Chapter 3 Building Customer Satisfaction, Value, and Retention

True/False Questions
1. Total customer cost is the perceived monetary value of a bundle of economic, functional, and psychological benefits. False (moderate) p. 38 2. One way of improving a marketing offer is to increase the buyers nonmonetary costs. False (moderate) p. 39 3. Customer satisfaction is a function of perceived performance and expectations. True (moderate) p. 40 4. A cruise line that promises a 100 percent restful time is promoting complete satisfaction. True (moderate) p. 40 5. The key to delivering high customer satisfaction is to exceed customer expectations. True (moderate) p. 40 6. The value proposition is the whole cluster of benefits the company promises to deliver. True (easy) p. 40 7. The main goal of customer-centered firms is to maximize customer satisfaction. False (difficult) p. 41 8. The primary activities of the value chain include: logistics, operations, service, procurement, and human resource management. False (moderate) p. 43, Figure 3-3 9. Customers, employees, and suppliers are all considered a firms stakeholders. True (easy) p. 41 10. An example of a primary activity as identified in the generic value chain is human resources. False (moderate) p. 43, Figure 3-3 11. An example of a supporting activity in the generic value chain is operations. False (moderate) p. 43, Figure 3-3 12. The first step in the process of calculating the customer defection rate is to define and measure the companys customer retention rate. True (moderate) pp. 45 13. Customer churn is the rate at which a company loses customers and must replace them. True (easy) p. 45 14. An essential step in calculating the defection rate of customers is to estimate the lifetime value of a customer in order to figure the amount of profit lost when a customer defects. True (moderate) p. 45 15. The task of creating high customer retention is called ISO 9000 marketing. False (moderate) p. 45 16. Customer equity is the total revenue that all of a firms customers will provide over their buying lifetimes. True (moderate) p. 47

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17. Frequency programs add social benefits and help keep customers loyal. False (moderate) p. 49 18. A companys largest customers are always its most profitable ones. False (moderate) p. 51 19. A profitable customer is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the firms cost stream of attracting, selling, and servicing that customer. True (easy) p. 51 20. The Malcolm Baldrige National Quality Award measures only customer satisfaction and firm leadership in making its decisions. False (moderate) p. 52

Multiple Choice Questions

21. The difference between total customer value and total customer cost is _______________. a.) satisfaction b.) value/price ratio c.) customer perceived value (moderate) p. 38 d.) total added value e.) market cost 22. _______________ is the bundle of costs that customers expect to incur in evaluating, obtaining, using, and disposing of the given market offering. a.) Customer perceived value b.) Total customer value c.) Absolute fixed costs d.) High product value e.) Total customer cost (moderate) p. 38 23. Which of the following best describes the bundle of costs that customers expect to incur in evaluating, obtaining, using, and disposing of the product or service? a.) customer delivered value b.) total customer value (moderate) p. 38 c.) total customer cost d.) value added cost e.) total value cost 24. Rajiv is selling a $100,000 software package to a large accounting firm. As the seller, he needs to improve his offer to close the sale. How could he enhance customer delivered value? a.) Rajiv could minimize the training offered to accompany the system. b.) Rajiv could make it harder to evaluate and compare his companys product to competitors products, and thus, minimize unfavorable comparisons. c.) Rajiv could lower the value/price ratio for the customer. d.) Rajiv could explain the extraordinary quality and value of his system and then threaten to leave the customers office without allowing the customer to buy. e.) Rajiv could enhance the image of the product and offer special servicing. (difficult) p. 39

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25. The main goal of the customer-centered firm is _______________. a.) to maximize customer satisfaction b.) to treat all stakeholders equally c.) to deliver the highest customer satisfaction possible within the constraints of acceptable resources (difficult) p. 40 d.) to maximize shareholder wealth e.) to retain all or most of its customers 26. Which is not considered a stakeholder? a.) a competitor (moderate) p. 41 b.) a customer c.) an employee d.) a supplier e.) a distributor 27. ______________ is a persons feelings of pleasure or disappointment resulting from comparing a products perceived performance in relation to his or her expectations. a.) Satisfaction (easy) p. 40 b.) Culture c.) Value d.) Ethics e.) Morals 28. _______________ is a function of perceived performance and expectations. a.) Total customer value b.) Customer delivered value c.) Value/price ratio d.) Customer satisfaction (moderate) p. 40 e.) Customer service 29. A waterbed maker that advertises its mattress will provide you With the greatest nights sleep of your life, is aiming to provide its customers with _______________. a.) a value proposition b.) complete satisfaction (moderate) p. 40 c.) a value-delivery product d.) a superior value chain e.) total quality marketing 30. According to the consulting firm of Arthur D. Little, the four keys to the success of a highperformance business are_______________. a.) employees, management, corporate culture, and core competencies b.) stakeholders, processes, resources, and organization (moderate) p. 41 c.) core competencies, resources, customers, and intermediaries d.) intermediaries, resources, customers, and organization e.) employees, resources, organization, and customers

