Years ago we developed the Revenue Index after building a statistical model that combined customer satisfaction data with revenue behavior over time.  Though the mechanical details of the study don’t make for terribly interesting reading, the actual results were fascinating.  Consider that over time:

• A Totally Satisfied customer, having a dollar to spend on your particular product or service, will generally spend all of it – 100% - with you.
• A Somewhat Satisfied customer, having that same dollar to spend will, on average, spend only 40 cents with you.  The rest is going to your competitors.  Worse yet,
• A Somewhat Dissatisfied customer will contribute only 10 cents on the available dollar. 
• And, here’s the scary part, a Totally Dissatisfied customer actually creates a drain on revenue by not only taking their entire spend somewhere else, but by telling anyone who asks what they think of their former relationship with your company.  The destructive power of negative referrals.      

Let’s turn the same numbers around and look at them from a different angle. 

•  A Totally Satisfied Customer contributes 2.6 times as much revenue to a company as a Somewhat Satisfied Customer.
• A Totally Satisfied Customer contributes 14 times the revenue of a Somewhat Dissatisfied Customer.
• A Totally Dissatisfied Customer decreases revenue at a rate equal to 1.8 times what a Totally Satisfied Customer contributes to a business.

Now, that opens up all sort of potential discussion points.  For example, we often see companies proudly proclaim things like “surveys reveal that 90% of our customers are either satisfied or very satisfied with our company”.  While such claims may arguably make decent marketing headlines for the uninitiated, in reality, it could easily be masking a serious problem.  For example, if that combined satisfaction score of 90% is comprised of 15% Totally Satisfied and 75% Somewhat Satisfied customers, the PR bluster is hiding the fact that from a revenue perspective, the company is not even close to maximizing its revenues or profits.  A huge amount of money is being left on the table.  

Then there are the magic pill approaches to customer satisfaction.  Take Net Promoter Score, one of my personal favorites in terms of missing the target, as a glaring example.  NPS would have you believe that all you need to know in order to measure the health of a company is the likelihood of its customers to recommend it to others.  Well, okay, that view may tell you something, but from a revenue perspective, it’s not telling you anything useful.  Ah, but I digress.  We’ll come back to that in a future discussion.

What is relevant in a down economy is the vital role that customer satisfaction plays in keeping the revenue stream flowing.  As the Revenue Index established years ago, customers who are less than Totally Satisfied are in all probability spreading the wealth around, buying goods and services from your competition that you have failed to give them adequate reasons to buy from you. 

Worse, from a competitive standpoint, those same customers are approachable by your competition.  Think about it.  By practical definition, a Totally Satisfied customer has no unmet needs, no unresolved issues, no areas of either open or subtle discontent that would motivate them to even listen to someone else’s sales pitch.  The same cannot be said for Somewhat Satisfied customers, who typically can be persuaded to accept competitive options and alternatives.  And those Dissatisfied customers?  In all probability, they are picking up the phone and calling the competition, seeking alternatives, not merely being receptive to them. 

So what does it all mean?  Let’s distill it down to simple terms.  Totally Satisfied customers spend more, buy more often, tend to be virtually immune to competitive approach, are fiercely loyal, and are much more stable in the face of management or ownership changes.  Everyone else, and I mean everyone, is not only spending less, but they are at risk of loss.  The more areas of dissatisfaction they have, the greater the risk of loss. 

The cost of losing a customer can be huge.  A company’s failure to maximize sales from a customer can be just as costly.  In this economy, neither one is an acceptable outcome.  And this is not put forth as self-serving propaganda. Consider these little snippets I’ve run across over the years:

“Totally Satisfied” customers have a repurchase rate that is 3 to 10 times higher than that of “Somewhat Satisfied” customers. This is documented by research at Xerox and in other industry studies.

All or nothing: Customers must be ‘Totally Satisfied’ Steve Lewis. Marketing News. Chicago: Mar 2, 1998. Vol. 32, Iss. 5; pg. 11, 2 pgs

“Its Totally Satisfied customers were six times more likely to repurchase Xerox products over the next 18 months than its satisfied customers.”

Why Satisfied Customers Defect. By: Jones, Thomas O.; Sasser Jr., W., Harvard Business Review, Nov/Dec95, Vol. 73 Issue 6, p88, 14p

  “The relationship between satisfaction and actual share-of-wallet in a business-to-business environment is not only a positive relationship but the relationship is nonlinear, with the greatest positive impact occurring at the upper extreme of satisfaction levels”

  “By examining contract renewal rates (Johnson Controls) found a one point increase in the overall satisfaction score was worth $13 million increase in service contract renewals annually.” 

American Society For Quality, February 2003

  “IBM Rochester determined that if customer satisfaction level increased one percentage point, an additional $257 million in additional revenue would be generated over five years. The ratio of revenue growth between very satisfied and satisfied customers was 3:1.” 

 American Society For Quality, February 2003

 So, is there a conclusion to be found here?  While no rational person disputes the notion that customer satisfaction as a corporate strategy not only pays for itself, but does so in a big way, I nevertheless see two distinct schools of thought at work in the marketplace.  

There are companies that have cut spending to the bone, and customer feedback is among the things on the chopping block.  They know they should keep their survey activities in place – after all, the philosophy is continuous improvement, not improvement when it’s convenient, or when we can get around to it – but it fell prey to the budget axe anyway.   

Then there are companies who have kept right on, even enhanced their efforts, knowing that while business is slow, they may never have a better opportunity to make sure their top accounts remain Totally Satisfied, or to identify and then move those accounts that are less than Totally Satisfied into the ranks of locked-in business.  In my view, those are the companies most likely to emerge from the recession with improved market share.

Customer satisfaction is like any other management activity.  If you can’t measure it, you can’t manage it, and if you can’t manage it, it will probably end up controlling you, instead of the other way around.

This entry was posted on Tuesday, May 5th, 2009 at 3:49 pm and is filed under 2. Economics of Customer Satisfaction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.