The following appeared in a memo to executives at a company that manufactures industrial equipment:
"We are spending too much on free customer service after a sale has been made; we need to limit our warranty to two years in order to improve our profit margins. The current lifetime warranty can lead to costs decades into a product's life cycle. Also, we pay our customer service employees a premium because they must possess expert skills across the entirety of our very diverse product line, including products we no longer sell."
At first glance, the argument present above seems logical. However, after careful reading, there are certain flaws in the assumptions on which the executive's conclusion is based. The executive refers to two costs - fristly, the cost associated with free customer service provided to customers who use products that are covered under lifetime warranty, and secondly, the cost associated with the salaries of the employees who provide such free customer services.
The executive assumes that profit margins will increase if the warranty time period is limited. However, this assumption may be flawed. Reducing the warranty may cause a reduction in the customer's base as they may interpret the reduced warranty as a sign of reduced product quality.
Further, the executive mentions that there are huge costs associated with paying the employees who provide customer service. This is because, the executive mentions, that techincal expertise is required to fix the issues with the products. However, this may be a faulty assumption. Although, it might be true that technical expertise is required to an extent, there may be a possibility that all the products face similar issues, if any.
The executive hence requires additional information such as the frequency with which customer services are required by products sold.
Hence, the conclusion reached by the executive that there are huge costs associated with the free customer service may be faulty. The executive needs additional information such as the number of people who use the warranty. Also, a detailed study needs to be done to check if providing such warranty increases the number of customers of the company, who interpret this warranty as a sign of enhanced product quality.
"We are spending too much on free customer service after a sale has been made; we need to limit our warranty to two years in order to improve our profit margins. The current lifetime warranty can lead to costs decades into a product's life cycle. Also, we pay our customer service employees a premium because they must possess expert skills across the entirety of our very diverse product line, including products we no longer sell."
At first glance, the argument present above seems logical. However, after careful reading, there are certain flaws in the assumptions on which the executive's conclusion is based. The executive refers to two costs - fristly, the cost associated with free customer service provided to customers who use products that are covered under lifetime warranty, and secondly, the cost associated with the salaries of the employees who provide such free customer services.
The executive assumes that profit margins will increase if the warranty time period is limited. However, this assumption may be flawed. Reducing the warranty may cause a reduction in the customer's base as they may interpret the reduced warranty as a sign of reduced product quality.
Further, the executive mentions that there are huge costs associated with paying the employees who provide customer service. This is because, the executive mentions, that techincal expertise is required to fix the issues with the products. However, this may be a faulty assumption. Although, it might be true that technical expertise is required to an extent, there may be a possibility that all the products face similar issues, if any.
The executive hence requires additional information such as the frequency with which customer services are required by products sold.
Hence, the conclusion reached by the executive that there are huge costs associated with the free customer service may be faulty. The executive needs additional information such as the number of people who use the warranty. Also, a detailed study needs to be done to check if providing such warranty increases the number of customers of the company, who interpret this warranty as a sign of enhanced product quality.
