Customer satisfaction and profitability: is there a lagged effect?

Authors: Chiquan Guo a; Anand Kumar b; Pornsit Jiraporn c
Affiliations: a Department of Management, Marketing and International Business, College of Business Administration, The University of Texas-Pan American, Edinburg, TX 78539, USA
b Department of Marketing, College of Business & Administration, Southern Illinois University at Carbondale, IL 62901-4629, USA
c Department of Economics & Finance, College of Business Administration, Texas A&M International University, Laredo, Texas, 78091-1900, USA
DOI: 10.1080/0965254042000262878
Published in: Journal of Strategic Marketing, Volume 12, Issue 3 September 2004 , pages 129 - 144


Although customer satisfaction is one of the fundamental concepts in marketing theory and practices, the direct link between customer satisfaction and a firm’s profitability is still not clear. While most research focuses on how customer satisfaction contributes to the firm’s profitability, financial resources required to implement satisfaction programs are largely ignored in the literature. The purpose of this paper is to investigate the linkage between marketing metrics like customer satisfaction and sales and financial metrics such as profitability and stock prices. This paper takes a conceptual middle ground, proposing that customer satisfaction influences profitability, and at the same time, profitability impacts satisfaction.

As one of the fundamental concepts in marketing, customer satisfaction has been extensively studied. Since it is a behavioral construct, most behavioral researchers have investigated customer satisfaction at the individual consumer level using a transaction-specific perspective. Such a perspective involves consumers’ assessments of their interactions with a firm (or its products and services) on a specific occasion. However, consumers could also make satisfaction judgments based on their overall experience with a firm, which may be based on multiple transactions over a period of time. While investigating the link between customer satisfaction and the firm’s financial metrics, it makes more sense to consider consumers’ satisfaction with a firm that is based on their overall experience and not their satisfaction based on any one transaction

How customer satisfaction affects profitability

There are several models developed in the literature that suggest a link between customer satisfaction and profitability, In each of these models, the specific paths by which satisfaction contributes to the firm’s profitability is likely to be one of the following:
(1) Satisfied customers tend to be loyal and would be willing to buy more (repeated purchases) of the firm’s products at more profitable prices (high prices)
(2) Satisfied customers serve as an advertising medium by positive word of mouth, helping new customer acquisition;
(3) A high level of customer satisfaction requires good quality of products and competent after-sale services, which minimizes resources spent on fixing defective products.

Although the above rationales are intuitively appealing, there is evidence to show that satisfied customers do not always engage in behaviors that are necessary for satisfaction to lead to profitability via the paths suggested in (1) and (2) above . It is interesting to note that only through path (3) is profitability a direct result of customer satisfaction, i.e., without the relationship being mediated by loyalty or word-of-mouth.

In this study, they had intended to explore whether customer satisfaction has an immediate effect or lagged effect or both on profitability. This issue is of great importance and it is largely neglected in the literature.

METHODOLOGY

Data
The data on customer satisfaction used in this study is from the American Customer Satisfaction Index (ACSI) database administered by the University of Michigan School of Business and American Society for Quality Control.

Model estimation
Three separate equations are employed to capture the possible concurrent or lagged dynamics occurring between satisfaction, sales, and profitability

CONCLUSION
Company satisfaction performance in the past period positively affects current return on assets (ROA). Since ROA is the ratio of net income to assets, an increase in ROA means an unevenly larger increase in net income than equity or assets. Thus, a focus on satisfaction curtails short selling but boosts net income, which is the main path linking satisfaction to financial performance. The finding that current satisfaction performance has a negative effect on ROA is not intuitive, and needs to be further examined. It seems that satisfaction programs are costly in the short term, but they have long term strategic implications for firms. They have also found that sales and satisfaction are negatively related providing the leap of faith from the existing belief that market share is negatively related to satisfaction. Furthermore, past satisfaction reduces current sales, another counter intuitive finding that must be explored in the future. The results of event study also confirm that satisfaction has a direct bearing on the firm’s financial well-being. They concluded that marketing variables, at least customer satisfaction, are indeed of critical importance to the firm’s survival, growth, and success.

Comments about the article: Maintaining customer satisfaction is one of the most important topics of CRM, Quality Management etc. But it is not easy to calculate the return on investment of such programs (investments). Prior to such an investment It should be considered that the effect of this investment to profitability will be lagged. Budgeting of these projects should be done very carefully. In addition to that, the way how profitability will be affected should be assessed as well. The indexes similar to ACSI are so important, this information can be merged with other data such as industry specific information, budget etc. And these all these data can be used as a decision support tool prior to investmenst.