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Case Interview Fundamentals: Lesson 27 [Drill: B2B Software as a Service] — Transcript

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0:01All right, everyone. Ready for another
0:02quantitative analysis case?
0:05As you know, I've been building this
0:06module with a skill progression logic.
0:10So, this case is going to be tougher
0:11than the previous ones, but I still want
0:14you to
0:16learn the concepts that I'm going to
0:18bring up, and I don't want them to be
0:19cramped. So, I'm going to break it down
0:22into three different questions. This
0:23way, if you want just stuff practice,
0:26you're going to have it, but if you want
0:29to learn the concepts one by one slowly
0:32and internalize them,
0:34uh and if you have more trouble with
0:35quantitative analysis, you're also going
0:37to get a lot of value out of this. But,
0:40the end result is that I'm going to
0:41treat this more like a lesson
0:43than like a drill, but you can still do
0:46it like a drill. I just won't be
0:48answering exactly like I would to an
0:50interviewer. Now, I'm going to break
0:53this down into three questions. If
0:54you're treating this like a drill and
0:56getting full practice out of it, what
0:58you should do is
1:00pause after each one of them, follow the
1:03four steps, and then listen to each of
1:06the steps as I answer them. Of course,
1:09as in the other cases, you might need
1:12answers from step two to be able to
1:14follow along. So,
1:16you might want to listen to steps one
1:18and two after you've drafted yours
1:20before moving on to steps number three
1:23and four. All right? Let's get right to
1:25the case.
1:27This is a long one.
1:29Your client is a software company
1:31developing software that helps
1:32restaurants, single and small chains,
1:35manage their finances and get market
1:37insights using aggregate data from all
1:40clients they have. They currently charge
1:42$2,000 for a yearly subscription to
1:45their product and sell mostly via cold
1:48calls.
1:49Here's some data they've provided from
1:50their sales process. Their sales team
1:52contacts around 4,000 people every
1:55month. 30% of those respond to their to
1:58their calls. 1/3 of those who get on the
2:01phone agree to join a 1-month trial of
2:04their software, and 10% of those who
2:06join the free trial become paying
2:08clients.
2:09Now, the engineering team has recently
2:12come up with an idea to develop a
2:14software that will dig up information
2:16and segment their leads before they even
2:19call, so they can focus only on the ones
2:21with greater likelihood of success. They
2:24want your help deciding whether they
2:26should go forward with this or not. The
2:29full development process would cost $2
2:31million,
2:32and the sales team estimates the
2:34following changes in the sales funnel
2:36numbers.
2:37The percentage of calls answered would
2:39increase to 40%. The percentage of
2:42acceptance of the free trial would
2:44increase to 50%, meaning the people who
2:48join the free trial.
2:50And the percentage of free trials that
2:52convert to a full subscription would
2:55increase to 12%. All right, so this is
2:57the full context. Now, the final
3:00question would be whether would be
3:03should they do this or not. Okay? But, I
3:06want to break this down into three
3:08questions, and the first question that I
3:10want you to answer, and then I'm going
3:12to, is
3:13assuming the average buyer remains a
3:15buyer for 3 years, can you figure out
3:18what the client's revenues are?
3:21Now, pause your video and answer the
3:24question using the four-step approach,
3:26and then listen to what I have to say to
3:28the interviewer.
3:31So, to find this client's revenues, I
3:33would go through three different steps.
3:36Number one, I would find the number of
3:38new clients that they have every month
3:40because
3:41I can do that you just but basically
3:43multiplying the
3:46number of people that they speak to, the
3:48sales team speaks to,
3:50uh by
3:51all of the funnel
3:53that leads us to the percentage of them
3:55that buy, right? And then, I would
4:00find the number of total clients that
4:01they have because assuming that their
4:04revenues are stable, I might be able to
4:06assume that the number of old clients
4:09leaving the base is equal to the number
4:11of new clients coming in.
4:14And given that I know that the average
4:16client stays for a given time in my
4:20base, I can get to the number of clients
4:24that I have at any given moment simply
4:26by multiplying the number of clients
4:28that come in every month by the number
4:31of months that the average client stays
4:35in my client base. And then, just by
4:37multiplying that by
4:40the average price, I would get to the
4:43total revenues of my client. I just need
4:45to ask a few questions to confirm if the
4:47structure actually makes sense or if I
4:49need to change it a little bit. Would it
4:51be fine if I ask these questions now?
