If you pay attention to customer satisfaction, companies are told, success will follow. But Timothy Keiningham, global chief strategy officer and executive vice-president of Ipsos Loyalty, says new research shows this is simply not true.
The relationship between customer satisfaction and customer spending behaviour is actually very weak. Changes in customers' satisfaction levels explain less than 1 per cent of the changes in their spending in a specific category. "Yes, the relationship is statistically significant, but it is not very managerially relevant," he writes in MIT Sloan Management Review, with fellow customer-satisfaction experts Sunil Gupta, Lerzan Aksoy and Alexander Buoye.
This doesn't mean you should stop paying attention to customer satisfaction. But it does mean you need a deeper understanding of how it works, and why you can be led astray.
Begin by being alert to what the authors call "money-losing delighters." The researchers discovered this by evaluating offers from deal website Groupon: Four of the six categories with the highest customer satisfaction for offers were also big money losers for the companies hawking the coupons. The researchers also found the majority of customers of a large financial service company were highly satisfied – but, unfortunately, two-thirds of those highly satisfied customers were also unprofitable.
"The customers' high satisfaction was driven largely by the belief that they were getting exceptional deals – and they were. Products were often priced below cost. Every time the company mispriced its offer, customers bought in large quantities," they write.
Low prices can be a key factor in customer satisfaction. But lowering prices to garner greater satisfaction usually will be counterproductive, because for many products and services there is not enough margin to remain profitable, as with the financial services company. That firm changed its pricing strategy, based on the researchers' analysis, to ensure products were not sold at a loss. Its managers contacted unprofitable customers to talk about how the firm was losing money on the services, and to advise that there would be a cost for using them. At first, customer satisfactions scores dropped, but after three months most customers agreed to pay for the services and satisfaction returned to previous levels.
So pay attention to whether you are keeping your profitability up along with customer satisfaction scores. Don't overspend on customer loyalty initiatives. "You can always make people happy by giving the product away. You need to be fiscally responsible when you undertake improvement benefits," Mr. Keiningham said in an interview.
A second factor to consider is that smaller often means happier: Companies with less market share usually have higher customer satisfaction scores. We see that in fast foods, where Burger King and Wendy's consistently top McDonald's in satisfaction scores. In the retail sector, Wal-Mart trails Target, Sears and J.C. Penney.
It's not that big is arrogant, or niche is invariably better. The researchers note that to build market share, companies such as Wal-Mart and McDonald's have to attract customers whose needs don't completely fit the company's initial core target. When serving a more diverse set of customers, it's more difficult to keep everyone happy.
"Niche brands will always have higher satisfaction, as they are going after a narrower group and need to satisfy them fully," Mr. Keiningham noted.
Of course, you should want your company to expand and grow. But you must be alert to this contradiction, and find a workable customer satisfaction level. Mr. Keiningham suggests that market-share leaders evaluate their customers to find the core group and compare those to the satisfaction levels at niche brands. If your company's satisfaction rate is much lower, that's a warning signal.
The third factor highlighted by the loyalty researchers is the importance of being No. 1 in the customer's spending in your category. Single-brand loyalty, common in earlier generations, is no longer prevalent today. People are often loyal to many brands in a category. For example, a study of the hotel industry by Deloitte found that about 50 per cent of spending by hotel guests is not with their preferred hotel brand.
A McKinsey banking industry study found that, on average, only 5 per cent of bank customers close their accounts each year and the corresponding loss represents only 3 per cent of total deposits. But 35 per cent of customers reduce their share of deposits, a loss that represents 24 per cent of total bank deposits – eight times as much as the more overt closing.
So simply knowing your customer satisfaction level is not enough. Perhaps your competitors are at the same level, or higher. Customers may be cheerfully promoting your company and its product, and your score looks fine – but they are also promoting other brands.
"You need to give [customers] a reason to use you more," Mr. Keiningham said. You want to increase the number of people who list your product or service as their first choice, which will be a better measure than your customer satisfaction score.
Along with knowing the profitability of your customer satisfaction efforts, and how your scores are affected by market share, you will have a better shot at turning customer satisfaction into better bottom-line results.
Harvey Schachter is a Battersea, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online work-life column Balance. E-mail Harvey Schachter