Customer satisfaction: it is dead but it will not lie down

Citation

(2002), "Customer satisfaction: it is dead but it will not lie down", Measuring Business Excellence, Vol. 6 No. 4. https://doi.org/10.1108/mbe.2002.26706dab.006

Customer satisfaction: it is dead but it will not lie down

It is time we stopped paying so much attention to customer satisfaction. It really is not very important for most businesses any more. The trouble is, it may be dead but it will not lie down.

Declining satisfaction figures

Customer satisfaction with service industries in the USA is steadily deteriorating and there is little reason to suppose that the situation in Europe is very different. The major US measure, the American Customer Satisfaction Index (ACSI), calculated every quarter by the University of Michigan Business School, has declined substantially and steadily since it started in 1994 (Financial Times, 2001).

The suggested explanations do not hold water. For example, cyclical factors are blamed. The argument is that, during the mid-1990s, companies struggled to keep up with consumer spending and now service quality is being undermined again as companies look for ways to cut costs. However, such a rationale does not account for the absolute decline in customer satisfaction registered by the ACSI throughout the economic cycle.

Another reason is said to be increasing customer awareness, expectations and willingness to be critical. But levels of satisfaction with manufactured goods, as opposed to services, have generally been firm or have even risen since 1994. Improvements in manufacturing processes during the 1980s and 1990s have resulted in more reliable products. This has been achieved by paying close attention to classic quality metrics such as reject rates and warranty costs, and by linking managerial pay to quality performance.

The major reason why the ACSI has fallen steadily is decreasing customer satisfaction with services. We believe that the major cause of this marked decrease is because customer satisfaction with services is now not very important to any of the major parties involved. It is relatively unimportant for investors, top managers, line managers, marketeers and even customers. It is only the middle managers who really care.

Investor ambivalence

Investors, for the past five years or so, have been forced to invest in a vacuum. The gap between the companies' value on the stock market and that given by normal accounting information is now so wide that even the accountants are getting worried that their figures are becoming meaningless. The market value of S&P 500 companies is more than six times what is on their books. The balance sheet numbers reflect only 15 per cent or so of the value of these companies. These are hardly new economy stocks and include about 80 per cent of corporate America, most of which are low tech or service companies (Lev, 2001). The reason for this massive gap is said to be the rapidly escalating worth of the companies' intangible assets.

The problem, of course, is not new. Intangible assets such as patents, brands, copyrights and R&D are not new contributions to the world economy. What is new is their importance and the new types of assets such as customer relationships, intellectual capital and organisational structures and systems that investors are now considering. However, customer satisfaction is not seen by investors as one of the newly important intangible assets when they are called upon to evaluate a business. Investors no longer believe there is any competitive advantage in satisfying customers. In today's competitive marketplace, every company is measuring what customers want. Every one has help desks and 1-800 numbers. The competitive advantage lies in repeat purchases, rather than in attitudes such as satisfaction. Further, repeat purchases are the result of managing customer relationships which is concerned with how easy or difficult and how expensive it is for customers to switch suppliers, products and services. In a highly competitive market, investors will reward the company which has ensured that switching costs for their customers are high. Then, customer satisfaction is almost irrelevant. For example, Microsoft has over the years almost become a byword for customer dissatisfaction. Yet, its grip on the marketplaces in which it operates is such that it has even been the subject of investigation and attack by the US Department of Justice. Many of its key products and services have virtual monopolies in their fields and so it is highly favoured by investors. The importance to investors of valuation of intangible assets, which are not at present adequately reflected in formal financial statements, has led in recent years to a major increase in the power of investment analysts' reports on companies. However, the recent "dot com" boom and bust has led many to question both the accuracy and the trustworthiness of such reports. So, investors are considering that perhaps the people who can best value intangibles are those most intimately involved with them; the managers concerned. The same is probably true of relationships reflected in measures such as customer lifetime value (CLV). CLV is often defined as the discounted net profit that a customer generates during the relationship with the company. This value is generated by both purchase and non-purchase behaviour (e.g. such as customer referrals) of customers during their relationship.

If CEOs as insiders are better able than the market to put a monetary amount on key customers' lifetime value, then they stand to gain personally and, therefore, are likely to be very interested. But, CLV is concerned with purchasing and after sales behaviour and not with attitudes.

Studies of investors who use their own money to take over poorly running businesses have shown that marketing factors can play an important role in their decisions. However, they do not look to see if customers are satisfied. Rather, they examine whether or not profitable customers need the product or service offered and, if so, whether or not they have an alternative source of supply. They are concerned primarily with the business's basic reason for existence. If the customers are satisfied, that is fine. But will they, or better still do they, have to stay loyal; that is the key which can unlock the take-over.

