| Date | November 2016 | Marks available | 2 | Reference code | 16N.2.SL.TZ0.1 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Define | Question number | 1 | Adapted from | N/A |
Question
Valley Gardens (VG)
Valley Gardens (VG) is a large garden retailer that sells flowers, plants, trees and other garden supplies. In 2016, in an attempt to gain market share and increase sales, VG introduced a loss leader pricing strategy for several varieties of trees. The strategy had an impact on both sales and profitability.
Selected financial information for VG, all figures in $000s:
Define the term loss leader pricing strategy.
Using information from the table, calculate the missing figures V, W, X and Y (no working required).
Using information from the table, calculate the gross profit margin for 2015 and 2016 (no working required).
Using the quantitative information in the table and your answers to part (b), comment on the impact of a loss leader pricing strategy on VG.
Markscheme
A loss leader pricing strategy occurs when a business sells a product or products at a low price, often at a loss, to attract more customers. The approach can increase awareness of the business, lead to sales of other products, and lead to higher market share.
Candidates are not expected to word their definition exactly as above.
Award [1] for a basic definition that conveys partial knowledge and understanding similar to the above answer. The first mark would typically come from conveying the idea that a loss leader pricing strategy involves very low prices.
Award [2] for a full, clear definition that conveys knowledge and understanding similar to the answer above. Candidates should receive a second mark if they convey the idea that the intention of the low prices is some other benefit to the business (awareness, sales of other items, market share, etc).
V: 3500
W: 1500
X: 300
Y: 300
Award [1] for each correct answer V, W, X, and Y up to a maximum of [4].
2015: 34.88 %
2016: 31.37 %
Accept 34.9 % for 2015 and 31.4 % for 2016.
N.B. allow candidate own figure rule.
Award [1] for each correct answer (no working required) up to a maximum of [2].
The primary two impacts of the loss leader pricing strategy appears to be (1) an 18.6 % increase in sales revenue, which rose from $4 300 000 in 2015 to $5 100 000 in 2016, and (2) a decrease in the gross profit margin, which fell from 34.88 % in 2015 to 31.37 % in 2016. The net profit before interest and tax remained unchanged. If the intention of the loss leader pricing strategy was to increase sales revenue, the strategy appears to have worked: the low prices on certain items led to increased sales revenue. If it were to increase overall profitability, it did not.
N.B. allow candidate own figure rule.
Award [1] if the candidate links the loss leader strategy to a decrease in gross profit margin. Award an additional [1] if the candidate makes some other relevant comment related to pricing, profits, or profitability. Award up to a maximum of [2].
