Metrics: Breakeven Sales: Competition

Cost-Volume-Profit diagram, showing Break-Even...

Breakeven point

The breakeven sales, part II: Competition, will tell us if you should follow a competitor on its drop-price move.

Here again you need to know somehow your demand function. In the example attached you will find a competitor dropping its price from $ 6.00 to $ 5.00 this is 16.657 %. Now, you have two extreme alternatives.

Alternative A is to follow the drop-price move and alternative B is to don’t follow the drop-price move. In both alternatives you are expected to lose money, but if you choose alternative  B you will lose the same as alternative A only if sales drop 50.25% (equal to 1,990 units). If sales don’t drop that much you will be in a better position than in alternative A.

A third alternative will be to follow the competitor but partially.

You can try all the alternatives in the next spreadsheet model: breakeven-sales-analysis-competition

Have fun!

Omar

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