– 97 –
Chapter 6
Measuring and
Managing Customer
Relationships
QUESTIONS
6-1 Nonfinancial measures such as customer satisfaction and customer loyalty are
important in managing relationships with customers, but an excessive focus
on improving customer performance with only these metrics can lead to
6-2 Examples of differences between customers who have high and low costs–to–
High Cost–to-Serve Customers
Low Cost-to-Serve Customers
• Order custom products
• Order standard products
• Small order quantities
• Large order quantities
• Customized delivery
• Standard delivery
• Manual processing; high order
error rates
• Electronic processing (EDI)
with zero defects
• Large amounts of pre-sales
support (marketing, technical,
and sales resources)
• Little to no pre-sales
support (standard pricing
and ordering)
• Large amounts of post-sales
support (installation, training,
warranty, field service)
• No post-sales support
• Pay slowly (have high accounts
receivable from customer)
• Pay on time (low accounts
receivable)
– 98 –
6-3 Companies should not necessarily avoid high cost–to-serve customers. The
high cost of serving such customers can be caused by their unpredictable
order patterns, small order quantities for customized products, nonstandard
logistics and delivery requirements, and large demands on technical and sales
profitability.
6-4 The 80-20 rule as applied to sales revenues refers to the common finding that
when companies rank products and customers from the highest sales volume to
of total profits (“sea level” in the whale curve represents the company’s actual
reported profits). The hump (or maximum height) of a cumulative profitability
independent. Of course, the costs of marketing, selling, order handling,
delivery, and service of the products might be customer specific. For service
Chapter 6: Measuring and Managing Customer Relationships
– 99 –
deposits, withdrawals, balance inquiries, or service requests; and use only
electronic channels (i.e., automatic teller machines and the Internet). Another
customer may manage her checking account balance very closely, keeping only
6-8 The four broad groups of actions that managers might use to transform
unprofitable customers into profitable ones are:
Improve the processes used to produce, sell, deliver, and service the
customer.
to serve that customer.
Use more discipline in granting discounts and allowances.
6-9 A pricing waterfall chart depicts the multiple revenue leaks from list price
caused by special allowances and discounts granted to obtain the order and
build customer loyalty.
allowances granted to close the deals.
6-11 Life-cycle profitability analysis weighs the expected value of the stream of a
customer’s net margins against the cost of acquiring the customer. Companies
Atkinson, Solution Manual t/a Management Accounting, 6E
– 100 –
and retain profitable customers. Acquiring the information necessary for life–
cycle profitability analysis and using this information to calculate life-cycle
company.
6-12 No. Experts now agree that it is a mistake for a company to use the
satisfaction score as its only customer metric. A customer’s satisfaction is an
attitude or belief stemming from a feeling that the product or service has
6-13 Loyal customers are valuable for several reasons. Three reasons are required
in this question; the chapter lists the following five reasons:
1. Loyal customers have a greater likelihood to repurchase, and the costs to
new customer.
5. Loyal customers are willing to collaborate with the supplier to improve
performance and develop new products.
6-14 Customer retention rate, though a traditional customer loyalty metric, is a poor
indicator of a customer’s loyalty. This is because customers often remain with
6-15 The five stages of a hierarchy for categorizing customer satisfaction and
loyalty are:
1. Satisfied customers, as measured by how well a customer’s expectations
relationship.
3. Committed customers, those who not only purchase frequently from the
Chapter 6: Measuring and Managing Customer Relationships
– 101 –
supplier but also tell others about the supplier’s great products and service.
4. Apostle customers, committed customers who have credibility and
colleagues.
5. Customer “owners,” who take responsibility for the continuing success of
A company should strive to have more of its customers in categories 3, 4, and
5 above, since their willingness to recommend the company to others and to
Companies that offer personalized services to customers, such as by a
Nordstrom salesperson, or that offer rewards to loyal customers can generate
high customer loyalty. These loyal customers then recommend the companies
to others. Online companies such as amazon.com generate customer loyalty
6-16 The net promoter score is computed based on responses to the question, “How
likely is it that you would recommend [Company X] to a friend or colleague?”
