Hello - I recently took an MGMAT practice test and decided to try the AWA section, as my official test date is coming up. I would really appreciate it if anyone read it and gave some GMAT-based feedback. Thanks!

PROMPT:

The following appeared in a corporate memorandum of a beverage manufacturer:

"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 author claims that promotional price reductions placed on a firm's specific energy drink have increased sales of that product and, as a result, the company should place similar price reductions on every other drink that the firm produces. While consumers have shown to react positively to this singular reduction, the author's claim that the company's profitability and consumer perception will improve if the prices of all drinks are reduced is pure conjecture and based on several assumptions.

The first assumption that the author bases the argument on is that the promotions and price reductions that increased sales on this specific energy drink will have similar effects on the other drinks produced by the manufacturer. It is entirely possible that consumers are less willing to purchase expensive energy drinks and react to price reductions more powerfully than they would to a protein drink or soda. Sales for the other beverages produced by the manufacturer are not guaranteed to increase if the beverage company cuts prices across the board. In order to validate this assumption, one would need to understand the sales trends of different drinks and obtain more information on this energy drink's success pre-price reduction relative to the other drinks.

The second assumption is that increased unit sales would improve the company's profitability if every beverage had a decrease in price. This is flawed because we do not know the current margins of the other drinks. Units that already exhibit low margins for the manufacturer could become negative if the price was lowered, which could result in a potential decrease in profitability if too many units were sold. Without more information concerning the current profitability of each drink and the proposed price reductions, the assumption that profitability would improve as a result of promotional price reductions is not effective.

Finally, the author assumes that consumer perception would improve as a result of widespread price reductions. Lower prices can imply lower quality for customers, and lower perceived quality is not an effective way to improve customer opinion. Specialty products would actually benefit from higher prices, as consumers would associate the high price with better ingredients and other higher quality characteristics. This assumption is based entirely on the notion that lower prices immediately ensures better customer opinion, an idea that is not guaranteed to succeed.

In conclusion, the author's argument about the effectiveness of promotional price reductions is full of unfounded assumptions. There is too much unknown about the individual beverages to assertively state that the argument presented is valid. The beverage manufacturer would need to exhibit more information about the profitability of each drink and obtain a better understanding of how the price of each drink effects its perception on a general consumer scale.