Sunday, May 4, 2014

Customer Satisfaction - A Useful Metric?

We’ve now completed our preliminary customer experience assessment, and we have a high level sense of where the company is serving customers well, as well as an understanding of the problem areas.  One item that needs to be addressed, and in fact is our first priority, is the establishment of a customer transaction survey, and an accompanying closed-loop find and fix system.  This will serve as the foundation of our CX operations.  We’ll discuss the closed-loop approach in much more detail in future posts.  For now, let’s start with the design of a transaction survey.  A timely article discussing customer satisfaction appeared in the Spring 2014 issue of the MIT Sloan Management Review.  The authors focus on the relationship between satisfaction and customer spend.  Because of the instructive nature of this publication, here’s my summary of the key findings:
  1. The relationship between customer satisfaction and spending is very weak
  2. The Return on Investment on increasing customer satisfaction is trivial to negative
  3. What matters is how customers rank your brand in satisfaction relative to your competitors
A key finding from the article is that, academic research consistently finds a positive statistically significant relationship between satisfaction and business outcomes such retention, share of wallet, referrals and stock performance.  The problem is that the relationship between satisfaction and spend is weak.

The authors go on to identify three related issues...
  1. There is a downside to continually devoting resources to raising customer satisfaction because it’s difficult to quantify benefits of increasing satisfaction...the costs typically outweigh the benefits.
  2. High satisfaction is a strong negative predictor of future market share.  The article sites McDonalds and Wal-Mart as two of the more notable examples of this phenomena.  Both companies enjoy significant share in their markets, yet they trail competitors in customer satisfaction.  Why is this?  The authors argue that, gaining share typically comes from attracting customers whose needs are not completely aligned with the company’s core target market...these companies serve diverse markets with various expectations of customer satisfaction.  A significant implication arising from this issue centers on the idea of benchmarking.  Specifically, benchmarking best-in-class performers is usually not appropriate because these companies are typically niches brands with a focused customer base.
  3. Knowing a customer’s satisfaction is not predictive of future spending and how it will be divided among competing brands.  Because of divided loyalty among multiple brands, improving customers’ share of spending with your brand represents a far greater opportunity than efforts to improve customer satisfaction.
The article concludes by asserting that what matters is the relative rank that your brand’s satisfaction level represents vis-a-vis your competitors.  From this, the prescription that follows is that you must track the percentage of customers who give your brand their highest satisfaction rating among all the brands they use.
In a similar vein, the book Loyalty Myths also makes a similar case about the often misleading nature of customer satisfaction ratings.  The authors state several points that are similar to those made in the Sloan Management Review article...
  1. For almost all business enterprises worldwide, greater than 85 percent of their customers would be classified as satisfied.  As a result, satisfaction (the absence of dissatisfaction) is typically not a point of competitive differentiation.
  2. Customer satisfaction needs to thought of as falling into one of three general categories: dissatisfied, merely satisfied, and delighted.  It is not until customers achieve this upper level of satisfaction - delight - that satisfaction meaningfully influences loyalty.

I’ve also had first-hand experience with the shortcomings associated with customer satisfaction ratings.  Working with a well known brand that consistently attained top-five satisfaction ratings among competitor brands, I dug into the customer retention data and was shocked to learn that annual defection rates over several years exceeded 50 percent.


So, what are we to make of these well documented findings regarding customer satisfaction?  I personally think that asking customers if they are “satisfied” with a product or service is misleading simply because the term “satisfaction” is fairly subjective...does it mean the customer is pleased? loyal? an advocate? exceptionally delighted?  Who knows...and so relying on satisfaction as a customer experience metric can be dangerous.  In future posts, we’ll try to develop alternative measures that are more insightful and informative.

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