Wall Inc.

Updated

The following framework would be a good approach:

Information to provide if asked:

• Wall Inc. produces only one product.
• Sales volume will remain unchanged after the price cut.
• Wall Inc.’s and the competitor’s products are very similar.

Before performing calculations, the interviewee should have asked about any potential changes in sales volume.

Step 3: Interpretation

• The 20% price reduction reduces profit by two-thirds (from 300k to 100k).
• Profit margin falls from 30% (300k / 1,000k) to just 12.5% (100k / 800k).
• If sales volume stays constant, this strategy makes the company far less profitable.

We want to know: At the current price ($10), how much sales volume does Wall Inc. need to make the same $100k profit that it would earn after the 20% price cut?

So we’re comparing:

• Scenario A (price cut): Profit = $100k
• Scenario B (keep price but lose volume): How much volume can drop until profit = $100k

Step 3: Compare with the current volume.

• Current units sold = 100,000
• Break-even units to match price-cut profit = 66,667

So Wall Inc. could sell only two-thirds of its current volume and still do as well as with the price cut.

That means it can afford to lose about 33% of its market share.

Information that can be shared on the interviewee’s inquiry: 

• The competitor is a small company.
• Our main customers are contractors and small business owners. They buy products directly from us.
• Customers usually buy based on their relationship with the suppliers.
• They prefer certain brands.
• There is no information about price sensitivity.
• We do NOT have no long term contracts with customers.
• There is not much information about the competitor.
• The client has a strong brand presence.
• The client has been in the market for a long time.

The interviewee should find the main factors for solving the problem.

A well-structured plan would include:

• Market (number of competitors and their market share)
• Customer (preferences and price sensitivity)
• New competitor (size, advantages, disadvantages)
• Client (position in market, time in the market, brand)

Main conclusions

• The client is a relatively big player in a very fragmented market.
• The competitor seems to be only a small player.
• On average the new competitors market share will be around 60/21 = 2.85%
• The new competitor may take 2.85% of our client’s volume or compete with the other small-sized companies.

The interviewee should sum up his/her findings.

The client should NOT reduce the price because it will lead to a loss in profit that is equivalent to losing 33% of market share.

So far, it seems that the new competitor will take a maximum of 3% of the client’s market share.

There are two possible risks though:

• We could have underestimated the size of the new competitor.
• One of our bigger competitors could reduce their price in response to the new competitor’s low prices.