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31. A companys core competency _______________. a.) is a source of competitive disadvantage b.) is easy to copy c.) makes no contribution to perceived customer benefits d.) is something the competitor can never take away e.) is difficult for competitors to imitate (moderate) p. 42 32. A companys _______________ consists of its structures, policies, and corporate culture, all of which can become dysfunctional in a rapidly changing business environment. a.) organization (moderate) p. 42 b.) mission c.) vision d.) goals e.) chain of command 33. Which of the following is NOT an example of a primary activity as identified in the generic value chain? a.) human resource management (moderate) p. 43, Figure 3-3 b.) marketing and sales c.) operations d.) outbound logistics e.) service 34. An example of a supporting activity in the generic value chain would be _______________. a.) inbound logistics b.) procurement (moderate) p. 43, Figure 3-3 c.) outbound logistics d.) operations e.) service 35. Nate is the Vice President of Operations for a video game manufacturer. He is responsible for making sure the games are written according to customer expectations. The function Nate performs is what part of the value chain? a.) a primary activity (moderate) p. 43, Figure 3-3 b.) the network c.) total delivered customer value d.) a logistical activity e.) a support activity 36. As the Human Resources Director, Jolene performs in which part of the value chain? a.) service b.) a primary activity c.) infrastructure d.) operation e.) a support activity (moderate) p. 43, Figure 3-3

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37. The process of comparing ones own costs and performance to competitors to see how to improve ones own performance and gross margins is called _______________. a.) benchmarking (moderate) p. 44 b.) value-delivery networking c.) a value analysis d.) a flanking attack e.) a core business evaluation 38. Which of the following is NOT an example of a core business process? a.) customer service b.) customer acquisition and retention c.) promotion (difficult) p. 44 d.) inventory management e.) new-product realization 39. Allied Signal, maker of Fram oil filters, assigned three of its employees to live near and work at Checker Auto Parts headquarters to improve the speed and reduce the cost of supplying Allied Signal products to Checker branch stores. Allied Signal is trying to improve its _______________. a.) total quality management (TQM) process b.) value-delivery network (difficult) p. 44 c.) quick response system d.) inbound logistics e.) matrix relationship with Checker 40. Blizzard Entertainment provides a whole cluster of benefits to its customers, including a game server that allows free online gaming, online and phone-based technical support, and open beta testing for valued customers. This is an example of a _______________. a.) total quality management (TQM) process b.) value-delivery network c.) value proposition (difficult) p. 40 d.) strategy to reduce the value gap e.) matrix relationship with customers 41. Customer acquisition requires substantial skills in all of the following EXCEPT: a.) lead generation b.) finding new customers c.) lead qualification d.) account conversion e.) managerial accounting (easy) pp. 44-45 42. High customer churn means a.) high customer defection. (easy) p. 45 b.) trolling for new customers. c.) moving customers around between subsidiaries. d.) qualifying customer leads. e.) customer lifetime value.

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43. Which of the following is NOT a step in monitoring and reducing the customer defection rate? a.) Define and measure the customer retention rate. b.) Distinguish the causes of customer attrition and identify those that can be better managed. c.) Determine the competitive advantage that would attract customers. (difficult) p. 45 d.) Figure out how much it would cost to reduce the defection rate. e.) Estimate how much profit it loses when it loses a customer. 44. The first step in the process of calculating the customer defection rate is to _______________. a.) distinguish the causes of customer attraction b.) estimate how much profit is lost when the company loses customers c.) define the point at which the defection rate reduces profit by at least 2 percent d.) calculate the lifetime value of each customer e.) define and measure the companys customer retention rate (moderate) p. 45 45. _______________ is the present value of the profit stream that the company would have realized if the customer had not defected prematurely. a.) Customer lifetime value (difficult) p. 45 b.) Customer cost trends c.) Customer value cost d.) Customer retention rate e.) Customer defection rate 46. Hee Haw Flat Glass Corporation has 42,000 customer accounts. It lost 10 percent of its accounts this year due to service-related issues. The average revenue lost was $10,000. The companys profit margin is 5 percent. How much did the company lose due to this attrition? a.) $210,000 b.) $420,000 c.) $840,000 d.) $2,100,000 (moderate) p. 45 e.) $420,000,000 47. A small scrapbook store has 1,400 retail accounts. It lost 25 percent of those accounts this year. Each loss represented $600 in revenue. The scrapbook stores profit margin is 10 percent. How much did this small company lose this year? a.) $3,500 b.) $35,000 c.) $21,000 (moderate) p. 45 d.) $210,000 e.) $6,000 48. The key to customer retention is _______________. a.) customer satisfaction (moderate) p. 45 b.) inexpensive products c.) expensive products d.) customer concern e.) customer demographics

