Sample
E-Commerce Margin Erosion
Intermediate
Your interviewer will present a business problem, share exhibits, and ask questions during the conversation.
What to do
1
Clarify the problem
2
Structure your analysis
3
Deliver a clear recommendation
Interview
Really well, thanks. Excited to be here.
Ready.
My hypothesis is that the home goods expansion is the primary driver - impacting both gross margin and fulfillment costs.
Why is contribution margin declining 8pp?
Main Branch
Gross Margin Pressure
Level 1
Product mix shift to lower-margin categories?
Level 1
Pricing pressure from competition?
Level 1
COGS increase (supplier costs)?
Main Branch
Fulfillment Cost Increase
Level 1
Shipping cost per order rising?
Level 1
Return rate changes?
Level 1
Warehouse/labor costs?
Main Branch
Marketing Efficiency
Level 1
CAC trends by channel?
Level 1
New customer quality (LTV)?
Exhibit 1: Contribution Margin Bridge
The waterfall confirms my hypothesis. Product mix and fulfillment are the two biggest drivers of margin decline - both point to home goods as the culprit.
I'd like to see the gross margin and fulfillment costs broken down by category to quantify the impact.
The data confirms home goods is the primary margin killer. Let me size the impact:
- Home goods is 25% of $2B = $500M revenue
- Gross margin gap: 45% - 22% = 23pp
- That's roughly $115M in lost margin annually
My recommendation:
1. **Short-term**: Raise free shipping thresholds for home goods to offset fulfillment costs
2. **Medium-term**: Exit lowest-margin home goods SKUs
3. **Strategic**: Evaluate whether home goods fits the brand - it may be a distraction from the core apparel business
I'd run a cohort analysis: Do apparel customers who buy home goods have higher LTV? If multi-category customers show 50%+ higher retention, we optimize rather than exit. Data-driven, not assumption-driven.
Yes — I'm curious how McKinsey typically handles the sequencing when you have a profitability fix that conflicts with a strategic priority. The CEO in this case believed home goods was strategically important. How do you navigate that tension with a client?
Thanks so much, David. Really enjoyed the challenge.
Debrief
Debrief
E-Commerce Margin Erosion
Structure
Distinctive
Excellent MECE framework with hypothesis-driven approach.
Distinctive
Analytical
Strong
Strong exhibit interpretation and impact sizing.
Strong
Synthesis
Strong
Strong recommendations with clear prioritization.
Strong
Communication
Meeting Bar
Clear and structured throughout.
Meeting Bar
Skill Assessment
Quantitative Reasoning
ExpertAsked excellent clarifying questions upfront
Created clear hypothesis-driven framework
Could have calculated total margin drag including fulfillment
Could have explored more optimization levers before recommending exit