Traditional marketing, and for that matter, many Six Sigma practitioners, are captive to the “contented customer theory” which postulates that a satisfied customer is a profitable customer. Let’s look at this issue more closely.
When customer satisfaction is the objective of either marketing efforts or Six Sigma deployments, it is elevated to the status of a strategic metric. Accordingly, it is cultivated with the idea that improving customer satisfaction will improve revenues, market share and profitability. To the advocates of the “contented customer theory” this makes sense. Unfortunately, the evidence does not support the linkage between customer satisfaction and market and financial performance.
Frederick Reichheld in a 2003 Harvard Business Review article entitled, “The One Number You Need to Grow” points out the lack of relationship between satisfaction and organizational performance.
Our research indicates that satisfaction lacks a consistently demonstrable connection to actual customer behavior and growth. This finding is born out by the short shrift that investors give to such reports as the American Consumer Satisfaction Index. The ACSI, published quarterly in the Wall Street Journal, reflects the customer satisfaction ratings of some 200 U.S. companies. In general it is difficult to discern a strong correlation between high customer satisfaction scores and outstanding sales growth. Indeed in some cases, there is an inverse relationship; at Kmart, for example, a significant increase in the company’s ACSI was accompanied by a sharp decrease in sales as it slid into bankruptcy (p. 4).
Reichheld concludes with one other piece of proof – this one from the auto industry.
The marketing executive at the company wanted to understand why, after the firm had spent millions of dollars on customer satisfaction surveys, satisfaction ratings for individual dealers did not relate very closely to dealer profits or growth (p.4).
In my own consulting work with different types of organizations, the lack of relationship between satisfaction and performance has been well documented. Banks with high ROAs (Return on Assets) often have the lowest satisfaction scores. Companies with high satisfaction scores are losing market share. During one seminar with marketing analysts I challenged participants to offer evidence that they have found that satisfaction does have a relationship with market or financial performance measures. Only one person spoke up indicating that her organization had done extensive work on satisfaction and found a R2 of .25 existed between satisfaction and sales. I pointed out that the R2 statistic indicated the amount of variance explained in the dependent variable (sales) by the independent variable (satisfaction). Translating this into English means, that satisfaction only explains 25% of the changes in sales. Put another way, 75% of the changes in sales were explained by some other factor or factors! Not convincing testimony to the power of satisfaction. This strongly suggests that by attempting to improve satisfaction you will get only marginal returns to sales, if any at all.
Value, customer value that is, is a strong leading indicator of growth and profitability. Here’s some proof from Brad Gale author of the 1995 Managing Customer Value.
AT&T spent the years after its breakup in 1983 losing market share….the loses were particularly painful to quality advocates, because AT&T’s old fashioned “customer satisfaction” surveys showed the company scoring well even in the businesses that were losing share most dramatically. In long distance, the company’s core business, the share losses were running at six points a year – equivalent to more than a billion dollars a year in sales (p. 6).
Brad Gale quantifies the degree to which value (market perceived quality) impacts earnings.
Using the market-perceived quality metric (value) … and the Profit Impact of Market Strategy (PIMS) database, we can demonstrate that the companies who move into a superior quality (value) position with a market-perceived quality ratio that is at least 24% better than their competitors earn a return-on-sales of more than 12 percent….Businesses that get pushed into an inferior quality position with a market-perceived quality ratio that is 24% or more worse than the competition earn a profit that is less than 4% of sales (p. 15-16).
Superior customer value is the best leading indicator of market share and competitiveness. And market share and competitiveness in turn drive the achievement of long term financial goals such as profitability, growth, and shareholder value (p. 26).
Customer value is the core of Six Sigma Marketing. Unlike its more traditional parents, Six Sigma and marketing, SSM has a laser like focus on the creation and delivery of customer value. It does so because of the strong linkage between value and performance. Please share with me and other readers, your experience regarding customer satisfaction and/or customer value.