The High Price of Customer Satisfaction

Managers often assume that improving customer satisfaction and financial performance go hand in hand. The reality, however, is much more complex.

“Satisfaction guaranteed or your money back.” That business promise has been made to consumers since 1875, when Montgomery Ward used it to differentiate his mail-order catalog from other retailers. Commitment to customer satisfaction is now a vow many businesses make. It is common to find mission statements and marketing plans that specifically address customer satisfaction; compensation systems that incorporate satisfaction metrics into their bonus criteria; and advertisements that trumpet customer satisfaction awards.

Customer satisfaction has become the most widely used metric in companies’ efforts to measure and manage customer loyalty.1 The assumption is simple and intuitive: Highly satisfied customers are good for business.

However, the reality has not proven nearly so simple. In fact, we have found that if you look across industries at the correlation between companies’ customer-satisfaction levels for a given year and the corresponding stock performance of these companies for that same year, on average, satisfaction explains only 1% of the variation in a company’s market return.

Another recent examination of the relationship between satisfaction and stock performance by Bloomberg Businessweek reported even worse results than our own. In a 2013 article entitled “Proof That It Pays to Be America’s Most-Hated Companies,” the magazine reported that “customer-service scores have no relevance to stock market returns … the most-hated companies perform better than their beloved peers … Your contempt really, truly doesn’t matter … If anything, it might hurt company profits to spend money making customers happy.”2 These findings were so unexpected that comedian Stephen Colbert offered American corporations his faux help to “get those customer satisfaction ratings right in the toilet.”3

Admittedly, the above examples represent overly simplistic examinations of the relationship between satisfaction and stock performance. You would expect customer satisfaction to impact performance over time, so simply looking at satisfaction and stock performance levels for the same year is not going to accurately capture the complete relationship.

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References

1. L. Aksoy, “How Do You Measure What You Can’t Define? The Current State of Loyalty Measurement and Management,” Journal of Service Management 24, no. 4 (2013): 356-381; and V.A. Zeithaml, R.N. Bolton, J. Deighton, T.L. Keiningham, K.N. Lemon and J.A. Petersen, “Forward-Looking Focus: Can Firms Have Adaptive Foresight?” Journal of Service Research 9, no. 2 (2006): 168-183.

2. E. Chemi, “Proof That It Pays to Be America’s Most-Hated Companies,” Bloomberg Businessweek, Dec. 17, 2013.

3. S. Colbert, “Rethinking Customer Satisfaction,” The Colbert Report, Comedy Central, December 18, 2013, www.colbertnation.com/the-colbert-report-videos/431618/december-18-2013/rethinking-customer-satisfaction.

4. L. Aksoy, B. Cooil, C. Groening, T.L. Keiningham and A. Yalçin, “The Long-Term Stock Market Valuation of Customer Satisfaction,” Journal of Marketing 72, no. 4 (July 2008): 105-122; and C. Fornell, Sunil Mithas, F.V. Morgeson III and M.S. Krishan, “Customer Satisfaction and Stock Prices: High Returns, Low Risk,” Journal of Marketing 70, no. 1 (January 2006): 3-14.

5. E.W. Anderson, C. Fornell and D.R. Lehmann, “Customer Satisfaction, Market Share and Profitability: Findings From Sweden,” Journal of Marketing 58, no. 3 (July 1994): 53-66; C. Fornell, S. Mithas and F.V. Morgeson III, “Commentary: The Economic and Statistical Significance of Stock Returns on Customer Satisfaction,” Marketing Science 28, no. 5 (September-October 2009): 820-825; and V. Mittal, E.W. Anderson, A. Sayrak and P. Tadikamalla, “Dual Emphasis and the Long-Term Financial Impact of Customer Satisfaction,” Marketing Science 24, no. 4 (November 2005): 544-555.

6. Some examples of our research into consumer satisfaction include: L. Aksoy, A. Buoye, P. Aksoy, B. Larivière and T. L. Keiningham, “A Cross-National Investigation of the Satisfaction and Loyalty Linkage for Mobile Telecommunications Services Across Eight Countries,” Journal of Interactive Marketing 27, no. 1 (February 2013): 74-82; Aksoy et al., “Long-Term Stock Market Valuation”; B. Cooil, T.L. Keiningham, L. Aksoy and M. Hsu, “A Longitudinal Analysis of Customer Satisfaction and Share of Wallet: Investigating the Moderating Effect of Customer Characteristics,” Journal of Marketing 71, no. 1 (January 2007): 67-83; and S. Gupta, D. Lehmann and J.A. Stuart, “Valuing Customers,” Journal of Marketing Research 41, no. 1 (February 2004): 7-18.