4:54Let's say the interviewer says, "It's
4:56okay." So,
4:57I basically want to know if revenues
4:59have been stable and will remain stable.
5:01Like, number of clients coming in is
5:03equal to the number of clients going
5:05out, right? And I also need to know if
5:09price has recently changed cuz if it
5:11has, then revenue being stable doesn't
5:14mean that I can assume that number of
5:16clients is the same. And if old clients
5:18that are leaving or that have joined a
5:21long time ago pay less, for example,
5:24than current clients coming in, then I
5:26also need to adjust my model for that.
5:29Let's say that my interviewer says, "No,
5:31assume that price didn't change and that
5:33all clients pay the same $2,000 per year
5:36and that you can assume that number of
5:39clients leaving the base is equal to the
5:41number of clients coming into the client
5:43base every month."
5:45All right, so
5:46I'm going to move on to do my
5:47calculations now. What I have is
5:504,000
5:52leads for a thousand people that we call
5:55on the phone. 30% of those pick up, 1/3
5:58of those join the free trial, 10% of
6:01those actually purchase. And so
6:06this is 4K * 3 / 10 * 1 / 3 * 10%. So,
6:13I'll cut the threes here and I have 4K /
6:16100, which is 40. Okay, so this is the
6:19number of new clients coming in every
6:21month. Now,
6:23since this is also the number of old
6:25customers leaving, and I know that they
6:27stay
6:283 years or 36 months. So, basically I
6:31have to divide
6:3340 by 1 / 36, which is the same as
6:37multiplying 40 by 36.
6:39And I'm going to call 36 40 minus 10% to
6:43make this simpler, as I've done in the
6:45other drills a ton of times. So, this is
6:4840 * 40 minus 10% of that, of 40 * 40.
6:52So,
6:5340 * 40 is 1,600.
6:5610% of that is 160, and so 1,600 minus
7:00160 is
7:031,440.
7:05So, this is the number of clients that I
7:08currently have.
7:10Now, we just need to multiply that by my
7:12current price, which is 2,000. So,
7:151,440 * 2 is
7:192,880.
7:21And now I got to add on the thousand, so
7:23this is basically 2.88 million.
7:27So, around $3 million.
7:29This
7:30This is a little bit scary to me. It
7:33looks like
7:34the investment that we would need to
7:36make that we were talking about in the
7:38context of this question is almost a
7:40year worth of revenue. So, it's 2/3 of a
7:43year worth of revenues.
7:45So, the next thing I would do is
7:46definitely size the benefit of this
7:48investment to see if it's it's worth it
7:51or if it's even worth looking at cuz
7:53honestly, it's got to be a huge
7:55difference to make up for
7:598 months of revenue.
8:01All right. Now,
8:03I want to before I move on to the next
8:05question, I want to go through a quick
8:07lesson here with you cuz I think this is
8:10the biggest lesson from this one
8:12question. It's the reason I broke it
8:13down into this specific question. I
8:16broke I broke this case down into this
8:17specific question because I wanted you
8:19to learn this.
8:21And it is basically the idea that you
8:23can find the
8:25total revenues of this client just by
8:29knowing the size of a small segment and
8:32what that small segment represents of
8:34the whole. So, now in this case, I know
8:36that
8:38the number of clients coming out of the
8:40base were 40 every month. And I also
8:43knew that the number of customers
8:45leaving the base every month were
8:481/36
8:50of the base. So, what this means is that
8:52there
8:53the number of clients coming out or
8:55going in would fit 36 times into the
9:00customer into the customer base. So,
9:02basically to find the customer base, I
9:04multiplied the number of customers
9:06coming in or going out, it's the same,
9:08which is 40, by 36, which is the number
9:11of times they would fit in the full
9:13client base.
9:15And I wanted you to learn this because
9:17it's not intuitive and it might appear
9:20several different times when doing the
9:23when doing cases. And if you already
9:24know this unintuitive structure, this
9:27unintuitive math trick, then you're a
9:29lot better off. Okay? Another ideas of
9:33places where this could appear is So,
9:35basically,
9:36let's say you're doing a case on a
9:37specific market, and you know that the
9:40market growth is 2%. And you also happen
9:43to know for other reasons the number the
9:46growth of the market in units. And then
9:49you can just multiply it by 50 or divide
9:51it by 2% to find the full market size.
