Basic profitability structure
Start with profit = revenue - cost. Break revenue into price, volume, mix, and customer segments. Break costs into fixed costs and variable costs, then split variable costs by major category. The goal is not to list every possible branch; it is to find where the economics changed.
Example 1: Restaurant margin decline
Prompt: Revenue is flat but profit fell from $12M to $8M. Answer path: Since revenue is flat, isolate costs. If food cost rose from 28% to 35% of sales on $100M revenue, that adds $7M in cost, explaining more than the $4M profit decline. Recommendation: Renegotiate suppliers and redesign menu pricing before cutting labor.
Example 2: Airline route profitability
Prompt: A route has high load factor but weak profit. Answer path: Compare average fare, ancillary revenue, fuel, crew, airport fees, and aircraft utilization. High load factor may hide low fares. Recommendation: Improve fare mix or reduce frequency if peak flights subsidize low-yield seats.
Example 3: Subscription churn
Prompt: A subscription business has growing signups but declining profit. Answer path: Compare acquisition cost, churn, gross margin, support cost, and lifetime value. If CAC rose from $80 to $150 while monthly contribution is $10 and churn is high, payback may be too long. Recommendation: Improve retention and acquisition targeting before scaling spend.
Example 4: Manufacturer cost inflation
Prompt: A manufacturer has stable volume but lower margin. Answer path: Split material, labor, freight, and overhead. If material cost per unit rose $4 on 3M units, that is $12M of margin pressure. Recommendation: Test supplier renegotiation, substitute inputs, selective price increases, and SKU rationalization.
Common mistakes
Do not say "increase revenue and reduce costs" as the recommendation. Diagnose the driver first. A strong answer names the specific driver, quantifies its impact, and recommends an action linked to that driver.