Originally posted by AfterPentax Mark II You do not really think that they would make these kind of offers it they would lose money by it?
Dropping the price is a relative loss for each product unit sold, but overall profitable operation. This refers to the notions of "cost" vs "marginal cost" and "price elasticity of demand" i.e. how much more quantity is sold by dropping the price. During the time limited promotion, they move the volume vs profit margin tradeoff to a different point, but that point can only be sustained for a limited amount of time because sales volumes decrease again after the initial period of limited time offer. The money lost by selling at lower price is offset by the additional quantities sold and the value of future sales achieved via market penetration (e.g capture of new customers triggered by promotional prices). All this is about sales tactics.
The notion of marginal cost: If you run a restaurant, you have to pay for the floor, tooling, personnel (fixed costs) and raw materials (variable costs). Your costs are made of raw materials and fixed cost. So, if, some days of the week your restaurant is not full and you still have to pay for fixed costs, any price drop some food (e.g special promotion) that brings more customers, while still above the cost of raw material, will achieve more profits than keeping prices high.