Competitive response
A rival has acted; decide how to respond by comparing profit under each option and knowing the break-even point, rather than reacting on reflex.
Key takeaways
- Diagnose the real size and cause of the threat before choosing a response, and pick the option that is best after the rival reacts, not the one that feels good right now.
- Interviewers often add a twist during the case (the rival cuts again, or a third player enters) to see whether you keep thinking ahead rather than defending your first answer.
- The strong answer quantifies and thinks a move ahead. The weak one reacts on reflex and walks into a price war.
What this case type is and when it shows up
A competitive response case starts with a rival doing something (cutting price, launching a product, entering your market) and asks how you should respond. The trap is reacting fast and in kind without thinking about what happens next.
The underlying theory, in plain language
First understand the move: what did the rival do, why, and how much does it threaten us. Many moves look alarming but barely affect our customers, and overreacting can start a costly price war.
Then generate options across a real range (match, differentiate, ignore, or change the rules of competition) and judge each by its effect on our profit and the rival's likely next move. Thinking one move ahead is the core skill.
For a price cut, compare profit if we match with profit if we hold. The break-even volume loss tells you how much volume we could lose by holding before matching becomes the better choice. Use it to set the trigger for revisiting the decision.
What the prompts sound like, from simple to hard
- Simple: a rival cut prices 10 percent; do we match.
- Medium: a competitor in India launched a cheaper product; how do we respond.
- Hard: a well-funded new entrant is undercutting the whole European market.
Finding and narrowing the real problem
Key idea
Diagnose the real size and cause of the threat before choosing a response, and pick the option that is best after the rival reacts, not the one that feels good right now.
Frameworks for this type, each as a thinking tool with its limit
- Understand, options, consequences: Diagnose the move, list real options, play out each. Limit: Requires honest estimates of customer and rival behavior.
- Match, differentiate, ignore, change the rules: A menu of response types so you do not default to matching. Limit: The right choice depends on your cost position and brand, which the menu does not decide.
Methods for solving this type
- Find out why the rival moved and whether it can last
- Size the real threat to our customers
- Compare profit under each option
- Find the break-even volume loss and set a trigger below it
The math patterns it relies on
- Profit = units x contribution per unit, for each option
- Break-even volume loss = 1 minus (contribution if we match / contribution if we hold)
Worked cases
Worked case
Should we match a price cut?
The prompt
A rival cut its price by 10 percent. We sell 1,000,000 units a year at USD 20, earning a contribution of USD 5 per unit (a 25 percent margin). If we match, contribution falls to USD 3 per unit and we keep all our volume. If we hold our price, we will lose some volume; the table below shows how each customer segment reacted the last time a rival cut price. Which is better, and when should we reconsider?
Interviewer-led: the interviewer shows the segment table and asks for the expected volume loss, profit under each option, the break-even point, and a recommendation.
Clarifying questions, with the interviewer's answers
- Why did the rival cut price?Answer: It has excess stock after a weak season; there is no sign that its costs have fallen.
- If we match, do we keep all our volume?Answer: Yes, customers see the two brands as similar at equal prices.
- How did customers react the last time a rival cut price?Answer: The table shows it by segment, from two years ago. Assume they would react the same way.
A hypothesis to say out loud: A rival clearing stock is unlikely to keep prices low for long, and matching costs us margin on every unit. My hypothesis is that holding our price is better, unless we would lose a very large share of volume.
The structure
- Compare profit if we match versus if we hold
- Profit if we match
- Profit if we hold and lose volume
- Key: Break-even volume loss and the trigger
The exhibit
| Customer segment | Share of our volume (%) | Volume lost when we held our price (%) |
|---|---|---|
| Loyal regular buyers | 60 | 5 |
| Occasional buyers | 25 | 12 |
| Price-sensitive buyers | 15 | 60 |
Working it through
1. Profit if we match
All 1,000,000 units, but contribution drops to USD 3 each (a USD 2 price cut on a USD 5 contribution).
