3.1.3 Follow the Business Logic

Welcome to On Judgement. DailyCup raises menu prices 5% and unit transactions fall 3%. Does higher revenue mean the business became more valuable? Take a first view. You can change it when you have considered the evidence.

A useful argument links a business change to customers, prices, volumes and costs, then to profit, reinvestment and cash. Value also depends on the durability and risk of those cash flows and what is already reflected in price. Write every link rather than jumping from one favourable operating statistic to a buy recommendation. A diagram can reveal where the evidence runs out.

Revenue equals price times units for a single consistent product mix. A price rise and volume fall combine multiplicatively; simply subtracting percentages is an approximation. Profit also depends on variable contribution and fixed costs. First hold other factors constant to understand the arithmetic, then relax the assumptions. The controlled calculation is not a claim that the real world holds everything else fixed.

If revenue rises after a new loyalty scheme, seasonality, a nearby closure or a concurrent price change might explain part of the change. Comparing before and after alone does not isolate causality. Look for comparable locations, timing, customer cohorts and other changes. Evidence can strengthen a causal explanation without proving that one action caused every observed difference.

Higher profit can require more inventory, customer credit and capacity spending. A faster-growing business can consume cash. Ask whether the return on incremental investment justifies its funding and risk. Stakeholder effects also enter the mechanism: staffing, supplier terms and service quality can support or undermine repeat demand. Explain these effects in context rather than add a generic ethics paragraph.

Let's work through Price, units and contribution. Use the simplified DailyCup base: 100,000 transactions at £5, variable cost £3 per transaction, annual fixed costs £150,000. Raise price 5%, reduce units 3%, and initially hold unit cost and fixed costs unchanged. Pause here and try the calculation or reasoning before continuing.

Base revenue = £500,000; contribution = 100,000×(5−3) = £200,000; operating profit = £50,000. New price £5.25; units 97,000; revenue = 97,000×5.25 = £509,250. Revenue factor =1.05×.97=1.0185, or growth 1.85%. New contribution =97,000×(5.25−3)=£218,250; profit=£68,250 under the stated assumptions.

Profit rises here because unit cost and fixed costs were held constant. Customer retention, promotions, wage costs, capex and tax could change the wider conclusion.

Now try the choices in this lesson. If your answer changes, identify the reason. Identify alternatives and missing links. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.