A competitor cuts its price by 20%. The client's sales team wants to match immediately. Before agreeing, ask which customers are actually likely to leave and what contribution the business would lose.
A broad price cut gives up margin on customers who would have stayed as well as those at risk. It can therefore cost more than the competitive threat it is meant to solve.
The purpose of a competitive-response framework is to compare those consequences, then choose a response the client can sustain. Sometimes that means acting quickly. Sometimes it means protecting a specific segment while keeping the rest of the offer intact.
Understand what the competitor has changed
A headline discount may apply only to new customers, a limited period, selected products or a lower service level. Compare the customer's full experience and bill before treating it as an equivalent offer.
Find out what might support the move. Is the rival clearing excess inventory, launching a short promotion or operating with a lasting cost advantage? Does it have enough capacity to serve the customers it is trying to win?
Those facts affect both urgency and the likely duration of the response. Matching a temporary acquisition promotion with a permanent price reduction across the entire base can create a much larger commitment than management intends.
You do not need to know the rival's private strategy with certainty. Form plausible explanations and identify the evidence that would distinguish them.
Identify the customers and contribution at risk
Suppose a telecom provider has 100,000 customers, each paying $50 per month with $20 in variable monthly cost. Current contribution is $30 per customer, or $3 million per month before fixed costs.
Thirty thousand customers are in a price-sensitive segment. Assume 20% of that group would switch because of the rival's move, while the other customers would remain.
That means 6,000 customers and $180,000 of monthly contribution are at risk: 6,000 × $30. Without a response, contribution falls to $2.82 million under these assumptions.
This is the first commercial comparison to make. Market share and customer count matter, but they do not tell you what the client should be willing to spend to retain those customers.
Check the assumption against actual behaviour when possible: lost deals, cancellation reasons, switching rates and the competing offers customers mention. A customer's stated interest in a discount is not the same as a completed switch.
Calculate the cost of a broad response
A matching 20% cut takes the client's price from $50 to $40. Contribution falls from $30 to $20 per customer.
Even if all 100,000 customers stay, contribution becomes $2 million per month. That is $1 million below the current position and $820,000 below the no-response forecast.
| Option | Customers retained | Contribution per customer | Monthly contribution |
|---|---|---|---|
| Before the competitive move | 100,000 | $30 | $3.00m |
| Hold price | 94,000 | $30 | $2.82m |
| Cut everyone's price by 20% | 100,000 | $20 | $2.00m |
The broad cut would need other benefits to justify the difference, such as substantial new-customer acquisition or avoiding a much larger loss than initially forecast. Name and estimate those benefits rather than assuming they appear.
At $20 contribution per customer, the business would need 141,000 customers to match the $2.82 million no-response contribution. That would require 41,000 customers beyond the original base, before allowing for the cost of acquiring and serving that expansion.
Quick Case Math Drill
A self-storage operator rents units by the month. A rival has opened nearby with lower rents, and the sales team wants to match them for all renters.
- Current rent
- £100 per unit per month
- Variable cost
- £40 per unit per month
- Matched rent
- £85 per unit per month
If matching keeps every renter, what percentage could leave before holding price earns less?
Test a targeted offer, including the customers who did not need it
Suppose the client can identify 10,000 customers for a selective $5 monthly discount. Assume all accept and remain, and that the group includes all 6,000 customers who would otherwise leave.
The offer preserves $180,000 of contribution that would have been lost, while giving up $50,000 in discounts across the 10,000 recipients. It improves contribution by $130,000 relative to holding price.
Under those optimistic targeting assumptions, monthly contribution becomes $2.95 million. The other 90,000 customers still pay the original price.
Now test weaker targeting. If only 2,000 of the recipients would otherwise leave and the offer saves all of them, preserved contribution is $60,000 against $50,000 of discounts. The net improvement is only $10,000 before implementation and service costs.
The discount is paid to everyone who receives it, while the benefit comes only from behaviour it changes. This is why an offer's take-up rate is not a measure of incremental retention.
For these inputs, saving more than about 1,667 customers is necessary to cover the $50,000 discount cost, before other effects. The retention framework explains how a comparison group helps estimate those incremental saves.
Consider a response customers value without cutting every price
The right intervention may address a reason to switch other than the headline bill. Better service reliability, a simpler package, a useful feature or clearer communication of an existing advantage could change the comparison.
Test the economics of those options too. A benefit that costs the company $2 but is worth $5 to the relevant customer may outperform a $5 discount. A feature that adds complexity and support expense may do the opposite.
Keep the offer understandable and the eligibility rules workable. If customers can easily obtain the discount by threatening to leave, its cost may extend well beyond the initially targeted group. Model that possibility before describing the saving as permanent.
Quick Business Judgment Drill
A commercial laundry serving restaurants has started losing clients since a new rival began advertising lower prices.
- Rival's price gap
- £15 less per restaurant weekly
- Lost clients' main reason
- missed collection slots
- Cost to fix collections
- £4 per restaurant weekly
Which response should the laundry test first with its restaurant clients?
Think one move beyond your own response
The competitor may extend its promotion, reduce prices again or target another segment. A response that works only if the rival stands still is incomplete.
Compare a few plausible reactions and the client's ability to continue. A short scenario comparison makes the risk visible without pretending to predict exactly what each competitor will do.
