Customer Satisfaction Index; six point scale very dissatisfied 0, dissatisfied 20, somewhat dissatisfied 40, somewhat satisfied 60, satisfied 80, very satisfied 100; forward looking indicator
= 1/(1-customer retention)
= 1-1/customer life
net promoter score
1-6 detractors, 7-8 passive, 9-10 promoters; % of promoters- % of detractors
customer loyalty score
customer satisfaction * customer retention * customer recommendation
sum of all weighted loyalty score (% of customer * weighted loyalty score)
advocates- top performer
buy nearly everything a business has to sell and purchase regularly. they do the business’s marketing for it by extolling its products to others and thereby generating new customers. advocates are a business’s unpaid salesperson
loyalists- top performer
high level of dedication to a particular business, prefer to buy from that business over any other and are very profitable
Big Spenders- high potentials
repeat customers who buy at above-average levels and frequently purchase products; highly profitable who continue to buy from one business, but also purchase from competitors, satisfied or very satisfied, less likely to only recommend one business product
Underachievers- high potentials
customers who buy often, but make relatively small purchases
Win-back customers – new opportunities
many high potentials and top performers who switched to a competitor , often because they were mismanaged, will for various reasons return to a busines, already knows products and services; in 5 years “second time lifetime value” has npv 3x higher then average lifetime value of an entirely new customer
New potentials- new opportunities
new potentials fit business’ profile for target market, positive customer experiences are crucial
offerings of business do not and will not meet customers’ needs, help them leave as a customer
buy one time and then exit, groupon style
market metrics measure a market with respect to current performance and profit impact
gauge a business or product in terms of its performance wiht customers
index against benchmark competitors with respect to product performance, service quality, brand image, cost of purchase, and customer value
internal vs external
process or result
NP= Sales Revenue- COGS- operating expenses
NP= SR * percent gross profit-operating expenses
NP= NMC- Operating Expenses
Net Marketing Contribution
NMC= Sales Revenue* %gross profit-marketing expenses
ROS= NMC/Sales * 100%
ROS= Gross Profit(%of Sales) – Marketing Expenses (%of Sales)
ROI=NMC/ Marketing Expense * 100%
ROI= Marketing ROS/ Marketing Expense(%sales)
=Sales Revenue * percent margin – marketing expenses
=market demand*market share*average selling price* channel discount *%margin- marketing expenses
units; number of units purchased per year in served market
%; the business’s market share of the served market
average selling price
the price paid by end customers who will use the product
1-CD%; one minus the channel discount is the percent of the market sales that the company will obtain after compensating channel intermediaries for channel services, such as sales, distribution, and customer service
%, gross profit as a percentage, (price-unit cost)/price
the investment in marketing to produce a 12.5% market share and a net marketing contribution of $15.5 mil
If a company has a 10% market share in Year 1, and it “holds share” in Year 2, what is its market share in Year 2?
The company’s market share at the end of Year 2 is 10%. This phrase is initially used in Chapter 1, and discussed again in Chapter 2.
True or False. High levels of customer satisfaction always lead to high levels of customer retention.
False. High levels of satisfaction may not eliminate brand switching in markets in which customers have many alternative products and low costs of switching. Alternatively, low levels of satisfaction may not lead to customer exit when customers have few options (p. 15-16).
Provide an accurate example of a market in which high levels of customer satisfaction may not deliver a high level of customer retention.
Markets in which this is likely to occur are highly competitive, i.e., many alternative products (or suppliers) and low switching costs. Best provides examples of grocery stores, restaurants, and banks (p. 15).
4. Fill in the blank. In general, it costs ______ times more to attract a new customer than it costs to keep an existing customer.
In general, it costs five times more to replace a customer (p. 18). Why? Average revenue per customer is lower, and the company must spend more to attract the new customer.
The CLS measure described by Best includes three components. Name the three components.
Customer satisfaction, customer retention, and customer recommendation. The latter two components have been described as behavioral loyalty and affective (or emotional) loyalty, respectively (p. 21).
7. Suppose a business has a CSI of 60, a customer retention rate of .90, and a 10% rate of customer recommendation. What is their CLS?
The CLS in this case equals 60 x .90 x .10, or 5.4 (p. 21). That’s pretty low.
Is it possible for a company to increase its sales revenues, and yet lose market share from one year to the next?
Yes. This was shown in the BioTronics example in Best Chapter 2 (p. 36). This situation would suggest that the company’s sales were increasing at a rate less than the market growth rate.