9:56Or let's say that you know the
9:58market leader's revenues and you know
10:01their market share. With that, using the
10:03same logic, you can find the total
10:05market size. So, let's say the leader of
10:07the market has
10:0810 billion in revenues and it represents
10:1210% of the market. So, you can tell
10:16that the total market size is 100
10:19billion. Okay?
10:20So, basically, the formula here is that
10:23we're reversing a simple equation. A
10:27simple equation which is a part divided
10:30by the whole
10:31is equal to the percentage of that part
10:33on the whole. Like, 3 / 100 is 3%. And
10:38we're reversing this equation to a part
10:41divided by the percentage that that part
10:44represents is equal to the total. So, 3
10:48/ 3% would be 100. That's the reverse.
10:52And as I said, this can appear in many
10:55different cases. So, take note of it,
10:57write it down, and once you see that in
11:00a case again, you're going to remember
11:01me.
11:02Another quick thing that I want you to
11:04learn here is that the
11:07there's a technical term for a concept
11:09that we used, which is the percentage of
11:12clients leaving the recurring revenue
11:16client base every year. So, we have, you
11:18know,
11:191,440 clients, and every year we have
11:23leaving uh a third of those clients,
11:26right? Because they stay in for 3 years
11:27on average. And we call that the churn
11:30rate.
11:31The churn rate is the percentage of
11:33clients leaving the client base every
11:35year.
11:36Net churn would be
11:39the
11:40net number of clients leaving the base
11:42every year. So, in this case, it'd be
11:43zero because the number coming in is
11:45equal to the number going out.
11:48But, here you go. If you didn't know it
11:50before, now you know the concepts of
11:52churn and net churn, what they mean, if
11:54they appear, you know what they're
11:55talking about.
11:58Now, let's move on to question number
11:59two. Basically, what we want to know is
12:03can you figure out what the revenues
12:05would be with this new software once
12:08revenues reach stability, assuming that
12:11nothing else changes, prices, capacity,
12:14anything.
12:15Okay? Now, pause the video, get to your
12:18answer, and then listen to mine.
12:21I would solve this case for the future
12:24revenues in two simple steps. First, I'd
12:27find the multiple
12:30of change of the revenues simply by
12:32finding the change in each of the
12:35drivers of revenues cuz I calculated the
12:37revenues simply by using
12:39the numbers in the sales funnel, right?
12:41And then dividing it by the average time
12:43the customer stays in the base. And
12:46since the average time didn't change as
12:48per the case question, then I can just
12:52find how each of the drivers changed,
12:54and then I'll find the multiple that I
12:56can multiply my revenues by and find the
12:58future revenues. Of course, step two
13:00will be multiplying this multiple by the
13:04current revenues that I found, and then
13:06I'll get to the final answer.
13:08So, let's move on to step number two,
13:10asking questions. And I don't really
13:13have any questions in this case. I if
13:16the interviewer hadn't stated that
13:19everything else was staying the same, I
13:21had
13:22to confirm that all the other drivers
13:24other than the sales funnel were not
13:26changing. And let since they already
13:28said they're the same, so I don't have
13:31any questions. Now, I'm moving on to
13:32step number three, calculating my
13:34answer.
13:36So, here I have the funnel numbers from
13:38before that I'd already written. And now
13:41I know that after this change, I will be
13:45still talking to 4,000 clients, but the
13:48percentage of those that answer the the
13:50get on the phone is 40% now. The
13:54percentage that is
13:55joins the free trial is 1/2 now, and the
13:58percentage that buys now 12%. So, the
14:01change here, no change to the number of
14:05people we call,
14:06but the
14:08percentage that get on the phone with us
14:10changes by 4/3, right? Which is 40% /
14:1430% 4/3.
14:17The percentage that get into the free
14:19trial changes by 3/2. It's 50% larger.
14:23Right? 1/2 over 1/3 is 3/2.
14:27And the percentage that buy
14:30increases by 20% or it's a multiplied by
14:341.2.