If the rival has a structurally lower cost, repeated matching may erode the client's economics without restoring an advantage. The longer-term answer may involve a differentiated segment, a lower-cost offer or changes to the operating model.
If the move is a brief promotion with limited reach, a narrower response may be sufficient. Fit the commitment to the threat.
Recommend an action and a trigger for reconsidering it
For the telecom example, broad repricing is unattractive under the stated forecast. A selective offer looks more promising, but its value depends on identifying genuinely at-risk customers and changing their behaviour.
Recommend testing that offer while monitoring switching, realised price and contribution by segment. Compare with similar customers who did not receive it where the test design permits. Set the escalation rule around measured economic exposure, rather than a vague promise to “watch the market.”
If switching spreads to the premium base or the targeted offer fails to preserve contribution, reopen the comparison. Holding price is an active choice when it includes evidence to monitor and a condition for changing course.
Try Industrial Hardware Pricing Pressure. Build a structure that distinguishes the competitor's move, the client's exposure and the economics of its response. For the price-volume calculation itself, use the pricing framework.
Structure drill
Would your case structure convince an MBB interviewer?
Industrial Hardware Pricing Pressure
Compare matching a rival’s price cut with selective discounts and holding price. Present your approach to Casey, Case Room’s AI interviewer, then review feedback on your structure and starting point.
Frequently asked questions
Reading the competitor's move
A competitor has cut prices. Should we match straight away?
Not before checking who is likely to leave and how much contribution the business would lose. A broad cut gives up margin on customers who would have stayed as well as those at risk, so it can cost more than the threat it is meant to solve. Compare holding price, targeted offers and broad repricing first.
How can I tell whether the competitor's discount is genuinely comparable?
Compare the customer's full experience and bill, not the headline percentage. A discount may apply only to new customers, for a limited period, to selected products or with a lower service level. Once those conditions are visible, the offer may threaten your existing customers far less than it first appears.
Why does it matter what is behind the competitor's price cut?
The cause suggests how long the threat may last. Clearing excess inventory or running a short promotion differs from operating with a lasting cost advantage. Also check whether the rival has enough capacity to serve the customers it is trying to win, because a move it cannot fulfil limits the real risk.
Putting numbers on each option
How do I calculate contribution at risk?
Identify which customers are likely to switch and multiply by the contribution each provides. In the telecom example, customers pay $50 with $20 variable cost, giving $30 contribution. If 20% of a 30,000-customer price-sensitive segment would switch, that is 6,000 customers and $180,000 of monthly contribution at risk.
Why could matching the price cut be worse than doing nothing?
Because it cuts margin for every customer, not only those at risk. Matching 20% drops the price to $40 and contribution to $20 per customer. Even if all 100,000 stay, monthly contribution is $2 million: $1 million below today and $820,000 below the forecast for holding price and losing the at-risk customers.
Does a targeted discount always beat holding price?
Not automatically. In the example, a $5 monthly discount to 10,000 customers costs $50,000 and preserves $180,000 of contribution, a $130,000 improvement. That assumes everyone accepts and stays and that the group contains all 6,000 at-risk customers. These are optimistic targeting assumptions, so the gain depends on accurately identifying who would leave.
What is discount leakage?
It is the discount given to customers who would have stayed anyway. In the targeted telecom offer, 10,000 customers receive $5 each but only 6,000 were at risk, so the remaining recipients cost money without changing behaviour. A broad price cut is the extreme case, because every customer receives the lower price.
What happens to the targeted offer if our targeting is imperfect?
Its value falls. Every at-risk customer outside the target group still leaves, and every recipient who would have stayed adds discount cost without saving contribution. That is why the offer should be tested and measured on switching, realised price and contribution by segment, rather than assuming the optimistic case holds.
Looking beyond price and this round
Are there ways to respond without cutting prices?
Yes. Customers may be switching for reasons other than the headline bill, so better service reliability, a simpler package, a useful feature or clearer communication of an existing advantage could change their comparison. Each option still needs its economics tested against the contribution at risk, just as a discount does.
How do I compare a non-price benefit with a discount?
Compare what it costs the company with what it is worth to the customers you need to keep. A benefit that costs $2 but is worth $5 to the relevant customer may outperform a $5 discount, because it delivers similar value to them while giving up less contribution.
How should I account for the competitor's reaction to our response?
Compare a few plausible reactions instead of assuming the rival stands still. It might extend its promotion, cut prices again or target another segment. A short scenario comparison shows how each option holds up and whether the client could keep responding, without pretending to predict exactly what the competitor will do.
What if the rival has a lasting cost advantage?
Be cautious about repeated matching. If the rival's costs are structurally lower, each round of price cuts squeezes the client harder than the competitor. Focus instead on protecting genuinely at-risk customers or offering value they care about, rather than entering a price contest the client is poorly placed to sustain.
Making the recommendation
What would a strong recommendation for the telecom case include?
A clear action plus a way to check it. Broad repricing is unattractive under the stated forecast, while a selective offer looks more promising. Recommend testing that offer, monitoring switching, realised price and contribution by segment, and comparing with similar customers who did not receive it where the test design permits.
When should the client move from a targeted offer to a bigger response?
Base the trigger on measured economic results, such as switching and contribution by segment, rather than reacting to every competitor announcement. Agreeing that rule in advance means the client reconsiders when evidence shows the selective offer is no longer protecting enough contribution, not simply when pressure to match grows.