In the startup world, there’s a concept called a minimum viable product (MVP). Basically, it means if you have an idea for a new product, one way to test it would be to build the simplest version of it you can and release it ASAP to gauge if there’s interest.
In case interviews, I’d like to posit that there’s a concept called a minimum viable calculation (MVC). The MVC is the simplest calculation you can do to gauge if you’re going down the right path.
But, let’s be more specific. Why do we need to use a MVC and how do we identify what it is in each situation?
Why do we need to use a MVC?
Imagine the following situation: you’re doing a case about a new service introduction and you haven’t made much headway yet.
You have learned that there are multiple customer segments that you could serve, and each customer segment has:
1. A different price they’re willing to pay
2. A different cost to serve
3. A different size
Now you’re left wondering which segment(s) to target with this new service.
You could try to calculate the profit from each segment but that would take ages and since you’d be dealing with large numbers you may be liable to make mistakes.
An easier thing to do would be to figure out the minimum viable calculation (MVC) necessary to determine if the service would work for a segment and then quickly eliminate the segments for which it wouldn’t work.
How do you identify the MVC?
It really depends on the situation. What I usually ask myself is: what’s the easiest calculation I can do to answer my question?
In the above example, the question is, which of the segments would be profitable to serve?
The MVC, then, is calculating if the service is profitable on a single customer or single unit basis. If it is, then that segment is worth exploring further. If it isn’t, then we can eliminate that segment with minimum time / effort.
Now let’s actually put numbers to the above example and see what it looks like.
We need to figure out the Profit / Customer for each segment. We could do it on an annual basis if we want but the majority of the data is on a per month basis, so let’s try to calculate the Profit / Customer / Month.
Profit / Customer / Month = Price / Customer / Month – Variable Cost / Customer / Month – Fixed Cost / Customer / Month (1)
To calculate the Fixed Cost / Customer / Month, we need to take the total fixed cost and divide it by the number of months in a year and the number of customers.
Fixed Cost / Customer / Month = (Fixed Cost /yr) * (1yr/12 mo) * (1/# customers) (2)
Note* we have to calculate the value for equation (2) first, and then put it in equation (1).
Fixed Cost / Customer / Month = ($6 million/yr) * (1yr/12mo) * (1/10,000 customers) = $50/month/customer (2)
Profit / Customer / Month = $50 /month/customer – $25 /month/customer – $50 /month/customer = -$25 /month/customer (a loss!) (1)
Segment A is not profitable!
Fixed Cost / Customer / Month = ($12 million/yr) * (1yr/12mo) * (1/20,000 customers) = $50/month/customer (2)
Profit / Customer / Month = $100 /month/customer – $50 /month/customer – $50 /month/customer = $0 /month/customer (we break even!) (1)
Segment B breaks even!
Fixed Cost / Customer / Month = ($60 million/yr) * (1yr/12mo) * (1/50,000 customers) = $100/month/customer (2)
Profit / Customer / Month = $150 /month/customer – $50 /month/customer – $100 /month/customer = $0 /month/customer (we break even!) (1)
Segment C breaks even!
What can we conclude? Segment A loses money, and B / C break even. We probably shouldn’t launch this service unless we have reason to believe that:
1. Our prices were an underestimate.
2. The costs to serve will go down.
3. The number of customers was an underestimate.
And this was much faster than calculating the annual profit for each segment (try it and see!)
The MVC is the simplest calculation you can do to gauge if you’re going down the right path.
It allows you to save time and minimize errors! When you have to do a calculation, always ask yourself: What’s the simplest calculation I can do to do to answer my question? And do that.