Match profit (USD):1,000,000 × 3 = 3,000,0002. Read the exhibit: expected volume loss
Weight each segment's loss by its share of our volume. Price-sensitive buyers are only 15 percent of volume but cause 9 of the 15 points.
Expected volume loss if we hold (%):0.6 × 5 + 0.25 × 12 + 0.15 × 60 = 153. Profit if we hold
Contribution stays USD 5, but volume falls 15 percent to 850,000.
Hold profit (USD):850,000 × 5 = 4,250,0004. Break-even volume loss
Holding stays better until our remaining volume times USD 5 falls to USD 3 million.
Break-even volume loss (%):(1 - 3,000,000 ÷ 5,000,000) × 100 = 405. Targeted defense
Hold the price for loyal and occasional buyers, and give price-sensitive buyers a targeted offer that matches the rival (contribution USD 3), so they stay.
Profit with a targeted offer (USD):1,000,000 × (0.6 × 0.95 × 5 + 0.25 × 0.88 × 5) + 1,000,000 × 0.15 × 3 = 4,400,000
What the exhibit shows
Most of the expected loss comes from a small, price-sensitive segment, so a targeted response can protect it without cutting price for everyone.
The recommendation
Hold our list price and defend only the price-sensitive segment. First, holding earns about USD 4.25 million against USD 3 million from matching, and it stays better unless we lose more than 40 percent of volume, far above the 15 percent we expect. Second, the table shows that price-sensitive buyers cause 9 of those 15 points, so a targeted offer for them lifts profit to about USD 4.4 million. Third, a general cut would give away USD 2 on every unit to protect a segment that is only 15 percent of volume. Revisit if volume losses pass 25 percent, well before the 40 percent break-even, or if the rival's lower price lasts beyond one season, which would suggest a lasting cost advantage.
Risks: Lost customers may not return even after the rival raises prices again; A rival with lower costs could keep the cut for years.
Next steps: Track weekly volume by customer segment; Prepare targeted offers for the most price-sensitive customers.
A strong candidate
Compared both options by profit, found the 40 percent break-even, and set a trigger tied to it.
A weak candidate
Said "match immediately so we do not lose customers," giving up USD 2 on every unit to avoid a smaller volume loss.
Worked case
A low-cost rival enters an airline's best route
The prompt
A full-service Australian airline flies about 2,000 passengers a day from Sydney to Melbourne, and about the same number back; the case works on one direction. A low-cost rival has just started flying the route at much lower fares. How should the airline respond?
Candidate-led: you drive the analysis and ask for fares, costs, and customer segments; the interviewer answers and challenges.
Clarifying questions, with the interviewer's answers
- Why has the rival entered this route?Answer: It is a low-cost airline growing fast in Australia, and this is the busiest route it does not yet fly.
- Is its cost per seat lower than ours?Answer: Yes, clearly, so it can keep low fares for a long time.
- What does the client want to protect: passengers or profit?Answer: Profit on the route.
A hypothesis to say out loud: A rival with lower costs can win a fare war, so my hypothesis is that we should not match fares, and should instead protect the passengers who value what we offer, such as business travelers, and cut capacity to fit.
The structure
- Compare route profit under each response, one move ahead
- Understand the move: can the rival last?
- Key: Options: match, hold, a basic fare for leisure, change capacity
- Profit per day under each, and the point where the answer flips
Working it through
1. Profit today
Candidate: "What do we earn per passenger?" Interviewer: "The average fare is AUD 200, and contribution after fuel, fees, and catering is AUD 80."
Contribution today (AUD a day):2,000 × 80 = 160,0002. Option 1: match the rival
Candidate: "What is the rival charging?" Interviewer: "About AUD 130." Candidate: "Matching cuts AUD 70 from every fare, which leaves almost nothing, even if we keep every passenger."
Contribution if we match (AUD a day):2,000 × (80 - (200 - 130)) = 20,0003. Option 2: hold fares
Candidate: "Who flies with us?" Interviewer: "40 percent are business travelers, and we expect to lose about 5 percent of them. The other 60 percent are leisure travelers, and we could lose 40 percent of them."
