Does it pay off to increase satisfaction?

[arnar]

Hi all

Would love your input on the following problem. I have calculated it but it would be great to get a second (and third and forth ) opinion.

Many thanks in advance,
Arnar

Your CEO has just returned from a seminar on the importance of customer satisfaction to the profitability of the firm. The CEO has asked you to estimate the value of customer satisfaction on the profitability of the business. Based on the following assumptions, estimate the value of increasing customer satisfaction by 5 percentage points.


• The current satisfaction rate is 85% (goal is 90%).
• Of customers who are satisfied, 80% repurchase your product.
• Of customers who are dissatisfied, 30% repurchase your product.
• Customers, on average, purchase the product four times per year.
• The current net price of your product is $5.00.
• The current variable cost (COGS) of your product is $3.00.
• Total sales for your brand last year were 1 million units and would remain the same in the coming year without any changes in satisfaction levels.


What is the expected additional contribution that the CEO can expect during the coming year?
Would you be willing to spend $100,000 as a one-time cost on product improvements if it was estimated to increase customer satisfaction to 9O%?

 

[Deleted member 4993]

Hi all

Would love your input on the following problem. I have calculated it but it would be great to get a second (and third and forth ) opinion.

Many thanks in advance,
Arnar

Your CEO has just returned from a seminar on the importance of customer satisfaction to the profitability of the firm. The CEO has asked you to estimate the value of customer satisfaction on the profitability of the business. Based on the following assumptions, estimate the value of increasing customer satisfaction by 5 percentage points.


• The current satisfaction rate is 85% (goal is 90%).
• Of customers who are satisfied, 80% repurchase your product.
• Of customers who are dissatisfied, 30% repurchase your product.
• Customers, on average, purchase the product four times per year.
• The current net price of your product is $5.00.
• The current variable cost (COGS) of your product is $3.00.
• Total sales for your brand last year were 1 million units and would remain the same in the coming year without any changes in satisfaction levels.


What is the expected additional contribution that the CEO can expect during the coming year?
Would you be willing to spend $100,000 as a one-time cost on product improvements if it was estimated to increase customer satisfaction to 9O%?

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[arnar]

Thanks for the reply.

Unfortunately I only have it in Excel format so that shows in a very limited way how I arrived at the conclusion and makes it hard to show my work.

Therefore, I will ask if my answer is correct. The answer I got was the following.
Income if satisfaction is 85% = $1.450.000
Income if satisfaction is 90% = $1.500.000
Hence, not worth it to pay $100.000 to increase satisfaction from 85% to 90%

The reason I am stuck is that I did not use the fact that average customers purchase a product 4 times a year since it is not clear to if that is relevant or not.

I am an older student that has not been dealing with math for quite some time.