The High Price of Customer Satisfaction

by Tim Keiningham

While it is true that no business can last for long without satisfied customers, satisfaction alone is no guarantee of market success. Our research — based upon 161,552 consumer satisfaction ratings and category spending levels across 315 brands — demonstrates how to make the connection between customer satisfaction and market share, profitability, and overall market leadership.

How weak? A change over time in consumers' satisfaction levels explains less than 1 of the change in consumers' share of category spending. In other words, over 99% of what is driving changes in customers' spending levels is completely unexplained by customer satisfaction. Moreover, our research found virtually identical results for the Net Promoter Score (NPS, a way to measure customer loyalty).

Because the relationship is so weak, misguided attempts to improve satisfaction (or NPS) are unlikely to improve customers' share of spending with a brand, and may even damage a company's financial health. Our research uncovered three critical issues that have a strong negative impact on translating customer satisfaction (and NPS) into positive business outcomes.

1. Money-Losing Delighters Although we find that improved satisfaction can increase sales revenue, the additional costs frequently outweigh the benefits. In general, satisfaction and price are almost always inversely related. As a result, lowering price tends to be one of the easiest ways to improve satisfaction levels. But for most products and services, the potential for dropping price while still remaining profitable is limited — and low prices are often not good for businesses.
2. Smaller Often Equals Happier For most industries, satisfaction and market share are negatively correlated. Why? Gaining market share typically comes from attracting customers whose needs are not completely aligned with the company's core target market. As a result, smaller niche companies are better able to serve their customers. Companies with a large market share, on the other hand, must by their very nature serve a more diverse set of customers. Should managers not care about customer satisfaction in the pursuit of market share growth? No — they should care. If market share is the goal, then managers need find the right balance between customer satisfaction levels and broad customer acceptance
3. The Importance of Being Number 1 The measure that really matters isn't your percentage of delighted customers or promoters. What matters is the relative "rank" that your brand's satisfaction level represents vis-а-vis your competitors.

Fortunately, each of the above issues are solvable. But they require that managers recognize and address each of the issues that can negatively impact the relationship between satisfaction and business performance. Increasing satisfaction levels can be a useful component of a company's strategy, but it doesn't have to be. Often it isn't compatible with market share growth — or even good business.

This topic was covered in greater detail in MIT's Sloan Management Review. Click here to read the full article.