Dear GMATclubbers - please grade my third AWA attempt

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 . . . etc.

This argument reasons that because a firm has experienced success with price reductions on energy drinks, price reductions should be rolled out to all other drinks in order to increase profitability and boost company perception. The argument is flawed because it makes over simplistic assumptions about profitability, consumer perception and similarities in consumer behaviour across products.

First, it is assumed that price reductions lead to increased profitability. No evidence is cited to support this assertion. We are told that price reductions have led to greater sales volumes. Yet, price reductions may lead to reduced profitability since discounted products arguably force the seller to absorb a lower margin. It is not clear whether promotional price reductions would be sustainable for this company in the long term, which would cast doubt on the wisdom of rolling out this pricing strategy to all drinks products. The memorandum also makes clear that the energy drinks price strategy has only been favourably perceived by a 'majority' of customers, not all customers.

Second, the firm believes price reductions could positively impact consumer perception of the company. Again, no evidence is cited to support this assertion. It is possible that increased sales due to price discounts lead to enhanced perception of products. Equally, there are consumer goods that experience a decline in brand value due to perceptions of being underpriced or cheap. The company's idea of enhancing consumer perception through price reductions may be misguided. Market data about consumer preferences and the impact of price on product and company perception would be useful information to have.

Third, the firm wishes to apply price reductions on 'all drinks'. This appears on the face of it to be a rash strategy. For a beverage manufacturer to discount all of its products suggests it would need to be a in strong financial position in order to absorb reduced profit levels or even losses for the duration of the price reductions. Moreover, any negative impact on consumer perception due to price discounts may have long lasting implications for the company and its brands. For example, consumers who abandon the firm's products due to their cheap price and perceived inferior quality may not return after the price reductions are reversed. Detailed profit margin information and expected sales volumes for each product under consideration for would be helpful.

Overall, the argument used by this firm to justify universal price reductions on all products is flawed because it relies on replicating success experienced with one product across all products.