Question

No matter what your business, to stay in business you have to attract and retain customers. How do you do that? One way is to deliver a quality product or service in a high-quality manner. In other words, it is a combination of what is offered and how it is offered that determines whether a buyer will become a loyal customer. Training is one way to make sure that employees’ technical skills and customer-service skills meet customer expectations. When making a business decision, two basic elements are typically considered: costs and benefits. In the case of training, the issues are: (1) how much does the training reduce costs? and (2) how much does the training increase revenues? If the training sufficiently reduces costs and/or increases revenues, then there is a strong business case to conduct the training. Your ability to identify the potential sources of revenue and costs and to estimate their levels can be an important business skill. It can be the basis by which you can successfully make the case for needed training for your employees.

1) Given your answers to the previous questions (1. How much does the training reduce cost? and 2) How much does the training increase revenues - no data necessary), estimate the combined impact on the bottom line of direct and indirect savings generated by training. Extrapolate this number over a one- or two-year time period.

2) As you have read, training can increase revenue. The revenue could come from increased quality of the customer experience due to the impact of training. Consider, as an example, the following table of customer survey responses before and after training. The number are percentages of customers in each satisfaction category six months before and six months after employees received their training. A key change is a reduction in the "Very dissatisfied-will never return" category of customers, which fel from 15 to 5 percent.

A) What will this 10-percent change mean to the bottom line? Assume that the avergae revenue renerated per month by a customer is $500. Also assume that you have 500 customers.

B) What is the increased revenue due to the training for the past six months?

C) What would be the revenue generated if you had 1,000 customers?

	Very dissatisfied-will never return	OK, but would return	Satisfied- would return
before training	15	15	70
After training	5	15	80

3)  Make assumptions about the costs in each of these direct cost categories and any other direct costs you can think of. Also assume that you can expect a 10-percent reduction in each of these categories. Generate the direct cost savings estimate due to the training. Training can also impact the bottom line by reducing indirect costs. These are costs that may not be obvious, but that are still important. For example, the safety of work processes or equipment can be improved due to training if workers handle materials or equipment more safely. Employee turnover can also be reduced, because of improved job satisfaction due to the training.

4)Assume that training results in a 10-percent reduction in your turnover rate. Also, assume that the cost of a turnover is 1.5 times the departing employee’s salary. For a given average employee salary of your choosing, estimate the reduced costs due to the reduction in turnover.

Answer 1

1. Given the reduction in the number of very disstisfied customers (before training 15% to after training - 5%) it is reasonable to assume that the revenue will increase by 10%

2A. A 10% reduction in very dissatisfied customer will mean incremental revenue of 10%. Hence we can say that 50 customers will come additionally (10% x 500 customers) and bring us an average revenue of $500 amounting to $25000 additional revenue per month. To understand the impact on bottom line or GOP (Gross operating profit) we must know the % of cost involved and GOP % of the concerned industry.

Assuming a GOP % of 20% means the cost involved would be 80% (of total revenue) of which variable cost is 60% of total revenue and rest is fixed cost. Assuming there is no reduction in cost due to training.

So the incremental revenue of $25000 will have an additional cost of 60% as cost of sale amounting to $15000. Hence the bottom line will be increased by $10000 per month.

2B. Incease in revenue for six months would be 50 x 6 x 500 = $150000

2C. Revenue generated if we had 1000 customers would be 1000 x $500 = $500,000 plus additional customer 1000 x 10% = 100 Hence additional revenue is 100 x 500 = $50000. Total revenue =$550000

3. As assumed above we have 60% as variable cost (including direct & indirect cost such as cost of material and labour). As question suggest there is 10% reduction in cost sue to training hence the cost saving would be (taking 500 customers) (500 x $500 x 60% x 10%) = $15000 per month.

4. Assuming per month salary of employee is $5000 hence the cost of turnover is 1.5 x $5000 = $7500. Hence cost reduction would be 10% x $7500 = $750.