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The Satisfied Customer
Winners and Losers in the Battle for Buyer Preference
By Claes Fornell
Palgrave Macmillan Copyright © 2007 Claes Fornell
All rights reserved.
It was a dark and stormy night in Ann Arbor, Michigan. From the inside looking out, summer-night storms in the Midwest are often spectacular and sometimes scary. I was driving home from my office at the University of Michigan, after a long day at work a few years ago. David VanAmburg and Forrest Morgeson were busy crunching numbers for the upcoming American Customer Satisfaction Index (ACSI), to be released by mid-August 2005. The rain came in spurts, with clusters of small drops seeming to shower from the side more than from the sky. Every now and then, just as they were about to hit the ground, the rain drops seemed to merge and reverse course, going back to where they came from. The streets were nearly empty. No traffic to speak of. In a way, it was kind of nice. The cost of thinking—something economists occasionally worry about—was lower than usual because of the ease of driving. No pedestrians to worry about and hardly any other drivers out there. The ACSI data was still on my mind. What were the underlying trends in customer satisfaction? What did they mean for consumer demand, economic growth, and stock prices? What companies were in difficulty? What companies were going to benefit? And, above all, how would the new forces of the global economy impact the way we do business?
The year had not started well. Americans were getting fed up with the poor level of service; complaints were up and our customer satisfaction numbers were plunging. In the first quarter, the overall ACSI score was the worst we'd seen in 27 months. Had we reached bottom yet? Oil prices were at near record highs and real wages were falling. Households were taking on more debt and interest rates were rising. Would companies really invest more resources in beefing up customer service? The national economic outlook was full of questions—both for the long and the short term. But, as far as I was concerned, it was gratifying to see how useful the ACSI had turned out to be. The index, which we launched in 1994, had demonstrated predictive powers beyond expectations. The companies I started, CFI Group and Foresee Results, which use the same ASCI determinants to help individual companies, were doing well. After ten years, we had strong management and a cadre of very capable people. A decade of data showed that ACSI forecasts consumer spending, GDP growth, corporate earnings, and stock prices. I always thought it would do this, but the predictions were better than I had hoped for.
We were now armed with enough evidence to convince managers that it really paid off, at least in most cases, to invest in customer service improvements. But the key was not how much to invest, but how to make that investment and what to improve. Exactly what aspects of service were going to have the best economic returns? The answer, I knew, varied from company to company. I also knew how to determine what the best approach was likely to be. Much depends on the understanding of the difference between levels and changes. Most managers understand the difference between marginal cost and average cost, but when it comes to investment in customer service most managers don't think in these terms. But in just about every situation, every organization, and every task, it is the marginal contribution that matters most. If I push this lever, what will happen? If I change x, how will y change? The same applies to customer service and customer satisfaction. But when I discussed this with managers, their general approach was often along the lines of: "What's our service level? What do we do well? What do we do poorly? Attention would then be directed at the areas where service was considered to be poor. Now, that's not a good way to allocate scarce recourses or get the most bang for the buck.
If business managers can cultivate better returns from investing in the satisfaction of their customers, investors should be able to reap similar returns by investing in businesses with these kinds of managers. As a matter of fact, the stock returns for companies that have done well on the ACSI are much better than the overall returns of the stock market. Why is this? The answer is actually quite straightforward. Investors make money from companies that increase their profits. Future profits, in a global economy where there is a lot of buyer choice, come from satisfied customers.
It was raining more now. Streets were overflowing; here and there it looked like mini-tsunamis—if there are such things. Similarly, it was easy enough to see that there was an economic tsunami in the making. Something so strong and so powerful that it would wipe out companies that failed to see it coming. But this also would provide a terrific opportunity. Obviously, it's not possible to surf a real tsunami. Surfing needs whitewater and breaking waves. A tsunami can be 100 miles long, but it also has an end. The economic tsunami is long too; it is generated by consumer power fused with investor capital, but it has no end in sight. There is a way to ride it—by harnessing its power for advantage rather than trying to confront it.
Because of globalization, outsourcing, information technology, and growing numbers of sellers competing for the same group of buyers, the balance of power between buyers and sellers is shifting. The implications are fundamental and far-reaching. For example, the very nature of what constitutes an economic asset is going to be very different in the future. The way we look to productivity improvements as a basis for growth will be determined, to a much greater extent, by how the buyer is affected. Otherwise, the true costs of poor service, often as a result of our push for squeezing out more productivity, will escalate to intolerable levels. And, it is the companies—not the consumers—that are going to bear the brunt of these costs. As always, however, every threat comes with an opportunity. How should business management and investors best deal with the newly empowered buyer? That's the question this book attempts to answer.
More buyer choice, more buyer information, rapid movement of capital, as well as the transferal of work across nations without transplanting labor all contribute to increased buyer power. There is no difference between the use of power in business transactions and the use of power in more general settings. Power means that you can dictate terms and make others do what they otherwise wouldn't. The more powerful the buyers, the more damage they can inflict on sellers. The punishment can be swift and brutal. Dissatisfied customers not only defect, they broadcast the seller's shortcomings in ways unimaginable only a few years ago. Gone are the days when consumers just shared their experiences with the neighbor across the fence or on the phone with a friend. In recent years we have witnessed the mushrooming of what Nielsen Buzzmetrics CMO Pete Blackshaw dubbed "consumer-generated media." The Internet creates all sorts of channels for voicing opinions that can be read by millions of complete strangers via bulletin boards, chat rooms, and forums; sites specifically for customer feedback and complaints; customer reviews of products on retailers' websites; and the ever-growing number of blogs. There are an estimated 75 million blogs in cyberspace, and that number is expected to exceed 100 million by the end of 2007. Today's consumers exchange information about their purchase and consumption experiences at a breathtaking pace. An offending seller will see revenues plunge, fixed costs (per unit) increase, profits deteriorate, and investor capital withdrawn. This is, of course, exactly how it should be in free markets: Sellers compete for the satisfaction of the buyer, and buyers maximize their satisfaction (or utility, to use the conventional economic term). Satisfied customers reward the seller with more business in the future, the good word spreads, and investors provide more capital to the seller. But it only works this way if the buyer is more powerful than the seller. For most of the twentieth century, that wasn't the case. Things began to change after World War II, but it's not until recently that the pace has truly accelerated.
