Customer Satisfaction leads to higher stock prices: New evidence

by Colin Shaw on July 20, 2012

As one of the first Customer Experience dedicated consultancies; we’ve always known that it’s not about making customers happy but to motivate customers to act in a way that is valuable to the business. We’ve seen more and more people open to this concept as we go deeper into the “experience economy” but it is still either missing or way down the line in the c-suite agendas. As their pay packages are linked with the company’s share price and the question that keeps them awake at night is “how to improve our share price” we thought we’ll share this new evidence by the CFI Group that ties customer satisfaction to higher-than-average stock prices.

The CFI Group created a stock portfolio in 2000 to examine the relationship between customer satisfaction and financial success in the short and long term, using data from the American Customer Satisfaction Index (ACSI), and the National Customer Satisfaction Index UK (NCSI). According to the study, “the cumulative return of a $100 investment in the ACSI fund from April 2000 to April 2012 was $490, a gain of 390 percent. By comparison, the S&P 500 returned only $93, a 7-percent loss. In the United Kingdom, the NCSI portfolio earned a return of 59 percent from April 2007 to June 2011, and the FTSE 100 had a negative return of 6 percent.” In addition, higher levels of customer satisfaction are tied to high levels of positive cash flows with low volatility, and positive earnings surprises.

University of Michigan professor and ACSI founder Claes Fornell attributes the correlation to the influence customer satisfaction has on retaining customers and driving loyalty. Investors hate risk, and a company with strong customer retention is one where risk is diminished. “Companies with highly satisfied customers generate superior returns because customer satisfaction is critical for repeat business, and that type of business is usually very profitable,” Fornell said in a press release. Other research has estimated that every customer you keep represents at least 3 that you don’t have to attract. And when it comes to acquiring a new customer the cost usually runs from 2-4 times the annual cost of keeping an existing one.

The value to the bottom line goes beyond just keeping the existing customers. It is estimated that defecting customers will tell 8-10 people about their negative experience. One in 5 will tell 20 people (multiply for Social Media and the internet). Thus the positive experience keeps the company in the radar of a lot more customers than otherwise. In addition you have the positive word of mouth generated. Research has found that a referral from a loyal customer has a 92% retention rate versus 68% for a customer acquired from advertising.

Prof. Fornell makes an important remark though: “loyal customers tend to be highly profitable as long as their loyalty comes from their satisfaction and not because prices are low”. Whilst we see the Customer Experience as a way to differentiate yourself from the competition and exit the price race to the bottom, we don’t think that if your business model is based on “low prices” this should be seen as an excuse for providing poor service to your customers. Southwest Airlines in the US is a low cost airline that has consistently been amongst the top performers of the ACSI and it’s no surprise the company has posted a loss only 2-3 times in its 45 year history. The key for Southwest’s success is knowing what customers really want and value and creating an outstanding customer and “fun” focused culture and brand. Have a look at this video to see how they do things with “luv” and the rewards this approach generates.

Another example of a “low-cost” focused model with a great customer experience comes from the supermarket retailer ASDA in the UK (owned by Walmart). With a market-leading price promise, Asda’s customers value both low prices and the friendly staff – a powerful combination. Using TV to communicate their extensive price-based research, the firm consistently reassures its price-sensitive customers that it is continuing to deliver the brand promise.

How do you build the business case for your customer experience initiatives? How do you get senior executives on board? We’d be interested to hear your challenges and stories of success.

Zhecho Dobrev is a consultant and project manager for Beyond Philosophy. He has worked with a wide array of large corporate companies. Zhecho’s expertise includes customer behaviour analytics, customer loyalty, complaints management and journey mapping. He holds an MBA and Master’s degree in International Relations.

Zhecho Dobrev on Twitter @Zhecho_BeyondP
Colin ShawCustomer Satisfaction leads to higher stock prices: New evidence

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