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Information Is Power

This article discusses the vital need for customer satisfaction research and the bottom line impact of that information.

At Pearson NCS, research begins with a partnership in which our professionals understand your operations, processes and overall strategic direction. NCS' action-oriented research is designed to assess key facets of your organization as perceived by your constituents. Still the question remains, "why should I bother to spend the time and money necessary to gather and analyze this information?"

Read any business magazine or newspaper and you will see the words "Customer Satisfaction." However, customer satisfaction is more than a current buzzword or catch phrase. It plays a vital role in business today, not only through the workings of national initiatives and quality awards, but also because financial success is driven by customer satisfaction.

As the following quotation indicates, recent awareness of customer satisfaction has come from two main sources.

"Awareness of the importance of customer satisfaction stems from two sources: 1) a national quality award given to outstanding American companies who demonstrate product and service quality; and 2) the desire to achieve financial security of companies which are able to satisfy their customers and subsequently able to keep them" (Hayes, 1992).

In the increasing competitive market place, the balance of power in business transactions is shifting to the ustomer. In recent years, consumers have become more demanding and unwilling to settle for less than the best. As the American Management Association states:

"High-growth companies stay in touch with their markets—and willingly spend the money to do so. They know their customers and they keep their knowledge fresh" (American Management Association).

However, even with all the focus on customer satisfaction, many companies are just burying their heads in the sand and hoping for the best. The only ones who really know how your customers feel are your customers. The needs and wants of those customers are changing as the marketplace continues to change. These changes are illustrated by Kenneth Long:

"More than half of the executive surveyed by the Gallup Organization (53%) report that demands from their company's customers are rising or changing a great deal" (Long, 1994).

Why Measure?

Today's leaders use actionable information to initiate and shape change for their organizations. Once change is made, leaders need to measure progress toward achieving their vision and goals through valid reliable measurement. There are many tangible reasons to invest in customer satisfaction measurement.

Proactive Indicators:

Don't be the last to know. Customers are increasingly using their wallets to express dissatisfaction with a product or service. Don't wait until financial indications let you know your customers aren't happy.

Resource Allocation:

In these times of tight budgets, you can't expect to change everything at once. By targeting those areas customers feel are most important, you can get the biggest bang for your buck.

Build Relationships:

A dedicated program can help a company build a stronger relationship with both current clients and key prospects. More and more in business today, committees are taking over the buying decision and traditional relationship selling is suffering. Customer satisfaction research can provide your sales force with the tools they need to win business.

Defection Opportunity:

All companies will lose some customers. The key is to manage defections and learn from them. By conducting follow up research, a company can learn what is the root cause for customer defections and act on that information, if necessary.

Measure Perceptions:

What is true and what customers believe is true may be two different things. For example, just because we know that our service calls are answered faster than the competitions', doesn't mean that customers believe that they are. To change customer perceptions you must address what they believe to be true, not necessarily the empirical truth.

Service and Product Reengineering:

Let your customers tell you what changes should be made to improve a product or service. Effective research can provide actionable information on what changes will most directly impact customer satisfaction

Measure Success of Changes:

After changes have been made, customer satisfaction research can let you know if those changes were successful.

Communicate to Customers:

A regular customer satisfaction survey will send the message to your customers that your company has: a focus on customer satisfaction, a willingness to let customers set standards, and an overall commitment to quality and continuous improvement.

National Awards and Initiatives:

Quality driven initiatives such as TQM, ISO 9000, CI and the Baldridge Award require a company to measure and monitor customer satisfaction on an on-going basis.

The Bottom Line

Most executives would agree that the information gathered through customer satisfaction research is valuable. The question that many are unable to answer is how valuable.

When answering this question, it is necessary to remember that companies spend millions of dollars annually collecting detailed revenue and cost data to track every product's financial performance. Similarly, sophisticated statistical process control systems are now used in most manufacturing plants to measure and monitor product and process quality. However, few companies use information systems to track service performance, and extensive service quality improvement programs rarely survive a budget crunch unless the profit potential is clear.

The rewards of placing this same emphasis on customer satisfaction can be significant. Making sound business decisions for change requires accurate information. How can the regular collection and effective use of customer satisfaction information affect the bottom line?

Referrals:

While a dissatisfied customer will tell more people than a satisfied customer, word of mouth is an invaluable asset. Many consumers rely on recommendations for initial discovery and evaluation of potential providers.

Repeat Sales:

Satisfied customers will provide a solid base of repeat sales. The lifetime value of a customer is significant, as is the cost of recruiting new customers. Research has indicated that it can cost a company from five to seven times as much to attract a new customer as to keep an existing customer. The profit relationship is described below:

"The average lifetime of a customer relationship doubles—from five years to ten years—as a company's retention rate goes from 80 percent to 90 percent. Longer-lived customer relationships can simultaneously drive down costs and expand market share...In most business, customer profits increase with customer life" (Dawkins & Reichheld, 1990).

Less Expensive Customers:

Experienced customers are generally less expensive for a company to serve. Once you have done business with a company, both companies know the products, services and procedures required to do business.

Customer Retention Drives Profit:

Retaining satisfied customers can have a distinct impact on profit. A study by Dawkins and Reichheld showed that a retention increase as small as five percent can drive up profits by as much as 85 percent in some companies:

"We find that a five-percentage-point swing in a company's customer retention rate drives profits by 25 percent to 85 percent for a wide range of industries" (Dawkins & Reichheld, 1990).

Premium Pricing:

When a customer believes that they are receiving the highest quality item, premium pricing may be justified. Savvy consumers are becoming aware that overall value is more important than bottom line price in many situations:

"...nine out of 10 business buyers believe that paying a higher price for quality is more cost-effective in the long run, and according to a study conducted by Kane, Parsons & Associates, most executives (86%) prefer to do business with suppliers that have made a formal commitment to quality improvement and customer satisfaction" (Long, 1994).

What Should I Do?

There is no one perfect answer to the question. Every satisfaction measurement program should be tailored to the specific needs of each business, and the parameters used to measure service quality will vary by industry and type of service function.

If you have questions about the information contained in this issue, if you would like more information, or if there is a topic you would like to see addressed in an upcoming issue of Research Notes, please contact your Account Manager, or feel free to call a member of the NCS Consulting Services staff.

References

American Management Association (AMA) "Research Report on Consumer Affairs."

Dawkins, P. M., & Reichheld, F. F. (1990, Summer). "Customer Retention as a Competitive Weapon." Harvard Business Review.

Hayes, R. E. (1992). Measuring Customer Satisfaction (p. xii). Milwaukee, WI: ASQC Quality Press: Milwaukee, WI.

Long, K. (1994, October). "The Need for Customer Satisfaction Research Will Continue to Grow." Quirk's Marketing Research Review.

Rosenfeld, P., Edwards, J. E., & Thomas, M. (1993, March). "Improving Organizational Surveys." American Behavioral Scientist, 36, pp. 414-418.

Rust, R. T., & Zahorik, A. J. (1993, Summer). "Customer Satisfaction, Customer Retention, and Market Share." Journal of Retailing, 69.

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