The Seven Drivers of Customer-Satisfaction ROI

Customer satisfaction is a major predictor of a firm’s financial health. Companies try to measure and improve customer satisfaction using customer surveys. In helping companies develop and implement their customer satisfaction strategy I find two general patterns.

 Many companies have a high customer satisfaction rates (90% or more customers indicate they are “satisfied”). Yet, these companies have a difficult time translating the high satisfaction-levels into action. Despite high satisfaction ratings, they experience low customer retention, declining profitability, and low rates of customer acquisition. Other companies have low to mediocre satisfaction scores. They find that all attempts at improving customer satisfaction unsuccessful.

Why does this happen? Is it the case that customer satisfaction is unrelated to retention or profitability? No. In my engagement with over a thousand satisfaction studies for firms all over the world, I have found that companies can reap the benefits of customer satisfaction if they tap into its drivers.

 ROI driver # 1: Develop a Customer Model: Most companies only measure and track overall satisfaction, and some companies track a net-promoter score. The belief is that tracking this overall metric is enough. Wrong. Companies need to develop a customer-model that measure all elements of the satisfaction profit chain. This chain is shown below.

Perceived performance on service/product attributes leads to overall satisfaction with the firm. Overall satisfaction is associated with customer retention which drives market share and profits. When firms only focus on a single part of the chain they miss the overall customer model.

Most firms only measure overall satisfaction. Some firms measure key attributes. Many firms fail to take appropriate measures of customer retention. Still others fail to link retention to profitability. To get the full benefit, the customer model should simultaneously measure and statistically model all aspects of the chain.

 ROI driver # 2: Identify key driver attributes: First, firms must identify specific attributes that are actionable. An attribute is specific and actionable when it can be objectively rated by customers and implemented by the company. For instance, I was involved in a satisfaction study for a document delivery company. Customer interviews showed reliable delivery to be a key driver. However, this was not specific enough. Further research showed that, by reliable delivery, customers really meant delivery within two days. Thus, in the satisfaction study, we included the latter as the attribute, because it was specific and actionable. Over time, the firm made it a goal to achieve 99% of its deliveries in two or fewer days.

Second, all attributes are not equally important. We determine the relative importance of each attribute using multivariate statistical analysis that adjusts for the inter-relationship among attribute ratings. Simplistic techniques such as rank-ordering attributes based on average scores of a correlation coefficient can be misleading. They should be avoided.

Many firms do not identify key driver attributes and end up investing their limited resources on more attributes than is necessary. A study of automotive customers showed that among the 30 attributes measured in the satisfaction survey, only five were key drivers of overall satisfaction. These included: reliability, comfort, transmission, brakes, interior roominess, and styling. Further research showed that interior roominess has specific dimensions such as: leg room, elbow space, and high ceiling. Similarly, a study for a national lawn-care company showed only punctual service and competitive pricing were key driver attributes. The analysis enabled the companies to narrow their spending on those attributes that are most relevant to their customers.

ROI driver # 3: Customize key drivers for different segments: Different customer segments ascribe different levels of importance to an attribute. For example, a satisfaction study for an airline company showed quality of meals was equally important to all customers. However, comfort was eight times more important among business travelers who more frequently took long international trips. Similarly, in a study of computer programmers, and attribute such as documentation was more important among new users, but reliability and capability were more important for expert users.

Failure to consider segment-specific differences may lead a firm to optimize performance on the wrong attribute for a targeted segment. Worse yet, by failing to consider segment-specific differences firms may conclude that, on average, an attribute is not important when in fact its importance to a particular segment may be artificially masked. Learning: ascertain the target segments for your company and then conduct separate key-driver analysis for each segment.

ROI driver # 4: Time changes everything: In a study of mutual-fund customers we found trust and confidence in the advisor is very important in the early stages of the relationship. However, over time efficiency becomes the key driver of satisfaction over time. Similarly, a credit card company found that among new users, credit limit and interest rate are more important, but among customers who have been with the company for a long time additional services such as frequent user points were more important. Thus, different attributes should be stressed at different times in a customer’s relationship. Statistically addressing these time-sensitive changes allows a company to use a dynamic approach toward its customers.

 ROI driver # 5: Link customer satisfaction to retention: Though positive, the strength of the relationship between customer satisfaction and repurchase behavior may be affected by many factors: the aggressiveness of competition and customer characteristics. In a study of automobile buyers, my research showed that satisfaction had a stronger effect on repurchase behavior among males than females. Similarly, we found that the association between patient retention and patient satisfaction differed based on patient income.

