Chapter 1 – Introduction to Managing with Appendix



Chapter 2 – The Value of Customers

True/False Questions

1. If sales revenues are greater than costs, the firm earns a profit.

True (easy)

2. The profit earned from an individual customer during a single time period is called the cost of capital.

False (moderate)

3. The defection rate is the number of customers at the end of the year, divided by the number of customers at the start of the year.

False (moderate)

4. If a firm starts the year with 100 customers and ends the year with 80 of these same customers, the retention rate is 80 percent.

True (moderate)

5. If a firm starts the year with 100 customers and ends the year with 80 of these same customers, the churn rate is 80 percent.

False (moderate)

6. The defection rate is the probability that a customer at the start of the year will still be a customer at the end of the year.

False (moderate)

7. The discount rate for many firms is the cost of capital.

True (moderate)

8. The discount rate is typically provided by the firm’s Chief Financial Officer.

True (moderate)

9. As the firm’s retention rate increases, its steady-state market share increases.

True (moderate)

10. Retaining current customers is generally more costly than acquiring new customers.

False (moderate)

11. Independent marketing activities are the most common approach for acquiring customers.

True (moderate)

12. Working through third parties like distributors and selling agents is an example of channel strategies.

True (moderate)

13. The 80:20 rule indicates that 80 percent of a firm’s revenue is derived from 20 percent of its customers.

True (moderate)

14. There are three ways to improve customer CLV with current customers: improve customer retention, grow customer margins, and delete customers.

True (moderate)

15. Only small customers can be unprofitable.

False (moderate)

16. The higher the defection rate, the greater is the impact on market share for a given increase in retention rate.

False (difficult)

17. To attract new customers, a firm has to incur an acquisition cost, which needs to be part of the CLV calculation.

True (moderate)

18. Satisfied customers are less likely to defect, and they may also be willing to buy more.

True (easy)

19. General medical practitioners use affiliations as an approach to acquiring new customers.

True (moderate)

20. When it completes a merger or acquisition, the firm acquires customers, regardless of the acquisition’s purpose.

True (moderate)

Multiple Choice Questions

21. Which of the following is a NEW way in the changing view of optimizing shareholder value?

a. Measure customer profitability (moderate)

b. Measure product profitability

c. Products are at the heart of the firm’s decision making

d. Firms should attract, retain, and grow all customers

22. All of the following are NEW ways in the changing view of optimizing shareholder value EXCEPT:

a. firms should fire some customers

b. customers are the firm’s core assets

c. product profitability drives incentive programs (moderate)

d. customer databases are pivotal

23. Which of the following statements is TRUE?

a. If sales revenues are greater than costs, the firm earns a profit. (moderate)

b. If sales revenues are less than costs, the firm earns a profit.

c. If costs are greater than sales revenue, the firm earns a profit.

d. All of the statements are incorrect.

24. According to the text, the profit earned from an individual customer during a single time period is called _____________.

a. cost of capital

b. profit margin (easy)

c. current assets

d. customer lifetime value

25. _____________ is the number of customers at the end of the year, divided by the number of customers at the start of the year.

a. Retention rate (moderate)

b. Defection rate

c. Churn rate

d. Discount rate

26. Customer lifetime value (CLV) depends on which of the following factors?

a. Profit margin

b. Retention rate

c. All of the indicated factors (moderate)

d. Discount rate

27. Customer lifetime value (CLV) depends on all of the following factors EXCEPT:

a. inflation rate (moderate)

b. profit margin

c. retention rate

d. discount rate

28. What is the calculated retention rate if a firm starts the year with 100 customers and ends the year with 80 of these same customers?

a. 60 percent

b. 70 percent

c. 80 percent (moderate)

d. 90 percent

29. What is the calculated defection rate if a firm starts the year with 100 customers and ends the year with 80 of these same customers?

a. 20 percent (moderate)

b. 40 percent

c. 60 percent

d. 80 percent

30. Which of the following shows the correct formula for calculating customer lifetime value?

a. CLV = r + m/(1+d-r)

b. CLV = m * r/(1+d-r) (difficult)

c. CLV = d * r/(1+m-r)

d. CLV = r * d/(1+m-r)

31. In the customer lifetime value formula, “d” represents ______________.

a. defection rate

b. declining rate

c. discount rate (moderate)

d. doubled rate

32. In the customer lifetime value formula, “r” represents ______________.

a. retention rate (moderate)

b. reduction rate

c. regulated rate

d. profit margin rate

33. The ______________ is the probability that a customer at the start of the year will still be a customer at the end of the year.

a. defection rate

b. growth rate

c. retention rate (moderate)

d. discount rate

34. The _____________ is the firm’s cost of capital.

a. defection rate

b. growth rate

c. retention rate

d. discount rate (moderate)

35. The discount rate is typically provided by the firm’s ________________.

a. Chief Executive Officer

b. Board of Directors

c. Chief Marketing Officer

d. Chief Financial Officer (moderate)

