Case - Bank Envelope

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Bank envelope
Topic Difficulty Style
Pricing Beginner Candidate-led (usual style)
Profitability analysis
Your client, Customlope, is the leader in the US secure envelope

manufacturing industry. Banks buy these envelopes for operations such as
money deposits and high value transactions.
Next year, a new digital technology will reduce the overall number of units
sold in the industry by 25%.
In the short term, our client wants to maintain his current profit level
without investing in the new technology.
How can you help him?

Comments
Since this is a candidate-led case, the candidate should drive the case from
start to finish.
This is a classic example of a substitute product disrupting a well-

established industry.
Competitors often react strongly to such products by utilizing strategies

such as price wars.
To simplify the case, we will assume there is only ONE type of envelope in
the market and that all the current manufacturers sell it for $1 per envelope.
Short Solution
Short-term:
Decrease unit price in order to gain market share.
Long-term:
Invest in new technology

Acquire one of the new competitors, thus obtaining their technology.
Paragraphs highlighted in green indicate diagrams or tables that can be
shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the

interviewee.
The following structure is used as approach for the problem:
I. Company / Costs
Initially, the interviewee should outline the profitability equation:
Profit = Revenue – Costs
The interviewee should ask for the following information:
Type of products sold

Number of units sold
Price of units sold
Cost breadkdown
Share Table 1 (Customlope’s cost break down) if the interviewee

inquires additional information.
Information that can be shared on the interviewee’s inquiry:
Customlope only sells ONE type of product

Price: $1/unit.
This year, Customlope sold 50 million units.
Costs have already been reduced as much as possible.
Customlope has excess capacity. It can produce at least
double the amount of units per year at similar or lower unit
costs.
Customlope’s products are similar in quality and price to their
competitors’
products.
This year, 100 million secure envelopes will be sold. Next year
, this total will shrink by 25%.
Costs per envelope
The candidate should calculate the costs per envelope:
Profit
The candidate should calculate last year’s profit because the client wants to
maintain profit at that level.
II. Competition
The interviewee should ask for the following information:
Main competitors
Competitor’s size
Competitor’s cost structure
Competitor’s products
Share Diagram 2 (market share overview) if the interviewee inquires

information about the market.
Information that you can share on the interviewee’s inquiry:
Since competitors do NOT benefit from Customlope’s economies of

scale, their unit cost this year is $0.90 per envelope
(Customlope’s is $0.70).
Competitors CANNOT further decrease their unit cost.
Key insights
Now that the interviewee knows more about the client and the client’s
competitors, the interviewee should consider ways to help the client
maintain his current profit level.
III. Revenues
Since costs are already optimized, the only way to maintain the current
profit level is to increase revenue.
Increase price
This will probably NOT work because the product is commodity-like.

Now that a new substitute has appeared, it is even more unrealistic
to raise prices.
Increase market share
Customlope could decrease its price to steal market share from its
competitors.
We assume that competitors will leave the market if they cannot be
profitable. Thus, if Customlope decreases its price to $0.90 (their
competitor’s per-unit manufacturing costs), Customlope should obtain
100% market share.
New profit:
Key insights
Customlope can maintain its current profit level by reducing its per-unit
price. The market share and revenue gained is greater than the loss from
lower profit margins.
IV. Conclusion
Although there is no right answer, it seems that the client could benefit from a
short-term price war because its costs are lower than its competitor’s
costs.
Possible answer:
The client should initiate a price war and decrease the price of the
customized envelopes to $0.90 or to slightly less than that.
Key insights
Increasing the price is NOT an option because the envelope is a

commoditized good.
Decreasing costs is NOT an option because costs are already
optimized.
The only way to maintain current profit levels (without investing in the
new technology) is to increase market share by decreasing per-unit
price.
By taking advantage of its lower costs, Customlope can push other
competitors out of the market because the competitors cannot make
a profit on their envelopes.
The objective of maintaining the current profits would be met, as
proved previously.
Further considerations
Before implementing this strategy, the following points should be taken

into consideration:
There could be market regulations against a monopoly. However,

since the company would not be selling their products at a loss,
competitors cannot accuse Customlope of price dumping.
Some competitors might remain active in this market even if they
have to sell at a loss. For example, they might use their market
presence to cross-sell different products to banks.
Thus, Customlope may not obtain 100% market share.
In the long run, the client should invest in and implement the new
technology. The client can do this via R&D or by acquiring one of the
new competitors and its technology.
COGS: Costs of goods sold

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www.preplounge.

Your client, Customlope, is the leader in the US secure envelope

How can you help him?

This is a classic example of a substitute product disrupting a well-

Competitors often react strongly to such products by utilizing strategies

Decrease unit price in order to gain market share.

Invest in new technology

Paragraphs highlighted in blue can be verbally communicated to the

The following structure is used as approach for the problem:

Initially, the interviewee should outline the profitability equation:

Profit = Revenue – Costs

The interviewee should ask for the following information:

Type of products sold

Share Table 1 (Customlope’s cost break down) if the interviewee

Information that can be shared on the interviewee’s inquiry:

Customlope only sells ONE type of product

Costs per envelope

The candidate should calculate the costs per envelope:

The interviewee should ask for the following information:

Share Diagram 2 (market share overview) if the interviewee inquires

Since competitors do NOT benefit from Customlope’s economies of

This will probably NOT work because the product is commodity-like.

Increase market share

Increasing the price is NOT an option because the envelope is a

Before implementing this strategy, the following points should be taken

There could be market regulations against a monopoly. However,

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