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The Value of Satisfied Customers

The Value of Satisfied Customers - Vikas Mittal and Carly FrenneaThe following is excerpted from “Customer Satisfaction: A Strategic Review and Guidelines for Managers” by Vikas Mittal and Carly Frennea.

Many leading-edge firms strategically measure and invest in customer satisfaction (CS) initiatives, and for good reason: Satisfied customers are likely to repurchase, purchase more from the firm, engage in more cross-buying, and have lower service and retention costs. Satisfied customers may help a firm to lower the cost of customer acquisition through positive word-of-mouth and recommendations to friends and family. They have lower price elasticity, i.e., they are less likely to defect when competitors offer lower prices. They are also more forgiving: when there is an occasional product or service failure, highly satisfied customers may attribute it to external causes and stay loyal to the firm. New research also shows that strong customer satisfaction (CS) reinforces a firm’s reputation in areas such as corporate social responsibility and influences analyst recommendations, leading to a virtuous cycle of positive financial performance.

Satisfied customers are likely to repurchase, purchase more from the firm, engage in more cross-buying, and have lower service and retention costs.

Defining customer satisfaction

Customer satisfaction is a customer’s post-consumption evaluation of a product or service. Several decades of research have been devoted to understanding factors that influence customer satisfaction evaluations. These include: expectations about product performance, absolute product performance, performance relative to expectations (disconfirmation level), performance level experienced during previous consumption episodes, and performance level of and expectations about competitive offerings. A closely related concept—perceived service quality—is also strongly associated with CS. In general, service quality is equivalent to service performance, and an input to CS.

Customer satisfaction is conceptually distinct from concepts of brand image, brand equity, corporate social responsibility (CSR), brand trust, and brand commitment, which represent general customer opinions and perceptions of the overall firm on a variety of dimensions. CS is specifically based on product usage or service experience, and therefore represents a narrower slice of the customer’s experience. From a strategic perspective, CS, brand equity, and CSR are all important to measure though their role varies in affecting a firm’s stakeholders. While CS provides a picture of the firm’s ability to satisfy its customers through its product and service offerings, brand metrics can tap into the firm’s broader relationship with both customers and non-customers.

Nowhere else in marketing has the impact of a customer-based metric on a firm’s financial performance been so clearly and consistently established.

Customer characteristics such as demographics, culture, involvement, and self-identity are related to their level of CS as well as to how CS affects their behavioral intentions. Further, customer attributions about the cause of high or low performance can influence their satisfaction judgments. For example, if customers encounter a delayed flight, their satisfaction judgment will vary depending on their belief about the cause of the delay (e.g., the weather or the airline’s logistics). Similarly, emotions such as anger and fear—caused by the consumption situation—can affect satisfaction judgments. Thus, a situation-specific approach is needed to fully understand the antecedents and consequences of CS for a firm and its customer base.

Strategic importance

The best evidence for understanding the strategic impact of CS is provided by the annual American Customer Satisfaction Index (ACSI) at the University of Michigan. Because participating firms are publically traded, academics have been able to examine the association between CS as measured by the ACSI and financial performance. . . . [R]igorous academic studies using advanced statistical techniques have found a strong and consistent association between CS, as measured by the ACSI, and firm financial performance. These studies provide the clearest and most robust evidence that a firm’s CS scores are related to its financial performance in terms of ROI, sales, long-term firm value (Tobin’s Q), cash flow, cash flow volatility, human capital performance, portfolio returns, cost of debt, risk, and consumer spending. Stated differently, nowhere else in marketing has the impact of a customer-based metric on a firm’s financial performance been so clearly and consistently established.

From
Customer Satisfaction: A Strategic Review and Guidelines for Managers

Related links

Reports

Do Satisfied Customers Always Buy More? The Roles of Satiation and Habituation in Customer Repurchase
Glenn B. Voss, Andrea Godfrey, and Kathleen Seiders (2010)

Customer Satisfaction, Analyst Stock Recommendations, and Firm Value
Xueming Luo, Christian Homburg, and Jan Wiesecke (2009)

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