14:35And so,
14:374/3 * 3/2 * 1.2 is 2.4. So, this is by
14:43how much the revenues are going to
14:45increase because basically
14:47what I have is an equation, and I'm
14:49going to write it down here for you. So,
14:51calls * percentage responded *
14:54percentage free * percentage that buy
14:57equals revenue. And if I multiply each
15:01of these by a different number,
15:04then my new revenues are going to be
15:06multiplied by a number that is the
15:09product of those. So, here I have 4/3
15:12multiplied by 3/2 multiplied by 1.2, and
15:17this is 2.4.
15:19My previous revenues were 2.88 million.
15:23Would you mind if I rounded this to 2.9
15:26million or maybe 3 million? 2.9 would be
15:29just a 0.02 change. It's just a little
15:32bit, almost nothing. And even 3 million
15:35would be less than a 3% change.
15:38And let's say the interviewer says they
15:40will only allow me to
15:42to round it to 2.9 million. So, 2.9
15:46million * 2.4. I'm going to break this
15:49down. 3 million * 2.4
15:530.1 * 2.4. Okay? So,
15:583 million * 2 is 6 million. 3 million *
16:020.4 is
16:041.2 million. So, this is 7.2 million.
16:087.2 million - 0.24 million is 6.96
16:14million. So, this is
16:17my
16:18new revenues after the change. When
16:20they're stable, they will be
16:236.96 million or around 7 million.
16:27And now this is looking a lot better for
16:29this investment. Not only did the
16:31revenues increase by
16:34over 200%,
16:36but the increase is also a lot greater
16:38than the investment. The investment was
16:412 million if I recall correctly, and
16:44revenues increased from around 3 million
16:45to around 7 million. So, it's around
16:48double the investment. Next thing I
16:50would look at is the profit margin that
16:53we have, or rather the marginal profit
16:55margin of this change, to see whether it
16:59would pay off this investment or not.
17:01And before I we move on to question
17:03number three, I want to touch on just a
17:06single lesson here. Again, the reason I
17:08divided this case into these three
17:11questions and specifically into this
17:13question number two,
17:14and that is
17:16in this case finding the deltas or the
17:20multiplier for each of the drivers was
17:23so much faster than calculating the full
17:26revenue again. Right, I could have done
17:29the same thing as I did in the case
17:30before. Right, had
17:33the 4,000 multiplied by all of those
17:35percentages.
17:37So, by 40%, by 1/2, by 2% and then
17:41divide multiply that by 36 and I'd get
17:44to a number that is the same. But,
17:48since I knew that
17:50I could find simply the changes in the
17:52drivers and multiply the revenue that I
17:54had before, I could do this so much
17:57faster. And this question is not
18:00actually unfeasible even though it was
18:02very simple,
18:03the interviewer might want to see if
18:06you're able to find this quicker path
18:08because it's something that it's a skill
18:10that if you hone and if you have,
18:13once you're in consulting it might be
18:15super useful cuz if you can do an
18:17analysis that could take a week in only
18:20one day or anything any kind of savings
18:23in this order of magnitude, you're
18:25saving the client a ton of money and
18:28you're making them a lot more satisfied.
18:30And so, this means a lot to the partner
18:33and to the firm. And so, basically this
18:35is something that they are actively
18:36looking for.
18:38Now, let's finally move on to question
18:41number three which is
18:43should your client move on with this
18:46investment or not? And of course, the
18:48questions that we've answered before are
18:51going to help answer this one, but
18:52there's still a long way to go.
18:55And before you and I start solving this
18:58case, I want to make a quick comment
18:59here because this is the
19:01first and only investment analysis
19:04question that we're doing in this in
19:06this short course.
19:07Basically, there are several ways to
19:10decide
19:11if an investment is worth doing or not,
19:14right? You don't want to simply see
19:17if profits are positive or negative
19:19because you want to take into account
19:21value of money in time, which means
19:25money today is worth more than money
19:27tomorrow. And of course, you also want
19:29to take into account that there are
19:31other stuff you could do with that money
19:32as well.
19:34And among the several ways to benchmark
19:37your investment returns and see if it's
19:40worth doing, some of them are
19:42payback time. So, a client might say,
19:45"My money must be back into my account,
19:48the full money that I invested in 2 or 3
19:51or 5 years." Right? There's a discount
19:54rate method. So, you could discount the
19:57cash flows into
20:00all to the present value, compare it to
20:02the value of the investment that you're
20:03making, discount the all of the future
20:05investment as well, and get to the net
20:08present value. This is basically the
20:10discounted cash flow method. Or you
20:13could have a return rate expected. So,
20:15you'll see
20:16based on the discount rate and the cash
20:18flows, what is the return rate that you
20:21can expect? And if it's greater than
20:23your cost of capital, then you can do
20:25it. If it's not, then you won't do it.
