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This is my first argument essay from MGMAT CAT. I would appreciate if yo could rate this essay. Thanks.

Topic:
The following appeared in the memorandum of a beverage company:

"Our promotional price reductions on energy drinks have been highly successful, as we have seen a dramatic increase in unit sales. Further, surveys of our consumers indicate that this promotion was favorably received by the majority of our customers. Therefore, to improve our company's profitability and enhance its perception in the eyes of consumers, similar price reductions should be offered on all drinks produced by our firm."

Response:

The corporate memorandum of the beverage company states that a recent promotional price decrease on their energy drinks has boosted sales and has been favorably received by the consumers. The memorandum generalizes this observation and argues that such price cuts on all their products would lead to higher profits for the company. The conclusion reached by the memorandum is too general and cannot be justified with the evidence presented. Further data needs to be gathered and evaluated in order to ascertain whether price cuts on other products would be beneficial.

Perhaps the energy drinks made by the beverage company were selling at very high price points before the promotion. As a result the market for their energy drinks was very small. By reducing the price of their energy drinks, the company was able to expand its market and attract more consumers. This increase in volume led to higher profits. However the situation could be different with other drinks marketed by the company. Perhaps these drinks are already very popular with consumers and enjoy a very healthy market share. Also it is possible that these drinks are essential and hence price is not a very important factor for them. For example consumers will consume orange juice even if it is a little expensive. The important factors for such products is quality and consistency. Also it is possible that the market for these drinks is already saturated and hence further price decreases would not gaurantee a substantial increase in volume. In such a case, the strategy suggested by the memorandum would lead to losses for the beverage company.

Decreasing the prices of all their products could lead to a dilution of the brand value of the beverage company. As a result many loyal costumers who identified the brand with quality might be put off. Although promotions could increase the market share in the short term, once the promotions cease, market share could decline to much lower levels. Hence in the long run, promotions are not necessarily a good idea especially for companies with good recognition. For instance if we look at the personal computer industry, Dell started selling its computers for reduced prices in 2006. This strategy increased its market share significantly and also increased its profits. However by the end of 2007, when some of these promotions no longer existed, profits were hit at the company. Of late Dell has had to reformulate its strategy. It is now trying to improve its brand value.

Thus in final analysis, cutting prices on all products at the beverage company is a flawed strategy especially in the absence of further supporting evidence. Data in terms of market share enjoyed by these drinks and the brand recognition for the company would be useful in evaluating this proposal.