Extensive research has shown that the effects of short-term price

Question

Extensive research has shown that the effects of short-term price promotions on sales are themselves Line short-term. Companies’ hopes that promotions might have a positive aftereffect have not been borne out for reasons that researchers have been able to identify.

A price promotion entices only a brand’s long-term or “loyal” customers; people seldom buy an unfamiliar brand merely because the price is reduced. They simply avoid paying more than they have to when one of their customary brands is temporarily available at a reduced price. A price promotion does not increase the number of long-term customers of a brand, as it attracts virtually no new customers in the first place. Nor do price promotions have lingering aftereffects for a brand, even negative ones such as damage to a brand’s reputation or erosion of customer loyalty, as is often feared.

So why do companies spend so much on price promotions? Clearly price promotions are generally run at a loss, otherwise there would be more of them. And the bigger the increase in sales at promotion prices, the bigger the loss. While short-term price promotions can have legitimate uses, such as reducing excess inventory, it is the recognizable increase in sales that is their main attraction to management, which is therefore reluctant to abandon this strategy despite its effect on the bottom line.   1 
 1. The primary purpose of the passage is to

A. compare the arguments in favor of a certain strategy with those against it
B. attack a certain strategy by enumerating its negative consequences
C. justify the use of a certain strategy in light of certain criticisms that have been made against it
D. advocate a particular strategy by arguing against an alternative
E. explain the effects of a certain strategy and the primary motivations for adopting it

2 
 2. According to the passage, which of the following is the reason why short-term price promotions do not attract new long-term customers to a brand?

A. Short-term price promotions do not produce an increase in sales.
B. Customers come to regard the promotional price as the fair price and the regular price as excessive.
C. Most customers select among competing products largely on the basis of price and very few are loyal to any particular brand.
D. Customers who have not previously bought the promoted brand are almost never persuaded to do so by the short-term price promotions.
E. Any customers that a brand gains by means of a short-term price promotion are liable to be lost when a competing brand has a similar promotion.

3 
 3. The passage suggests that evidence for price promotions’ “effect on the bottom line” (Last line ) is provided by

A. the lack of lingering aftereffects from price promotions
B. the frequency with which price promotions occur
C. price promotions’ inability to attract new customers
D. price promotions’ recognizable effect on sales
E. the legitimate uses to which management can put price promotions

4 
 4. It can be inferred from the passage that if a company ceased to run short-term price promotions for a particular product, an effect of this change would be

A. reduce excess inventory of the product
B. lose some of the product's long term customers
C. reduce the product's overall sales
D. inhibit growth in the number of product's customer.
E. threaten the products profitability.

MacFauz · Accepted Answer

3. The passage suggests that evidence for price promotions’ “effect on the bottom line” (Last line ) is provided by

A. the lack of lingering aftereffects from price promotions
B. the frequency with which price promotions occur
C. price promotions’ inability to attract new customers
D. price promotions’ recognizable effect on sales
E. the legitimate uses to which management can put price promotions

The effects on the bottom line are that losses are brought due to these promotions. So what does the passage state to provide support to the fact that these promotions do in fact bring losses? "Clearly price promotions are generally run at a loss, otherwise there would be more of them". This sentence almost explicitly provides the reason. The right answer is hence B.

anairamitch1804 · Answer

1) Price Promotion -> bad for loyalty, Bad for bottom line.

Why companies do this ? – Some benefits (explanation)

Consider Option E : explain the effects of a certain strategy (this is true, the author discussed this in the first para) and the primary motivations for adopting it (this is also true, the author explains this in the end of the passage – clearance, and reluctance to to abandon in hopes of profit margins later on)

Option  E therefore is correct!

Consider Option C: justify the use of a certain strategy(does he justify the use of price promotion?) in light of certain criticisms that have been made against it.

Understand that the tone of the author overall is more or less negative wrt price promotions. The word “justify” implies that the author argues in support for this strategy. This is NOT true! C is therefore wrong.

2) "people seldom buy an unfamiliar brand merely because the price is reduced."

3)What does the passage state to provide support to the fact that these promotions incur losses? It is the sentence that says, “Clearly price promotions are generally run at a loss, otherwise there would be more of them”.  Hence B.

