This management consulting case study looks at a health insurer whose profits fell even as its customer base doubled. It is a classic profitability case: work out what happened to revenue and costs, then make a pricing recommendation and be honest about the trade-off that comes with it.
Case Scenario
FitCo. is a health insurance company that has shown rapid growth in the past five years, but due to some critical reasons the profitability of this company has decreased in the last three years.
FitCo. made $1.5 billion in earnings five years ago with a $1,500 profit margin per member and 1 million consumers. With 2 million members now, it has an average profit margin of $500, generating $1 billion in revenue. The gap between $1.5 billion and $1 billion is $0.5 billion.
Why Did Profitability Fall?
The decline in revenue per member is one of the main causes of unprofitability. Customers in new markets may spend less on healthcare. FitCo. has outbid rivals to succeed in new markets, and the rule in those markets mandates that larger businesses set lower prices.
Other than this, costs have gone up, including fixed costs. FitCo. has invested in new markets for marketing, customer support and so on. Variable costs have grown too: FitCo. provides insurance for specific healthcare, yet clients choose to access other types of healthcare.
Recommendation
We found that FitCo's profitability decreased by a third as a result of setting prices too low in new areas. It will have to boost pricing in order to increase earnings in line with consumer growth. As of now, I would advise a 40% price increase, since it would enable us to earn the same $1,500 margin in new areas as we do in our present markets. However, this plan will also result in a 40% decrease in our consumer base.
Going forward, I want to assess whether a 40% rise is appropriate based on our rivals' prices in new areas, since this might potentially have an impact on our brand's reputation.
Practise More Consulting Case Studies
Profitability cases like this one come up constantly in consulting interviews. A few more from our library to work through next:
- Gold mine investment case – weighing return against political risk
- Toothbrush wars – responding to a disruptive competitor
- Airline case – the value of one extra passenger per flight
- Timed prep cases for full interview practice