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49. Surveys of customer satisfaction _______________. a.) indicate customers will complain when they are dissatisfied b.) demonstrate that less than 5 percent of all customers will actively complain if dissatisfied (difficult) p. 45 c.) are accurate measurements of the total level of satisfaction/dissatisfaction among customers d.) use a value-gap analysis e.) are only reliable when conducted with current customers 50. A company should commit to reducing the customer defection rate if _______________. a.) the cost to do so is more than the potential profit b.) it is costly to find new customers c.) the cost is less than the lost profit (moderate) p. 45 d.) the economy is slow e.) the economy is strong 51. Which is a highly satisfied customer not likely to do? a.) be more aware of the competition (moderate) pp. 45 b.) be loyal longer c.) talk favorably about the product to other consumers d.) be less price sensitive e.) offer ideas for product improvements 52. L.L Beans 100 percent Guarantee includes _______________. a.) a pro-rated refund for products that do not work as they should b.) only a refund to the purchasers credit card if the product is defective c.) only the option to replace unsatisfactory merchandise d.) only provisions for goods that were bought less than one year ago e.) 100 percent satisfaction in every way (easy) p. 46 53. The task of creating strong customer loyalty is called _______________. a.) the Deming approach b.) a value-added tactic c.) guerilla marketing d.) lifetime value enhancement e.) relationship marketing (moderate) p. 46 54. Customer retention may be strengthened by _______________. a.) erecting high switching barriers (moderate) p. 46 b.) calculating the lifetime value of the customer c.) reducing the value/price ratio on products d.) eliminating affinity groups e.) enhancing the supply chain 55. After a cost analysis, a company that sells office pc networking equipment found it was spending more to attract new customers than they were worth. How could they remedy this situation? a.) decrease the company profit margin, thereby lowering costs to the customer b.) determine how it can spend less per sales calls (difficult) p. 51 c.) increase the number of sales calls per conversion of each customer d.) engage in transfer marketing e.) reduce its promotional efforts

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56. Anyone who might conceivably buy the product or service is called _______________. a.) a suspect (moderate) p. 47 b.) a prospect c.) a customer d.) an advocate e.) a partner 57. The salesclerk at the video store takes your order and your money for a DVD rental. This is an example of _______________marketing. a.) accountable b.) basic (moderate) p. 48 c.) partnership d.) reactive e.) proactive 58. The assistant manager at Best Buy gives you his card and tells you to call him if you cant program your new DVD player. This is an example of _______________marketing. a.) reactive (moderate) p. 48 b.) basic c.) partnership d.) accountable e.) proactive 59. The physicians assistant at the clinic where you sought treatment for an ear infection calls you the next day to see if you are feeling better. He also asks you if you are satisfied with the clinics service. This is an example of _______________marketing. a.) accountable (moderate) p. 48 b.) basic c.) partnership d.) proactive e.) reactive 60. Three months after you bought your new Honda Accord Hybrid car, the salesperson that sold it to you calls to inform you that Honda has developed an electronic mobile car security system that should alleviate any concerns you might have about the car being stolen. This is an example of _______________marketing. a.) reactive b.) accountable c.) basic d.) partnership e.) proactive (moderate) p. 49

