SELF TEST #16: Estimating the Core Customers’ Life Cycle Costs Per Unit

Test #1:

What cost categories do Final customers incur over the life cycle of your product? Please explain each cost.


The Final customer incurs four major types of cost over a product's life: Acquire, Use, Maintain, and Dispose.

Acquire steps include all activities the customer completes preceding the use or the consumption of the product. These steps include the customer's efforts needed for evaluation of alternative suppliers and for acquisition of the product.

Use steps include the customer's value added activities or the consumption of the product itself. Use costs include any activity incurred in employing the product for its intended function.

Maintain steps include all activities required to keep the product operating as expected. These steps include the costs the customer incurs to diagnose and correct product problems.

Dispose steps include all activities required to remove the product from the customer's premises or system of activities. These steps include the costs for final disposition of the product.

Test #2:

Identify the Final customers' product life cycle costs reduced by the following innovations:

McDonald's has eliminated its styrofoam containers.

Explanation: By eliminating styrofoam containers, McDonald's reduced the amount of waste sent to landfills. This particular type of waste had a long life within the landfill. By eliminating these types of containers, McDonald's reduced the cost of its consumer's appropriate Disposal of the product.

Doctors' offices are selling, directly to patients, common prescription drugs that have been presorted into standard dosages.

Explanation: These pre-packaged standard dosages reduce the consumer patient's cost to order and learn how to use the product. They reduce the patient's Acquire Cost.

"Long-life" lightbulbs burn 50% longer.

Explanation: The "Long-life" innovation reduces the number of times that a customer must replace the product. This is an example of a reduction in the customer's Use cost.

The new lavish attention companies such as Sony Electronics, British Airways and Virgin Atlantic are displaying among their elite customers is intentionally kept a secret from the public. The companies using the concierge service are trying to build a higher level of trust with their customers.

Explanation: These companies are reducing the Use costs for their Very Large customers by offering them additional services and other benefits.

Test 3:

What cost categories do Intermediary customers incur over the life cycle of your product with the customer? Please explain each cost.


The Intermediary customer incurs four major types of cost over a product's life: Obtain, Sell, Guarantee and Return.

Obtain steps include all activities preceding the selling of the product. These activities include the costs of identifying potential suppliers and stocking the product.

Sell steps are the activities intermediary customers take in selling and delivering the product to their customers. These activities include the Intermediary's recruitment of customers and product delivery.

Guarantee steps include the activities required for the Intermediary customer to keep the product or service in working order for the final customer. These activities include both problem assessment and correction.

Return activities include the work to deliver the product back to the supplier and to receive credit for the returned product.

Test 4:

Identify the Intermediary customers' product life cycle costs reduced by the following innovations:

To help Wal-Mart optimize its stocking and merchandising, the company expanded its data warehouse to store and analyze two years of sales transactions. This data allows the company to concoct assortments of products that enables Wal-Mart to Sell more products at better margins.

Explanation: This company is gathering information about how customers buy its products at Wal-Mart, then converting that information into new sales ideas for Wal-Mart. This is an example of a company reducing the Intermediary customer's Sell costs.

A shared info-technology system, Okumalink, keeps distributors informed about the location and availability of machine tools and parts. If the part is available, the distributor can order it electronically. If not, the distributor uses Okumalink's email to locate the part.

Explanation: This innovation reduces the customer's cost of tracking inventory and ordering the product. This innovation reduces the customer's cost to Obtain the product.

Miller Brewing Company is going to sell three of its best-selling beers – Miller Lite, Miller Genuine Draft, and Icehouse – in 16-ounce and 20-ounce plastic bottles as well as in the traditional glass bottles and aluminum cans. The nation's second-biggest brewer has been testing reaction to beer in plastic bottles over the past 18 months in more than a dozen markets and arenas. Miller would be the first U.S. brewer to use plastic bottles on such a large scale.

Explanation: The switch from glass to plastic bottles reduces the breakage in the product. This is a reduction in the Intermediary customer's cost of Return.

Skyjack's scissors platforms were an instant hit, largely because their design made mechanical parts easy to reach. All the parts were attached to trays that swung out at ground level. This innovation cut out hours of downtime for distributors who rented equipment.

Explanation: This innovation reduced the time that the Intermediary customer needed to correct the Final customer's problems. This is an example of reducing the Intermediary's Guarantee costs.

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