Interview question: Accounting
I happen to know one of the questions ahead of time, but I'm not sure how to answer it since both seem equally good to me.
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You are preparing a business plan, but are not sure which product you'd like to sell. You have two choices: Gizmos or Gadgets. Based on your research, you know that:
-- Your plan is more likely to be approved for Gizmos, but the profit per unit is lower.
-- Your plan is less likely to be approved for Gadgets, but the profit per unit is higher.
Your break-even analysis (BEA) thus shows more Gizmos need to be sold than Gadgets. However, the plan for Gizmos is more likely to be approved. What do you do? Explain your reasoning.
Gizmos is probably more likely to be approved if the dollar amount of profit is projected to be higher than Gadgets. Choose the project that gives you the most dollars of profit even if the profit per unit is lower.
What’s a gizmos and gadget?
Assign probabilities and calculate the expected value of profit for each scenario
I don't think I'm allowed to do that, and that's part of the problem: there aren't any numbers. My thinking is that even though the plan for Gizmos is more likely to be approved, you'd need more customers just to break even. The Gadgets plan is less likely, but fewer customers will need to purchase the product. It seems like each choice is equally good to me, and that's the trouble: I think I'll be asked to take one position and argue why it's a good one.
This question isn’t about calculating the actual profit margin from theoretical numbers - it’s testing your business acumen to see how you’d think about Pricing & Packaging strategy. Do we sell higher end products that are inherently more risky (I.e. harder to approve) due to a smaller TAM or pricing sensitivity w/ customer base, or other competitive dynamics OR do we suggest more of the status quo that is low risk, low reward.
Personally, if you can justify selling a higher quality product, the risk is worth the reward, so how would we underwrite it?
1) Commercial Analysis: What is the TAM of each product? Are their markets fragmented or saturated by scaled players already? Any case studies of peers releasing a similar product - and if so, has that product taken increased revenue share or extraordinary growth compared to legacy products?
2) Customer Dynamics: Can we expect to successfully cross-sell the expensive product to our customers, or can we bundle it in a premium package offering? Are our customer price sensitive, which is more likely in a competitive market where there’s not much differentiation? Will this new product be stickier, improving retention / expansion metrics?
3) Other Unit Economics / Cost Considerations: How costly is it to produce the more expensive product vs. The safer one? Do we have the talent in house to bring this product to market / sellers in house that can sell this to the right ICP - or do we need to go on a hiring spree? Do we need any significant capex investment in the more expensive product?
4) Executive Sentiment: What are the overall goals of the business? Do we care about growing as fast as possible or are we trying to maximize profitability? (Most companies cannot have their cake and eat it too.) Do we have executive buy-in on successfully resourcing and launching the more expensive product so that all the operating leaders prioritize it? Do we have systems in place to accurately track the performance of the more expensive product, with the ability to course correctly as much as we can for legacy products?
The rule of thumb is that if you can sell a higher priced product efficiently (I.e. with a minimal increase in production/distribution costs) AND you have a large greenfield market to capture - then you should sell the more expensive product. If it’s not so cut and dry, evaluate the pros and cons in an organized way, like above. Think this a big picture Q more than anything.
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