Firms also need to customize their measures of retention. For an automotive company it may be simple purchase or repurchase of their brand. For a telephone company it may be the number and duration of calls made, and the number of days/months that a consumer stays with the company. For a bank, the appropriate retention metrics may include share of wallet, number of accounts, and the balance in each account. Unless retention measures are carefully aligned with a firm’s strategy, they may not be actionable.

ROI driver # 6: Monetize customer satisfaction and retention: Retaining a customer benefits a firm in many ways. Higher customer retention means a base of customers who buy more frequently, in greater volumes, are more prone to try other offerings by the firm (“cross-buying”), generally require lower maintenance, and become less sensitive to the outreach of competitors, thus increasing revenues while lowering the cost of marketing and sales by engaging in positive word-of-mouth. Therefore, retained customers are a revenue-producing asset for the firm.

Customer acquisition costs determine the price of this revenue-producing asset. A firm must first spend resources to acquire customers (acquisition cost) and then to cultivate them (maintenance cost). Balancing these is the revenue stream (revenues) generated by a customer. The contribution to the bottom line then is [cumulative revenue - (acquisition cost + cumulative maintenance cost)]. The acquisition cost is an upfront expenditure, while the revenue comes over a long period of time – hence, the importance of customer retention.

A firm focused only on customer acquisition, without a good retention strategy will lose money. The revenue-stream from a retained customer is lost to the firm when the customer leaves. The firm not only loses sales, but also the benefits of retained customers such as lower servicing and marketing costs. The loyal customer has to be replaced (at a high acquisition premium) by a new customer who initially buys less frequently and in smaller quantities (lower revenues), requires more service (higher service cost), and is less likely to recruit new customers (higher marketing costs). To make the same level of sales, a firm with a low retention rate must incur higher costs. The deleterious impact of customer defection can be much larger than the benefit reaped from retaining a customer. The competitive nature of markets amplifies this asymmetry, as firms with relatively low customer satisfaction are unlikely to attract many delighted, loyal customers from their rivals.

ROI driver # 7: Profit-based customer segmentation: Customers differ in the revenue streams they generate for a company. Firms need to focus on retaining high-value customers, or those customers who have the potential to become high value customers. For example, a leading mutual fund company found varying levels of retention and profitability among different customer segments. In one segment it was able to recoup all its customer acquisition cost within six years, while in another segment it would have taken the firm over 230 years to recoup the customer acquisition cost. As this example demonstrates, firms should assess the retention-profitability link separately for each segment and then decide on an optimal resource allocation strategy to optimize retention and profitability. In doing so, do not confuse revenues with profitability. Some high-revenue customers may not be profitable!

Conclusion

These seven drivers can help companies can ensure their customer satisfaction programs generate the anticipated ROI. In my experience, every satisfaction study needs to be customized for a firm’s specific goals. This customization can drastically reduce the incidence of costly mistakes and help firms maximize their ROI on customer satisfaction.

Cited and suggested articles:

Anderson, E.W. and Mittal, V., 2000. Strengthening the satisfaction-profit chain. Journal of Service research, 3(2), pp.107-120. Available at SSRN: https://ssrn.com/abstract=2345327

Danaher, Peter J. "Customer heterogeneity in service management." Journal of Service Research 1, no. 2 (1998): 129-139.

Keiningham, T.L., Cooil, B., Aksoy, L., Andreassen, T.W. and Weiner, J., 2007. The value of different customer satisfaction and loyalty metrics in predicting customer retention, recommendation, and share-of-wallet. Managing Service Quality: An International Journal, 17(4), pp.361-384.

Mittal, V. and Frennea, C., 2010. Customer satisfaction: a strategic review and guidelines for managers. MSI Fast Forward Series, Marketing Science Institute, Cambridge, MA. Available at SSRN: https://ssrn.com/abstract=2345469

Oliver, Richard L. Satisfaction: A behavioral perspective on the consumer. Routledge, 2014.

All comments and suggestions are welcome.

Dr. Vikas Mittal is the J. Hugh Liedtke Professor at Rice University. He may be reached at [email protected]. He teaches customer-focused strategy, strategic decision making, and marketing research to MBAs and executives. He has consulted with companies in industries such as banking, healthcare, pharmaceutical, oil & gas/ energy, and hospitality. His research examines customer-based strategy, and decision-making processes.