New Research Reveals Link Between Happy Customers and Strong Financial Performance

by Diane Berenbaum

As service advocates, we know in our hearts and minds that increased customer satisfaction leads to better financial performance. But, sometimes senior leadership needs more than our opinion—especially in an economic downturn when many organizations focus on cutting costs and scaling back. Some even shift their focus away from customer service since it is often perceived as a “cost center.”

This new research may surprise you and provide some data that will cause leaders to look at customer service with newfound respect and appreciation. According to two studies by the Stephen M. Ross School of Business at the University of Michigan, companies with the most satisfied customers have financial results that dwarfed the Standard and Poor's (S&P) 500 Index and a multitude of other meaningful economic benefits.

Take a look at the results:

  • A portfolio of companies with the happiest customers gained 75% from 2000 to 2005, far greater than the 19% gain for the S&P 500 Index.
  • Companies with high customer satisfaction ratings advanced 40%--or three times better than the S&P from 1997 to 2003.
  • The stocks of companies with the happiest customers were less volatile.

Customer Satisfaction and Stock Prices:  High Return/Low Risk

The University of Michigan study led to the following conclusion:  “It is possible to beat the market consistently with investment decisions based on customer satisfaction. Perhaps even more remarkable is that these results are not associated with a risk premium.” These findings are consistent with previous studies that a firm's satisfied customers are likely to improve both the level and stability of cash flow. 

As implausible as it may sound, investing in customer satisfaction is a high return/low risk strategy.

The link between happy customers and good stock is so strong that Michael Brush, an award-winning New York financial writer, suggests that this should influence your investing routine (MSN Money, Company Focus). I have certainly heard of people investing in companies that treat the earth and environment well. But, I never thought about investing in companies that treat their customers well!

Economic Benefits of Companies with Happy Customers

According to this study, in a competitive marketplace, companies that do well by their customers are rewarded with increased repeat business and new business (Their customers are more loyal and they share their joy with their friends). They also experience more cross-selling opportunities and greater marketing efficiency.

Customer satisfaction also tends to reduce customer complaints, transaction costs, price elasticity and customer defection.

Concerned about keeping employees happy and engaged?  Well, this survey found that customer satisfaction tends to reduce another increasingly important measure…employee turnover.

Companies that have strong relationships with consumers can also get away with price increases—and that's good for profits, according to Larry Coats, the manager of the Oak Value Fund. For example, H.J. Heinz, with a 4 point lead in customer satisfaction ratings over its peers, was able to increase prices 6% in the first quarter, more than any other larger cap company.

Looking for Customer Satisfaction Data?

Interested in discovering which companies have happy customers, for your own curiosity or your future investment plans? Check out ACSI, the American Customer Satisfaction Index (ACSI), developed by the National Quality Research Center of the University of Michigan. ACSI reports scores on companies, industries and sectors that are representative of the US economy. They produce indices for 43 industries and more than 200 companies and government agencies. 

ACSI conducts about 65,000 phone interviews asking consumers about their satisfaction with a company's goods/services, whether they have complaints and whether they are likely to do business with that company again. The answers are compiled and then used to create a score between 1 – 100 (highest). 

Customer Service Hall of Shame There's also MSN Money's Customer Hall of Shame. MSN asked Zogby International to conduct an online survey in March 2008. Over 7,700 respondents were asked to rate 140 companies in 14 industries on the level of customer service provided.  The response choices were “excellent,” “good,” “fair,” “poor,” “not familiar,” and “not sure.” MSN focused on the responses from customers who were familiar with the company and gave “poor” ratings.  The result:  The Customer Service Hall of Shame—the companies America loves to hate. 

Interested in Improving your Organization's Performance?

In this difficult economic period, some companies are looking for ways to increase sales and profits, or just stay afloat, despite ever increasing costs. Perhaps this new research will convince them that another approach will yield greater results and help them surpass their competitors. Now is the time to invest in customer service. Be sure your associates know how to treat your customers well. Don't cut back on critical customer-facing staff or the training needed to help them better serve customers. Focus on keeping customers and you'll keep your business financially healthy and strong.
Diane Berenbaum is a long-time contributor and former editor of the MAGIC Service Newsletter. She has more than twenty-five years of experience as a consultant, coach, and facilitator. Diane is the co-author of How to Talk to Customers: Create a Great Impression Every Time with MAGIC® .
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