So, despite the importance of investors being able to value intangible assets, it is the whole quality and basis for customer relationships which most concerns investors rather than any simple relationship with customer satisfaction.

CEO indifference

Most CEOs probably spend more time with investment analysts that they do with key customers. CEOs, like most people, are concerned primarily with looking after their own interests and images. But, now the big change is that they are spending less and less time in post. The average number of years a US CEO can look forward to is now around four years (Scott, 2001). So, they have less time to ensure themselves either a lucrative retirement or another top job.

A lucrative retirement is coming more and more to depend on their ability to raise their company's share price since this is normally closely linked to their own personal bonus. So, what is really important for them is what will influence the share price, and there are many factors that have a much more direct and fast effect on the share price than customer satisfaction figures. For example, most top managers are deeply concerned with mergers and acquisitions, divestitures and downsizing, alliances and joint ventures. These are often directly reflected in movements in the share price. So, they give CEOs a much better opportunity to look directly after their own interests than do any movements in customer satisfaction.

Again, for some CEOs, even more important than share price and bonuses or their next job is their own image. Hayward and Hambrink (1997) concluded that it was because CEOs are so proud of their own abilities, that they are willing to pay above the market value for companies they are taking over and subsequently to destroy rather than add to shareholder value. They found that the decision to acquire a firm has less to do with how well the target firm may or may not be doing and much more to do with perceptions of the acquiring firm top managers that, under their leadership, the acquired firm will perform better. Measures of hubris used in the study included media attention from major newspapers, and a measure of self-importance derived from the ratio of the CEO's own compensation to that of the firm's second highest paid executive. Typically, CEOs in the USA, where this study was conducted, receive 30 to 50 per cent more compensation than their second highest paid executive, and some receive as much as 100 per cent or more.

The researchers examined firms involved in acquisitions in 1989 and 1992 involving payments in excess of 100 million dollars. They looked at the relationship between CEO hubris score and the acquisition share price and subsequent firm performance. They found that the hubris measure was able to predict clearly the size of the acquisition premium (being the difference between the firm's market value and the actual price paid). Indeed, acquisition premiums increased no less than 4.8 per cent for each highly favourable article which featured the acquiring CEO.

The general result of all this arrogance on the part of CEOs was loss in shareholder value following the acquisitions. The greater the premium paid as a result of CEO hubris, the greater were the subsequent shareholder losses. It was their own, rather than any investor or customer, satisfaction that clearly mattered to these CEOs.

Line managers' lack of customer satisfaction focus

Customer satisfaction is also relatively unimportant for line managers. Line managers are interested, primarily, in meeting their financial targets since this is what most of them believe dictates their bonuses and future promotion and their ability to move to other jobs.

For such managers, customers are potential assets that need to be managed and leveraged (Srivastava et al., 1998). So, customer relationship management is crucial, not customer satisfaction.

Again, in order to meet financial targets, segmentation of customers according to their lifetime value can lead to a willingness on the part of the line manager to get rid of unprofitable customers, irrespective of their satisfaction. The old argument that all customers are important if they provide a contribution to paying for the overheads and fixed costs seems now to be less valid. With the major recent growth in outsourcing, overheads have shrunk, and the move away from ownership of fixed assets such as buildings, vehicles and machinery towards rental has also diminished the amount of fixed costs having to be covered.

More and more companies are moving towards offloading their unprofitable customers, whether they are satisfied or not, onto their major competitors.

Marketers measure behavior, not attitudes

Customer satisfaction is losing its importance even for marketeers. Their aim is to understand their marketplace so that they can continually present key customers with better value offerings than the competition. This aim can only be attained if they can study customer purchase and re-purchase behaviour and the reasons behind it.

Customer satisfaction, they are realising, is not helping them much in achieving this aim for three main reasons. It is very difficult to measure; even when measured it often has little relation to actual purchase behaviour; and new technology is opening up both the actual purchasing activities and the possible reasons behind them.

Marketeers have long known how difficult it is to carry out a meaningful survey, especially in the service sector because of the characteristics of intangibility, heterogeneity, inseparability and perishability (Lam and Woo, 1997). Indeed, Slater (2001) goes so far as to conclude that customer satisfaction surveys are often unreliable indicators of intention to purchase or of the likelihood of repeat business. Many times they are poorly conceived, and conducted, measure the wrong activity or customers, or do not assess relative value or satisfaction.

Customer satisfaction was only ever important for marketeers because it was assumed to have a direct relationship with subsequent behaviour. However, behaviour was difficult to measure but, due to technology changes, marketeers now have an ever-increasing battery of information sources covering actual customer action.

