Price
What each customer pays, after discounts.
- Change
- Did list price or discounting change?
- Mix
- Are buyers shifting to cheaper products or plans?
- Peers
- How does the price compare with competitors'?
Profitability framework, the profit tree, worked
The profitability framework splits profit into revenue and costs, then revenue into price and volume, and costs into variable and fixed, until one or two lines explain the change. Compare each line with last year or a peer, find the one that moved, ask why it moved, and fix the biggest gap first. Soreno, an AI voice interview practice app for consulting, investment banking and other finance candidates, runs profitability mock cases with an AI interviewer who hands you the data as you ask for it.
Updated
- The formula
- Revenue − costs
- Revenue is price times volume, costs are variable plus fixed
- Worked case
- A gym chain
- Profit down 40%, every number shown
- Structure time
- 1 to 2 minutes
- Quiet time before you walk through it
- Free practice
- No sign-up
- A full profitability case with a timer
The profit tree
Profit equals revenue minus costs. Revenue is price times volume, and costs are variable (they grow with each unit sold) plus fixed (they don't). So profit = (price − variable cost per unit) × volume − fixed costs. Each card below is one branch of that tree, with the questions to ask under it.
Volume
How many units, customers or visits.
- Split
- Customers times purchases each, or sites times sales per site
- Where
- Which product, region or site lost the most?
- Market
- Is the whole market shrinking, or only the client?
Variable costs
Costs that rise with every unit sold.
- Per unit
- Materials, shipping, commissions, payment fees
- Inputs
- Did a supplier price or a commodity move?
- Waste
- More spoilage, returns or rework per unit?
Fixed costs
Costs that stay put whatever you sell.
- Lines
- Rent, salaried staff, energy, equipment, overhead
- Change
- Which line grew, and is the rise one-off or lasting?
- Use
- Are sites or machines sitting half empty?
Worked example: Pinecrest Fitness6 steps
Pinecrest Fitness, an invented chain of 30 gyms, made $9 million of profit last year and $5.4 million this year. The owners want to know why, and what to do.
Size the gap
Down $3.6 million, or 40%
$9 million last year, $5.4 million this year. Ask whether total profit or margin is the worry, and whether the fall is one year or a trend. Here it is one year, in total profit.
Split revenue
Revenue down $2.4 million
Revenue is members times $50 a month times 12. Last year: 45,000 members (30 gyms of 1,500), $27 million. This year: 41,000 members, $24.6 million. The price did not change, so the whole drop is volume: 4,000 members times $600 a year.
Split costs
Costs up $1.2 million
Costs went from $18 million to $19.2 million. Rent and other costs held flat. Staff rose 5%, from $8 million to $8.4 million. Energy rose 40%, from $2 million to $2.8 million.
Segment
88% of lost members at five gyms
Split the lost members by gym. Five gyms fell from 1,500 members to 800 each, 3,500 in all. The other 25 lost 500 between them. A chain-wide number hid a local problem.
Ask why
A budget gym opened nearby
Case data: a budget gym charging $20 a month opened near all five last spring. That explains the members. The energy rise came from a new utility contract across the whole chain, and the wage rise matched local pay. The bridge closes: $9 million less $2.1 million and $300,000 of lost fees, less $800,000 of energy and $400,000 of wages, is $5.4 million.
Recommend
Win back about $960,000
Lead with the biggest line. At the five gyms, add an off-peak plan at $30 with the classes the budget gym lacks. If each wins back 300 members, that is 1,500 times $30 times 12, or $540,000. Then cut energy use 15% with better heating and lighting schedules, worth $420,000. Together about $960,000, taking profit to about $6.36 million. Say plainly that profit won't fully return while the budget gym stays, and that some full-price members may switch to the cheaper plan.
The profit bridge, line by line5 lines
The bridge walks from last year's profit to this year's. If the lines don't add up to the full gap, something is missing.
Last year
$9 million
Revenue $27 million less costs $18 million, a 33% margin.
Lost members
Less $2.4 million
$2.1 million at the five gyms near the budget gym, $300,000 at the other 25.
Energy
Less $800,000
Up 40% on a new contract, at every gym.
Wages
Less $400,000
Up 5%, in line with local pay.
This year
$5.4 million
Revenue $24.6 million less costs $19.2 million, a 22% margin. The lines add up to the full $3.6 million.
Where to look for the why4 places
The tree tells you which line moved. These four places usually hold the reason.
Customers
Needs or habits changed
They buy less often, trade down to a cheaper option, or move to another channel.
Competitors
Someone new, or someone cheaper
A new entrant, a price cut or a better product. Look for it where the losses cluster, as the five gyms did.
The company
Something it changed
A price rise, a new supplier, a cut in staff, a new product or a lost contract. Ask what changed inside before blaming the market.
Inputs and rules
Costs set outside
Commodity prices, wages, energy, rent or a new rule. These tend to last, so a one-off cut won't answer them.