4)"While short-term price promotions can have legitimate uses, such as reducing excess inventory, it is the recognizable increase in sales that is their main attraction to management, which is therefore reluctant to abandon this strategy despite its effect on the bottom line.". Main reason to go for short term is because it helps in boosting sales. So, if you cease it obviously sales will go down.  Hence C

royrijit1 · Answer

3. The passage suggests that evidence for price promotions’ “effect on the bottom line” (Last line ) is provided by

A. the lack of lingering aftereffects from price promotions
B. the frequency with which price promotions occur
C. price promotions’ inability to attract new customers
D. price promotions’ recognizable effect on sales
E. the legitimate uses to which management can put price promotions

The first sentence of the last para states the below:

"So why do companies spend so much on price promotions? Clearly price promotions are generally run at a loss,  otherwise there would be more of them.  "
Clearly, the author says that the price promotions are not worthy to companies. Had they been, there would be more occurrences of price promotions. From this, we can infer that the answer would be 'B'.

We need to understand that this is a inference question. Hence we must be able to prove the answer by materials stated in the passage.

Hope this helps.

sdlife · Answer

Hi Experts/  VeritasKarishma  /  GMATNinja   GMATNinja 2,

Can you please help with the following?
 
Q1: The primary purpose of the passage is to 
B. attack a certain strategy by enumerating its negative consequences --  My understanding is that "attack" is too strong a word to use here. Sure, the author does provide some negative comments on the use of the strategy, but his overall purpose is not to attack the price promotions. Correct?  
C. justify the use of a certain strategy in light of certain criticisms that have been made against it --  Similary, for C, he is not justifying a theory, he is merely telling us the effects and understanding still why this strategy is used. Correct?

Q3: The passage suggests that evidence for price promotions??? ???effect on the bottom line??? (Last line ) is provided by
A. the lack of lingering aftereffects from price promotions
B. the frequency with which price promotions occur
C. price promotions??? inability to attract new customers
D. price promotions??? recognizable effect on sales
E. the legitimate uses to which management can put price promotions

I still couldn't understand how choice D is wrong here. Can you please explain?

thanks so much!

SD

KarishmaB · Answer

His purpose of writing the passage is the last line - 
it is the recognizable increase in sales that is their main attraction to management, which is therefore reluctant to abandon this strategy despite its effect on the bottom line. - the motivation for adopting the strategy. 
The author starts off by explaining the effects, basically to show that they are not the ones because of which the management adopts this strategy. 
Hence, neither (B) nor (C) works. (E) is perfect.

As for question no 3,

Clearly price promotions are  generally run at a loss, otherwise there would be more of them . And the bigger the increase in sales at promotion prices, the bigger the loss. While short-term price promotions can have legitimate uses, such as reducing excess inventory, it is the recognizable increase in sales that is their main attraction to management, which is therefore reluctant to abandon this strategy despite its effect on the bottom line.

Th highlighted part shows the effect on bottom line. They are run at a loss. If they weren't, there would be more of them. 
Bottom line of the company is the profit/loss ( = Sales - Cost)

Increase in sales doesn't tell us what happens to the bottom line. If the sales increase by bearing loss, it will reduce the bottom line.

e.g. you have 100 widgets at cost of $1 each. 
If you sell 20 at $2 each, you get $40 sales and cost is $20. So profit = $20 (bottom line)
If you sell 20 at $2 each and 10 at $.50 each, sales = $45 (increased sales) and cost is $30. So profit = $15 (bottom line reduced)

Shrey08 · Answer

VeritasKarishma

Can you please explain why is B in Q4 wrong?

I marked B because of this line from first line of second paragraph.

KarishmaB · Answer

This does not mean that without a promotion, the "loyal" customers will not remain loyal. It means that when particular a brand has a promotion, only the loyal customers (who would have anyway bought) buy more or in advance. 
If there is no promotion, they will buy at their own convenience. They are "loyal" customers so they will anyway buy. 
So promotions only increase the overall revenue (shot term).

(C) is correct.

nikitamaheshwari · Answer

Can someone explain why option choice C is wrong in the first question.
C. justify the use of a certain strategy in light of certain criticisms that have been made against it

He tells why the management are using the strategy despite there is no use of it.

VeritasKarishma   GMATNinja 
Also, please explain option choice E
Thanks

KarishmaB · Answer

Look at the structure of the passage:

First para: 
Effects of short-term price promotions on sales are themselves short-term. Companies’ hopes that promotions might have a positive aftereffect have not been borne out for reasons that researchers have been able to identify.

Second para: 
A price promotion entices only a brand’s long-term or “loyal” customers; people seldom buy an unfamiliar brand merely because the price is reduced...

Third para
So why do companies spend so much on price promotions? 
Clearly price promotions are generally run at a loss 
While short-term price promotions can have legitimate uses, such as reducing excess inventory, it is the recognizable increase in sales that is their main attraction to management, which is therefore reluctant to abandon this strategy despite its effect on the bottom line.