7. J. Hofmeyr, V. Goodall, M. Bongers and P. Holtzman, “A New Measure of Brand Attitudinal Equity Based on the Zipf Distribution,” International Journal of Market Research 50, no. 2 (2008): 181-202; and A.W. Mägi, “Share of Wallet in Retailing: The Effects of Customer Satisfaction, Loyalty Cards and Shopper Characteristics,” Journal of Retailing 79, no. 2 (2003): 97-106.

8. S. Gupta and V. Zeithaml, “Customer Metrics and Their Impact on Financial Performance,” Marketing Science 25, no. 6 (November-December 2006): 718-739.

9. J. Gitomer, “Customer Satisfaction Is Worthless, Customer Loyalty Is Priceless: How to Make Customers Love You, Keep Them Coming Back and Tell Everyone They Know” (Marietta, Georgia: Bard Press, 1998); and F.F. Reichheld, “The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value” (Boston: Harvard Business Review Press, 2001).

10. J.E. Hilsenrath, “A Stock Theory Linking Price With Satisfaction Isn’t Perfect,” Wall Street Journal, Feb. 19, 2003, A2; C.D. Ittner, D.F. Larcker and D.J. Taylor, “The Stock Market’s Pricing of Customer Satisfaction,” Marketing Science 28, no. 5 (September-October 2009): 826-835; R. Jacobson and N. Mizik, “The Financial Markets and Customer Satisfaction: Reexamining Possible Financial Market Mispricing of Customer Satisfaction,” Marketing Science 28, no. 5 (September-October 2009): 810-819; D. O’Sullivan, M.C. Hutchinson and V. O’Connell, “Empirical Evidence of the Stock Market’s (Mis) Pricing of Customer Satisfaction,” International Journal of Research in Marketing 26, no. 2 (June 2009): 154-161; and R. Williams and R. Visser, “Customer Satisfaction: It Is Dead but It Will Not Lie Down,” Managing Service Quality 12, no. 3 (2002): 194-200.

11. S. Gupta and D.R. Lehmann, “Models of Customer Value,” chap. 8 in “Handbook of Marketing Decision Models,” ed. B. Wierenga (New York: Springer Science+Business Media, 2008).

12. C. Adamson, “How to Waste Money Measuring Customer Satisfaction,” Managing Service Quality 4, no. 5 (1994): 9-12; E.W. Anderson and V. Mittal, “Strengthening the Satisfaction-Profit Chain,” Journal of Service Research 3, no. 2 (November 2000): 107-120; T.L. Keiningham and T. Vavra, “The Customer Delight Principle: Exceeding Customers’ Expectations for Bottom-Line Success” (New York: McGraw-Hill, 2001); R. Niraj, G. Foster, M.R. Gupta and C. Narasimhan, “Understanding Customer-Level Profitability Implications of Satisfaction Programs,” Journal of Business & Industrial Marketing 23, no. 7 (2008): 454-463; F.F. Reichheld, R.G. Markey Jr. and C. Hopton, “The Loyalty Effect: The Relationship Between Loyalty and Profits,” European Business Journal 12, no. 3 (2000): 134-139; R.T. Rust, A.J. Zahorik and T.L. Keiningham, “Return on Quality: Measuring the Financial Impact of Your Company’s Quest for Quality” (Burr Ridge, Illinois: Irwin Professional Publishing, 1994); and J. Tanner and M.A. Raymond, “Customer Satisfaction,” chap. 14.3 in “Principles of Marketing” (Washington, D.C.: Flat World Knowledge, 2010).

13. Niraj et al., “Understanding Customer-Level Profitability Implications.”

14. L. Aksoy, “Linking Member Satisfaction to Share of Deposits: Applying the Wallet Allocation Rule in CUs,” research report, Filene Research Institute, Madison, Wisconsin, February 2013; and L. Aksoy, “Linking Satisfaction to Share of Deposits: An Application of the Wallet Allocation Rule,” International Journal of Bank Marketing 32, no. 1 (2014): 28-42.

15. “Credit Unions Set All-Time Record for Customer Satisfaction,” press release, American Customer Satisfaction Index, Ann Arbor, Michigan, December 13, 2011, www.theacsi.org/media-resources/press-release-december-2011.

