Should we raise price when costs and demand are changing?
Compare profit at the same cost base, then respond to weaker order evidence.
The question
Merefield Packaging, a fictional UK business unit, must set next month’s price. Both plans use the same forecast input costs. Fixed costs do not change. Tax, one-time costs and working-capital timing are outside this first operating-profit comparison.
| Hold price | Raise price | |
|---|---|---|
| Price per order | 200 | 220 |
| Forecast orders | 1000 | 950 |
| Variable cost per order | 114 | 114 |
| Monthly fixed costs | 60000 | 60000 |
Invented inputs. Orders are whole units. The price response is a forecast, not a measured elasticity.
“Should we raise price when costs and demand are changing?”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Keep the cost comparison fair
What would you do here? Open the move you’d make.
Compare the new price with last year’s profit.
Tempting, but it misses something. That mixes a price decision with a different cost environment.
Use the same next-month costs for both options.
The strong move. This isolates the price and volume trade-off.
Keep price fixed because fewer units must mean lower profit.
Tempting, but it misses something. The unit contribution changes with price.
See how a strong candidate says it
“Compare both prices at GBP114 variable cost per order. Last year’s cheaper inputs are not the relevant alternative.”
Why it works: A decision needs a consistent forecast period and cost base.
Step 2: Build the profit bridge
What would you do here? Open the move you’d make.
Use contribution at each volume, then deduct fixed cost once.
The strong move. This produces the operating-profit comparison.
Choose the plan with the highest percentage price rise.
Tempting, but it misses something. A percentage increase alone ignores the order response.
Add the price rise on all 1,000 old orders.
Tempting, but it misses something. The proposal forecasts 950 orders, not 1,000.
See how a strong candidate says it
“Holding price gives GBP26,000. Raising it gives GBP40,700, a forecast improvement of GBP14,700.”
Why it works: Contribution per order is price less variable cost; fixed cost is deducted once.
Step 3: Choose a controlled commitment
What would you do here? Open the move you’d make.
Treat the forecast as proof that every customer will accept.
Tempting, but it misses something. The price response has not been established.
Cancel the increase because demand is uncertain.
Tempting, but it misses something. Uncertainty can justify a bounded test rather than a permanent decision.
Test the key demand assumption before committing broadly.
The strong move. The test addresses the variable that could reverse the choice.
See how a strong candidate says it
“Test the proposed price with an agreed customer segment and review date. Track orders, contribution and retention.”
Why it works: The profit advantage depends on an unverified demand response.
Step 4: Revise after the order forecast falls
Updated customer commitments support only 800 orders at the proposed GBP220 price. The hold-price forecast remains 1,000 orders; costs are unchanged.
What would you do here? Open the move you’d make.
Keep the increase because GBP220 is above GBP200.
Tempting, but it misses something. Price alone is not the profit result.
Reopen the price or segment plan using the new order evidence.
The strong move. The expected profit ordering has reversed.
Apply the old GBP40,700 forecast to the new volume.
Tempting, but it misses something. That ignores the revised input.
See how a strong candidate says it
“At 800 orders, the proposed price earns GBP24,800, below the GBP26,000 alternative. At least 812 whole orders are needed to beat that alternative.”
Why it works: A higher price can become the weaker profit plan when volume falls enough.
The answer, in short
- Decision
- Retest the price and segment plan before broad rollout.
- Because
- The original price proposal led on profit, but the updated volume puts it below holding price.
- What would change it
- Reliable demand evidence supports the higher-price volume, or the hold-price forecast and costs change.
Common traps
- Comparing different cost periods.
- Treating a forecast as proven price elasticity.
Check your answer
- Do both options use the same period and costs?
- What is contribution at each volume?
- Which input could reverse the choice?
- How does the new evidence change profit?
Last reviewed Nov 10, 2026