Price increases and lost sales

Start with the objective and the customer

A price decision can aim to improve profit, increase adoption, use spare capacity or position a new service. Establish which objective matters before optimising the wrong measure. Revenue growth alone does not establish a profit improvement. A premium price can increase unit contribution while reducing the number of customers; the useful question is whether total contribution improves after accounting for any other cost changes.

Understand what the customer receives, what they currently pay and which alternatives they can choose. Check whether the price is a list price or the amount realised after discounts and refunds. Ask when the new price can take effect, especially for contracts. Applying a higher price to every existing customer immediately can materially overstate the benefit if only renewals are eligible.

Write the baseline economics

A fictional workshop provider sells 10,000 seats a year at a net price of $50 per seat. Variable cost is $30 per seat and annual fixed costs are $100,000. Assume, for this exercise, that variable cost per seat and fixed costs do not change with the proposed price. Current contribution is 10,000 × $20 = $200,000, and operating profit is $100,000.

The provider is considering a $55 price. New contribution per seat would be $25. Instead of immediately guessing demand, calculate the number of seats required to preserve current profit. Because fixed costs are unchanged, the provider must preserve $200,000 of total contribution. At $25 each, that requires 8,000 seats.

Volume can therefore fall by 2,000 seats, or 20% of the original 10,000, before profit becomes lower than the baseline. The 20% figure measures the sales loss that would erase the profit improvement; actual demand still needs to be estimated. The remaining commercial question is whether actual demand is likely to stay above 8,000.

Test a concrete demand scenario

Suppose research suggests 8,500 seats at the higher price. Annual revenue would be 8,500 × $55 = $467,500, below the current $500,000. Yet contribution would be 8,500 × $25 = $212,500 and operating profit would be $112,500. Revenue falls by $32,500 while profit rises by $12,500. The example shows why the chosen objective matters.

Now consider whether the research supports the scenario. A survey asking whether customers "like" the new price may be less informative than observed purchase behaviour under comparable conditions. A small pilot can still be unrepresentative if it includes unusually loyal customers or runs during peak demand. Describe the limitation and how it could affect the result instead of treating an estimate as a fact.

Add the complications that could reverse the answer

If the new price requires an additional $20,000 in annual support costs, preserving the original $100,000 profit requires $220,000 in contribution. The threshold becomes 8,800 seats. At 8,500 seats, profit would then be $92,500. The same price and demand estimate now lead to a different comparison because the cost assumption changed.

Segment customers when there is a defensible reason to expect different responses. Contracted and new customers, occasional and frequent users, or different service packages may have distinct economics. Avoid counting customers in overlapping groups. Check whether someone can switch to a cheaper package, whether discounting undermines the proposed price and whether a competitor response changes the demand estimate.

Capacity also matters. If the business is fully booked, losing some low-contribution demand may allow higher-contribution customers to enter. If it has spare capacity and few avoidable costs, a lower price might create useful incremental contribution. In either case, focus on what changes because of the decision rather than allocating existing fixed costs mechanically to each extra sale.

Recommend a decision with a threshold

A practical answer states the price action, the economic threshold and the next piece of evidence. "At $55, we preserve current profit with 8,000 seats if costs stay unchanged. The 8,500-seat scenario adds $12,500 to annual profit. I would test demand before a full rollout, with particular attention to whether the sample reflects renewing and new customers."

Do not claim the exact best price from a single proposed price and one demand estimate. Finding an optimum requires information about other prices, demand responses and any relevant constraints. In a case interview, identifying what the available data can support is part of making a sound recommendation.