Customer Satisfaction, Loyalty, and Other Tall Tales
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:
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.
There’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:
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.