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 that a customer satisfaction firm approaches GM with a proposal to increase satisfaction from the current 80% rate to $85% through a low-cost maintenance program that will cost GM $300 per customer. Would the program be worth it?
What will be an ideal response?
Raising customer satisfaction to 85%, at a cost of $300 per customer, translates to an NPV of $8150. Because this is lower than the answer in Question 68, GM would be better off not adopting the customer satisfaction firm’s proposal.
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