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January 18, 2013

17

Customer Satisfaction, Loyalty, and Other Tall Tales

by Jeremy Arnone

This post has its genesis in some questions a client recently asked me:  How does our customer satisfaction compare to what you’ve seen?  What can we do to increase it?  How will that impact our growth?  The relationship between satisfaction and growth is something I’ve been thinking about for a while, but the client’s questions helped clarify my focus.

The notion of being customer-centric plays a prominent role in the mission and growth strategies of nearly every organization.  Yet quite often, customer satisfaction levels and growth rates appear unrelated.  While many growing companies have satisfied customers, so do companies with slowing or negative growth.  And while some companies with abysmal satisfaction scores may be stagnating, I’ve seen companies with mutinous customers growing despite themselves.

Is it true that a focus on the customer is a bedrock strategy to initiate, invigorate, and sustain growth?  Or is something inherently appealing (“The customer is always right!”) and seemingly straightforward more complicated than it appears?  Once we’ve disentangled assumptions from facts, is a strategy based on satisfying customers a realistic way for most companies to grow?  Or is customer satisfaction a flawed measure which simply reflects customers’ rationalizations of their past decisions, but says little about their future intentions?

Perceived Relationship Between Customer Focus & Business Growth

The assumed relationship between a customer focus and an organization’s growth is seen below:

Screen Shot 2013-01-17 at 11.04.45 PM

On the surface, these relationships conform to what most of us expect.  Listening to and focusing on what customers say matters to them should increase their satisfaction.  Higher satisfaction should in turn positively impact loyalty.  And loyalty should have a direct impact on a company’s long-term growth.

But a view from the trenches with a variety of clients has led me to question these assumptions, starting with the belief that there’s a direct connection between customer focus and customer satisfaction.

Does A Customer Focus Increase Customer Satisfaction?

Anybody who has worked to improve customer satisfaction understands how hard and frustrating it can be.  In their seminal book, “The Discipline of Market Leaders,” Treacy and Wiersema describe three “value disciplines” that companies can follow:  Operations, Product, Customer Intimacy.  They estimate that fewer than 10% of companies have value propositions, resources, and systems sufficient to “win” with customer intimacy.  Yet nearly every company believes their passion for the customer provides them a unique competitive advantage.

Screen Shot 2013-01-17 at 3.21.07 PMThere’s no question that different companies have very different levels of customer satisfaction.  However, much of this difference is based not on the company itself (including their level of customer focus) but the industry they’re in and the customers they (and their competitors) tend to serve.  To show this, I analyzed the ACSI benchmarks by industry and their component companies over time.  To the right is a summary of those results, for a variety of industries.

The top number is the compound annual growth (CAGR) in satisfaction by industry, ranging from -0.2% to +0.3% – essentially zero, confirming that improving customer satisfaction is hard and often unrewarding work.  Below that is the satisfaction average by industry for the past 17 years.  Not surprisingly, TV Subscriptions (cable, satellite, etc.) are dead last at 63, followed closely by Airlines.  The number at the bottom is the difference between the best company in an industry and the industry average.  The largest difference occurs with Internet Retail, with Amazon (unsurprisingly) the standout at +7 vs. its average competitor.  In the other industries, the company with the highest satisfaction exceeds its industry average by less than 5%.

What these and other data show is that most satisfaction rate differences are due to the industry, not the company.  Improvements in customer satisfaction – at least in established industries – are very tough to come by, once industry averages are achieved. (A key distinction; satisfaction laggards can and should improve their satisfaction rates.)  Even the “best” companies in an industry often have similar satisfaction levels relative to the rest of the industry, due to best-practice imitation and similar customer demands.  Further proof of the weak relationship between satisfaction and growth – the widely divergent growth rates of firms within a given industry relative to their nearly equivalent satisfaction scores.

