GMAT Essays (AWA)

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."

Discuss how well reasoned you find this argument. Point out flaws in the argument's logic and analyze the argument's underlying assumptions. In addition, evaluate how supporting evidence is used and what evidence might counter the argument's conclusion. You may also discuss what additional evidence could be used to strengthen the argument or what changes would make the argument more logically sound.
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Answer:

In the highly competitive world, specially in FMCG sector, no market share is guaranteed for the companies. Companies have to strive hard to keep their market share for sustainable growth. Promotion on products is one of the strategies used by the companies to meet the objectives. Every company has it's own strategy on deciding the promotions. In the current context, argument mentioned above is highly debatable. Author claims that promotional price reduction has been successful in increasing the dramatic sales, but author does not mention about the objectives for defining the success. Promotional price reduction does not necessarily mean profits to the company, thus I strongly believe context for success determines success and company can not achieve profitability on every promotions. In addition to this author's reasoning is flawed and many assumptions have been made.

Firstly, Promotional price reduction does not mean profitability. Many companies prim use promotional price reduction with the sole purpose of increasing sales and acquiring new customers. More often than not companies incur losses during the promotions. In fact promotions are controlled by finance team which defines the reduction in the price. For instance, Pepsi in mexico recently decrease the prices on their savories product category. This reduction was planned by finance and marketing team. Sales of savories had taken a hit because of the introduction of a new item from competitor. So to increase the sales of savories, pepsi decided to reduce prices by 2 percent of it's existing price. The team expected that reduction in prices will help savories gain market share back and losses were expected up to 20 million dollars. In fact promotional did achieve it's objectives and savories from pepsi gained it's market share back.So promotion was declared as successful. This example shows that if pepsi were to use the same promotional strategy across other product categories, then company would go into irreparable losses.

Secondly, Surveys conducted during the promotions on consumers is always biased. Consumers would be happy to buy lot of good during the promotions and thus consumers might end up favoring a particular brand due to reduction in brand's prices. In the claim, author considers surveys as one of parameters in making a decision. Since author does not mention about the time when survey was conducted, it is likely that survey has been conducted during the promotional sales. Thus unless author clarifies on the timing of the survey, conclusion from the survey can not be taken as fair.

Lastly, strategy on one product does not work on the strategy on the other products. Author claims that promotions on energy drink should be taken as a reference to apply the same promotional strategy on other drinks. Promotions might have increased the sales of energy drinks, but there could be lot of other parameters which decide increase in sales. e.g. Energy drinks are flavor of the season during summer and all the companies provide discounts on the energy products during summer. So sales of energy products dramatically increases during summer, this does not mean promotions on energy drinks in other season would also increase the sales. So unless author specifies that there are no other parameter impacting the sales of energy drinks, it can not be conclusively proved that promotion is the only reason for dramatic increase in sales. Thus promotional strategy used on energy drink might not work with other drinks.

In conclusion, above mentioned points prove that author's reasoning is flawed. Author has to substantiate the assumptions in the argument with evidences. Thus it is safe to say, promotion might lead to increase in sales but success of the promotion depends on other factors. Companies need to take into account other parameters such as Season, losses incurred during promotion and unbiased consumer survey before deciding to implement promotional strategies on the products.