Florida International University

MAR 3023

Chapter 2-The Value of Customers: Optimizing Shareholder Value

True/Questions

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

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

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.

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.

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.

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.

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

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

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

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

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

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

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

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

15. Only small customers can be unprofitable.

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

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

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

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

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

Multiple Choice Questions

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

a.) Measure customer profitability

b.) Measure product profitability

c.) Focus on near-term customer revenues d.) Attract, retain, and grow all customers

22. All of the following are NEW ways in the changing view of optimizing shareholder value EXCEPT: a.) focus on lifetime customer value

b.) customers as the firm’s core assets

c.) plant and equipment as the firm’s core assets

d.) resource allocation dominated by customer and customer segment considerations

23. Which of the following statements is TRUE?

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

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

c.) current assets

d.) customer lifetime value

25. When a firm has a large number of customers,                               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

b.) defection rate c.) churn rate

d.) discount rate

26. Customer lifetime value (LTV) depends on which of the following factors? a.) Margin

b.) Retention rate

c.) All of the indicated factors

d.) Discount rate

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

a.) inflation rate

b.)   margin c.) churn 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

d.) 90 percent

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

a.) 20 percent

b.) 40 percent

c.) 60 percent

d.) 80 percent

30. Which of the following shows the correct formula for calculating customer lifetime value? a.) LTV = r * m/(1+d)

b.) LTV = m * r/(1+d)

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

31. In the customer lifetime value formula, “d” represents                               . a.) defection rate

b.) declining rate

c.) discount rate

d.) doubled rate

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

a.) retention rate

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

d.) discount rate

34. The                                  is the firm’s cost of capital. a.) defection rate

b.) growth rate c.) retention rate

d.) discount rate

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

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

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

b.) Increase the customer retention rate. c.) Reduces the discount rate.

d.) Increase the customer defection rate.

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

b.) increase the customer retention rate c.) increase the discount rate  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

40. Which of the following statements is TRUE?

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

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

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.

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

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.

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

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

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

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

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?

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.

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.

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