The Diagnostic Chain That Expanded Into a Loss
The Prompt
Your client is a pathology-lab chain that grew from 40 to 85 collection centres in 18 months, all feeding two central processing labs. Revenue grew 60%, but EBITDA halved. The board approved the expansion expecting operating leverage — instead margins collapsed. Why, and what now?
Structure & Hypothesis
Analysis & Data
Numbers: retail realizes ₹520/test at 38% contribution. B2B realizes ₹290/test at 12% contribution after logistics. B2B is now 55% of volume. Also, B2B receivables run at 90+ days, and the central labs added a night shift at a 25% wage premium to hold turnaround times.
Let me bridge it. The blended contribution fell from 38% to roughly 23% just from mix. The night-shift premium and transit re-tests push another few points down. And the 90-day receivables mean we're funding hospitals' working capital — at 60% revenue growth, that's a cash squeeze on top of the margin squeeze.
Connects P&L to working capital unprompted — interviewers consistently reward this.
The CEO says: "B2B is strategic — it fills the labs and the brand needs the hospital relationships." How do you respond?
Partly true: B2B volume above the fixed-cost line is fine even at thin margins — but only if it's priced above its variable cost including logistics and penalties, paid on time, and scheduled into off-peak lab hours. Today it fails all three tests in the small-city centres. I'd keep B2B, but re-cut it: re-price or exit contracts below variable-cost-plus, enforce 45-day terms, and batch B2B processing into daytime slack.
Recommendation
Recommend to the board
- Re-price or exit B2B contracts whose realization sits below variable cost + logistics + penalty risk; target 20%+ contribution on renewals.
- Move B2B batch processing to daytime slack capacity; reserve the night shift for retail TAT promises only.
- Tighten B2B terms to 45 days with interest clauses; stop being the banker to hospital chains.
- For the next expansion wave, add a third regional processing lab — distance costs, not demand, are the binding constraint beyond ~300 km.
Key Takeaway
What this case teaches
"Operating leverage" only materializes when new volume resembles old volume. When expansion changes the mix — segment, geography, payment terms — model the new cohort's economics on its own, and check the cash cycle, not just the P&L.