Extensive research has shown that the 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. 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.
Sorry.Stuck on this question? Leave comments below.
You are not logged in. Login here to keep track of your progress.
Looking for the latest Official Guide to the GMAT 2018?
Post your thought process and respond to others' questions below. Download the FREE "GMAT PILL HD" app for iPad, iPhone, and Android device. Remember to rate!
Sign up for the GMATPill Video Course covering SC, CR, RC, PS, DS and IR.
OG Tracker | MBA PILL | Taking the GMAT