Match or hold, priced on one product family: the cost of matching, the defection that would justify it, and the elasticity at which the answer flips.
Match a competitor's price cut only if the contribution you would lose by holding exceeds the certain cost of matching. When a rival cuts sealant prices 8 per cent at Ravensworth Adhesives, matching costs 1,598,533 a year, 32.9 per cent of the family's contribution. Holding is cheaper unless more than 32.9 per cent of that contribution walks, which needs an elasticity beyond −4.11.
Worked in full in Pricing Strategy by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The instinct when a competitor cuts is to match at once, because the volume at risk is visible and frightening and the cost of matching feels like a percentage. It is not a percentage. It is a sum of money, paid on every unit you sell, including the units no customer was ever going to move. Holding costs money only on the units that actually leave. That asymmetry is the whole calculation.
| Input | Value |
|---|---|
| Sealants pocket revenue | 20,421,807.27 |
| Sealants contribution | 4,861,661.76 |
| Contribution margin | 23.81% |
| Competitor's cut, matched on the pocket price | 8% |
| Money the cut takes off invoices | 1,760,581.98 |
| Sales commission, share of invoice | 2% |
| Elasticity of volume to the price gap if you hold | −1.2 |
=(d*R-k*I)/C for the break-even defection, with R pocket revenue, I the invoice money cut, k the commission rate and C contribution.At the declared response, holding costs 466,720 and matching costs 1,598,533. Matching is 3.43 times dearer, and holding saves 1,131,813 a year. Matching would be the right call only if the customers are far more price-sensitive than the case assumes: a third of the family's contribution would have to leave over an 8 per cent gap.
The cut has to be matched where it bites, on the pocket price: the money that reaches the bank after every discount and deduction. Adding eight points to a list discount does not cut the pocket price by eight per cent, and comparing with the competitor's list is how a match ends up either too small to hold the customer or larger than the rival's.
| Elasticity | Volume lost if held | Cost of holding | Cost of matching | Cheaper |
|---|---|---|---|---|
| −0.5 | 4.0% | 194,466 | 1,598,533 | hold |
| −1.2 | 9.6% | 466,720 | 1,598,533 | hold |
| −2.0 | 16.0% | 777,866 | 1,598,533 | hold |
| −3.0 | 24.0% | 1,166,799 | 1,598,533 | hold |
| −4.0 | 32.0% | 1,555,732 | 1,598,533 | hold |
| −5.0 | 40.0% | 1,944,665 | 1,598,533 | match |
The answer holds across a wide range. Even at −4.0, a response most commercial teams would call a stampede, holding is still 42,801 cheaper. The decision is therefore robust to the one input nobody can measure before it happens, and that is what makes it a decision rather than a guess.
There is a middle road. In the case, distributors and direct industrial accounts carry 65.6 per cent of sealant contribution, 3,191,208, and they are the customers who can actually switch. Matching only there costs 1,032,047 a year, 566,486 less than matching everywhere, and its own break-even defection is 32.3 per cent of those segments' contribution. A selective match is still a cut of a third of what those accounts earn, so it needs the same strong evidence of defection before it is made.
Measuring the risk in revenue. The cost of matching is 7.8 per cent of pocket revenue, which makes losing 9.6 per cent of volume look worse than matching. On contribution, the right base, matching costs 32.9 per cent. Holding at −1.2 “loses 1,960,493 of revenue”, but only 466,720 of that was contribution.
Ignoring that a match is permanent and a defection is not. A matched price is rarely restored; a customer lost on an 8 per cent gap can be won back when the competitor's cut proves unsustainable. The static comparison above, if anything, flatters matching.
Matching before measuring. The elasticity of −1.2 is a declared input, not a measurement. Before matching, watch the accounts that can actually switch for a few weeks: order intake, quote win rates, the accounts asking for a price review. A defection running near the break-even shows up in those numbers well before it shows up in the year's contribution.
Forgetting the commission. The cut also reduces commission, which is why the break-even is 32.88 per cent rather than the 33.60 per cent of cut over margin. Small here, but it should be in the model.
The full elasticity table and the selective match are in the price bridge workbook in the free workbook for this case. The mirror question, how much volume a price rise of your own can afford to lose, and the volume a cut needs to stand still, is worked in how much volume a price increase can lose before EBITDA falls.
Because matching gives away the cut on every unit, while holding loses only the contribution of the units that leave. With a 23.81 per cent contribution margin, an 8 per cent cut removes about a third of contribution: 1,598,533 of 4,861,662. Holding loses less unless 32.9 per cent of the contribution walks, more than four times the cut.
Often, yes. Where customers are contestable, distributors and direct industrial accounts in the case, matching only there costs 1,032,047 a year instead of 1,598,533, and still needs 32.3 per cent of those segments' contribution to defect before holding becomes the dearer choice.
When volume lost per point of price gap exceeds break-even defection divided by the cut: 32.88 per cent over 8 per cent, an elasticity of -4.11. At -1.2 holding costs 466,720 against 1,598,533 for matching; even at -4.0 holding is still 42,801 cheaper. At -5.0 matching wins by 346,132.
The match-or-hold comparison is the price bridge workbook's treatment of chapter 11 of Pricing Strategy, with the elasticity as an input cell. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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