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61. Morton Buildings, a manufacturer of agricultural out-buildings, works closely with a large hog processing plant that subcontracts to various local farmers to raise the animals it slaughters. Morton Buildings works with the processing plants research and development team to design animal housing that meets all the requirements necessary to ensure healthy livestock. This is an example of _______________marketing. a.) reactive b.) basic c.) accountable d.) partnership (moderate) p. 49 e.) proactive 62. _______________reward customers who buy frequently and/or in substantial amounts. a.) Frequency programs (moderate) p. 49 b.) Club membership programs c.) Point-of-purchase programs d.) Sampling programs e.) Trade shows 63. Frequency marketing programs _______________. a.) cheapen the company image b.) are acknowledgements that 20 percent of a companys customers probably account for 80 percent of its business (moderate) p. 49 c.) tempt customers into buying more than they can afford d.) can result in a decrease in quality as the company tries to increase its efficiency e.) seldom, if ever, become a financial burden to the companies that operate them 64. There are many levels of relationship marketing. When a company has many customers and distributors, _______________marketing produces the lowest margins. a.) basic or reactive (difficult) pp. 48 b.) basic or accountable c.) proactive or reactive d.) reactive e.) accountable or reactive 65. A _______________is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the companys cost stream of attracting, selling, and servicing that customer. a.) profitable customer (moderate) p. 51 b.) nonprofitable customer c.) prospect d.) lifetime customer e.) reactive account 66. The 80-20 rule suggests that _______________. a.) every company loses money on some of its customers b.) a company could improve its profits by firing its worst customers c.) the top 20 percent of customers might generate 80 percent of the profits, half of which are lost serving the bottom 30 percent of unprofitable customers d.) midsize customers are often the most profitable e.) all of the above are suggested by the 80-20 rule (difficult) p. 50-51

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67. _______________is an organization-wide approach to continuously improving the quality of the organizations processes, products, and services. a.) Customer service b.) Core competency development c.) Total quality marketing d.) Total quality management (moderate) p. 52 e.) Conformance quality 68. According to the text, a company that satisfies most of its customers needs most of the time is called a _______________. a.) quality company (moderate) p. 53 b.) performance company c.) customer company d.) profitable company e.) competitive company 69. Both Daisy and Bosch make vacuum packaging machines. If when delivered to their buyers, each brand of machine performs exactly what its salesperson promised it would, then both manufacturers are said to have delivered the same _______________. a.) total quality b.) a competitive advantage c.) performance quality d.) a core competency e.) conformance quality (moderate) p. 53 70. Many customers have the perception that a Seiko watch will outperform a Casio watch because a Seiko watch has higher _______________. a.) performance latitude b.) quality maximization c.) performance quality (moderate) p. 53 d.) substitutability e.) transferable quality

Essay Questions
71. ERP Delinquent Collections Services has been challenged lately by significant customer churn, customers seem to be defecting to competitors. In a short essay, discuss how ERP may be able to reduce customer defections and retain its existing customers. Answer: There are four steps in attempting to reduce the defection rate. First, ERP must define and measure its retention rate. Second, ERP must distinguish the causes of customer attrition and identify those that can be managed better. Third, ERP needs to estimate the amount of profit it loses when it loses customers. Fourth, ERP needs to calculate the cost of reducing the defection rate. As long as the cost is less than the lost profit, the company should spend that amount to reduce the defection rate. The most effective method for reducing customer defections is simply listening to the customers. This creates loyalty and customer satisfaction and turns defecting customers into retained customers. Listening is not enough, however. ERP must also be ready to respond quickly and constructively to customer complaints. There are two ways for ERP to strengthen customer retention. One is to erect high switching costs. For ERP this could amount to free replacement liners if the customer buys all

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supplies from Waters Edge. The better approach is to deliver high customer service. To do this, ERP must involve every employee in delivering service and engage in relationship marketing. (difficult) Marketing Skills: Winning Back Lost Customers section p. 48 72. In 1964 Truett Cathy developed a fried boneless chicken filet, which he began selling as a sandwich under the brand name of Chick-fil-A. In 1997 the company had $800 million in sales. The company has consistently produced a satisfying product and that consistent product quality is what it has built its reputation on. In recent years, McDonalds, Burger King, Wendys and other fast-food restaurants have introduced chicken sandwiches. In a short essay, discuss what Chick-fil-A should do in the face of this new competition? Answer: Students will suggest the company expand its product lines. Some may suggest that the company offer a delivery service or change its store format. The higher quality answers will realize that the chicken sandwich sold at Chick-fil-A restaurants represents a core competency for the firm. (moderate) p. 42 73. In a short essay, discuss how the nine activities of the Porters Value Chain work together to create value for customers. Answer: Students might end up drawing and labeling the Value Chain, which demonstrates a superficial understanding. The five Primary value-creating activities are: inbound logistics, operations, outbound logistics, marketing and sales, and service. The four Support activities include: firm infrastructure, human resource management, technology development, and procurement. Stronger answers will discuss how the firm cannot do many of these activities in the absence of the others. For example, procurement is integral to the marketing and sales functionyou cant sell what you do not have. (moderate) p. 43, Figure 3-3 74. In a short essay, discuss the concept of customer lifetime value and why marketers should pay attention to this concept. Answer: When a customer continues to buy from the same company over time, the profitability of that customer continues to rise. The text mentions that a loyal Taco Bell customer brings in $11,000 in revenue to the company. Contrast this with a customer who has a bad experience with a fast food provider as a teen and vows to never return to that provider again. The stream of revenue is a very important way of measuring success and a very important thing for front-line service employees to remember. (moderate) p. 45

