Nov. 16, 2016
Rather than taking a narrow view of customer satisfaction, companies can earn more by deriving insights and informing strategies with customer feedback
Customer satisfaction is a major predictor of a firm’s financial health. Companies try to measure and improve customer satisfaction using customer surveys. Research shows many companies use a short, 2-5 item survey to document their overall customer-satisfaction rates. Typically, such a company finds a high rate of overall customer satisfaction (90% or more customers indicate they are “satisfied”). Happy with it, management becomes complacent.
Despite high customer-satisfaction rates, companies that only measure overall satisfaction have a difficult time realizing its benefits. Many of these companies experience low customer retention, declining profitability, and low rates of customer acquisition. Why does this happen?
Is it the case that customer satisfaction is unrelated to retention or profitability? No. Rather, this happens because companies take a narrow view of customer satisfaction. They can substantially improve the ROI on the customer satisfaction research if they tap into its ROI drivers.
ROI driver # 1: Develop a customer-based model.
Instead of focusing only on overall satisfaction, a customer-based model also provides:
Perceived performance on key-driver attributes can increase overall satisfaction with the firm. Overall satisfaction is associated with customer loyalty—retention and referrals—which can drive revenues, market share, and profitability. The execution plan and KPMs should focus on key attributes linked with overall satisfaction.
Most firms only measure overall satisfaction. Some firms measure key attributes. Many firms fail to take appropriate measures of customer loyalty. Still others fail to link loyalty to revenues and profitability. To improve customer satisfaction ROI, a firm should simultaneously measure and statistically model all aspects of the customer model.
ROI driver # 2: Identify key driver attributes.
Identify specific attributes that are actionable. An attribute is specific and actionable when it can be objectively rated by customers and operationally implemented by the company. In a satisfaction study for a document delivery company, qualitative interviews showed reliable delivery to be a key driver. However, this was not specific enough. We drilled down to discover that reliable delivery really meant delivery within two days. In the satisfaction study, we included delivery within two days as the attribute. It was specific, measurable, and actionable. The firm made it a goal to make 99% of its deliveries in two or fewer days.
Second, all attributes are not equally important. We can determine relative attribute importance 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.
When a firm does not identify key-driver attributes, its management ends up investing 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: roominess, accessories, handling, transmission, and brakes. 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.
A key driver analysis enabled management at each company to narrow its execution focus. This enabled it to improve overall satisfaction with fewer resources.
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 among airline customers 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, attribute such as documentation was more important among new users, but reliability and capability were more important for expert users.
By incorporating segment-specific differences firms can better optimize performance on the attributes most important for their target segment(s). Learning: ascertain the target segments for your company and then conduct separate key-driver analysis for each segment.
ROI driver # 4: Time changes everything.
A study of mutual-fund customers showed 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. 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.
Strengthen relationships and overall satisfaction by focusing on those attributes that are most relevant 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 customer loyalty.
A large body of academic research shows a positive association between customer satisfaction and customer loyalty metrics like retention, word-of-mouth, and referrals.
Yet, for different firms and industries this positive association can vary in magnitude. A study of automobile buyers found satisfaction had a stronger effect on repurchase behavior among males than females. Another study showed the association between patient retention and patient satisfaction differed based on patient income.
Firms also need to customize their loyalty metrics. For an automotive company it may be purchase or repurchase of its 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. The appropriate retention metrics for a bank 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 consume resources without being actionable or improving financial performance.
ROI driver # 6: Monetize customer satisfaction and customer loyalty.
Customer loyalty 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. All this should increase revenues while lowering the cost of marketing and sales through positive word-of-mouth by satisfied customers. Therefore, retained customers are a revenue-producing asset for the firm.
Customer acquisition costs determine the price of this revenue-producing asset. Customer acquisition costs may be lower for a company whose customers engage in positive word of mouth, recommend the company to others, and refer it to their colleagues.
Research shows a firm that simultaneously focuses on customer acquisition and customer retention can be more profitable than a firm that only focuses on one. As an example, consider a firm only focused on customer acquisition. The revenue-stream from a retained customer is lost to the firm when a 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). Smart firms link their customer satisfaction strategy to their customer-lifetime-value metrics. This ensures the firm can identify, acquire, and retain the most profitable customer segments.
ROI driver # 7: Shun spurious loyalty.
There is a growing trend focus on customer loyalty metrics such as customer referrals, customer recommendations, and customer acquisition. As the recent example of Wells Fargo shows, an exclusive focus on loyalty metrics can mislead executives and employees and even harm customers.
Customer loyalty must be earned through customer satisfaction, and not garnered via shortcuts such as high-pressure sales tactics, easy giveaways to lure customers, and price-based promotions. Firms should develop an integrated satisfaction and loyalty strategy to optimize overall revenues and profitability. In industries such as banking, business-to-business, and healthcare, many companies are already doing this.
These seven ROI drivers can help ensure your customer satisfaction and loyalty programs generate the anticipated ROI. To do this, your company will also need to customize its approach to its strategic goals and execution abilities. This customization can drastically reduce the incidence of costly mistakes and help firms maximize their ROI on customer satisfaction.
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