Her purpose of writing the passage is the last line - 
it is the recognizable increase in sales that is their main attraction to management, which is therefore reluctant to abandon this strategy despite its effect on the bottom line. - the motivation for adopting the strategy. 
The author starts off by explaining why price promotions do not help the company. She then questions why the management still uses this strategy even though profit reduces? Then she reveals why the management does so - because of the recognisable increase in sales.

Q1:The primary purpose of the passage is to
A. compare the arguments in favor of a certain strategy with those against it
B. attack a certain strategy by enumerating its negative consequences
C. justify the use of a certain strategy in light of certain criticisms that have been made against it
D. advocate a particular strategy by arguing against an alternative
E. explain the effects of a certain strategy and the primary motivations for adopting it

The entire purpose of writing the passage was the big reveal - the recognisable increase in sales is the reason for using this strategy despite all its ill effects. That is why (E) makes sense.

The author's main concern is not to attack the strategy. If it were, then she would have said that these are the ill effects, so management should not use this strategy any more. But she doesn't do that. She questions why the management still uses it and then explains why. Hence (B) is not correct.

Rickooreo · Answer

Hi, from passage it can be inferred that the reason price promotion is not able to generate the intended effect is because of it's inability to attract new customers. Had that happended sales would have increased and hence future profit.
So for question 3, can you please helpe me understand how to eliminate option C - inability to attract new customers. - Official guide answer is B which I agree with but I was unable to eliminate option C

GMATNinja · Answer

Question 3 
 
Overall, the passage is arguing that "the effects of short-term price promotions on  sales  are themselves short-term." In other words, while short-term price promotions might increase sales in the short run, they don't increase sales in the long run.

Notice that this main idea doesn't address the idea of  profits  or a company's "bottom line." It's only talking about the effect on sales.

To support this main idea about sales, the author tells us in the second paragraph that price promotions fail to attract new customers. This fact explains why short-term price promotions only increase sales in the short-term. Notice, however, it doesn't explain why price promotions run at a loss. In theory, simply enticing existing customers to buy more probably  could  increase profits. As long as each good is still sold at a profit, a price promotion  could  theoretically run at a profit.

But either way, the failure to attract new customers isn't cited to explain why price promotions run at a loss. It's only cited to explain why the effect of short-term price promotions is itself short-term.

Let's now consider (C):

The passage talks about "price promotions' inability to attract new customers" in order to explain why their effect on  sales  is short-term. This fact doesn't explain why price promotions cause companies to run at a loss. For that reason, (C) is incorrect.

I hope that helps!

IN2MBB2PE · Answer

GMATNinja  can you please elaborate why B is the correct answer. I was not sure how to justify "frequency" ..... ?

GMATNinja · Answer

Question 3

The author thinks that price promotions have an "effect on the bottom line" -- a  bad  effect. They run at a loss.

Question 3 asks us about evidence to support this claim. We find that evidence earlier in the final paragraph: "price promotions are generally run at a loss,  otherwise there would be more of them. "

Here, the author makes a connection between the frequency of price promotions and their effect on the bottom line. He/she supports the claim that price promotions cause a loss by citing the relatively low frequency of such promotions. If the promotions caused a huge profit, then they would be run more frequently.

So, "the frequency with which price promotions occur," as stated in (B), is evidence that the price promotions run at a loss.

I hope that helps!

hmandhan · Answer

@VeritasKarishma  GMATNinja 
Could you please help with elimination of options B and C for Q2?

GMATNinja · Answer

Question 2 
 
Here's Q2 again:
 
The reason is stated in the passage:
 
In short, the promotions fail to attract new long-term customers because the promotions largely fail to attract ANY new customers! After all, you can't attract a new  long-term  customer if you can't attract  any  new customers. And that's exactly what (D) states in a different way.

Here's (B) again:

Choice (B) explains a potential side effect to promotional pricing: your customers might view the regular price as excessive when the promotion is over and perhaps that would make them buy less stuff. But this isn't mentioned in the passage and certainly isn't cited as the reason that the promotions fail to attract new long-term customers, so (B) is out.

Here's (C):

Perhaps this is true, but, as with (B), it isn't mentioned in the passage or cited as the reason that promotions fail to attract new long-term customers.

(B) and (C) are both things that  could  be true, but there's nothing in the passage suggesting whether or not they are actually true. More importantly, unlike (D), they aren't cited as the specific reason why short-term price promotions do not attract new long-term customers to a brand.

So (D) is our winner.

VerbalBot · Answer

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Extensive research has shown that the effects of short-term price

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Extensive research has shown that the effects of short-term price

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