Finance Lab · Case study
Testing pricing power
Margins are reasonable but volume growth has stalled. The team must decide whether to compete on price or defend margin.
Nova ManufacturingIntermediate10 min
Testing pricing power
Nova's largest distributor has signalled that it expects better terms. Management believes the product is differentiated, but the market is competitive.
The situation
Margins are reasonable but volume growth has stalled. The team must decide whether to compete on price or defend margin.
Constraints
- A price cut cannot be reversed without losing the distributor.
- Variable cost is fixed in the short term at ৳215 per unit.
- Spare capacity limits how much extra volume can actually be shipped.
The numbers
- Gross margin
- 48.8%
- Operating margin
- 21.3%
- Volume trend
- flat for 4 quarters
- Estimated price elasticity
- −1.1
- A 1% price cut lifts volume about 1.1%
- Spare capacity
- 3%
Your decision
How should Nova respond?
What strong reasoning looks like
- Compare the contribution margin lost against the volume gained.
- Recognise that capacity constrains the upside of a price cut.
- Separate a margin decision from a cash-flow decision.
- Use elasticity as a testable assumption, not a fact.
Reflect
- At what elasticity would the price cut have been worth it?
- Why is cutting cost usually safer than cutting price?