a customer base
discounting prices to hold on to those customers is something the brothers
will have to do to match the competition).

II. Determining the right product mix:

Once the interviewee understands that the products of the client are a
great fit for the market the interviewee should switch gears and determine
the best product mix (to be able to calculate how much the client profits on
a per customer basis) as well as the distribution channel that maximizes
the number of customers our client can serve. Some interviewees might

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 determine that only the highest margin product should be introduced and
the remaining products should not be sold. You should tell the interviewee
in that case that this is a bad hypothesis as customers of our client have a
fixed preference so if you sell for example only powder you will lose all bar
and cereal customers you might have had otherwise. Also, the factory of
your client has already been build to create all 4 products so not producing
all 4 will reduce efficiency and would be a wasted investment.

To determine the right product mix we need to calculate the total demand for
all products our client has to offer. We know we can capture 20% of the total
market through our advertising campaign and that the 20% will be uniformly
distributed across the product lines giving us 20% of the total market share in
each of the 3 product lines. This means that we should have the same output
proportions as the market demands so:

20% bars,

10% cereal,

70% powder.

However, as we know from our powder-customer survey that 70% of those

customers will buy MX3 and 30% will buy our normal powder we can calculate
that we should produce:

MX3% = 70% (powder market) * 70% (interested in MX3) = 49%

Normal powder% = 70% (powder market) * 30% (not interested in MX3) =

21%

So our client should produce:

20% bars,

49% MX3,

21% normal powder,

10% cereal.

III. Choosing the right Distribution channel:

Once the ideal product mix has been found ask the interviewee to

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 determine the average profit our client will make when selling protein to a
single randomly selected customer. Once we know the profit per customer
we can calculate how many customers we need to cover our costs and then
see which distribution channel is better at covering those costs.

Calculation of the average earnings per customer:

To determine which distribution channel to use of the two available options

(online shop or local shop) we first need to calculate the average monthly
profit (from product sales) made per customer. (We look at monthly profits
because all costs are given to us as monthly costs to make it easier to
compare costs to profits of selling the product, notice profit per product is
really just profit before overhead, not total profit):

Cereal: [15€ price per portion – 10€ cost per portion] * 30 portions per month

150€ of monthly profit for cereal sales before overhead.

Bar: [7€ price per bar – 5€ cost per bar] * 30 bars per month

60€ of monthly profit for bar sales before overhead.

Normal powder: [50€ price per box – 30€ cost per box] * 1 box per month

20€ of monthly profit for normal powder sales before overhead.

MX3: [70€ price per box – 50€ cost per box] * 1/3 of a box per month

6.67€ of monthly profit for normal powder sales before overhead.

Taking into consideration that we have a mix of customers and we know the
ratios at which we can sell each product to them then for a single customer
selected at random there is a 10% chance that cereal will be bought, a 20%
chance that bars will be bought, a 21% chance that normal powder will be
bought and a 49% chance that MX3 will be bought so the probability-weighted
average will give us the expected profit our client will make on average on a
single customer:

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Average profits per customer = (monthly profit of cereal) * (probability that
the customer prefers cereal) + (monthly profit of bar) * (probability that the
customer prefers bar) + (monthly profit of normal powder) * (probability that
the customer prefers normal powder) + (monthly profit of MX3) * (probability
that the customer prefers MX3)

Average profits per customer = 150€ * 10% + 60€ * 20% + 20€ * 21% +
6.67€ * 49%

Average profits per customer = 34.47€ (per month).

So if we had, for example, a group of 10,000 customers we would expect to

earn 34.47€ * 10,000 = 344,700€ every month.

Now that we know how much we can expect to earn on average on a single
customer it is time to look at both distribution channels to determine which
one will be able to reach more customers and if any of the 2 channels will
be able to reach enough customers to cover the overhead costs:
advertising campaign (10,000€ a month), loan repayments (10,000€ a
month) and distribution channel specific costs. There are 2 ways to go
about this. A good interviewee will attempt to guesstimate how many
customers are within a 10km radius of a local shop and how many
customers can be reached globally via the online shop and then once a
customer number has been guesstimated it can be multiplied by the
average profits per customer (34.47€) to determine if total profits from
product sales are larger than overhead costs.

A very good interviewee will instead first calculate the total overhead cost
for each distribution channel and then divide that by the average profits
per customer (34.47€) to calculate how many customers must be reached
to at least cover total monthly overhead costs. This is more efficient as the
interviewee will quickly realize that the number of customers necessary to
cover total overhead is very low when using the online store distribution
channel. This makes the guesstimation of the exact number of customers
and the total profits before overheads irrelevant to perform.

