GMAT analysis of argument

ESSAY QUESTION:

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 you find this argument. Point out flaws in the argument's logic and analyze the argument's underlying assumptions. In addition, evaluate how supporting evidence is used and what evidence might counter the argument's conclusion. You may also discuss what additional evidence could be used to strengthen the argument or what changes would make the argument more logically sound.

MY RESPONSE:

The memorandum of a beverage manufacturer states that promotional price reductions on energy drinks led to a dramatic increase in unit sales and therefore the best way to improve profitability and increase customers' perception is to reduce price in a similar way to all other drinks.

The argument logics might be correct but some assumptions are definitely missing. First of all, the author of the argument did not specify if there is any difference between the group of customers who consume energy drinks and customers who purchase other types of beverages. There is no guarantee that people buying energy drinks wish to consume more other types of drinks even in case of discounts.

The second missing assumption I would like to outline is the correlation between profitability and increase of the unit sales of discounted goods. It can be that price reduction is not compensated by the enhanced sales volume. For example, elasticity of demand on other beverages is very low and it can lead to the failure of the price reduction strategy. So, if the author wants to prove the profitability he has to provide calculations supporting his statement.

The same I would like to tell about the correlation between brand perception and price reduction. What if beverages of this company are considered luxury goods and the whole segment of customers will be lost? To be more convincing the author should name the factors which influence on brand perception and evaluate the role of price among these factors.

Also I would like to notice that for better understanding of the memorandum it is worth disclosure precise numbers: how many percent is the "majority of customers", what is the amount of the "dramatic increase of unit sales" in dollars and percentage, what is the amount of "similar price reductions". It is always difficult to make practical inferences from the abstract information.

From the statistical point of view I would also like to see more information about surveys of customers indicating that promotional was favorably received. Were those surveys representative enough? Did the customers favorable to price reduction as to a short term sale campaign or as to a change of the sales policy? Also I would like to notice that I think that substantial decrease of prices can affect the quality of the product. Are the customers aware of that?

Also, I cannot unambiguously understand if the memorandum suggests offering price reductions as a promotional action or as a long term policy. I think that the author should be more careful with the choice of vocabulary for expression of his ideas.