Suppose that GM earns a $4000 profit each time a person buys a car. We want to determine how the expected profit earned from a customer depends on the quality of GM's cars. The customer is assumed to buy a new car every five years, for a total of 10 cars through her lifetime. The customer will keep buying GM cars so long as they are satisfied with them. The probability that the customer will be satisfied with her GM car is 80%. If she is not satisfied with her GM car, she will buy another brand (we'll call all other brands cumulatively "Toyota"). The probability that she is satisfied with "Toyota" is 85%.
Suppose GM could raise it customer satisfaction to 85%, to match Toyota's. What would the customer NPV be in that case?
What will be an ideal response?
The extra 5% customer satisfaction translates to an NPV of $8770.
Business
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