Some companies have highly sophisticated analytic systems that allow them to estimate these parameters based on the demographic characteristics of a potential or newly-acquired customer. The analytics help guide the companies’ promotion strategies and campaigns to attract customers with the highest expected lifetime value. For example, RBC Financial Group in Canada uses an analytic model of a customer’s future profitability based on age, tenure with the bank, number of products and services already used at the bank, and the customer’s potential to purchase additional products and services, grow account balances, and generate fee-based income.
1 The bank assigns a personal account representative to its estimated high lifetime value customers, ensures that their phone calls get picked up quickly, and provides them with ready access to credit at attractive terms. 6-31The net promoter score is likely to have the greatest predictive power for repeat purchases and growth in business-to-customer settings where customers have frequent interactions with companies.
The score is likely to have the least predictive power in business-to-business settings where purchasing decisions are made by highly sophisticated professionals. In this case, it is better to ask, “How likely is it that you will continue to purchases products or services from Company X? ” CASES 6-32The responses below are based on “Survival Strategies: After Cost Cutting, Companies Turn Toward Price Increases,” by Timothy Aeppel, The Wall Street Journal (September 18, 2002, p. A1).
(a)Jergens’ president based the price on what he determined to be the cost of producing the order of 10 odd-sized fasteners from scratch. The cost included setup for the odd size and overtime labor. The company actually produced the odd-sized fasteners by producing full-size fasteners and then shortening 10. This method was less costly than setting up the equipment to run a small batch of the required odd size. (b)Goodyear had been rewarding its sales force based on volume, providing an incentive for the sales force to deeply discount prices to large distributors.
The discounts were so substantial that the large distributors could resell the tires to smaller distributors (even with transportation costs to other regions), reducing Goodyear’s sales at higher prices to smaller distributors. Goodyear responded by cutting the discounts to large distributors, removing discount approval authority from the sales force and transferring it to a “tactical pricing group” that determines whether Goodyear can profitably match a competitor’s prices. Goodyear also modified its sales force bonus scheme to include a “revenue per tire” metric.
(c)Emerson discovered that customers were willing to pay about 20% more than Emerson’s initially proposed cost-based price of $2,650 for a new compact sensor. Emerson priced the sensor at $3,150. Note that the article does not provide information on how Emerson determined product costs that it used as a basis for its markups. A traditional cost system is more likely to undercost a low-volume or customized product because it allocates manufacturing support costs to products based on unit-level drivers.
An activity-based costing system more accurately assigns costs based on resource usage. (d)Wildeck, “a maker of metal guard rails, mezzanines and material lifts for factories and warehouses,” promoted packages that included installing its products. The installations bring higher profit than parts catalog sales. Wildeck responded to a competitor’s lower-priced storage-rack protector by developing its own “lite” version and pricing it much lower than the competitor’s price.
When customers called about purchasing the lite version, they were informed of the benefits of the original version, and most of these customers bought the original version. An accurate costing system, such as a good activity-based costing system that includes both manufacturing and nonmanufacturing costs of providing goods and services to customers, provides reasonably precise information to managers for making decisions about the mix of products and services to offer to customers and prices to charge in order to generate the desired level of profitability.
(e)Union Pacific introduced a minimum price that was higher than a third of its customers paid. The company was not concerned if it lost these customers because customers who were paying higher prices would fill up the newly free space. Dropping unprofitable customers will not lead to an immediate increase in profit if the associated capacity-related costs are committed costs and the resources cannot be put to other profitable use.