Adapt it to the question5 cases
Interviewers want the tree fitted to the client, so rename the branches to how this business earns and spends.
Profit fell
Find the line that moved
The worked case above. Compare with last year, segment the line that moved, then ask why.
Raise profit by X%
Size each lever
Nothing broke, so there is no line to find. List levers on each branch, put a dollar figure on each, and rank by size and speed.
Revenue up, profit down
Look at cost per unit
Growth that costs more per customer than it brings in. Check variable cost per unit and the mix of what is selling.
Several products
Build one tree per product
A chain-wide margin can hide one product losing money. Split by product line before you split by price and cost.
Nonprofit or public
Swap profit for the budget gap
Funding against cost to serve. The same tree works with grants and fees in place of revenue.
What interviewers listen for in a profitability case
The tree is the start. These moves earn the credit.
A comparison for every number
Last year, another site, a peer. A cost of $8 million means nothing until you know it was $7 million before.
Segmenting before concluding
Splitting the line that moved by product, region or site. Most profitability cases hide the cause one level down.
A bridge that adds up
Each line's change, in dollars, summing to the full gap. If it doesn't close, say so and ask for the missing piece.
Fixes tied to the lines
Each recommendation names the line it fixes and what it is worth, biggest first, with the main risk.
7 profitability questions to practice
Each links to a question page with a short answer and the follow-ups. Sketch your tree first, then compare.
Profit fell
Find the line, then the reason.
Your client is a regional grocery chain. Profits are down 20% over two years. How would you structure the problem?
Asks whether it is total profit or margin, then splits by store and by category before naming a cause. Practice it, see a model answer
An airline's profits are falling even though it is carrying more passengers. What is going on?
Volume is up, so the answer sits in price per passenger or cost per seat. A strong answer says so in the first minute. Practice it, see a model answer
A packaging manufacturer's cost per unit has risen 15% in two years. How would you find the cause?
Splits cost per unit into inputs, labor and overhead, and checks whether lower volume spread fixed costs over fewer units. Practice it, see a model answer
Raise profit or cut costs
No single line broke. Size the levers.
A clothing retailer needs to cut costs by 10% without hurting sales. Where would you look?
Starts from the biggest cost lines and rules out cuts customers would notice in the store. Practice it, see a model answer
One of your client's three divisions is losing money. Should they fix it, sell it or close it?
Checks what the division covers of shared overhead before closing it, since those costs stay behind. Practice it, see a model answer
Growth and cash
Profit questions with a twist.
A software company is growing 40% a year and still losing money. How would you assess whether that is a problem?
Compares what a customer costs to win with what they pay over their lifetime, by customer group. Practice it, see a model answer
How can a company be profitable and still run out of cash?
Separates profit from cash: customers paying late, stock building up, or heavy spending on equipment. Practice it, see a model answer
Common profitability case mistakes
A framework from a textbook
The 4 Ps or SWOT in place of the profit equation. The interviewer is waiting for revenue and costs, fitted to this client.
Ideas before the diagnosis
Proposing marketing pushes when revenue is flat and the whole fall sits in costs.
Totals only
Reading chain-wide numbers and missing that five sites out of thirty hold most of the loss.
Flat revenue taken as healthy
Fewer customers paying more each can look flat. Split volume and price before you move on.
A one-off fix for a lasting cause
A new competitor or a reset input price won't go away. Size a fix that lasts as long as the cause does.
Run a profitability case out loud
Soreno's AI interviewer gives you a profitability case, asks for your tree, hands you the data as you ask, checks your bridge and scores the session. Try it free.
Questions people ask
What is the profitability framework?
A way to find why profit changed. Split profit into revenue and costs, revenue into price and volume, and costs into variable and fixed. Compare each part with a benchmark, find the one or two lines that explain the gap, ask why they moved, and fix the biggest first.
What is the profit formula?
Profit = revenue − costs, where revenue = price × volume and costs = variable cost per unit × volume + fixed costs. Written per unit: profit = (price − variable cost per unit) × volume − fixed costs.
Is a profit tree the same as the profitability framework?
Yes, in practice. The profit tree is the framework drawn as a tree: profit at the top, revenue and costs below, then price, volume, variable and fixed costs.
How long should I take to structure a profitability case?
About one to two minutes of quiet time, then a walk-through in under a minute. Say which branch you want to start with and why.
Should I memorize a profitability framework?
Know the profit equation cold, then build each tree from the client's business: members and fees for a gym, seats and fares for an airline. A tree that fits the client shows more than a recited one.
What if both revenue and costs moved?
Put a dollar figure on each change and start with the bigger one. In the worked case revenue fell $2.4 million and costs rose $1.2 million, so the lost members came first.
Where do profitability cases come up?
In consulting case interviews at most firms, and inside other case types. A market entry or M&A case often includes a profit step, and the same tree applies.