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The High Price of Customer Satisfaction

Book Description

“Satisfaction guaranteed or your money back” is a business promise made to consumers since 1875, when Montgomery Ward used it to differentiate his mail order catalog. It is now a vow many businesses make. However, the correlation between increasing customer satisfaction and increasing customer spending with your company is very weak, according to the authors. Their research finds that changes in customers’ satisfaction levels explain less than 1% of variation in a company’s share of category spending. Is customer satisfaction worth the cost? To find out, the authors investigated the relationship between customer satisfaction and business outcomes, gathering data from more than 100,000 consumers covering more than 300 brands. Although high customer satisfaction ratings are typically treated by managers as being universally good for business, the authors’ findings indicate that the benefits are not nearly so clear-cut. There is a downside to continuously devoting resources to raise customer satisfaction levels. Managers are rarely able to accurately quantify the cost associated with increasing customer satisfaction scores (for example, from 8.7 to 9.1 on a 10-point scale), nor are they able to determine precisely what such an increase is actually worth. It turns out the return on these investments is often trivial or even negative. Knowing a customer’s satisfaction level tells you little about how he or she will divide his or her spending among the different brands used. As a result, changes in customer satisfaction levels are unlikely to have a meaningful impact on the share of category spending customers allocate with your brand. Why? Single-brand loyalty, which was common in our parents’ and grandparents’ generations, has been replaced with loyalty to multiple brands in a category in many sectors. Because of this divided loyalty, more customers partially defect (in other words, they give more of their business to a competitor) than completely defect from a business or brand. As a result, improving customers’ share of spending with your brand tends to represent a far greater opportunity than efforts to improve customer retention. kThe measure that really matters, according to the authors, isn’t your percentage of delighted customers or promoters. What matters is the relative “rank” that your brand’s satisfaction level represents vis-àvis your competitors.