36. Suppose the firm earns an annual profit margin of $400,000. The customer retention rate is 70 percent, and the firm’s discount rate is 12 percent. If the margin multiple is 1.67, then what is the customer lifetime value?

a. $33,600

b. $80,000

c. $280,000

d. $668,000 (difficult)

37. According to the text, which of the following is NOT a method of increasing customer lifetime value?

a. Increase the profit margin.

b. Increase the customer retention rate.

c. Reduce the discount rate.

d. Increase the customer defection rate. (moderate)

38. According to the text, all of the following are methods used to increase customer lifetime value EXCEPT:

a. increase the profit margin

b. increase the customer retention rate

c. increase the discount rate (difficult)

d. decrease the customer defection rate

39. According to the text, all of the following are options used to increase customer the margin from current customers EXCEPT:

a. customer satisfaction and loyalty

b. reduce operating costs

c. raise prices

d. standardization (moderate)

40. Which of the following statements is TRUE?

a. As the retention rate increases, the steady-state market share increases. (moderate)

b. As the retention rate decreases, the steady-state market share increases.

c. As the retention rate increases, the steady-state market share decreases.

d. There is no correlation between the retention rate and steady-state market share.

41. To attract new customers, a firm has to incur a(n) ______________, which needs to be a part of the customer lifetime value calculation.

a. discount cost

b. acquisition cost (moderate)

c. retention cost

d. defection cost

42. According to the text, which of the following is NOT an approach to improving customer lifetime value for current customers?

a. Improve customer retention.

b. Grow customer margins.

c. Retrieve current customers. (moderate)

d. Delete customers.

43. According to the text, all of the following are approaches to improving customer lifetime value for potential customers EXCEPT:

a. cutting prices to attract customers (moderate)

b. retrieving former customers

c. acquiring new customers

d. ignoring potential customers

44. Which of the following statements is TRUE?

a. There is no difference in the cost of retaining current customers and acquiring new customers.

b. Retaining current customers is generally less costly than acquiring new customers. (moderate)

c. Retaining current customers is generally more costly than acquiring new customers.

d. Retaining current customers cost 50 percent more than acquiring new customers.

45. Which of the following is NOT mentioned in the text as a major approach for acquiring customers?

a. Independent marketing activities

b. Churning activities (moderate)

c. Affiliations

d. Firm and business unit acquisitions

46. Which of the following is the most common approach for acquiring customers?

a. Independent marketing activities (moderate)

b. Churning activities

c. Affiliations

d. Firm and business unit acquisitions

47. Which of the following approaches for acquiring customers is most commonly used among general medical practitioners?

a. Independent marketing activities

b. Churning activities

c. Affiliations (moderate)

d. Firm and business unit acquisitions

48. Working through third parties like distributors and selling agents is an example of which of the following approaches for acquiring customers?

a. Independent marketing activities

b. Churning activities

c. Channel strategies (moderate)

d. Firm and business unit acquisitions

49. Most firms invest heavily in sophisticated accounting systems and data analysis tools to help managers answer questions that include all of the following EXCEPT:

a. Are our current products profitable?

b. Should we discontinue this old product and, if so, when?

c. How ethical are our employees? (easy)

d. Should we introduce a new product?

50. Which of the following accurately describes the 80:20 rule?

a. 80 percent of the firm’s revenue is derived from 20 percent of its customers. (moderate)

b. 80 percent of the firm’s expenses are derived from 20 percent of its customers.

c. There is an 80 percent probability that a firm will acquire 20 new customers annually.

d. There is an 80 percent probability that a firm will lose 20% of its customers annually.

51. Which of the following accurately describes the 20:80 rule?

a. 20 percent of the firm’s revenues are derived from 80 percent of its customers. (moderate)

b. 20 percent of the firm’s expenses are derived from 80 percent of its customers.

c. There is a 20 percent probability that a firm will acquire 80 new customers annually.

d. There is a 20 percent probability that a firm will lose 80% of its customers annually.

52. Which of the following accurately describes the 80:20:120 rule?

a. 80 percent of the firm’s revenue is derived from 20 percent of its customers, which provides 120% of the firm’s profits. (moderate)

b. 80 percent of the firm’s expenses are derived from 20 percent of its customers, which provides 120% of the firm’s losses.

c. There is an 80 percent probability that a firm will acquire 20 new customers annually, resulting in 120% of the firm’s profits.

d. There is an 80 percent probability that a firm will lose 20% of its customers annually, leading to 120% in losses.

53. Which of the following accurately describes the 20:80:20 rule?

a. 20 percent of the firm’s revenues are derived from 80 percent of its customers, which represents 20% of the firm’s losses. (moderate)

b. 20 percent of the firm’s expenses are derived from 80 percent of its customers, which represents 20% of the firm’s losses.

c. There is an 20 percent probability that a firm will acquire 80 new customers annually.

d. There is a 20 percent probability that a firm will lose 80% of its customers annually.

54. Which of the following is NOT mentioned in the text as a major option for addressing low-profit or unprofitable customers?

a. Review the current way in which the firm interfaces with its customers.

b. Pass the customer over to distributors or contract sales forces.

c. All selections are viable options for addressing low-profit or unprofitable customers. (moderate)

d. Fire the customer.