16. S. Gupta, T. Keiningham, R. Weaver and L. Williams, “Are Daily Deals Good for Merchants?” Harvard Business School background note 513-059 (Boston: Harvard Business School Publishing, December 2012).

17. C. Fornell, “The Quality of Economic Output: Empirical Generalizations About Its Distribution and Relationship to Market Share,” Marketing Science 14, no. 3 supplement (August 1995): G203-G211.

18. L.L. Rego, N.A. Morgan and C. Fornell, “Reexamining the Market Share-Customer Satisfaction Relationship,” Journal of Marketing 77, no. 5 (September 2013): 1-20.

19. “Benchmarks By Company,” American Customer Satisfaction Index, www.theacsi.org/customer-satisfaction-benchmarks/benchmarks-by-company.

20. G.R. Dowling and M. Uncles, “Do Customer Loyalty Programs Really Work?” MIT Sloan Management Review 38, no. 4 (summer 1997): 71-82; L. Gentry and M. Kalliny, “Consumer Loyalty — A Synthesis, Conceptual Framework, and Research Propositions,” Journal of American Business Review, Cambridge 1, no. 1 (December 2012): 119-27; and J. Kapferer, “The Roots of Brand Loyalty Decline: An International Comparison,” Ivey Business Journal 69, no. 4 (March/April 2005): 1-6.

21. A. Weissenberg, A. Katz and A. Narula, “A Restoration in Hotel Loyalty: Developing a Blueprint for Reinventing Loyalty Programs,” Deloitte, 2013.

22. S. Coyles and T.C. Gokey, “Customer Retention Is Not Enough,” McKinsey Quarterly 2, no. 2 (2002): 81-89.

23. Hofmeyr et al., “A New Measure of Brand Attitudinal Equity”; J. Hofmeyr and G. Parton, “Rank Matters,” Marketing Research 22, no. 3 (autumn 2010): 6-12; T.L. Keiningham, L. Aksoy, A. Buoye and B. Cooil, “Customer Loyalty Isn’t Enough. Grow Your Share of Wallet,” Harvard Business Review 89, no. 10 (October 2011): 29-31; T.L. Keiningham, L. Aksoy, A. De Keyser, B. Larivière, A. Buoye and Luke Williams, “It’s Not Your Score That Matters: The Importance of Relative Metrics,” chap. 9 in “Handbook of Service Marketing Research,” ed. R.T. Rust and M.-H. Huang (Cheltenham, United Kingdom: Edward Elgar Publishing, in press); and T.L. Keiningham, B. Cooil, E.C. Malthouse, L. Aksoy, A. Buoye, A. De Keyser and B. Larivière, “Perceptions Are Relative: An Examination of the Relationship Between Relative Satisfaction Metrics and Share of Wallet,” Journal of Service Management, in press.

24. R.T. Rust and R.L. Oliver, “Should We Delight the Customer?” Journal of the Academy of Marketing Science 28, no. 1 (January 2000): 86-94; R.T. Rust, A.J. Zahorik and T.L. Keiningham, “Service Marketing” (New York: HarperCollins, 1997); and S. Varki and R.T. Rust, “Satisfaction Is Relative: Apply Analysis of Variance Techniques to Determine If Your CSM Scores Measure Up,” Marketing Research 9, no. 2 (summer 1997): 15-19.

25. When examining the partial correlations between rank and share of wallet (i.e., SOW, Log[SOW] and Logit[SOW]) after removing satisfaction, the correlations remain strong. By contrast, when examining the partial correlations between satisfaction and share of wallet after removing rank, the correlations are almost zero (and are actually negative). This research is forthcoming in Keiningham et al., “Perceptions Are Relative.”

26. This work is a natural extension of S. Gupta and D.R. Lehmann, “Customers as Assets,” Journal of Interactive Marketing 17, no. 1 (winter 2003): 9-24; and S. Gupta and D.R. Lehmann, “Managing Customers as Investments: The Strategic Value of Customers in the Long Run” (Upper Saddle River, New Jersey: Wharton School Publishing, 2008).

27. The Customer Satisfaction vs. Market Share matrix builds upon standard marketing theory and the work of Dowling and Uncles, specifically, Dowling and Uncles, “Do Customer Loyalty Programs Really Work?”