True or False. NMC = Sales Revenues – Company Expenses
False. This equation describes net profits before taxes. To determine the NMC, we need to first remove “other operating expenses” from the company’s expenses
Fill in the blank. __________________ include the purchase of materials, direct labor, packaging, transportation costs, and any other costs directly associated with making and shipping a product.
Variable costs, which along with manufacturing overhead comprise COGS (p. 45).
True or False. The NMC assumes that “other operating expenses” are indirect expenses that DO NOT vary with changes in marketing strategy for a given product line within a company.
True. In fact, this is why Best suggests that we remove it in consideration of marketing profitability. The NMC allows us to focus our attention on only those elements of profitability that vary with changes in marketing strategy for a particular product line, brand, or company division (p. 44-45).
Calculate NMC given the following figures: Sales Revenue = $10 million, COGS = $8 million, Marketing Expenses = $1 million, and Other Operating Expenses = $2 million.NMC = $1 million. If we instead calculated net profits, the answer would be -$1 million based on subtracting COGS and ME from Sales Revenue.
NMC = $1 million. If we instead calculated net profits, the answer would be -$1 million based on subtracting COGS and ME from Sales Revenue.
Calculate Gross Profit given the following figures: Sales Revenue = $10 million, COGS = $7 million, Marketing Expenses = $2 million, and Other Operating Expenses = $1 million.
Gross Profit = $3 million. This is simply based on Sales Revenues minus COGS. The NMC would then remove ME, and Net Profit would remove OOE as well.
Calculate NMC given the following figures: Sales Revenue = $10 million, Gross Profit % = 40%, Marketing Expenses = $1 million, and Other Operating Expenses = $1 million.
Note first that Gross Profit % is equivalent to what Best also refers to as a Percent Margin. To calculate NMC in this situation, multiply Sales Revenue by the Gross Profit %, and then subtract out the ME. This is similar to the example at the middle of p. 44.
Calculate Percent Margin (i.e., Gross Profit %) given the following figures: Sales Revenue = $10 million, COGS = $6 million, Marketing Expenses = $2 million, and Other Operating Expenses = $1 million.
To solve for the Percent Margin, we must remember that (conceptually) it refers to the Gross Profit as a percentage of Sales Revenues. Thus, we can employ the following formula:
Sales Revenue – COGS
Percent Margin = —————————————-
(i.e., Gross Profit %) Sales Revenue
Since Gross Profit in this case is $4 million and Sales Revenue is $10 million, the Percent Margin would be 40%.
Market Demand can be described in terms of one of three units of measurement. Name the three ways we’ve discussed in class.
Total sales revenues in the market, total product units sold in the market, or total number of customers in the market.
If a market has total sales revenues of $1 million, and Company A has a market share of 15%, what are the sales revenues for Company A?
Company A’s sales revenues equal $150k, based on multiplying $1 million by .15.
Assume that a market has total sales revenues of $10 million in 2012, and in 2013 the market grows by 50%. If Company A has a market share of 15% in 2013, what are the sales revenues for Company A in 2013?
This is the same type of problem as above, but we first need to determine the new market demand in 2013. Based on $10 million in 2012, and a 50% increase, the market demand in 2013 increases to $15 million (or $10 million times 1.50). From here, Company A’s sales revenues equal $2.25 million, based on multiplying $15 million by .15.
Assume that a market has total sales revenues of $10 million in 2012, and in 2013 the market decreases by 10%. If Company A has a market share of that grows from 15% in 2012 to 20% in 2013, what are the sales revenues for Company A in 2013?
Yet another similar problem: in this case we need to first determine the new market demand for 2013. The new sales revenue figure is $9 million, based on multiplying $10 million times .90. The new market share number is of course given at 20%. Thus, Company A’s sales revenues equal $1.80 million, based on multiplying $9 million by .20.
Assume that a market has total sales revenues of $20 million in 2013, and that Company A has a market share of 10%. If Company A had an average selling price for this product of $50 in 2013, then how many units did they sell during this time period?
This question offers a slight twist, and builds on an understanding of what I’ve referred to as the “expanded NMC equation.” Based on market demand of $20 million and a 10% market share, we know that their pre-channel discounted sales revenues are $2 million. From here then we can determine total number of units sold by dividing sales revenue by the average selling price per unit – which is 40,000 units (or $2 million divided by $50 per unit).
True or False. Any product line that produces a positive NMC contributes toward covering the “other operating expenses” of a company.
True. Best suggests that any product line with a positive NMC is beneficial to the company because it contributes to covering (other) operating expenses, and ultimately enhancing the company’s net profit (p. 46-47).
Describe the NMC expanded formula from a product-focus perspective.
This is first illustrated on the bottom of p. 47. The key distinction here is that the Sales Revenue component is expanded to include Market Demand, Market Share, Average Selling Price (i.e., Retail Price), and the Channel Discount.
