Manufacturers sometimes discount the price of a product to retailers

Let's start with the claim that we are trying to support: "the manufacturers could often make more profit by not holding the promotions."

Next, let's make sure we understand the situation:

• "Manufacturers sometimes discount the price of a product to retailers for a promotion period when the product is advertised to consumers." - The manufacturers sell their products to retailers who then sell the products to consumers. Sometimes, when the product is being advertised to consumers, the manufacturers will lower the price that the retailers pay for their products.
• During those promotional periods, there is often a "dramatic increase in the amount of product sold by the manufacturers to retailers." This makes sense. If manufacturers lower their prices, then retailers might want to buy more.

At first glance, this seems good for both retailers and manufacturers. The manufacturers give the retailers an incentive to buy more product (lower prices). Then the product is advertised to stimulate consumer demand. If all goes well, consumers will flock to the retailers to buy the product, and the retailers will have plenty of inventory because they stocked up on the discounted product.

True, the manufacturers are making less profit per item because of the discounted prices. But if there is a DRAMATIC increase in the amount of product sold by the manufacturers to retailers, then that could easily make up for the decreased revenue per item.


Now back to the claim: "Nevertheless, the manufacturers could often make more profit by not holding the promotions." As described above, it is easy to imagine how these promotional periods could benefit the manufacturers. But despite the possible benefit, the author claims that manufacturers could often make more profit by NOT holding the promotions.

Why is that the case? We need an answer choice that explains how the situation described above could actually backfire and lead to lower profits:


This explains how manufacturers can minimize their discounts and thus minimize the amount of revenue lost per item. This would help explain how manufacturers can boost profits during promotional periods (increasing sales while decreasing profits per item as little as possible). This does not explain how the promotional periods could hurt the manufacturers' profits, so eliminate (A).


If (B) were not true, consumers might decide to stop buying the product once the promotional period is over. In other words, they might get used to the lower price and then decide that they don't want the product at the higher (regular) price.

But (B) says that this is not the case. Consumers might get excited during the sale, but they will not get accustomed to the sale price. This suggests that consumers will continue buying the product when the sale is over. This should HELP the manufacturers' profits, so eliminate (B).


Choice (C) describes potential benefits of offering promotions. This explains how promotional periods could actually boost profits in the long run. We need something that suggests that promotional periods might hurt profits in the long run, so eliminate (C).


This explains how the promotional periods could end up hurting the manufacturers. The retailers aren't actually SELLING all of the discounted inventory. Instead, the retailers are thinking, "Hey, let's buy a bunch of extra product while it's cheap. Then when the promotional period is over, we can sell it at regular price to boost our profits!"

The manufacturers thought everything was great because they were selling more product during the promotional period. But, if (D) is true, think about what happens AFTER the promotional period. First of all, retail sales might drop back down once the advertising period is over. Also, the retailers already have plenty of inventory stocked up. With a decrease in consumer demand AND an excess supply of product, the retailers probably won't need to buy any more product from the manufacturers for a while.

Also, without any excess inventory, retailers would have to continue buying product at full price once the promotion is over. By purchasing extra inventory in advance (at discounted prices), retailers are saving money that would have otherwise added to the manufacturer's profits. Thus, any accumulated retail inventory represents a loss of potential profits for the manufacturers.

The manufacturers may have boosted profits during the promotion. But, if (D) is true, their sales and profits will likely dry up after the promotion. This explains how the promotions could actually hurt the manufacturers' profits in the long run. Hang on to (D).


Choice (E) explains how a failure to offer promotions could hurt a manufacturer's profits. We need something that explains how offering promotions could actually hurt a manufacturer's profits. Eliminate (E).

(D) is the best answer.
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Nevertheless, the manufacturers could often make more profit by not holding the promotion : Conclusion.

This conclusion is based on the assumption that the product continues to sell even after the promotion has ended.
Now go thro' the options and see which option addresses above point.

The amount of discount generally offered by manufacturers to retailers is carefully calculated to represent the minimum needed to draw consumer's attention to the product. Not Relevant. Does not address the conclusion.
For many consumer products the period of advertising discounted prices to consumers is about a week, not sufficiently long for consumers to become used to the sale price.Very Specific and does not address "more profit"
For products that are not newly introduced, the purpose of such promotions is to keep the product in the minds of consumers and to attract consumers who are currently using competing products.Not relevant
During such a promotion retailers tend to accumulate in their warehouses inventory bought at discount; they then sell much of it later at their regular price. This option address the point we discussed.
If a manufacturer fails to offer such promotions but its competitor offers them, that competitor will tend to attract consumers away from the manufacturer's product. Arguments speaks about manufacturer in general

(D) During such a promotion retailers tend to accumulate in their warehouses inventory bought at discount; they then sell much of it later at their regular price.

