Pricing against the market, and why undercutting usually loses — Learn

What this lesson teaches

Price from a contribution requirement rather than from a competitor's number
Compute how many extra orders a discount must produce to be worth taking
Know the narrow conditions under which undercutting is rational

A price has two constraints. Below one figure you cannot afford to acquire a customer; above another, too few people will buy. Pricing is finding where those constraints leave room, and confirming that they do.

Price from the bottom up first

Deriving a floor before looking at anyone else

landed cost                       £10.18
contribution required per order   £15.00   (to fund acquisition + fixed)
                                 -------
floor price                       £25.18

median observed price             £28.75
→ There is room. Price inside the band, not beneath it.

What a discount actually costs

Because a discount comes entirely out of contribution, it is far more expensive than its headline suggests. Cutting a £29.00 price by 10% removes £2.90 from a contribution of £18.82 — a 15.4% cut in the money you have to run the business with. To stand still, orders must rise enough to restore the total.

The break-even volume increase for a discount

required order increase = d / (m − d)
  where d = discount in £, m = contribution per order before the discount

10% off £29.00:  d = 2.90,  m = 18.82
  2.90 / (18.82 − 2.90) = 2.90 / 15.92 = 18.2% more orders

20% off £29.00:  d = 5.80
  5.80 / 13.02 = 44.5% more orders

A 20% discount that does not lift orders by nearly half is a loss, no matter how much the revenue line improves. This is the arithmetic behind the common experience of a store having its busiest ever week and its worst ever month.

When undercutting is rational

Your cost base is genuinely structurally lower — you buy at volumes others do not, or ship from where they cannot. Then the low price is a defensible position rather than a decision.
The first order is deliberately bought at a loss and you have measured repeat contribution on a real cohort. Measured, not projected.
You are clearing stock whose alternative is being written off, in which case the relevant cost is not landed cost but zero, and almost any price is an improvement.

Outside those cases, undercutting invites the one response every competitor can make immediately and for free: matching you. Price is the only lever a rival can copy the same afternoon.

Raising price is a test, and it is cheap

The upward direction is tested far too rarely. If contribution is £18.82 at £29.00, a rise to £32.00 can afford to lose 13.7% of orders before it is worse: new contribution £21.82, and 18.82/21.82 = 0.863. Many stores discover the band is wider upwards than they assumed.

Figures in this lesson are illustrative inputs chosen so the arithmetic can be checked. They are not measurements. What FlowFinds Solutions actually measures is published, with its artifacts, in research.