01 · Recognize
Profitability
Why did profit fall, and how do we recover it?
You are in this case when
- The prompt names profit, margin or earnings moving.
- A number went down and the client wants to know why before what.
02 · Structure
Which drivers matter?
- 01
Revenue
Price × volume, then mixSplit by product, customer and channel. Find when and where the decline began.
- 02
Costs
Fixed + variableSeparate unit cost from total cost. Check what moved and what did not.
- 03
Recover profit
Cause → responseTest the cause, then compare recoverable profit against effort and risk.
Profit = revenue − costs = (price × volume) − (fixed + variable)
03 · Solve
Work the scratch sheet.
Illustrative practice scenarioA café serves 200 transactions a day at $10 each and carries $1,600 of daily costs. Transactions fall 10%; spending per visit and costs stay flat.
- Baseline revenue200 × $10 = $2,000 a day
- Baseline profit$2,000 − $1,600 = $400
- Revenue after the drop180 × $10 = $1,800
- Profit after the drop$1,800 − $1,600 = $200 (-50%)
A 10% volume decline halves profit because costs did not move. The next split is who stopped coming: new customers, returning customers, or a weekday segment.
Work backward from an answer
If the answer is “raise prices”, customers must leave more slowly than the price rises. So the first question is how price-sensitive the lost traffic was, not what the new price should be.
04 · Recommend
Make the call in three buckets.
Profit halved because traffic fell 10% against fixed costs.
Costs did not move; price and spend per visit held. The whole loss is volume.
Split the lost traffic by customer type and weekday; test one win-back offer. Risk: a market-wide decline nothing local can fix.
“I would first separate the revenue change from the cost change, then investigate the largest driver.”
Watch for: Do not count a market change twice. It explains a price, volume or cost movement; it is not another line of its own.
Special sauce
Bring a real company into the room.
If Costco added 1,000 SKUs, what incremental sales would cover the extra inventory and handling costs? Start with sales per SKU, gross margin and inventory days; then test whether customers switch from existing products.
Read the story →operations · PaymentsVisaIf a merchant asks to cut payment costs, which fee can the network change and which belongs to another participant? Trace a transaction before proposing a price cut.
Read the story →Three terms to use
- COGS
- Cost of goods sold: costs attributed to goods sold; the classification depends on the business.
- SG&A
- Selling, general and administrative costs such as sales teams and head office.
- Contribution margin
- Revenue minus variable costs; what is left to cover fixed costs and profit.
Original Harper practice examples; every figure is illustrative. Adapt the questions to the client’s objective, timing and constraints.