If the retailers do not pass on the discount to their customers, then there is no reason for the manufacturers to reduce profit margins and offer the retailers discount. They are better off making higher profits by not offering discounts.

The very interesting in GMAC reasoning is making a confusal to test taker, I think so!

Let see the slighly modification I made on this, and you will see that it is easier than it actually is!

Manufacturers sometimes discount the price of a product to retailers for a promotion period when the product is advertised to consumers. Such promotion often result in a dramatic increase in amount of product sold by the manufacturers to retailers. So, the manufacturers can increase their profit by holding promotions.

Which of the following, if true, most strongly shows that the manufacturers CAN NOT get the goal?

Stop and you see that at the very first sentence, the author appraise how good and best promotion can help increase sales of the manufacturers. But why it does not help increase profits. There must be something problemetic in "promotions"

ATTACK THE PROMOTIONS is slogan!
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Answer should be D. Whats the OA and OE?

You are correct but,
Will not retailers pay to manufacturers for their purchase from manufacturer? If retailers buy more then manufacturer will get more money either retailer sell or store. What is my wrong.
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Retailers will pay to manufacturers but they will pay a discounted price which has a direct bearing on the profit made by the manufacturer.

Try and understand it numerically - lets say 100 units of the product are sold every year in total including during the discount period with say 10 units coming during discounted period and 90 during full price season. What option C is saying is that retailers would probably buy much greater number of units than 10 (say 50) at discounted price from manufacturer and then sell the excess at at marked price without any discount. Thus, promotions has resulted in reduced profit for manufacturer. On the other hand, if there were no promotions, manufacturer would have sold at least 90 units at full price.

Does it make sense?

In questions where we have to evaluate a decision, I normally establish a relationship and then try to see which option has the most positive or negative impact on the relationship.
In this particular question, for example, the relationship is between the promotions and the profit earned. And the relationship is that the organization will earn more profit if promotions are not held. Lets ask the question: Why would it happen? There could be couple of reasons for that:

1. The customers are indifferent towards promotions and the sales of products is not increasing at all.
2. The discounted prices are not reaching customers at all. So customers are actually not aware of the promotions and they are buying the product at regular price. So if thats the case the company should not offer discounts.

Now lets evaluate options based on our understanding:

I agree with the OA and understand why OA is correct but I have some concern on how to interpret the question:

We must have the model of Manufacturer --> Retailer --> People in order to support this argument. We need this, otherwise the OA is not correct. If the manufacturers both sell the product DIRECTLY to the consumers (which some manufacturers do in real world, i.e. Coca Cola) and through retailers (i.e supermarket), then the promotion can actually increase their profits despite the fact that the retailers buy as many products as possible during the promotion period and then sell them at retail price as stated in D. In that case, since we don't know any information related to the price and number of units sold in comparison of with-promotion with without-promotion, we can't conclude anything about the profit.

Now, even though one knows the model MG --> RG --> People, meaning that the profit of the MG comes only from the RG, one can't still conclude that the MG makes less money with-promotion compared to without-promotion for the very same reason: we don't know any information about the number of products sold with-promotion and without-promotion. What if when without-promotion the RG buys significantly less product than they do with-promotion? So the MG can still make more money, hence profit, if the number of products sold in the 2 situations greatly differs.

Another question: I'm not a business guy, who do I supposed to know this model MG --> RG --> People?

Anyone can shed some light please? Thanks a lot!

Premise:-Manufactures think that the advertisements are causing more demand from the consumers so the manufacturer discounts the rate to the retailers to gain larger market share and spend money on advertisements.

Question stem:-If Manufacturers stop advertisements then how will be they benefited (acquire more market share/more revenue)?

Paraphasing:-There should be some link between the insufficiency of the advertisement over the enhanced sales(between manufacturer and the retailers) during the advertisement period.

(D)says that even if the the manufacturers doesn't spent on advertisements they can still have the same sales to the retailers because retailers buy from manufactures and sell the customer a higher price which means two things:
(i) manufacturers can save money spent on Ads.
(ii) end users are okay with the non-discounted/regular price ( because retailers will eventually sell the bought products)

+1 for (D)

Hi Verbal Experts,
I've some doubts on this question -

1. Why option D is preferred over option B? Is it because of the fact that although the consumers don't become used to the sale price of the promotional offer because of short promotion-period, not necessarily they'll move away from buying the products post-promotion at a higher price.So, option B becomes under 'might be true' segment...! Please explain.