Calculation of overhead costs for the online store distribution

channel and the number of customers needed to at least break even:

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Let us first investigate the total overhead if the client decides to use the
online store as the only distribution channel:

Overhead = Advertising costs + Loan repayments + Online store specific costs

Overhead = 10,000€ (monthly) + 10,000€ (monthly) + 5,000€ (one-off

payment).

So overhead will be 25,000€ in the first month and then only 20,000€ for
every month to follow. As we have 48,000€ to spend on our first month we
can ignore the one-off payment of 5,000€ as a first simplification to keep
calculations simple. (You could include it by assuming that you only have
48,000€ - 5,000€ = 43,000€ available at the start if you wanted to.)

So considering a monthly overhead of 20,000€ we would need a monthly

profit of 20,000€ from our product sails to break even and not lose money on
a monthly basis. As our average monthly profits of sales per customer are
34.47€ we can calculate how many customers we need each month to cover
the 20,000€ overhead:

#Customers = Overhead / Profit per customer

#Customers = 20,000€ / 34.47€

#Customers = 580.21 => 581 Customers per month.

Considering the fact that we have access to 20% of all customers globally a
crude estimation of the number of possible customers could be at least in the
thousands:

Guesstimation of the number of customers globally as a crude sanity check:

Bodybuilding can be assumed to be done only by males, let us further assume
only by males between the ages of 16-25. Assuming that the average life
expectancy is 80 years and that the age of people is equally distributed then
1/8 of all people are within the 10-year wide age group of 16-25. Only half of
those are male so 1/8 *1/2= 1/16 of the population might be customers. Let
us assume that only 0.01% of those actually use protein daily then 1/160,000
of the entire population might be potential customers. So, with 8b People, we
get 8b/160k = 50,000 potential customers of which we could get 20% so
10,000 customers and only 50% of those buy from online shops so 5,000
customers would be available to us. This estimate is very crude but shows
that the expected number is still roughly 10 times what is needed to break

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even. The online shop is thus most likely a profitable way to distribute our
client’s products.

Calculation of overhead costs for the local shop distribution channel

and the number of customers needed to at least break even:

Following the same steps again now for the local shop distribution channel
gives:

Overhead = Advertising costs + Loan repayments + Local shop specific costs

Overhead = 10,000€ (monthly) + 10,000€ (monthly) + 9,000€ (monthly).

So, overhead will be 29,000€. The minimum number of monthly customers to

break even is:

#Customers = Overhead / Profit per customer

#Customers = 29,000€ / 34.47€

#Customers = 841.31 => 842 Customers per month.

As this shop would be in Germany it is questionable to assume that our client

can get 842 customers within only a 10km radius around their shop
considering that they would only expect to get 20% of all customers in that
region. For this reason, it seems unlikely that the local shop will be as
profitable as the online shop as more customers are needed to break even
and fewer customers are available overall.

IV. Conclusion

The client should hire the advertising agency and enter the protein market
with a product mix of 20% bars, 10% cereal, 49% MX3 and 21% normal
powder. The best distribution channel to use would be an online shop. There
are 3 reasons why this is the right way to proceed:

1) The products of our client are the best tasting on the market due to
patented flavorings. MX3 is the cheapest powder on the market (ignoring
loyalty discounts and assuming only 13.33g per day are being consumed).
These unique product features will give our client an edge in this market and
attract customers to their brand.

2) The advertising campaign will allow the client to gain 20% market share
instantaneously so demand is large and predictable in this industry right from

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the start. The suggested product mix is based on the natural segmentation of
the customers and will exactly meet demand without over- or underproducing
any of the products available.

3) The online distribution channel should be used as only about 581

customers are needed to break even and due to the global reach of the online
shop, the fact that 50% of all customers globally buy their protein online and
that we can transport our products globally at negligible transportation costs
means that the online store gives our client access to the maximum amount
of potential customers while also being the cheapest distribution channel
available.

V. Next steps

To increase certainty in this recommendation or advise on a more specific

recommendation we could:

1) Do a more thorough analysis of the planned advertising campaign. Is a 20%

market share achievable? If yes, then how long will it take to actually reach
20%? We assumed that 20% will be achieved by day one but how will the
market share actually look like as a function of time between day one and the
day we finally reach 20%? What will the graph of that function look like and
what does that mean for the breakeven analysis of our client? Are 581
customers in the first month really achievable under more realistic conditions
or could the brothers end up bankrupt?

2) Could the client leverage the popularity of the fitness model by selling
products directly to fans instead of just opening an online store and hiring an
advertising agency for marketing purposes? How large is the fan base of the
fitness model? What proportion of fans would be interested in buying products
monthly? Are those more than 581 already?

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