20:27And
20:29I would definitely suggest you ask your
20:31interviewer
20:32even before structuring your all of your
20:35investment analysis if they haven't
20:37mentioned it. If they have a preferred
20:39method, if they have a benchmark. So,
20:42you might ask them if they have a
20:43preferred method or you might ask them
20:44if they have a specific payback time
20:47that they want or a specific return rate
20:50that they expect. Okay? And
20:54in this case, the reason I'd ask this as
20:56soon as possible is because it
20:58completely determines what structure
21:00you're going to use. If it's a more
21:02complex case or if it's a more complex
21:05method like the discounted cash flow,
21:08you might need a more complex structure.
21:10Usually in case interview, you're not
21:13going to get a very complex cash flow,
21:15you know, with ups and downs all the way
21:17which you have to discount entirely.
21:19You're hardly ever going to have to do a
21:21ton of compound math with pen and paper.
21:24That hardly ever makes sense.
21:26But, sometimes that might be what the
21:28interviewer wants. And of course, the
21:31interviewer appreciates you giving them
21:33the choice and you showing them that you
21:35know that these exist, you know it can
21:37be more complex, you know it can be less
21:38complex.
21:40And usually they're going to give you a
21:41simple method and you're also going to
21:43get a simple cash flow structure.
21:45And one thing that you should know is
21:47that many times the interviewer is not
21:49going to give you a an answer to this.
21:52They're not going to prefer anything.
21:53They just want you to tell them whether
21:56they should do it or not. And then,
21:58you've got to choose your own method and
21:59then you've got to create your own
22:00structure based on that. But let's say
22:02that in this specific case, I did get an
22:04answer and that answer is the client
22:07wants their money back in 2 years.
22:10All right. So, let's move on to the
22:12answer. Pause the video right now and
22:15come up with your answer.
22:18So, I would solve this case in four
22:21different steps. Step number one, I
22:23would find the difference in profits
22:26between the client with the investment
22:30when stable and without the investment
22:33when stable. And then,
22:35I'm going to chart that into a formula
22:38because those profits are going to grow
22:39steadily. Every month we're going to get
22:42a little bit more clients than than are
22:44leaving our base
22:45for 3 years until
22:48the clients that we acquired 3 years
22:49before are leaving the base and that
22:51brings us to stability again except with
22:54a lot more clients like we calculated in
22:56question number two.
22:57Right? And so, I've I would charge that
23:01into a steady increase and draw formula
23:06for it
23:07where I plug in the time and I get the
23:10difference in profits or the monthly
23:12profits.
23:14And then I would use that formula to
23:16find the profits in 2 years that our
23:20client would have.
23:21Because that's how that's when we want
23:24the investment to be paid back. And then
23:26I would add up all of the profits during
23:28those 2 years
23:30or the increase in profits of those 2
23:33years and I would see if it paid off the
23:36investment or not. All right. Now, I do
23:39have just a couple of questions that I
23:42would need to I would need to have the
23:44answer to to start doing this case. So,
23:47would you mind if I ask them now? And
23:48let's say the interviewer says that's
23:49okay. And question number one is
23:52do we know what is the profit margin
23:55that our client has and if that profit
23:58margin will change over the years?
24:00Because of course, we can only pay our
24:03investments with our profits, not with
24:05our revenues. Of course, we don't it
24:07wouldn't work to only know the
24:09difference in revenues. We need to know
24:11the difference in profits.
24:12And let's say that the interviewer tells
24:14me that the profit margin is 75%
24:17but I also want to know if
24:19that will be different because we're
24:20going to scale this company a lot. So,
24:22profit margin might increase because we
24:25now have more customers to scale. And
24:28let's say the interviewer tells me no
24:30profit margin's not going to change.
