If our client raises prices by 10%, what happens to its margin?
A price increase flows entirely into margin as long as costs do not move, which gives it an effect well above its percentage. So the full question has two parts: by how much the margin per unit rises, and what volume loss the client can absorb before the increase costs more than it brings in.
What the interviewer is assessing
- That you do not answer "margin goes up by 10%". That is the trap: 10% more price is a much larger share of a margin that is itself smaller than the price.
- That you think about volume without being asked. A price rise almost always drives some customers away, and reasoning at constant volume is not enough.
- That you can calculate the indifference point, meaning the volume loss beyond which total profit falls.
- That you come back to the context to say whether that loss is likely.
How to build your answer
- 1
Set out the current unit margin
Price minus variable cost. Ask for both if they are not given. - 2
Calculate the new unit margin
The price increase adds to margin in full. Then express the rise as a percentage of the old margin. - 3
Find the volume loss the client can absorb
Profit is unchanged when new volume equals old volume multiplied by the ratio of old to new unit margin. - 4
Judge how likely it is
Customers' price sensitivity, competitors' offers, the buyer's switching cost. Conclude on whether the increase is worth it.
How a good answer starts
"I will first look at the effect on margin per unit, then ask how much volume the client can lose. The product sells for 50 euros with a variable cost of 30 euros, so the unit margin is 20 euros. A 10% rise takes the price to 55 euros. The cost does not change, so the margin goes to 25 euros: it rises by 25%, not 10%.
At constant volume, contribution profit would therefore grow by a quarter. But some customers will probably leave. To earn the same profit as before, it is enough to sell 20 divided by 25, or 80% of current volume. In other words, the increase pays off as long as the client loses less than 20% of its sales. The question then becomes: is that plausible? If its products are close to competitors' and buyers compare prices, a 20% loss can come quickly. If it sells to loyal customers, or to buyers for whom this product is a small part of the budget, the increase has a good chance of sticking."
This example is made up: it shows the tone and the construction, not a script to memorise. Your answer has to come from your own experience or from the data the interviewer gives you.
Common mistakes
- Answering that margin rises by 10%, confusing the percentage applied to price with its effect on margin.
- Reasoning only at constant volume, as if no customer reacted.
- Applying the 10% increase to costs as well, when nothing in the prompt says they rise.
- Calculating the volume threshold without saying whether it is likely to be crossed.
Follow-ups to expect
"What if volume falls by 10%?"
Multiply: 90% of volume at a margin of 25 euros against 100% at 20 euros, so 22.5 against 20. Profit grows by 12.5%.
"How would you estimate customers' reaction?"
Suggest concrete sources: the effect of past increases, a test in one region, price gaps with competitors.
Frequently asked questions
Why does price affect profit more than volume?
Because one more euro of price goes entirely to margin, while one more unit sold only brings its margin, once its variable costs are paid. The lower the starting margin, the bigger the gap.
What is price elasticity?
It is the ratio between the change in volume and the change in price. If a 10% price rise cuts sales by 5%, elasticity is 0.5 in absolute terms. In an interview the concept is enough, and the figure is supplied by the interviewer.