In 2001, Montgomery Ward Department Store in the United States first put forward the slogan of "guaranteed refund if you are not satisfied if you are not satisfied" in an attempt to make its mail-order catalog business stand out from the competition with other retailers. This promise has since been used. Nowadays, customer satisfaction has become a commitment of many companies. It appears frequently and clearly in various mission statements and marketing plans. The personnel salary system also uses customer satisfaction as an indicator for employee bonus evaluation. Company advertisements also heavily exaggerate the customer satisfaction achieved. Awards.
Currently customer satisfaction has become the most common metric used to measure and manage customer loyalty. The hypothesis behind it is simple and intuitive. Higher customer satisfaction is beneficial to company performance. However, this proved not to be the case. Ipsos research found that on average, if a company's customer satisfaction level is surveyed in a certain industry in a given year, it has little relationship with the company's stock performance in the same year. Customer satisfaction can only bring about % of the market return at best.
Granted, you would expect customer satisfaction to have an impact on company performance over time, so looking solely at customer satisfaction and stock market performance in the same year does not give an accurate and complete picture of the relationship between the two. Academic research has found a positive and statistically significant relationship between satisfaction and many business outcomes (e.g., customer retention, customer share, referral rates, stock market performance).
However, the problem is that the relationship between customer satisfaction and customer consumption behavior is very weak. We found that changes in customer satisfaction caused less than % of the fluctuation in customer category spending. Yes, there is only a statistical correlation between the two, but it does not bring much significance to the company's operation and management.
Because of these findings, some managers wonder whether evaluations of unobservable issues (such as customer satisfaction) can influence observable behaviors (such as purchasing behavior) to a large enough extent that they can become a A major forecasting tool. Some experts have delved further into the issue. They claim customer satisfaction is a waste of money. Even in academia some scholars question whether customer satisfaction actually affects market performance.
Key Questions
Will increased customer satisfaction lead to increased profits?
Research Results
The relationship between customer satisfaction and their consumption behavior is quite weak.
The return on investment in customer satisfaction is often negligible or even counterproductive.
What matters is whether customers are more satisfied with your brand than your competitors.
We are facing such a crossroads. Is it really worth it to improve customer satisfaction? In order to find the answer, we conducted an in-depth investigation to explore the relationship between satisfaction and business performance and collected data covering multiple brands and more than 10,000 consumers. material.
Our survey, which combines our previous research on customer satisfaction with background information, uncovered three key issues. These three issues are detrimental to converting customer satisfaction into positive business results. What's more, these questions also apply to other commonly used metrics such as Net Promoter Score (a method used to measure customer loyalty). Given their broad scope, we believe these findings should guide every company's customer service strategy.
High customer satisfaction is not necessarily profitable
Managers often believe that higher customer satisfaction is good for the company's business. Yet our research shows that the benefits of increased customer satisfaction are not easy to discern. Continuously investing resources in improving customer satisfaction can have negative consequences. Why? Because it is difficult for managers to accurately quantify the cost of improving satisfaction, for example, how much it costs to increase satisfaction from .
In fact, investment in improving customer satisfaction is often insignificant or even has a negative effect on improving company profits. While we find that sales revenue increases as customer satisfaction improves, the increased costs often outweigh the benefits. For example, a large beverage distributor in the American Midwest found that its customer satisfaction efforts were experiencing negative results. Although customers were more satisfied and brought in more revenue, customer service costs rose by 1%, more than offsetting the gains from the sales growth.
It's easy to see why this is the case if we consider that one of the key factors in improving customer satisfaction is low prices. Our analysis of the U.S. credit union industry found that the main reason why customers choose credit unions instead of banks is that compared to banks, credit unions charge lower fees but offer higher deposit interest rates. That's why credit unions have the highest customer satisfaction of any industry surveyed, according to the American Customer Satisfaction Index (i.e., the National Customer Satisfaction Index).
Generally speaking, there is almost always an inverse relationship between customer satisfaction and product price. Therefore, lowering prices is often the easiest way to improve customer satisfaction. But for most products and services, there is limited room for lowering prices while maintaining profitability, and low prices are often detrimental to a company's business development.
For example, the customer satisfaction rate of a large financial services company we surveyed was quite high. But the problem is that more than two-thirds of these highly satisfied customers contribute no profit to the company. The high level of satisfaction among these customers is due in large part to the fact that they believe they can get a deal from this company and they do get it. The company's products are generally priced below cost. Whenever a company misprices customers, they buy their products in bulk. Therefore, these customers are unprofitable for the company but are the company's largest customers. To make matters worse, they also expect the company to consciously provide a large number of auxiliary services to large customers like them for free.
Such results reveal the important relationship between customer satisfaction and customer profitability. While customer satisfaction and profitability are not mutually exclusive they are not consistent either. Managers often have many alternative ways to improve satisfaction. For example, one could provide a better customer experience or offer more innovative products but not all alternatives are profitable. Furthermore not all customers are profitable and satisfying for the merchant. Some people are unwilling to pay the price necessary for a high level of service. Others require levels of service that cost more than they can bring in profit. The bottom line for businesses is to know that the negative impact on profits caused by efforts to improve customer satisfaction cannot be changed. Knowing these managers can make decisions that benefit the business, albeit sometimes difficult ones.
Smaller is often happier
If higher customer satisfaction means more spending, then there should also be a positive correlation between customer satisfaction and market share. However, the actual situation in many industries is exactly the opposite. Research has found that high customer satisfaction often means lower future market share.
We often see examples of this inverse relationship between customer satisfaction and market share. According to surveys over the years, McDonald's customer satisfaction ranking in the industry has always been lower than that of Wendy's Burger and Burger King. Customer satisfaction of Wendy's Burger is usually the highest, Burger King is second, and McDonald's ranks last. So does Wal-Mart, which has the lowest customer satisfaction of any discount retailer in 2019's survey. Target, Sears, and Penney outperform Walmart in customer satisfaction every year. Yet despite relatively low customer satisfaction, McDonald's and Wal-Mart continue to hold the largest market shares in their respective industries.
The main reason for this seemingly counterintuitive phenomenon is that the broader a company's market appeal is compared with its competitors, the lower its customer satisfaction will be. Why does this happen? Because winning a larger market share means that the company must attract customers who are not entirely in the core target market and must therefore serve customers with more diverse needs. And relatively smaller companies can better meet customer needs.
Consultants asked managers to align their performance with those of high-satisfaction brands. They believed that customers judge a company's performance not only by direct comparison with the best competitors in its industry, but also by comparison with their performance in other industries. Best service ever. There may be some truth to this, but the comparison often has little to do with management. These top niche brands exist because they typically have high levels of customer engagement. While there are lessons to be learned from their experiences, striving to achieve the level of satisfaction that only these top niche brands can achieve will be counterproductive for many companies.
In addition, improving a company's customer satisfaction often leads to a decline in market share. Data shows that during the period when Burger King's satisfaction index rose the most, its market share was eroded by McDonald's and Wendy's Burgers. When Kmart reached the highest month-on-month growth in customer satisfaction (its index was the highest ever), its massive customer churn forced the company to prepare for bankruptcy.
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