A low-cost competitor has just entered our client's market: how should it respond?

• That you keep your analytical cool. The prompt pushes you to react at once, and the interviewer is watching whether you take the time to size the problem.
• That you segment customers. A low-cost competitor usually attracts only part of the customer base, the part for whom price matters more than anything else.
• That you question the competitor's economics. Do its low prices come from genuinely lower costs, or from a land-grab strategy it cannot fund for long?
• That you cost each response. Cutting all prices by 10% to keep a minority of customers can cost far more than letting them go.

1. 1

   Measure the current and expected impact

   Has the client already lost sales, on which products, in which areas? What happened in other countries or industries where this kind of competitor set up?
2. 2

   Understand the entrant

   Its offer, its prices, what it does not provide, and where its advantage comes from: a simpler model, lower costs, patient investors.
3. 3

   Identify the exposed customers

   Split the customer base by what it values. Estimate the share of revenue genuinely at risk.
4. 4

   Compare the responses

   Cut prices, launch a separate entry-level offer, strengthen what sets the client apart, or focus on the least exposed segments. For each, the cost, the effect and the competitor's likely reaction.

"Our client is a long-distance coach company, and a new player has just opened the same routes at prices 30% lower. Before talking about a response I would like to size the problem: have we already seen a drop in passengers, and on which routes?

I suggest three stages. First I would like to understand the competitor: how it reaches those prices, with genuinely lower costs or by losing money to get established, and how many routes it serves. Then I would look at our passengers, because they will not all react the same way: a student booking three weeks ahead is very price sensitive, while a last-minute traveller mainly looks at the timetable. That gives me the share of revenue truly under threat. Finally I would compare the responses, costing each: matching prices across the board, matching only on the routes and times where the competitor operates, or a reduced fare with fewer services..."

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.

• Recommending an across-the-board price cut without calculating its cost on all the customers who would never have left.
• Treating the competitor as a uniform threat, without looking at where it operates and whom it attracts.
• Assuming the competitor will not react to the client's response. A price cut can start a war nobody wins.
• Dismissing too quickly the option of not matching and defending what justifies a higher price.