2. Argument says that although during promotion Manufacturers make profit and witness dramatic increase in amount of product sold to retailers, without promotions they'll actually make more profit. Now, per option D,we can say retailers during post- promotion period will first clear the inventory accumulated during promotional offer. So eventually there will be some decline in the fresh sales after promotion-period is over. But how we can say that this decline will be such that that it'll not only offset the 'dramatic increase' in sales to retailers during promotion but rather will bring down the total sales (hence revenue) of both with and without promotion-period (than the same for the similar overall time frame without promotion,considering that there will no promotion at all any time)?

Moreover, manufacturers are only concerned with the sales associated with the retailers not to the consumers directly I think. They sell the products to the retailers and take away the profits.
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Let me begin with the most problematic thing in your analysis. What does "might be true" segment mean in a "Strengthen" question? I can digest this term in Inference and with a lot of hesitation, in assumption questions too but using "might be true" in Strengthen question is a felony. More than the use of this term, I am worried about your general approach to strengthen questions.

Now, how you are interpreting option B seems to be correct. If this is your interpretation, does option B support or weaken the conclusion? If people don't become used to low sales price, does it not strengthen the belief the promotions are not that bad? In this case, doesn't it weaken the conclusion suggesting against the promotions?


I agree. Option B does not "conclusively establish" the conclusion. But that is not the purpose of a strengthener. The purpose is just to increase your belief. After reading option B, don't you become more convinced in the conclusion that the company can make more profits without promotions? The objective of a strengthener is to increase the confidence or belief in the conclusion, not to prove it.

Hope this helps.

Thanks,
Chiranjeev
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Hi Chiranjeev,
Thanks for your reply but I'm REALLY NOT able to understand your analysis as of now.

I'd request you to kindly come up with your detail analysis of meaning with emphasize on 'Why option B is wrong and D is correct'.

Look forward to hearing from you...
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Hi,

I can understand your problem. Instead of providing detailed solution, I have actually asked leading questions. However, there is a purpose behind doing so. I want to come up with the answer yourself, rather than I providing the same. There is an English proverb:

Give a man a fish, and you feed him for a day; show him how to catch fish, and you feed him for a lifetime.

I would just be very happy if you are able to think through these things on your own.

Let's try it. I am there to help you. Why don't you answer the questions I asked in my previous post?

Thanks,
Chiranjeev
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Yeah! I got this part wrong."might be true" doesn't come with "Strengthen" question actually. Sorry!



Well, my logic was - as the consumers don't become used to the sale price because of short promotion-period, hence they'll continue to buy the products post-promotion at a higher price and this will continue the sales after promotion period. So, basically I think this option neither strengthen nor weaken the conclusion as it doesn't explicitly indicate whether the sales without promotion will be higher than the same with promotion.

So, ultimately option D remains as the only option to be considered as it's evident that retailers will first clear up their accumulated stocks/inventories before purchasing any fresh stocks from Manufacturers after the promotion is over. So, eventually post-promotion sales would slow down hence the profits would come down. I got confused with option D because I brought in the concept of "might be true" here incorrectly in my earlier post.

Am I getting it properly now? Your thoughts please?



I think you meant option D here...NOT B. Right? Is my above mentioned reasoning for option D correct?
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Yes, you are correct now.



Yes, I meant option D. Sorry for the typo. Your reasoning for option D is correct now.

Thanks,
Chiranjeev
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Manufacturers sometimes discount the price of a product to retailers for a promotion period when the product is advertised to consumers. Such promotions often result in a dramatic increase in amount of product sold by the manufacturers to retailers. Nevertheless, the manufacturers could often make more profit by not holding the promotions.

Which of the following, if true, most strongly supports the claim above about the manufacturers' profit?

(A) The amount of discount generally offered by manufacturers to retailers is carefully calculated to represent the minimum needed to draw consumers' attention to the product.
(B) For many consumer products the period of advertising discounted prices to consumers is about a week, not sufficiently long for consumers to become used to the sale price.
(C) For products that are not newly introduced, the purpose of such promotions is to keep the products in the minds of consumers and to attract consumers who are currently using competing products.
(D) During such a promotion retailers tend to accumulate in their warehouses inventory bought at discount; they then sell much of it later at their regular price.
(E) If a manufacturer falls to offer such promotions but its competitor offers them, that competitor will tend to attract consumers away from the manufacturer's product.


* * * * *
D) (D) During such a promotion retailers tend to accumulate in their warehouses inventory bought at discount; they then sell much of it later at their regular price. - This answer proves that manufacturers could sell more product at a higher price because the retailers are making the excess profit.

