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

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:

******* 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.

(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!

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.

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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The conclusion the correct answer must support is the following:

The manufacturers could often make more profit by not holding the promotions.

In other words, the conclusion is that the promotions cause a reduction in profits.

The fact that consumers do not become used to the sale price does not indicate that manufacturers could make more profit by not holding the promotions. If anything, it indicates that the promotions don't reduce profits by causing consumers to expect a lower price.
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For all we know from what the passage says, profits are higher during the times when promotion are held than during times when full prices are charged. Right? Where does the passage say that profits are lower during the times when the promotions are held? It doesn't.

The conclusion is that, regardless of what occurs when the promotions are held, the profits are lower overall because of the promotions.

We need a reason to believe that conclusion, and check this out. You are assuming that the reason is that profits are lower when the promotions are held. You are adding the support yourself. The passage does not say that.
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It's worth noting that the argument doesn't actually say anything about the price to consumers during the promotional period. The retailers might leave prices exactly the same and simply enjoy an increase in sales thanks to the increase in advertising. In that case, they would enjoy greater profits per sale, since they were able to buy the products for a discounted price from the manufacturers.

But let's assume that prices are in fact discounted to consumers. In order for (B) to work, we have to further assume that consumer sales actually DECREASE when cost goes down -- as if consumers are saying, "hmm, this discounted price is suspiciously low... I don't feel comfortable spending that little on this product."

And that's certainly possible. Maybe consumers are worried that some change was made that decreased the cost and quality of the product? But we're going against Econ 101 if we pick (B) because we're relying on the assumption that a DECREASE in price will decrease demand -- it's a stretch, to say the least.

So yeah, is there a chance that lower prices for consumers will cause a decrease in sales and, thus, an increase in retailer inventory? Sure. But with (D), we don't have to invent anything. (D) specifically tells us that "during such a promotion retailers tend to accumulate in their warehouses inventory bought at discount." That makes (D) a much better choice.

I hope that helps!
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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)

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.

Responding to a question from the retired thread...

zoezhuyan, (B) does not say that customers will not REALIZE the sale price. It just means that they won't grow accustomed to it. In other words, if you are NOT accustomed to a sale price, you will be excited by the discount. But once you grow accustomed to it, you will EXPECT the lower price. If you are accustomed the sale price and the price is then RAISED back to the original, you might not want to buy the product anymore. You became so used to the sale price that the original price now seems like a rip off!

I hope that helps.
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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.

The argument is that manufacturers can make more profit by not discounting the price of their products for sale to retailers. The evidence used to argue this point is pretty weak as it doesn't really tie in rogue pieces of info presented in the conclusion. We are told that during such promotions, retailers often "advertise" the products to consumers.

We aren't told whether the discounts are passed onto consumers by retailers and the argument assumes that retailers will continue to buy from manufacturer's whether the manufacturer's products are discounted or not.

A is incorrect as it just tells us how the discount is calculated. This isn't relevant to the argument.
B neither helps nor weakens he argument. It just tells us that if retailers discount their products as well then it would be effective as consumers don't get used to this sale price.
C is incorrect as it does nothing to the argument.
D is correct because it tells us that the retailers stockpile product at this discounted price instead of selling it straight too consumers. This infers the retailers may not necessarily be passing on the discounts to the consumers, so the manufacturer's are losing out on profit that they could have otherwise made.
E is incorrect because it doesn't explain why offering a discount in the first place would lead to lower profits than would selling at the regular price in relation to the scenario presented. E presents an alternate scenario that MAY or MAY NOT reduce the profitability of the manufacturer.

Official Explanation

Argument Evaluation

Which of the answer choices provides the strongest evidence for the claim that the manufacturers could indeed make more profit by not holding promotions?

To promote a product during a period when it is advertised to consumers, manufacturers sometimes sell the product to retailers at a discounted price. This often results in a large boost in manufacturers' sales to retailers. However, we are told that manufacturers could make more profit by not offering the promotions.

The manufacturers' total profits on the product increase during the period of reduced-price sales to retailers; note that the price reduction results in a dramatic increase in the volume of sales to retailers.

Nevertheless, it is possible that this temporary increase in sales volume would reduce future sales volume to retailers at non-discounted prices. In such a case, it would be more likely that the manufacturers' overall profits on the product would be reduced.

A. It is reasonable for manufacturers to calculate the minimum needed to draw attention to a product if they wished to minimize the costs of the product promotion. However, this information gives little if any support for the claim that manufacturers could make more profit by not discounting prices to retailers.

B. The argument does not provide any information to suggest that the length of the promotion affects manufacturers' profits. According to the passage, many promotions last a short time, so consumers do not come to routinely expect a lower price on a product and thereby avoid purchasing it at the higher post-promotion price. However, this new information gives little if any support for the claim that manufacturers could make more profit by not discounting prices to retailers.

C. This choice implies that the manufacturer would risk making less overall profit, not more, if these promotions were not held.

D. Correct. The retailer profits by purchasing large volumes of the product at a manufacturer's discounted price and selling it to consumers at the higher post-promotion price. It follows that the increase in sales at the discount might in fact detract from non-discount sales. As noted above, this gives the strongest support for the claim about the manufacturers' profits.

E. This suggests that sales promotions are essential for manufacturers to compete in relevant markets. However, it gives little if any support for the claim made about manufacturers' profits.

The correct answer is D.

Dear Moderators,

Please correct the spelling of falls to fails in option E... leads to confusion.


Best !
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