For the few companies that have sustained a meaningful advantage in customer satisfaction vs. their peers, the key is the close tie between their operating model and value proposition (more on this in my next post).  Having a passion for the customer simply isn’t sufficient.  So to answer the question that began this section:  Can a customer-centric strategy lead to satisfaction levels above industry levels?  Yes, but not often and usually not for long.  Setting aside a passion for the customer, are most organizations capable of truly distinguishing themselves in this regard?  Probably not.

Does Customer Satisfaction Lead to Loyalty?

For most companies of course, customer satisfaction isn’t the goal, but the means to an end – business growth.  A big driver of that growth comes from existing customers, when satisfaction translates into loyalty – both repeat business and share of wallet. (I touch on word-of-mouth below.)  Because in all industries, over time, the growth of new customers slows and then declines, the company that can keep more of its customers will be most successful in the long run.

As expected, research has shown that there is a direct relationship between customer satisfaction and certain aspects of loyalty – things like motivation, emotion, and trust.  Of course, trust is great, but what about behavior, what customers actually do?  Well there it’s a different story.  Turns out there is little evidence that higher customer satisfaction by itself translates to profitable behavior (see here).  Researcher Robert Peterson has found that in most customer satisfaction surveys, 85% of an organization’s customers claim to be “satisfied,” but still exhibit willingness to switch providers.  And a Bain study found that 60% – 80% of customers who defected to a competitor said they were satisfied / very satisfied on the customer survey just prior to their defection!

The simple fact is that customer satisfaction levels have almost no impact on customer loyalty.  Many factors that impact loyalty are outside the immediate control of the company.  While a company can, to some extent, influence these factors – focus on different types of customers, increase switching barriers, provide a consistent experience – simply increasing satisfaction will have very little impact on loyalty.  Can and should companies focus on increasing customer loyalty?  Yes and absolutely.  Will customer satisfaction be a reliable way to get there?  Probably not.

Customer Satisfaction & Growth – Why Companies Get it Wrong

Recent research tries to tie customer satisfaction directly to growth.  As one researcher put it:  “Putting instincts aside, is there any proof that satisfying customers is worth the effort, and, in fact, pays off?”  The answer is, not really.  A broad set of research examined the relationship between employee and customer satisfaction and their impact on growth.  The verdict?  There’s no consistent relationship.  In other words, if you’re focusing on customer satisfaction (or employee satisfaction, for that matter) as the driver of your business growth, you’re probably going to be disappointed.

They say that in business, you manage what you can measure.  Well, customer value is very hard to understand, much less measure, so organizations focus on something that they feel must be related to value:  customer satisfaction.  Companies believe satisfaction is a close substitute for value delivered and thus a good leading indicator of the “health” of their business.

Companies assume that satisfied customers become better, more loyal customers, so companies try to increase satisfaction.  But they’ve got it backwards.  The real relationship is that better customers tend to be – but are not always – more satisfied.  This is a subtle but important distinction.  Customer satisfaction and loyalty don’t themselves add anything to customer value.  They are byproducts of delivering value, not the drivers behind it.  In fact, research shows that high loyalty can result from even low satisfaction situations, when there are exceptional levels of customer value (e.g., low prices).  This helps explain the coexistence of low satisfaction and high loyalty.  We can therefore revise the original relationship:

Screen Shot 2013-01-23 at 9.58.01 AM

Customer value drives loyalty, which leads to business growth.  While customer satisfaction doesn’t directly lead to growth, copious research shows that there is a clear relationship between customer satisfaction (especially very low and very high levels) and (positive and negative) network effects like reviews and word of mouth.  Customer satisfaction, when combined with loyalty and network effects, can therefore play a contributing role in improving both retention and acquisition.

Companies should be skeptical that they truly – intimately – understand their customers.  Instead, treat customers like an iceberg:  What you see – their satisfaction level – is only a small part of what motivates them.  While a select few companies are able to peer beneath the water because of their distinct competencies and operating model, for most companies, mooring to an iceberg, ignorant of what’s below the surface, can lead to disaster.