Contribution if we hold (AUD a day):2,000 × (0.4 × 0.95 + 0.6 × 0.6) × 80 = 118,4004. Option 3: a basic fare for leisure
Candidate: "What if we offer leisure travelers a basic fare of AUD 150, with no bag and no changes?" Interviewer: "That keeps about 85 percent of them, at AUD 30 of contribution each."
Contribution with a basic fare (AUD a day):2,000 × 0.4 × 0.95 × 80 + 2,000 × 0.6 × 0.85 × 30 = 91,4005. When would the basic fare win?
Interviewer: "What if the rival adds flights and leisure losses grow?" Candidate: "Holding stays better for leisure travelers until we lose about 68 percent of them."
Leisure loss at which the basic fare wins (%):(1 - (0.85 × 30) ÷ 80) × 100 = 68.136. Capacity to remove
Holding loses about 520 passengers a day, close to three full flights of 180 seats. Flying those seats empty would add cost for no revenue.
Lost passengers in 180-seat flights:(2,000 - 2,000 × (0.4 × 0.95 + 0.6 × 0.6)) ÷ 180 = 2.89
The recommendation
Hold fares, protect business travelers, and cut about three daily flights on the route. First, matching the rival would cut contribution from AUD 160,000 to AUD 20,000 a day, because the rival's lower costs let it charge fares we cannot afford. Second, holding keeps about AUD 118,400 a day, more than a leisure basic fare at about AUD 91,400, and holding stays better unless leisure losses pass about 68 percent. Third, the passengers we lose fill almost three flights, so moving those aircraft to other routes protects profit further. Invest in what business travelers value, such as schedule and lounges, and review the leisure basic fare if leisure losses pass 60 percent.
Risks: The rival may add many more flights, pushing leisure losses higher; Cutting flights may hurt the schedule that business travelers value; Some business travelers may switch if their employers change travel rules.
Next steps: Track bookings by segment weekly for the first three months; Identify the three flights with the most leisure passengers to cut or move; Survey business customers on schedule and lounge priorities.
A strong candidate
Asked why the rival entered and whether it could last, compared four options on profit by segment, found the point where the answer flips, and adjusted capacity.
A weak candidate
Matched the rival's fares to keep market share, which kept every passenger but wiped out almost all the route's contribution.
Prompt: "A rival cut prices; do we match?"
Weaker answer
Matches on instinct to protect volume, ignoring that the margin given up costs more than the volume lost.
Stronger answer
Asks why the rival moved, computes profit under matching and holding, finds that holding wins unless volume falls more than 40 percent, and adds targeted defense plus a trigger to revisit.
Why the stronger answer wins: The strong answer quantifies and thinks a move ahead. The weak one reacts on reflex and walks into a price war.
Common mistakes, traps, and curveballs
- Reflexively matching a price cut into a price war
- Assuming the rival can keep its move going
- Ignoring how our own customers behave
- Using "margin" to mean both a percent and an amount per unit
- Setting a review trigger with no link to the break-even point
Interviewers often add a twist during the case (the rival cuts again, or a third player enters) to see whether you keep thinking ahead rather than defending your first answer. Formats differ by office and change over time, so check the current process for your target office.
Practice
You earn EUR 8 of contribution per unit. Matching a rival's cut would reduce it to EUR 6. What share of volume could you lose by holding price before matching becomes better, in percent?
You earn ZAR 12 of contribution per unit. Matching a rival's cut would reduce it to ZAR 9 and keep all volume. Holding would lose 20 percent of volume. For every 100 units you sell today, by how much does holding beat matching, in ZAR?
A rival launches a cheaper, basic version of your product. Which list of responses is complete?
A rival with much lower costs cuts price and can keep the cut for years. What changes compared with a one-season cut?
Why does "thinking one move ahead" matter in a competitive-response case?
Holding price loses 15 percent of volume, and the break-even loss is 40 percent. Where should the trigger to revisit the decision sit?
Compare the options on profit, know the volume loss at which your answer flips, and set your review trigger below it.
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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