24:31It's always going to be 75%. Now, the
24:33second question I have is whether our
24:36customers pay us in advance
24:39or if they pay us in the end of the year
24:42because that totally changes how much
24:45revenues we're going to get in those 2
24:48years since it's seem like it's an
24:50yearly payment. And let's say that the
24:52interviewer tells me that we can assume
24:55that they pay monthly even though we
24:57gave me they gave me a
25:00yearly price. Assume that the
25:03new customers and old customers pay
25:05monthly.
25:06All right. So, I think I'm ready to move
25:09on to calculate.
25:11So, now is the time to pause the video
25:13and solve the case by yourself if you
25:16haven't done this yet.
25:19All right, step one.
25:21Finding the difference in profits
25:23between right now and what profits will
25:26be once we've implemented this change.
25:29So, basically what I'm going to do is
25:30find the difference in revenues and
25:33multiply it by the profit margin.
25:35Since revenues are now would you mind if
25:39I approximated or rounded the
25:43new revenues to 7 million and the old
25:46revenues to 3 million. And let's say the
25:48interviewer says that is fine. So,
25:51the difference between 7 million and
25:543 million is 4 million. That's a
25:56difference in revenues times the profit
25:57margin of 75%.
25:59That is 3 million. So,
26:02right now profits are zero. If we
26:04implement the change right now, it will
26:07take 3 years, actually 3 years and 1
26:09month because there's the
26:11free trial month.
26:14And then our profits will be
26:173 million more than our profits are
26:19today.
26:20For now, I'm going to forget about this
26:22free month and then I'm going to take it
26:25back into consideration in the end of
26:27the of the problem. So, what I'm going
26:30to do right now is step number two. I'm
26:32going to actually draw a chart
26:34with the Y axis being the difference in
26:38profits.
26:39So, it starts in zero cuz difference in
26:42profits from right now to right now is
26:43zero.
26:44And on the X axis, I'm going to have
26:47time. So, profits are going to slowly
26:49grow from the moment I implement change
26:52until the moment revenues and profits
26:55start stable again.
26:57And so what I have here is that in 3
26:58years
27:00our increase in profits will be 3
27:03million. And this is going to be a
27:05straight line, forgetting about the free
27:08trial month, okay?
27:10Which is only going to move this line a
27:12little bit to the right, anyway.
27:14So this is basically the formula here.
27:17Given that I'm assuming that they pay
27:19monthly, then this would be
27:21a a bunch of dots instead of a a
27:24straight line, but I'm going just going
27:26to assume that this is a linear function
27:29rather than a bunch of dots.
27:31And basically the accumulated profits
27:34are the area of the triangle, right?
27:36Mhm. First, I want to find what the
27:40profits are going to be in year number
27:42two. And since in
27:453 years it's going to be 3 million in
27:47revenues in difference in profits, I
27:50know that in 2 years it's going to be 2
27:53million, right? This is a simple chart.
27:55And so to get to the accumulated
27:58profits, as I said, I just need to find
27:59the area of this triangle, because
28:02it's the sum of the yearly profits from
28:06each moment, okay?
28:08And so this is basically the basis times
28:11the height of the triangle divided by
28:13two. And so 2 years times 2 million
28:17divided by two, this gives me 2 million.
28:19That's the accumulated profits over
28:22these 2 years. But I do have to consider
28:26that this 1 month of free trial.
28:29And honestly, I would go back and
28:31reconsider my approximations because now
28:34that we are right on top of the of the
28:37goal, we need to figure out if it's a
28:40little bit above or a little bit below.
28:42But to be honest, this is not the point.
28:45I think this
28:46Doing this would completely miss the
28:48point. And even considering the free
28:50trial month would completely miss the
28:52point, especially if we didn't make the
28:54investment because
28:56even if it's a little bit more than 2
28:59years that it takes to repay the
29:00investment, let's say it's 2 year and 2
29:02months or something.
29:05Right? If you look at it, the profits
29:08are still growing and they're growing a
29:09lot. And so,
29:11in 2 years we might accumulate around $2
29:14million
29:15in profits. But, in year three, look at
29:17the area of the of this triangle. It's
29:203 * 3 / 2. It would give me 4.5 million,
29:24the accumulated profits in year until
29:26year three.
29:28If I subtract the profits until then,
29:30which are $2 million, just year three
29:32would give me $2.5 million in profits.
29:36This means that only year three in year
29:39three alone would pay the investment and
29:41have an extra.