To answer the questions posed by my client, I’d say this.  Focus on value, not satisfaction.  Satisfaction is a consequence, not a driver.  Value tells a company what to do (gives it direction), while satisfaction tells the company how it is doing (gives a report card).  Doing the wrong things the right way is a great approach if your goal is highly satisfied, former customers.

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17 Comments Post a comment
  1. Gavin T.
    Jan 19 2013

    Very interesting and unexpected approach to customer satisfaction. You seem to have a knack for identifying where assumptions have taken the place of reality. Your clients must appreciate that. 🙂 Great read as always, I wish you would post more often!

    Reply
    • Jan 20 2013

      Thanks Gavin, appreciate the kind words. Yes, I’d like to find more time to blog as well!

      Reply
  2. Bob Thompson
    Jan 19 2013

    Jeremy, thanks for making this post.

    I think you nailed it with your point about value, not satisfaction.

    I think business people use the term “relationship” quite differently than customers. Companies want customers to buy, and if they do that’s a relationship.
    Value = orders/revenue

    Customers don’t tend to use the term relationship to describe their dealings with companies. But if they (we) are to be loyal to companies it still comes down to getting the value we care about.

    In some cases it’s the personal touch, like the bike shop I go to locally. In others it’s fault-free service, like my bank’s web site or ATM.

    If you ask customers, “Do you want to develop a relationship?” it doesn’t surprise me that most say no. But everyone wants value.

    Great insight about the difference between satisfaction and value. That helps explain “satisfied” defectors. “Sure you’re great at what you do, I’m satisfied you’re doing your best, but it doesn’t have value for me. Cya.”

    Reply
  3. Kristina
    Jan 19 2013

    I found a lot of truth in your argument that customer centricity is a strategic decision that doesn’t work for most companies. I think it is a decision that needs to align with the target audience and business goals as well as make sense for the culture – things you touched on, and it sounds like you’re going to discuss more thoroughly. I really enjoyed this post and would love to dialogue with you further on this topic!

    Reply
    • Jan 20 2013

      Hi Kristina, thanks for the comment. Perhaps we’ve all gone a bit overboard when it comes to “delighting the customer.” I believe that’s a reaction to the disappointment many companies have experienced when they focused on “satisfying the customer.” If satisfaction isn’t enough to move the growth needle, maybe “delighting” will do the trick.

      For some companies – those where loyalty and network effects are especially impactful – a strong customer focus is the right approach. For many other companies, though, meeting industry standards on customer expectations may be sufficient.

      Reply
  4. Anonymous
    Jan 19 2013

    Very interesting perspective. My company obsesses about customer satisfaction but its basically unchanged the past 3 years. I have no idea if we offer value or how to measure it if its not based on satisfaction. Will share this with our team.

    Reply
  5. Geoff
    Jan 20 2013

    G’day Jeremy. I agree about customer satisfaction but believe it should be replaced with customer delight. Focusing on customer delight assists to define and retain focus on the true values that create an organisation.

    The sharing of values across stakeholders also helps to maintain the delight and motivation in work for those stakeholders.

    Of course, this can be difficult for a public company with many, many shareholders. It is still possible however, by properly defining the shared values, focusing on client delight and being clear in their communication and search for shareholders about both, something that few public companies even try.

    Reply
    • Jan 20 2013

      Hi Geoff. In my reply to Kristina I added some thoughts around customer delight. I agree that it certain situations, that may be a strong play.

      Reply
  6. Fernando Grijalva
    Jan 20 2013

    Organizations have a life cycle and go through several stages, from the entrepreneurial phase up to their decline phase.

    Management/leadership theories and methods vary according to the organization’s context. For example, for the successful entrepreneurial organization, the voice of the customer becomes an obsession during the forming stage. During this process the organization needs to sub-optimize some of its components (overworked people, high levels of waste through experimentation, etc) in order to delight their customers and enter the market.