In consumer markets, the development of optical scanning technology has led to retailers being able to gather details of all purchases in real time at the checkout. Further, the spread of credit and loyalty cards, plus advances in computer systems, now enable such data to be linked to individual customers so that their actual buying behaviour can be tracked over time. In addition, the growth of purchasing over the Internet has led to major growth in customer purchase information.

Even so, actual purchase behaviour is only part of what the marketeer needs to know. He also needs to understand why the customer decides to purchase a service from one supplier and not from its competitors. In addition, new technology has removed one of the traditional ways in which relevant information used to be gathered; through customer contact staff. The amount of contact between the experienced sales or service person and the customer is shrinking fast. Developments such as the widespread use of ATMs, purchasing through the Internet and the proliferation of 0800 numbers and automated information and service provision is leading to shrinkage in the softer customer information flow. Yet, as Leonard Barton (1995, p. 177) says, "no information is more important than information flowing in from the market".

As a consequence, marketeers have had to look elsewhere to gain help in understanding customer motivations. Old technology has provided one answer. In order to uncover the reasons why people make purchases, they have developed methods to study customers' use of products and services in the normal context. By observing in context, they acquire information about needs that is not available from traditional market research such as satisfaction surveys.

As a result, because of the lack of customer contact information, firms are conducting market experiments on customer behaviour in order to learn and to modify their product and service offerings based on the new knowledge and insights. This process is often referred to as the "probe and learn" process in that the initial product or service is a prototype which becomes the foundation for subsequent, more refined generations that follow (Lynne et al., 1996).

Further, they are also looking to customers' use of the Internet for more clues as to decision processes. The growth both amongst individuals and companies of exploratory as well as actual purchasing behaviour using the World Wide Web has resulted in a whole wave of important new information for marketeers. It is not just the customers' actual purchases that can be recorded but also their behaviour as they seek information. What products have been examined, what information has been looked at, and in what order? Such data, from a well-designed Web site, can give insights into the attributes that a customer finds important when deciding on the purchase of a product or service. Similarly, encouraging customers to take part in Net-based virtual communities to discuss their experiences concerning what they have purchased can yield key information that enables marketeers to fine tune both their products and their messages (Van Bruggen, 2001).

Measures of customer satisfaction are conspicuous by their absence in this key area. It is behaviour not attitudes that matter to marketeers now.

Customers don't even care!

Finally, we would suggest that customer satisfaction is also relatively unimportant for customers.

First, this must be so because for years we have been getting, according to the ACSI, more and more dissatisfied with service company offerings. Yet, the economies of the western world, until very recently, have been expanding solidly all through this period. So, apparently we must have become immune to bad service. It has not stopped us from buying.

Second, as customers, we are more and more rewarded for being dissatisfied. It is no wonder that research has shown that the most loyal customers are those who complain and report, subsequently, that their complaints have been well attended to by the company concerned (Goodman et al., 1993).

This finding has meant that, in terms of complaint handling, many companies are moving into empowering customer contact staff to "bribe" the complainant quickly in order to achieve this aim. So, for example, a hotel will empower its front desk staff to give vouchers for free weekend night stays to customers whose complaints seem justified. Also, many stores will refund or replace products which are the subject of complaints with no questions asked. Such reactions on the part of the organisation are often cheaper than any deep investigation into the reason for the complaint and what appropriate remedial action might be.

The only customers for whom measures of satisfaction still play an important role are customers of monopolies. If a customer has no choice, then they have no voice, except satisfaction surveys. So, it may be argued that all monopolies, be they government, semi-government or privately owned, should be required by law to measure and publish their customer satisfaction indices. Investors may not like it, but it is the only way society has of seeing whether or not their ownership of this monopoly can be justified.

Conclusion

Customer satisfaction with service provided has declined steadily for the last seven years. We consider that the major reason for this is that customer satisfaction is relatively unimportant for key groups such as investors, top and line management, marketeers and even for customers.

So, why will the concept not just lie down and die? We suggest that this is because there is one group which continues to propagate the myth that it still matters. This group is middle management. We have a generation of middle managers who have been brought up to believe that customer satisfaction is important for their performance, their bonuses and their promotions. They have become addicted. They cannot sleep peacefully at night without having had their "fix" of customer satisfaction scores.

They cannot bring themselves to admit that what has replaced mass aggregated customer satisfaction is individual customer behaviour. Behaviour is driving out attitudes everywhere – except in the serried ranks of middle management.

This is a shortened version of "Customer satisfaction: it is dead but it will not lie down".

Williams, R. and Visser, R. (2002), "Customer satisfaction: it is dead but it will not lie down", Managing Service Quality, Vol. 12 No. 3, pp. 194-200.