Customers respond on a scale from 1 (extremely unlikely) to 10 (extremely
likely), with 5 representing a neutral point. The net promoter score is the
percentage of customers who are “promoters” (score of 9 or 10) less the
percentage who are “detractors” (scores of 1 through 6). The net promoter
score is recommended based on research that finds that a customer’s
willingness to recommend a company is strongly correlated with future
Atkinson, Solution Manual t/a Management Accounting, 6E
EXERCISES
6-17
Ashton
Brown
Sales
$430,000
$350,000
Cost of goods sold
$220,000
$155,000
Gross margin
$210,000
$195,000
Marketing, selling, distribution, and
administrative expenses: 33% × sales
$141,900
$115,500
Operating profit
$68,100
$79,500
Operating profit/Sales
15.84%
22.71%
–
Sales
$430,000
$350,000
Cost of goods sold
$220,000
$155,000
Gross margin
$210,000
$195,000
Marketing, selling, distribution, and
administrative expenses
Sales representative travel
$9,000
$42,000
Service customers
15,000
110,000
Handle customer orders
1,000
12,000
Ship to customers
24,000
72,000
Total activity expenses
$49,000
$236,000
Operating profit
$161,000
–$41,000
Operating profit/Sales
37.44%
–11.71%
(c)
The activity-based costing method provides more accurate assignments
of marketing, selling, distribution, and administrative expenses by
identifying activities consumed by each customer and assigning costs
to customers based on their activity usage. In this example, Brown
places smaller orders, orders more frequently, and requires more after–
sales support (travel and service support) than Ashton does.
6-18 (a) $873,600/20 operators = $43,680 per operator
(b) (i) 0.1 + (10 × 0.02) = 0.3 hours
(ii) 0.06 hours × $28/hour = $1.68
Chapter 6: Measuring and Managing Customer Relationships
– 103 –
6-19 (a) Students can refer to the In Practice box on textbook page 224. The
following table shows the customer profits sorted from largest to
Customer
Number
Sorted
Profit
Cumulative
Profit
Cumulative
Profit %
Cumulative
Percent of
Customers
Profit
Rank
0
$ 0
$ 0
0%
0%
0
13
264,000
264,000
31%
4%
1
9
259,000
523,000
61%
8%
2
12
233,000
756,000
88%
12%
3
1
221,000
977,000
114%
16%
4
4
217,000
1,194,000
139%
20%
5
11
208,000
1,402,000
163%
24%
6
7
101,000
1,503,000
175%
28%
7
10
96,000
1,599,000
186%
32%
8
22
87,000
1,686,000
197%
36%
9
14
83,000
1,769,000
206%
40%
10
25
75,000
1,844,000
215%
44%
11
17
50,000
1,894,000
221%
48%
12
20
30,000
1,924,000
224%
52%
13
5
22,000
1,946,000
227%
56%
14
16
14,000
1,960,000
228%
60%
15
6
9,000
1,969,000
229%
64%
16
21
– 10,000
1,959,000
228%
68%
17
2
– 40,000
1,919,000
224%
72%
18
19
– 90,000
1,829,000
213%
76%
19
24
-100,000
1,729,000
202%
80%
20
3
-143,000
1,586,000
185%
84%
21
23
-158,000
1,428,000
166%
88%
22
15
-179,000
1,249,000
146%
92%
23
18
-191,000
1,058,000
123%
96%
24
8
-200,000
858,000
100%
100%
25
– 104 –
0%
50%
100%
150%
200%
250%
0
20%
40%
60%
80%
100%
Cumulative Profit Percent
Cumulative percentage of customers, ranked from most–to-least profitable
Cumulative Customer Profitability
l f
Actual net profit
table in part (a).
(c) The least profitable 20% of the customers (i.e., the least profitable 5
become more efficient in handling orders is to encourage customers to
access a purchasing web page and place their orders over the Internet.
This would substantially lower the cost of processing large quantities of
small orders. If customers have a preference for suppliers offering high
(b) A company might also transform its breakeven or loss customers into
profitable ones by activity-based (menu-based) pricing. This approach
establishes a base price for producing and delivering a standard
quantity for each standard product. In addition to this base price, the
Chapter 6: Measuring and Managing Customer Relationships
– 105 –
special services requested by the customer. The prices for special
services on the menu can be set simply to recover the activity-based
cost to serve, allowing the customer to choose from the menu the
would be offered when a customer’s ordering pattern lowers the
company’s cost of supplying it.
Activity-based pricing, therefore, prices orders, not products. When
(c) Managing customer relationships provides still another way for a
company to transform its breakeven or loss customers into profitable
ones. For example, companies can persuade their customers to use a
greater scope of the company’s products and services. The margins
(d) Finally, companies might transform their breakeven or loss customers
into profitable ones by using their activity-based costing systems to
trace all revenue deductions, as well promotional costs and allowances,
disciplined approach to discounts and allowances, companies might
find that various functional areas (e.g., salespeople, the finance group,
and marketing) independently offer discounts or allowances during the
Atkinson, Solution Manual t/a Management Accounting, 6E
– 106 –
6-21 (a) Firms may fail to see all of the revenue leaks from list price on orders
because they record the discounts and allowances in different systems
and make the revenue deductions at different times of the year. For
refunded to the customer only once it has accumulated sufficient
volume to qualify, and it is not linked back to the individual
transactions that qualified for the volume discount. With discounts and
allowances recorded into different accounts and at different times, no
individual orders.
(b) Once firms become aware of pricing waterfalls leading to undesirably
large sales discounts, they can use their activity-based costing systems
to trace all revenue deductions, as well promotional costs and