28. S. Leeb, “Wal-Mart Fattens Up on Poor America with 25% of U.S. Grocery Sales,” May 20, 2013, www.forbes.com.

29. “How Wal-Mart Became a Grocery Giant in the U.S.,” January 18, 2013, www.trefis.com.

6 Comments On: The High Price of Customer Satisfaction

  • Alain Thys | April 16, 2014

    Excellent article, thanks for sharing.

    I would only suggest one nuance regarding the statement: “So the measure that really matters isn’t your percentage of delighted customers or promoters. What matters is the relative rank that your brand’s satisfaction level represents vis-à-vis your competitors.”

    This is positioned to highlight the value of NPS as a “poor indicator”. However, when looking at the full Net Promoter System, you will find that this all about the comparative satisfaction measures your research supports.

    In fact, every true NPS practitioner will tell you that the score on its own is meaningless without competitive comparison.

    In short, IMHO your findings may be less in conflict with NPS than you originally considered.

  • tlkeiningham@yahoo.com | April 21, 2014

    Alain Thys, I am very happy that you enjoyed the article, and thank you for your comment.

    I do need to clarify our position vis-a-vis what you are describing as relative NPS (Net Promoter Score).

    The first thing to note is that NPS is a firm-level metric, not a customer-level metric. Therefore, by relative NPS my assumption is that you mean that the focal firm is comparatively better or worse than other firms in the category based upon differences in NPS levels.

    Unfortunately, firm level (aggregate level) metrics won’t work if the goal is improved share of wallet. This analysis must be done at the customer level. [There are actually statistical rules for when you are allowed to aggregate data. If you are interested, I would direct you to Bliese, Paul D. (2000), "Within-group agreement, non-independence, and reliability: Implications for data aggregation and analysis," in Multilevel Theory, Research, and Methods in Organizations, Katherine J. Klein and Steve W. J. Kozlowski, eds., San Francisco: Jossey-Bass, pp. 349-381.]

    A simple rule of thumb is that you are never allowed to aggregate data when the relationship between the variable you are tracking and the outcome variable is very weak. Without going into too much detail as to why, the “averages” you come up with by aggregating the data cancel out the extremes (think people above and below the mean). As a result, you end up with what is called an Ecological Fallacy…simplistically, you mistakenly think you understand individuals within the group.

    As a result, you must first get the customer-level relationship between your metric of choice (e.g., satisfaction, recommend intention, Net Promoter classifications/Promoter, Passive, Detractor) to link strongly to share of wallet BEFORE you can aggregate the data. This is best done by converting these measures to relative ranks. While you can use any of the above metrics to derive relative rank–and thereby link to share of wallet–you cannot simply use the firm-level metric (relative or absolute level). It will almost always result in getting the wrong answer as to what is driving customers’ share of category spending.

  • Chris Reich | June 6, 2014

    I am sick and tired of measuring all things good against stock pricing and market performance.

    Those two metrics can be manipulated in a million ways—some not even legal.

    We have to stop seeing the bloody stock market as the last word in economic well-being. Look, the stock market has been above where it was before the near economic collapse of 2008 for years. Wall Street recovered while real earnings have actually contracted. Unemployment remains high, under-employment disgraceful.

    Don’t tell the monoliths of Wall Street that service doesn’t matter. They already know it.

  • Louis de Froment | June 10, 2014

    Hi,

    I really enjoyed your article.
    I have 2 objections though :
    – When you say that there is not always a link between satisfaction and profit :
    # You do not mention the impact of Word-of-Mouth that can be a disaster for a company considering that a dissatisfied customer will tell about his bad experience to at least 6 friends. Increasing client satisfaction will allow you to kill bad word of mouth and enhance good word-of mouth
    # You imply that increasing Customer Satisfaction often relies on increasing Customer Service Cost. But to my point of view, when you “do it right the first time” you significantly reduce the amount of contacts to Customer Service.
    – When you say that satisfaction and price are almost always inversely related :
    # I think it depends mostly on the experience you want to deliver to your clients. For example, Groupon’s promise is to deliver to clients the cheapest good plan on their neighborhood. You cannot blame the clients to expect the lower price of the market ! If Groupon loses money on those categories, it just means that they have poor financial fundamentals. On the opposite I don’t think customer satisfaction on Apple’s product relies on lower prices but on design, ergonomy etc.
    Finally, I have a last question : how do you measure the value brought by a customer to a company ?

  • tlkeiningham@yahoo.com | June 15, 2014

    CHRIS REICH, Thank you for you comment. Without question, many factors influence stock market performance.

