Add a meaningful complication: competitor response and market constraints.
Sarah called her friend Marcus, who runs a competing web design business in the same market. "Guess what," Marcus said. "I'm running a $1,200 promotional special this quarter. Can't hurt to test the market, right?"
Suddenly, Sarah's two-path comparison looked very different. The competitor's move changed the game entirely.
Path A: Premium Pricing Risk
Sarah's $1,635 price is now $435 above the competitor. How many customers pay that premium? Her margin of safety shrinks as price-sensitive customers defect.
Path B: Volume Play Risk
To maintain volume, Sarah now fights a price war. The competitor's $1,200 makes winning 39 projects much harder. She's competing on the competitor's terms.
Let's calculate what happens if Sarah matches the competitor's $1,200 price:
| Calculation Step | Value |
|---|---|
| Price | $1,200 |
| Variable Cost | $880 |
| New Contribution Margin | $320 ($1,200 - $880) |
| Target Profit | $10,000 |
| Required Contribution | $18,100 ($8,100 + $10,000) |
| Required Volume | 56.6 projects |
| Capacity? | 24 projects max |
🔴 At $1,200 price, Sarah would need 57 projects—more than double her capacity! The competitor's move makes Path B mathematically impossible.
1. When a competitor drops price to $1,200, which path becomes riskier?
2. If Sarah matches the competitor's $1,200 price, how many projects does she need to hit $10,000 profit?
3. What is the 'margin of safety' for Sarah's current business?
4. If Sarah raises prices to $1,635 but the competitor stays at $1,200, she will likely:
Discussion Prompt (3 minutes):
With the competitor now at $1,200, share with a partner:
- Which path (Premium or Volume) is now more realistic?
- What options does Sarah have that the spreadsheet doesn't show?
- How would you advise Sarah to respond if you were her consultant?
Coming Up Next
In Independent Practice, you'll run multiple scenarios with varied numbers and automatic checking. You'll master the art of comparing options quickly before we automate the process with Excel tools.