Customer Satisfaction: Xiaoling Chen, Melissa Martin and Kenneth Merchant Report on Their CIMA-Backed Research into the Relationship between Client Care and Profitability at a US Company
Chen, Xiaoling, Martin, Melissa, Merchant, Kenneth, Financial Management (UK)
Customer satisfaction is widely accepted as potentially one of the most important non-financial "performance drivers". In other words, it's thought of as a direct and reliable indicator of a business's future performance. But there is still much to learn about both the measurement and effects of customer satisfaction. Few companies conduct formal tests of the predictive abilities of their nonfinancial performance measures. Research findings on the links between customer satisfaction and financial performance have been mixed and little evidence exists on how best to measure satisfaction.
Our CIMA-sponsored study took advantage of our access to a unique research site: a medium-sized US firm in the homebuilding industry with a culture based on customer satisfaction. The company's managers believe that delighting customers to the greatest possible extent--in their words, creating "evangelical buyers"--is the best way to ensure strong financial performance.
The company used two consulting firms to conduct customer satisfaction surveys for it. Their methods varied significantly in both content and timing. One of the consulting firms asked a lot of generic questions and measured each customer's satisfaction once: six months after the end of the calendar year in which the home was purchased. The other firm, which specialised in the home-building industry, used questions more tailored to the sector and the client company's chosen strategy. It measured customers' satisfaction at three fixed times: 30 days, five months and 11 months after the purchase of a home.
Our analysis, which compared the two consultancies' customer satisfaction measures with the company's performance data, yielded several key findings. First, we discovered that one-dimensional, overall satisfaction indicators such as the popular "net promoter score" at best tell only part of the story. Satisfaction levels concerning different aspects of the buyer's experience for example, the seller's approach, the closing process and the build quality of the home--can be quite different. And, importantly, the different dimensions of satisfaction can have significantly different effects on key outcomes such as referrals and future profits.
Second, improvements in customer satisfaction beyond a certain level provide diminishing returns. We found that company profits were maximised when satisfaction scores were just above 5.5 on a six-point scale. Aiming higher is more costly than it's worth. This is typical of many satisfaction-performance relationships, although the point at which diminishing returns set in varies according to the aspect of satisfaction being measured. What is important is that the goal of creating evangelical buyers is not effective. It is better to try to make them mostly satisfied at a reasonable cost.
Third, we found that the content of a customer satisfaction survey matters. The survey that was more tailored to the homebuilding company's industry was far better than the generic poll at predicting all measured aspects of performance: referrals, warranty costs, revenues and profits.
Lastly, we found that the scheduling of measurements is also significant. In some cases it's important to survey customers soon after they make a purchase, because their memories of the experience will fade. But other aspects can be measured reliably only after the buyer has lived in the house for some time to allow them to assess, for example, the convenience of the layout, the quality of the construction and the ambience of the housing development.
The findings of our research have direct implications for practice. They suggest that managers need to be more sophisticated in running performance measurement and incentive systems. They need to learn whether customer satisfaction is materially importance to their business. If it is, they need to learn how, when and where best to measure it. They need to assess both the benefits and costs of improving customer satisfaction ratings so that they can determine whether further improvements are worthwhile. …