NMC = (MD x MS x ASP x CD) x Percent Margin – Marketing Expenses
This is a good time to note that Best’s use of the term “Channel Discount” here is a bit of a misnomer. Technically, the calculation assumes the inverse of the channel discount, or 1 minus the channel discount. Thus, a better way to think of the equation above is to consider the CD term to be the “Percentage of the Retail Price Captured by the Manufacturer,” or simply the Retail Price Capture %.
Here’s a quick example: If Nike sells to Scheels a product for $60 that “retails” for $100, then Nike has captured 60% of the retail price (i.e., $60 out of $100). The so-called channel discount would be 40% (i.e., Scheels buys the Nike product for 40% less than the retail price), BUT the percentage of the retail price captured by the manufacturer would actually be 60% (i.e., 1 – CD% or 1 – 40%). So when calculating the expanded NMC above, you should ALWAYS use the percentage of the retail price captured by the manufacturer.
24. As used in the NMC formula, does the Average Selling Price represent the retail or wholesale price?
On p. 48, the ASP is defined as “the price paid by end customers who will use the product.” He’s referring here to the retail price. By contrast, he uses the term “net selling price” to refer to the wholesale price charged by a manufacturer.
Assume that Columbia’s average cost per unit for a pair of pants is $20, which corresponds to a percent margin of 60%. What is the net selling price per unit (aka wholesale price) for the pants during this time period?
This begins with a similar formula as that found in question 16, except that we’re concerned with calculating the percent margin at the unit level, instead of aggregating it to a higher level (e.g., line, brand, company).
Net Selling Price – Average Cost
Percent Margin = —————————————————-
(i.e., Gross Profit %) Net Selling Price
With some simple algebra, we solve for the Net Selling Price as follows:
Average Cost per Unit
Net Selling Price = —————————————————-
(i.e., Wholesale Price) (1 – Percent Margin)
Since Percent Margin here is 60%, then the answer is $50, based on $20 divided by .40.
Assume a company has a COGS of $2 million, which corresponds to a percent margin of 60%. What is the level of sales revenue for the company during this time period?
This is virtually identical to question 25, but now we’ve reverted back to an interest in the company as a whole. Note the similarity of the two formulas:
Cost of Goods Sold
Sales Revenue = —————————————————-
(1 – Percent Margin)
Since Percent Margin here is 60%, then the answer is $5 million, based on $2 million divided by .40. Pretty sneaky, huh?
If the average selling price per unit for a manufacturer’s product is $100, and they are able to capture 90% of the retail price, then what is their corresponding wholesale price? Note that the retail price capture % used in Best’s expanded NMC formula is equal to 1 – CD%.
Ah ha. Here’s the first of many examples that helps you apply the discussion found above in my comments for question 23. The answer here is pretty straightforward – since the retail price is $100, and the manufacturer captures 90% of the retail price, then they must capture $90 (i.e., $100 x .90). Thus, the wholesale price that they charge the retailer is $90.
Note that this also tells us that the so-called channel discount is a mere 10%. But remember that the expanded NMC equation uses 1 minus the CD%, so the capture percentage in this case is 90%.
If the average selling price per unit for a manufacturer’s product is $100, and they are able to capture 60% of the retail price, then what is their corresponding wholesale price?
After the last question, this should be a piece of cake. If we multiply the retail price of $100 by the capture percentage of 60%, then the wholesale price is $60. And so what is the so-called CD%? It’s 40%.
If the average selling price per unit for a manufacturer’s product is $100, and the company sells direct (i.e., do not use a retailer or other intermediary), then what is their approximate retail price capture %? Furthermore, what is their CD%?
Alright, I’m really trying to burn this idea into your memory. If a manufacturer sells direct, there is no need to “discount” the product for a channel intermediary (i.e., retailer). Thus, the so-called channel discount is effectively 0%. It follows then that the approximate retail price capture % is 100% — meaning that manufacturer basically gets 100% of the retail selling price by eliminating the “middle man.”
Of course we have to note that marketing expenses will naturally increase in this scenario because the company is now responsible for all of the distribution expenses normally associated with the retailer. So the question becomes, is there a net gain available for selling direct, i.e., does the additional revenue outweigh the added distribution and promotional expenses?
If the average selling price per unit for a manufacturer’s product is $200, and the retail capture % is 50%, then what does the retailer pay to purchase the product for their inventory? Furthermore, what is the manufacturer’s CD%?
One more time. The retailer pays the manufacturer $200 times .50, or $100 – this amount represents the wholesale price. And the so-called channel discount is 50% since we know the retail capture percentage equals 1 – CD%.