    I don’t see how that this is relevant, however, in the context of this article. The stock performance linkage was simply used in the introduction to show the difficulty linking satisfaction to market performance.

    The article deals with the relationship between satisfaction and firm profitability, market share, and share of category spending. There can be no dispute about the difficulty making a “positive” linkage between customer satisfaction and any of these managerially relevant business outcomes.

    I would welcome discussing our findings further if you have any additional comments related to the research.

    Thank you again for your comments.

  • tlkeiningham@yahoo.com | June 15, 2014

    LOUIS DE FROMENT, I am very glad that you enjoyed “The High Price of Customer Satisfaction.” And thank you for your insightful questions. Below are my responses.

    When you say that there is not always a link between satisfaction and profit :
    You do not mention the impact of Word-of-Mouth that can be a disaster for a company considering that a dissatisfied customer will tell about his bad experience to at least 6 friends. Increasing client satisfaction will allow you to kill bad word of mouth and enhance good word-of mouth

    There is some truth to the idea that a dissatisfied customer is more likely to be be vocal. But research that I am currently working on with Roland Rust, Bart Larivière, Lerzan Aksoy, and Luke Williams challenges the relevance of this. Note, we are looking at a HUGE dataset: 13,240 consumers, 10 countries, 8 industries, covering 793 brands. It turns out that the vast majority of word of mouth (both given and received) about brands is positive.

    This isn’t surprising given that 1) research we conducted demonstrates that customers have a positivity bias (http://www.emeraldinsight.com/journals.htm?issn=1757-5818&volume=25&issue=3&articleid=17111996&show=html), and the overwhelming majority of customers are satisfied (discussed in more detail below).

    This does not mean that managers should not care about customer dissatisfaction. But focusing on reducing dissatisfaction for most businesses is not a major opportunity for most firms.
    You imply that increasing Customer Satisfaction often relies on increasing Customer Service Cost. But to my point of view, when you “do it right the first time” you significantly reduce the amount of contacts to Customer Service.

    Your argument that “failure” is always bad is absolutely true. This is a basic “Cost of Quality” issue which goes back at least 40 years to W. Edwards Deming. Managers most definitely know this to be the case.

    With regard to customer dissatisfaction in particular, however, the reality is that this isn’t the real problem for most businesses. Researchers have known for over three decades now that satisfaction levels are negatively skewed for the vast majority of brands–in other words, the distribution of satisfaction responses is grouped at the top, positive end of the scale. The reason for this is that customers don’t do business with firms that don’t satisfy them. So while reducing dissatisfaction is important, the opportunities for eliminating real dissatisfaction are limited. (That is why many managers treat scores of 5 or 6 on 10-point and 11-point satisfaction/recommend intention scales as dissatisfied, even though they are actually really “merely” satisfied–there would be very little opportunity at the bottom end of the scale otherwise).

    The big problem is that most brands are what we refer to as “Parity Brands.” Customers are satisfied with them, but they are also equally satisfied with a competing brand that is also used. Therefore, the key to success for most brands is finding a way to distinguish themselves in the eyes of their customers vis-a-vis competing brands.

    When you say that satisfaction and price are almost always inversely related :
    I think it depends mostly on the experience you want to deliver to your clients. For example, Groupon’s promise is to deliver to clients the cheapest good plan on their neighborhood. You cannot blame the clients to expect the lower price of the market ! If Groupon looses money on those categories, it just means that they have poor financial fundamentals. On the opposite I don’t think customer satisfaction on Apple’s product relies on lower prices but on design, ergonomy etc.

    Here we need to distinguish between “Willingness to Pay” and “Price Elasticity”. You are correct that Apple (and other high end brands) are able to command higher prices because they are perceived as offering a better experience (in your example, design, ergonomy, etc.). That, however, does not mean that customer satisfaction would not increase if Apple dropped its prices. In fact, Apple’s own history of price drops proves this to be true.

    The simplest way to understand this is to think in economic terms. If sales increase with a drop in price, then “satisfaction” must also increase with a drop in price. In fact, this is a fundamental tenet of economics referred to as Gossen’s Second Law: “a person maximizes his utility when he distributes his available money among the various goods so that he obtains he same amount of satisfaction from the last unit of money spent on each commodity.”

    Very few goods or services show declines in sales with declines in prices. There are some–for example, high end Gibson guitars–but they are the rare exception.

    Thank you again for your interest in our article, and for your insightful comments.

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