GMAT Verbal Reasoning Practice Test 1
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advertising costs) are amortized over many transactions. But this argument presupposes that these transactions are consistently profitable. A more plausible argument for the link between loyalty and decreased costs is that loyal customers,
more familiar with a company’s transaction processes, need less hand-holding and, hence, are cheaper to serve. However, in none of four companies tracked by Reinartz and Kumar were longstanding customers consistently cheaper. In fact,
the only strong correlation between customer longevity and costs that they found-in a high-tech corporate service provider – suggested that loyal customers actually cost more to serve. More surprisingly, they found only a weak correlation
between customer loyalty and lower costs in a mail-order company. Here, it seemed reasonable to assume that long-standing, experienced patrons would happily switch their purchases from the phone to the company’s Web site, thereby
significantly reducing communication costs. Yet the communication cost-to-sales ratio (the amount spent on marketing communication to generate a dollar’s worth of sales) for this company’s long-standing clients was about the same as for
newer ones. Evidently, customers who ordered through the company Web site expected lower prices.
Directions for Q. No 9 - 11
According to prevailing wisdom among business executives, loyal customers are the most profitable ones. One argument for this view is that long-standing customers cost less to serve because the up-front costs of acquiring them (e.g.,advertising costs) are amortized over many transactions. But this argument presupposes that these transactions are consistently profitable. A more plausible argument for the link between loyalty and decreased costs is that loyal customers,
more familiar with a company’s transaction processes, need less hand-holding and, hence, are cheaper to serve. However, in none of four companies tracked by Reinartz and Kumar were longstanding customers consistently cheaper. In fact,
the only strong correlation between customer longevity and costs that they found-in a high-tech corporate service provider – suggested that loyal customers actually cost more to serve. More surprisingly, they found only a weak correlation
between customer loyalty and lower costs in a mail-order company. Here, it seemed reasonable to assume that long-standing, experienced patrons would happily switch their purchases from the phone to the company’s Web site, thereby
significantly reducing communication costs. Yet the communication cost-to-sales ratio (the amount spent on marketing communication to generate a dollar’s worth of sales) for this company’s long-standing clients was about the same as for
newer ones. Evidently, customers who ordered through the company Web site expected lower prices.
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