Customer satisfaction is the extent to which a company can meet or exceed the most important needs of the largest proportion of its customers. How does customer satisfaction benefit a company?
A 2023 paper published in Marketing Letters synthesized 245 articles representing a combined sample size of 1,160,982. The results show a positive association of customer satisfaction with many customer-level outcomes (retention, word-of-mouth, spending, and price) and firm-level outcomes (product-market, accounting, and financial-market performance).
The results are summarized in Figure 1. CEOs should worry about increasing customer satisfaction because it increases customer loyalty, drives financial growth and improves shareholder value.
FIGURE 1
The Benefits of Customer Satisfaction for Companies
CUSTOMER LOYALTY. Satisfied customers stay with a company longer, say more positive things about the company’s to others, spend more money with the company, and more tolerant of price increases. These customer loyalty behaviors drive financial growth.
FINANCIAL GROWTH. When a company’s customers stay longer with it, buy more and recommend it to others it experiences higher sales, margins, and cash flow. When a company’s customers are less price sensitive, they will be less likely to leave to company if it raises prices or if competitors offer lower prices. This decreases the cash flow variability of the company and increases its margins. Thus, customer satisfaction drives financial growth.
SHAREHOLDER VALUE. Companies with stronger sales and profits, higher cash flow and lower cash-flow variability are a better investment for shareholders and debtors. That is why customer satisfaction is positively associated with stock returns and long-term firm value. Higher customer satisfaction also reduces stock risk and drives down a company’s cost of debt. CEOs focused on driving shareholder value should start by developing a customer-satisfaction
strategy.
CONCLUSION: Most CEOs intuitively believe they should satisfy customers. Yet, in the absence of credible evidence they may hesitate to create and implement a strategy based on customer-satisfaction. Evidence from more than 1.16 million customers shows that satisfaction is a critical driver of customer loyalty, financial growth and shareholder value. That is why high-performing CEOs worry about customer satisfaction.
Learn more about the power of customer satisfaction in Chapters 1, 2, and 3 of Market-Based Management (7 th edition). Chapter 1 can be reviewed online at www.mbm-book.com.
References:
- Mittal, Vikas, Kyuhong Han, Carly Frennea, Markus Blut, Muzeeb Shaik, Narendra Bosukonda, and Shrihari Sridhar (2023), “Customer satisfaction, loyalty behaviors, and firm financial performance: what 40 years of research tells us” Marketing Letters, 34(2), 171-187.