Mini-Cases
Mini-Case 3-1 Under the management of Garrison Cox, ComfortEase Mattress Company, Inc. has been losing business for several years to its competitors. Cox was recently replaced by Fred Wilson as CEO of the 78-year-old firm. Wilson implemented a new corporate-wide focus on the customer and on quality and the new CEO began by challenging his marketing team to increase customer value through product improvement while lowering customer costs in terms of time, psychic energy, and money. His second step was to focus on his companys primary activities; logistics, operations, service, etc. He also asked for a review of the companys procurement process, technological development, and other supporting activities. Third, he

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wanted to know how satisfied ComfortEases customers really were. Wilson was especially interested in learning what mattress former customers were now using. After a great deal of work and a careful analysis of the information gathered, his marketing team recommended that ComfortEase implement a program offering rewards to their most profitable customers. Wilson was pleased. 76. Refer to Mini-Case 3-1. Which of the following describes the purpose of the challenge the new CEO made to the ComfortEase marketing team? a.) It was intended to implement total quality marketing. b.) It was intended to measure customer profitability. c.) It was intended to increase customer perceived value. (difficult) p. 38 d.) It was an effective way to launch a customer retention program. e.) It was an efficient way to determine the companys defection rate. 77. Refer to Mini-Case 3-1. Based on what the CEO wanted to know about his customers satisfaction, which is the best tool to use to measure it? a.) sales force surveys b.) customer satisfaction surveys c.) SWOT analysis d.) ghost shopping e.) customer retention analysis (moderate) p. 45 78. Refer to Mini-Case 3-1. Since this company has been in operation for 78 years, what is the most difficult hurdle Wilson is likely to face as he tries to make the company more customer-centered? a.) the retention of customers b.) the reduction of the defection rate c.) maintaining the satisfaction level of the companys stakeholders d.) changing the companys corporate culture (moderate) p. 42-43 e.) operating in a mature market

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Mini-Case 3-2 Bernardo Sampson owns a sandwich shop in Bullhead City, Arizona. The recipe is a family one. He refuses to cut corners on the quality of his products and hence has had to raise the price more often than he would like. He finds that his older customers complain about the price increases and have even tried to bargain prices with him. Some customers will buy a sandwich to share and do not buy chips or sodas, but instead request water. Bernardo does not make much money on these customers. Bernardo will often take the time to explain the price-to-quality relationship in the restaurant business. Some customers are sympathetic to that argument, but some others leave angry and vow they will not patronize Bernardos shop anymore, that they intend to buy their lunch at Burger King across the street. No one has ever complained about the food itself, something that Bernardo is quite proud of. 79. Refer to Mini-Case 3-2. When Bernardo explains his logic behind price increases to a complaining customer, he may reduce _______________. a.) customer churn (moderate) p. 45 b.) customer lifetime value c.) customer retention d.) customer satisfaction e.) customer equity 80. Refer to Mini-Case 3-2. The high quality sandwiches that customers buy at Bernardos shop represent _______________. a.) Bernardos value proposition b.) Bernardos commitment to maximize customer satisfaction c.) Bernardos core competency (difficult) p. 42 d.) Bernardos value chain e.) Bernardos corporate culture 81. Refer to Mini-Case 3-2. The 20-80 Rule suggests that _______________. a.) Bernardo is losing money on some of his customers b.) Bernardo is making money on some of his customers c.) Bernardos best customers are subsidizing his worst customers d.) a, b, and c are all suggested by the 20-80 Rule in Bernardos case (difficult) p. 50-51 e.) none of the above are correct, related to the 20-80 Rule

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