Provide an example of how a company might act to grow overall market demand.
Examples include spending more to build awareness for a company’s products, or perhaps to highlight relative benefits. Another example is the “Got Milk” campaign in which firms might band together via a trade association to build market demand.
Assume the following about a market segment for which North Face competes:
Market Demand = 7 million customers
Market Share = 9%
Average Revenue per Customer = $180
Retail Price Capture % = 60% (i.e., CD% = 40%)
Percent Margin = 40%
Marketing Expenses = $7 million
What is their NMC for the segment?
Notice that these numbers are roughly the same as those found at the top of p. 52. I changed the “retail price capture %” so as to help students apply the channel discount concept in a more concrete manner. Note, too, that these figures encourage the use of the “customer-focus” version of the expanded NMC formula. Market demand is based on total number of customers, and average selling price is adjusted to average revenue per customer. The calculation here is as follows:
NMC = (7 million x .09 x $180 x .60) x .40 – $7 million
= $68.04 million x .40 – $7 million
= $27.2 million – $7 million
= $20.2 million
Start with the base numbers from question 32. If Company A pursues a “Market Growth” strategy in which they increase marketing expenses by $1 million and expect market demand to increase by 1 million customers. What is their projected NMC?
So now ME are $8 million and market demand increases to 8 million customers. The calculations below show this strategy is expected to improve the projected NMC.
NMC = (8 million x .09 x $180 x .60) x .40 – $8 million
= $77.76 million x .40 – $8 million
= $31.1 million – $8 million
= $23.1 million
Start with the base numbers from question 32. If Company A pursues a “Market Share” strategy in which percent margin is lowered to 33.3% to facilitate a 10% decrease in average revenue per customer, and share is expected to jump to 11%. What is their projected NMC?
The base numbers are adjusted as follows: Percent Margin = 33.3%, $162 Average Revenue per Customer, and an 11% Market Share. The calculations below show this strategy is expected to lower the projected NMC. This would typically be avoided, unless a company believed it was a short-term loss that would deliver long-term gain.
NMC = (7 million x .11 x $162 x .60) x .333 – $7 million
= $77.84 million x .333 – $7 million
= $24.92 million – $7 million
= $17.92 million
Start with the base numbers from question 32. If Company A pursues a “Customer Revenue” strategy in which they spend $3 million more in marketing expenses to support a $20 average revenue increase and a percent margin of 46%. What is their projected NMC?
The base numbers are adjusted as follows: Percent Margin = 46%, $200 Average Revenue per Customer, and increased ME to $10 million. The calculations below show this strategy is expected to enhance the projected NMC.
NMC = (7 million x .09 x $200 x .60) x .46 – $10 million
= $75.60 million x .46 – $10 million
= $34.77 million – $10 million
= $24.77 million
Start with the base numbers from question 32. If Company A pursues a “Channel Strategy” in which they now capture nearly 100% of the retail price, lower expected revenues per customer to $120, percent margin rises to 50%, and doubles marketing expenses. What is their projected NMC?
The base numbers are adjusted as follows: Retail Price Capture % = 100%, Average Revenue per Customer = $120, Percent Margin = 50%, and increased ME to $14 million. The calculations below show this strategy is expected to enhance the projected NMC.
NMC = (7 million x .09 x $120 x 1.00) x .50 – $14 million
= $75.6 million x .50 – $14 million
= $37.8 million – $14 million
= $23.8 million
Describe a market situation in which a business may not be able to build its profitability by growing overall market demand?
Best notes that this is likely to be the case when a market is mature. The maturity stage of the product life cycle suggests that the market is saturated, i.e., not likely to be further increased in the total number of customers. Hence, both total sales revenues and total number of product units sold are likely to be stable.
True or false. Higher levels of customer satisfaction are likely to improve a company’s marketing efficiency.
True. In both Chapter 1 and 2, Best describes an improvement in marketing efficiency as a situation in which a company can spend relatively fewer marketing dollars to achieve the same level of sales revenue.
Provide the formula for the “Marketing Return on Sales.”
Equals NMC / Sales Revenues x 100% (p. 44).
If a company has an NMC of $5 million, sales revenues of $20 million, and $2 million in marketing expenses, calculate its Marketing ROS.
Equals 25% based on $5M divided by $20M times 100%. The marketing expenses are not needed since the NMC is already provided.
If a company’s Marketing ROI equals 160%, this suggests that for each $1 spent on Marketing Expenses, the company has ________ in sales revenue.
For each $1 spent on ME, the company has $1.60 in sales revenue. This is similar to the example provided on p. 45.