Assignment Prompt
Motivation & Negative Contribution Margin
A sporting goods retailer is running a monthly special, with snow skis and snowboards being priced to yield a negative contribution margin. What would motivate a retailer to do this?
Readings:
Sekhar, L. R., & Rajagopalan, A. (2012). Management accounting. OUP India.
Chapters 7, 8, and 9.
Submission Instructions
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Initial Post:
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Write at least 200 words.
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Format and cite your post in current APA style.
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Support your analysis with at least two academic sources.
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The initial post is worth 8 points.
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Replies:
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Respond to at least two of your peers.
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You may extend, refute/correct, or add nuance to their posts.
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Each reply post is worth 1 point (2 points total).
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Tip: In your post, discuss the strategic use of negative contribution margin pricing (loss leader strategy), how it can drive traffic, increase cross-selling, or build customer loyalty, and relate it to the concepts found in the assigned textbook chapters.
The answer
Motivation and Negative Contribution Margin
In retail,
selling something for less than it costs to make or stock might sound like a
bad move. Take a sporting goods store slashing prices on snow skis and
snowboards, for example. Why would they do that? Well, there’s a method to the
madness.
One trick is using a “loss leader.” The store might take a hit on those skis to
get more people through the door, hoping they’ll grab other stuff—like
high-priced jackets or goggles—that more than make up for it. It’s all about
the bigger picture.
You know how skis and snowboards fly off the shelves in winter? But when spring
hits, they’re just cluttering up the store. If they don’t sell, the shop’s left
with outdated gear or stuck paying to store it. So, they slash prices—sometimes
even taking a loss—just to move it out quick and avoid a bigger mess later.
Those big price cuts aren’t just about moving extra stuff. They make people
feel like they’ve secured a highly valued deal, and that sticks with them.
They’re likely to come back next season or spread the word to their friends.
Losing money on a sale might sound counterintuitive, but it’s a strategic
approach to build a loyal following and keep the money coming in down the road.
Reply 1
When you stated
that discounts attract customers, you were absolutely correct. Additionally,
the store may better manage seasonal demand fluctuations by using snowboards
and snow skis as loss leaders. Avoiding becoming stranded with outdated
equipment can have a detrimental effect on your bottom line, therefore timing
your inventory clearance is essential. Therefore, the store benefits from
avoiding future write-offs and maintaining cash flow during periods of low
demand, even if they are losing money on each transaction.
Reply 2
Thanks for the
great point about using smart pricing to build customer loyalty. I would also
add that taking a risk now can have significant long-term consumer value
benefits. Offering attractive discounts encourages customers to keep shopping
for a variety of goods rather than just one. It benefits the store's reputation
in a competitive, crowded market and keeps customers coming back.
References
Horngren, C. T., Sundem, G. L.,
& Stratton, W. O. (2014). Introduction to management accounting (16th ed.).
Pearson.
Sekhar, L. R., & Rajagopalan, A.
(2012). Management accounting. OUP India.
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