Bertelsmann to Shut Book and Music Club Business

Case Type: improve profitability.
Consulting Firm: L.E.K. Consulting first round full time job interview.
Industry Coverage: Publishing, Mass Media & Communications.

Case Interview Question #01050: Your client Bertelsmann Group is a multinational media corporation based in Gütersloh, North Rhine-Westphalia, Germany. It is one of the world’s largest mass media companies and also active in the service sector and education. Founded as a publishing house in 1835, Bertelsmann is now one of Europe’s leading media companies, with revenues of $22 billion last year.

Bertelsmann Group operates a book club, the type of club where you get 4 books free and are committed to buying 5 more books at retail price, which is usually less than at a bookstore. Also, there is a book of the month you get unless you return the monthly card. Historically, the book club model was a huge success in the United States. Recently, however, Bertelsmann Book Club’s profits in the U.S. are going down. What is going on? What would you recommend the client do?

Possible Answers:

1. Suggested Framework

Profitability framework: Profits = Revenue – Cost = Price x Quantity – Cost

2. Detailed Analysis

a. Price
* Price remained stable

b. Quantity
* Demand hasn’t decreased in the market, but the client’s sales have.
* Demand has gone to: Internet based book companies such as Amazon and Barnes & Noble, traditional bookstores, books on tape, libraries, and big box retailers such as Wal-Mart and Sam’s Club.

c. Costs
* Actual cost of books
* Acquisition cost of customer
* Cost of keeping a customer
* Shipping Costs

d. How do book clubs acquire customers?

* Ads for these types of book clubs are found in magazines and newspapers. The actual price of the ads has not changed.

* However, the prices have changed because of fewer customers, so the acquisition cost per customer has gone up.

* As a side note, how would you estimate the size of the book market in the US?

There are 300 million people in the US. Taking out infants and illiterates I would narrow that number to 250 million. I would say on average each person buys 4 books per year. That would be 1 billion books at say, $20 a piece, for a grand total of $20 billion per year.

3. Sample Interview Transcript

Candidate: Well, to address profitability I would look at revenues and expenses. Under revenues we have price and quantity. Have the prices changed that you pay for the books or the prices you charge to customers?

Interviewer: No, both prices have remained stable.

Candidate: OK, then I would look at quantity sold. I would imagine that this is the problem. With all the competition in the industry, like Amazon.com, Barnes and Noble.com, traditional bookstores that have been expanding, adding coffee shops, etc, books on tape, libraries, etc. I would say that overall demand for books hasn’t decreased, but that your demand has, is this correct?

Interviewer: Yes, that is correct. You are forgetting one important competitor.

Candidate: Other book clubs?

Interviewer: No, actually I am thinking of another.

Candidate: I am not sure.

Interviewer: Actually I am thinking of stores like Sam’s Club and Wal-Mart. OK, what else would you look at?

Candidate: Well, I would also look at expenses. I would say there are four main costs:

1. Actual cost of books
2. Acquisition cost of customer
3. Cost of keeping a customer
4. Shipping Costs

Interviewer: Good, except actually shipping costs are considered a revenue because they charge more to customers than they actually pay for shipping.

Candidate: OK, Well the other things are costs. You have said that the price of the books has not changed. What about the acquisition costs?

Interviewer: How do you think they acquire customers?

Candidate: Well, I joined a CD club similar to this and I often see ads for these types of clubs in magazines and newspapers. Has the price for these ads increased?

Interviewer: In a way, the actual price has not changed, but how do you think the prices may have changed?

Candidate: If fewer people are responding to the ads, then in a sense the ads are more expensive.

Interviewer: True, how would you calculate this?

Candidate: Well, if the ad costs $10,000 and 10,000 people respond, then the acquisition cost is $1 per person. If now only 5,000 people respond, then the acquisition cost has increased to $2 per person.

Interviewer: Yes, and as a side note, how would you estimate the size of the book market in the US?

Candidate: There are 300 million people in the US. Taking out infants and illiterates I would narrow that number to 250 million. I would say on average each person buys 4 books per year. That would be 1 billion books at say, $20 a piece, for a grand total of $20 billion per year.

Interviewer: OK, we are running out of time. Thank you.