55. All of the following are reasons for ceasing to do business with a current customer or forgoing a relationship with a potential customer EXCEPT:

a. Standardization requirements (moderate)

b. Mismatched to the offer

c. Capacity constraints

d. Non-payer

56. ________________ is the ongoing process of identifying and creating new value with individual customers and sharing these benefits over a lifetime of association with them.

a. Perceptual mapping

b. Multidimensional scaling

c. Target marketing

d. Customer Relationship Management (moderate)

57. According to the text, which of the following is NOT mentioned as one of the three issues crucial for success of a CRM?

a. CRM system objectives

b. Customer benefits

c. Competitor benchmarking (moderate)

d. Technology

58. All of the following are characteristics of superior customer databases EXCEPT:

a. expensive (moderate)

b. accessible

c. relevant

d. accurate

59. __________________ is the level after which the firm’s communications create customer resentment.

a. Communications black box

b. Communications benchmark

c. Communications tipping point (moderate)

d. Communications retention rate

60. Which of the following “event-driven marketing” classifications do not require a customer decision but is often valuable for straight forward business processes?

a. Triggers

b. Scheduled events

c. Significant events

d. None of the selections apply (moderate)

61. For which of the following types of rewards does the customer accumulate points, then collect the reward?

a. Deterministic reward (moderate)

b. Probabilistic reward

c. Virtual reward

d. Hyperbolic reward

62. For which of the following types of rewards does the customer win either a large reward or nothing?

a. Deterministic reward

b. Probabilistic reward (moderate)

c. Virtual reward

d. Hyperbolic reward

63. Which of the following is NOT mentioned in the text as a specific benefit from a reward program?

a. Makes loyal customers more price-sensitive. (difficult)

b. Encourages loyal customers to spend more with the firm.

c. Stimulates loyal customers to spread positive word of mouth.

d. The firm gains insight into customer behavior.

Essay Questions

64. In a short essay, list and describe the three ways a firm can increase customer lifetime value.

Answer

a. Increase the profit margin the firm earns from its customer.

b. Increase the customer retention rate, or (restated), reduce the customer defection rate.

c. Reduce the discount rate.

(easy)

65. In a short essay, list and discuss five methods a firm can use to increase the margin from current customers and thereby increase customer lifetime value.

Answer

a. Customer selection – well-selected current customers provide a base level of profit margin.

b. Customer satisfaction and loyalty –well-served customers will increase their purchases over time. Hence, the firm’s revenues and profit margins increase.

c. Customization –targeted offers to defined segments provide greater value to customers.

d. Reduce operating costs – as the firm learns to serve its customers, it reduces its operating costs and may reap scale economies with individual customers.

e. Raise prices – if customer satisfaction is high, the firm may be able to set higher prices..

(moderate)

66In a short essay, list and discuss four major approaches a firm can use to acquire customers.

Answer

a. Independent marketing activities –The firm uses its communications efforts to reach potential customers and persuade them to buy products and services.

b. Affiliations – the firm has formal or informal relationships with individuals or other organizations to feed customers to the firm. Informal relationships are very common in the service sector.

c. Channel strategies – rather than approach potential customers directly, the firm works through third parties like distributors and selling agents.

d. Firm and business unit acquisitions – whenever it completes a merger or acquisition, the firm acquires customers, regardless of the acquisition’s purpose. However, some acquisitions are made solely for the purpose of acquiring customers.

(moderate)

67. In a short essay, list and discuss three major options a firm has for addressing low-profit or unprofitable customers.

Answer

a. Invest for the future – two types of customers may have significant potential: small organizations that may grow and large organizations where the firm is currently unsuccessful.

b. Reduce resource commitment – develop a new communication strategy that uses less resources and/or hand off to third parties

c. Fire customers – the firm stops selling to loss making customers with little potential

(moderate)

68. In a short essay, list and discuss five reasons a firm might fire or cease doing business with a current customer or forgo a relationship with a potential customer.

Answer

a. Capacity constraints – the firm may have insufficient ability to serve all customers

b. Competition – the customer is a current or potential competitor. The competitor could reverse-engineer the firm’s product, then launch a similar product.

c. Evolving strategy – if the firm shifts direction, drops products, or divests a business, it sheds customers as a byproduct of strategic change.

d. Foreclosing options – the customer forecloses the firm’s options by prohibiting it from serving other customers.

e. Impact on the firm’s reputation – a firm/customer relationship hurts the firm.

f. Impact on the offer – bad behavior by some customers reduces the value for all customers and can negatively affect employee morale.

g. Instability – the customer may be profitable but too unstable.

h. Non-payer – this customer would be profitable if it paid, but it doesn’t. Or it eventually pays, but the collection costs in money, human resources, and general aggravation are too high.

i. Potential costs – the future costs of doing business with this customer are too high. Selling to them might be quite profitable in the short run, but future servicing costs could be prohibitive.

(difficult)

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