    When the organization enters the norming stage, it has a working product/service. The customer may receive less innovation but more predictability (quality, cost, delivery, etc.) They always occupy a central role in the purpose of the organization. But, the organization is focused in finding ways to replicate what they have created by developing daily management systems.

    Mature and declining organizations go back to survival mode. In need of innovation, their focus turns again to the customer……..and they either fail or the cycle continues.

    Competent managers will optimize the interactions between the Voice of the Customer and the Voice of the Process (Internal organization and external stakeholders). No customer will be consistently delighted unless the company delights its employees and rest of stakeholders (government, banking, suppliers, community, etc.) The job of management is optimization of the system.

    Reply
  7. Dave Moran
    Jan 20 2013

    I recently blogged about the need to “Delight Your Customer Today, Enjoy Profits Tomorrow,” but only to point out that too many companies over-emphasize the wrong things, like “making money.” (Making a profit is a great measure, it ensures that you are doing all the right things.) Companies need customers and they darn well should understand their customers’ needs and what they value.

    Reply
    • Jan 20 2013

      Hi Dave. 100% agree about understanding what your customers value. That takes more insight than a customer survey. Even qualitative research (focus groups, interviews) often misses the mark because customers have difficulty expressing what it is about a good/service that they value.

      Reply
  8. Ralf
    Jan 20 2013

    Customer satisfaction is more of a means than an end, so to speak.

    But sooner or later it is of course obvious, that the initial primary goal cannot be seen in isolation. A founder cannot sustain himself for a longer period of time without customer satisfaction.

    So in the end, many parties – parts of the company system, parts of the environmental system – need to be satisfied.

    You can do business without satisfied customers for some time. You can do business without satisfied employees for some time. You can do business without a satisfied natural environment for some time. You can do business without satisfied IRS for some time 😉
    etc.

    For prolonged business, though, a satisfaction balance has to be establied. A dynamic equilibrium, I´d say.

    Reply
  9. Dirk
    Jan 20 2013

    The only purpose of a business is to make money

    Here’s why:

    The economic system is a complex and adaptive social system. A business is a business as long as it survives as a member of the economic system. Since the economic system’s binary distinction is having-money vs. not-having-money, the purpose of a business is to make money. There is no other.

    I remember hearing an EasyJet cabin crew member dismissing the passengers saying “and remember, nobody loves your money more than we do” (with an ironic undertone). A refreshingly honest guy, he earned a big cheer.

    If you set up an organization (better, let it self-organize) to implement a business, in order to be successful our business is well advised to focus not only on customer value, but have an eye on the motivation of all parties involved (aka stakeholders).

    But a business is not required to satisfy everyone. It is basically free to do whatever it can get away with, as long as it makes money. And some people would argue that the most successful businesses, while carefully observing all their stakeholders, do not aim to satisfy them all. I didn’t say I like it this way.

    Reply
  10. Daniel Spartson
    Jan 20 2013

    Great insight. You might find this research interesting. http://bit.ly/Wg8G0V It shows the impact of satisfaction as well as other factors (trustworthniness, image, etc.) on customer loyalty. Largely agrees with your findings, with some minor tweaks.

    Reply
  11. Feb 16 2013

    Great blog, indeed.

    Reply
  12. Martin A. Koschat
    Feb 21 2013

    There are many companies and brands that are very successful with only a minimal amount of customer focus and customer engagement – companies that could not be described as customer centric by any stretch of the imagination.

    Reply
  13. Doug Pedersen
    Feb 21 2013

    Dow Corning has a proud tradition of active customer engagement, and management sees the company not only as a supplier of chemicals but an active partner in solving its customers’ problems. About 10 years ago, the company realized that many of their customers did not want this level of attention but, instead, preferred a better price. Dow Corning responded by successfully launching its brand Xiameter, which stands for a very clear value proposition around a limited assortment of high quality products, ordered on the internet and distributed in bulk without any service, generally at a very attractive price. With Xiameter, the focus is on the value proposition rather than the customer; customers self-select if they find the value proposition attractive and many do.

    Reply

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