29:42And in 3 years, we would have
29:47uh
29:484.5, it's over two times the revenues of
29:51the investment back. And then, from then
29:53on, we would have $3 million more of
29:57profits every single year, which is more
29:59than the investment. So, even if the
30:01payback time is a little bit more than 2
30:03years, unless this is a hard no from our
30:06client for some reason, I would
30:07definitely recommend going forward with
30:09this investment. And if it is a hard no
30:13for some reason, like we have specific
30:16debt that we need pay by those 2 years,
30:19I would probably recommend that the
30:21client go find a way to be able to make
30:24this investment anyway, because it
30:25sounds like a really, really good
30:27investment, a really good opportunity.
30:29Okay?
30:30Now, I want to talk about three lessons
30:33from this third question. So, you got
30:35two important lessons from the previous
30:37two questions, but here there are a few
30:40more. Number one,
30:42notice that
30:43the interviewer in the case question
30:45omitted the profit margin and the
30:48existence of a profit margin in general.
30:50We're talking about revenues, revenues,
30:52revenues, never mentioned profits, but
30:54then when they started doing the
30:56investment analysis,
30:58I absolutely needed to come up with
30:59this. And of course, you can only pay
31:03for your investment using profits. You
31:05can't pay using revenues, otherwise you
31:07don't have any money to pay for your
31:09costs.
31:10And it was not a coincidence that this
31:12happened.
31:13This is something that
31:15you need to be wary of when you're in
31:18consulting. Like
31:20everyone's seeing a problem, everyone in
31:23the client firm is seeing a problem one
31:24way, right? They're talking about it in
31:27their own terms.
31:29And a consulting firm needs to come and
31:31be able to give an outsider look from
31:34first principles with a clear mind.
31:37And that means also
31:39thinking from the problem
31:41not only in the terms that they are
31:43talking about, not only in the terms and
31:45in the variables that they're using, but
31:47in all the terms and variables that are
31:49relevant. So, if you're able to come up
31:52with the idea that you should use the
31:54profit margin here
31:56and only consider profits rather than
31:58revenues in the payment of the
32:00investment, you are showing that you
32:03will be a consultant who gets to the
32:05client side and can think about the
32:07problem in your own terms and perhaps
32:09come up with a solution that they
32:10haven't thought of, which is super
32:12important to do as a consultant. Lesson
32:15number two,
32:16and this is this might be repetitive cuz
32:19I talked about in the beginning of the
32:20case, but I it needs to be
32:22re-emphasized.
32:24Every investment analysis needs a method
32:28to analyze an investment. You need to
32:30use a method. And it can be multiples,
32:33it can be the payback time, it can be
32:34the the rate, it can be discount cash
32:37flow,
32:38and asking the interviewer which one
32:41they want you to use and what their
32:42benchmark is, like what their return
32:45rate expected is or what the
32:48payback time that they want is
32:50is a good idea. You should always do
32:52this, but beware, many times they are
32:54not going to give you an answer to that.
32:57They are going to say, "Just tell me if
32:58I need to do it or not." And then, of
33:01course, you are going to have to pick
33:02one, okay? And it's going to depend on
33:05the complexity of the cash flows and on
33:07the complexity of the case. But
33:08generally, in case interviews, the
33:11cash flow structure is not going to be
33:13very complex. And of course, you need to
33:15have an idea in your mind of what is a
33:17good return rate and what is not.
33:21And lesson number three is
33:25this idea of drawing a chart and
33:30finding the function for profits in
33:33terms of time. Once we do the change and
33:36using a little graph, drawing on the
33:39paper and finding the area of a
33:41triangle, this is definitely a tool that
33:43you will benefit if you have it in your
33:45toolkit because sometimes it's just
33:47going to be so much easier to draw than
33:50to make formulas or explain things with
33:53words. This is something that you need
33:54to have.
33:56And even if you're doing Zoom interviews
33:58or video call interviews, have pen and
34:00paper with you. Have a few spare papers
34:02so that you can draw large charts on it
34:05or large tables and then show them to
34:06your interviewer on your camera.
34:09All right. Everyone, this is it for
34:11today's video. I hope this was helpful
34:13to you. I guess this is it for the
34:14quantitative analysis module as a whole.
34:17So, I hope this was fun to you. I hope
34:19it was helpful as well, most
34:20importantly. And I'll see you in the
34:22next one.

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