Now let's a manufacturer has a promotion and the retailer sells at fair value. They would normally sell at $5 but sold at $3. Therefore the manufacturer lost $2 of sales. E is actually quite similar to D for the overall industry. D is more tempting but E to me has equal weight.

(E) If a manufacturer falls to offer such promotions but its competitor offers them, that competitor will tend to attract consumers away from the manufacturer's product.

See the questions asks about Manufacturers not Manufacturer's. Meaning we should be looking at the industry as a whole. The argument in E doesn't say we increase customers. Therefore E & D would both show that the industry as a whole loses. Let's do a quick example. Product normally is $5 a deal makes it $3. So company A doesn't sell for $5 and company B gets the sale for $3. Therefore $2 in potential industry sales were lost due to the promotion.

I guess D is a little stronger considering it shows the promotions are mainly benefiting the retailer not the manufacturer. But E is not being properly assessed by people responding in this forum.

******* Its a good question. ********

Manufacturers sometimes discount the price of a product to retailers for a promotion period when the product is advertised to consumers. Such promotions often result in a dramatic increase in amount of product sold by the manufacturers to retailers. Nevertheless, the manufacturers could often make more profit by not holding the promotions.

Which of the following, if true, most strongly supports the claim above about the manufacturers' profit?

(A) The amount of discount generally offered by manufacturers to retailers is carefully calculated to represent the minimum needed to draw consumers' attention to the product.
Option A is talking about the manufacturer's strategy during the promotion period that would result in a dramatic increase in amount of product sold by the manufacturers to retailers. But it fails to answer how manufacturers could often make more profit by not holding the promotions. Therefore, incorrect.
Also, as per this option holding promotions is not that bad. But the conclusion is against holding the promotions.

(B) For many consumer products the period of advertising discounted prices to consumers is about a week, not sufficiently long for consumers to become used to the sale price.
Option B is talking about the duration/length of promotion period to consumers. It also fails to cater why the manufacturers should not hold promotion and can still gain profits.
As the period of promotion is less, the customers are not getting used to the prices during the promotion. Even after the promotion, when the prices will be higher, the customer would still be buying the products as they are not used to the promotional sales price. Thus, promotions are not that bad. It weakens the conclusion.

(C) For products that are not newly introduced, the purpose of such promotions is to keep the products in the minds of consumers and to attract consumers who are currently using competing products.
Irrelevant. It talks about the purpose of such promotions for products that are not newly introduced. But we are not concerned about those products and even the promotions.

(D) During such a promotion retailers tend to accumulate in their warehouses inventory bought at discount; they then sell much of it later at their regular price.
This answers to our question why not holding promotions could still produce profits to manufacturers. CORRECT answer.
Detailed Explanation - Retailers have accumulated the products, bought from the manufacturers during the promotional period, in their warehouse inventory. After the promotion period is over, retailers will first try to finish/sell off the accumulated inventory and will then buy the fresh stock of products from manufacturers. So, after the promotion period, the sales of the manufacturers will slow down and thus this options supports the conclusion that the promotions are actually bad.

(E) If a manufacturer falls to offer such promotions but its competitor offers them, that competitor will tend to attract consumers away from the manufacturer's product.
It still is talking about the benefits of offering promotions to the consumers. As per this option promotions are good. But we are not concerned with that.

IMO D.

The conclusion is the manufacturer "could often" make more profit by not holding such promotions. Pre-thinking: Why? Maybe, because the costs of the promotions are on the higher side thereby affecting the profits or there are other, better options than these promotions; options that will give increased sales with decreased costs for executing these options. With this, let us look at the answer choices-

(A) The amount of discount generally offered by manufacturers to retailers is carefully calculated to represent the minimum needed to draw consumers' attention to the product. Okay but this tells nothing about profits to manufacturers in relation with the promotions. Irrelevant. Incorrect.

(B) For many consumer products the period of advertising discounted prices to consumers is about a week, not sufficiently long for consumers to become used to the sale price. Even if consumers do not get "used to" sale price, we are specifically talking about situations in which the sales increase because of promotions and if there are better alternatives to achieve the same. Incorrect.

(C) For products that are not newly introduced, the purpose of such promotions is to keep the products in the minds of consumers and to attract consumers who are currently using competing products. Not related with our conclusion again. Incorrect.

(D) During such a promotion retailers tend to accumulate in their warehouses inventory bought at discount; they then sell much of it later at their regular price. Finds the flaw in the present method of offering discounts coupled with promotions. Suggests there can be a better alternative to achieve increased sales. In line with our pre-thinking. Correct.

(E) If a manufacturer falls to offer such promotions but its competitor offers them, that competitor will tend to attract consumers away from the manufacturer's product. This rather suggests why promotions should be held irrespective of other factors. Incorrect.