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.
Quote:
Which of the following, if true, most strongly supports the claim above about the manufacturers' profit?
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:
Quote:
(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.
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).
Quote:
(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.
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).
Quote:
(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.
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).
Quote:
(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 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).
Quote:
(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.
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.
close
Updated on: 01 Jun 2022, 01:22
35%
(medium)
27%
(02:30)
wrong 
CORRECT