In 1987 I was on leave from the University of Michigan and spent half the year in France teaching at INSEAD, the international business school just outside Paris. After that, it was on to the Stockholm School of Economics. I had grown up and received my basic education in Sweden. Stockholm is my hometown and it is always nice to be back—not so much for the meatballs or the Swedish weather, but to see family and friends. Much had changed for Sweden since I lived there—perhaps the most conspicuous change, at least to an economist, had been the decline in relative wealth. From its position as one of the wealthiest countries in the world, Sweden's GDP per capita had dropped to the middle of the pack in Europe after I left for the United States in 1977. I claim no cause and effect here, but I did have some ideas on how Sweden could become a more competitive nation by better attending to the things that really mattered in the modern economy. And, more recently, the Swedish economy has done quite well.
We were having a crayfish dinner at the Stockholm Grand Hotel with representatives from the Swedish government and executives from the Royal Post Office. They wanted to discuss an idea I had presented at a seminar for improving both the way companies in Sweden did business and the competitiveness of Swedish industry. Many companies failed to prioritize customer orientation; they were more focused on labor and how to improve productivity. Swedish shipyards were the most productive in the world, but nobody bought their ships. What good is superior productivity in such a scenario?
What I had in mind was the creation of a new measure, on a nationwide basis, that could tell us more about the demand side—something about what the buyer actually experienced and, as a consequence of that experience, was likely to do in the future. In other words, what I was after was a measure of buyer utility. Such a measure should be able to tell us what companies had done to (or for) their customers. After all, consumer utility is an important standard for economic growth. But a good measure of utility—such as customer satisfaction, which is the same as "experienced utility"—should also tell us what buyers' future interactions with such companies would generally be. Would they come back and buy more? If they were satisfied, they probably would. If not, the prospects for repeat business would be less promising. This was the starting point for the Swedish Customer Satisfaction Barometer. In order to find out how satisfied customers were, we would do annual surveys, feed the data into an econometric model that would help sort out background noise and establish causes and effects, and then aggregate all these to a national number.
The government officials thought this was a great idea: "This is something we can get behind and fund." The Royal Palace, of which there was a spectacular view from the Grand Hotel, looked even better than I remembered as a kid. We had funding from the government for a new and truly exciting project. The Swedish Customer Satisfaction Barometer was not only a forerunner to the ACSI, it was also the foundation for what would become Claes Fornell International (CFI) Group, the company I founded for the purpose of helping companies strengthen their relationships with customers. As the customer satisfaction work started to take shape and get attention, I also got more of the type of phone calls that business professors typically get. The questions posed to me were of this kind: Can you help us with our company's customer satisfaction? How should we measure it? How should we get our people to embrace it? What would the financial results be? Some of these questions were reasonably straightforward to answer—especially those about measurement and the financial value of a customer. The others required more work. But what surprised me was how primitive many companies' efforts were. This was true in the United States as well as in Europe. Almost nobody used modern measurement technology. Some generated near-random numbers. Even worse, such numbers were often the basis for strategy and sometimes for executive compensation. Simplistic but all-too-common notions that the customer is always right and that customer expectations should be exceeded are not helpful. I continue to be amazed that people still believe these maxims. The same is true about the need to stay close to the customer. Sometimes, you can get too close. Customers cannot be responsible for running the business. If they were, we would soon get unsustainable cost-price ratios. Another beef of mine is the way in which companies deal with customer complaints. Most are counterproductive. For the most part, the number of complaints should be maximized. That may sound crazy, but the opportunity cost of not getting the complaint is usually much higher than the cost of dealing with the complaint in the first place. Similarly, customer loyalty is often touted as a business objective. Loyal customers are good for business, they say. But not always. It depends on the cost of getting that loyalty. And the price can be very high—just ask General Motors or Ford.
Of course, everybody knows that customers are important. Without customers, there is no revenue. Most managers understand that poor service can exact a high economic cost in competitive markets. The problem is that the total costs of unhappy customers are often underestimated. The benefits accrued from creating satisfied customers are probably even more underestimated, in part because most companies do a poor job of measuring customer satisfaction. The problems get magnified as firms face pressure to reduce costs and improve productivity. Costs are often reduced in such a way that both expenses and revenues drop—the latter usually far more than the former. This book argues that the root cause of financial failure is not managers' lack of appreciation for customers, but often the tools they employ to allocate resources for improving the value of customer assets. Developed in an era when the economy was radically different, these tools are now painfully inadequate.
I suppose my advice to companies was reasonably constructive, because the phone calls kept coming. After a while, I realized that I couldn't do all this work myself. My first step was to hire a full-time secretary to keep my schedule straight, and I asked another faculty member, Mike Ryan, to help me out. Thus the start of the CFI Group (although it had a different name in the beginning). CFI grew quickly, with clients in Europe, Asia, and the United States trying to understand, measure, and diagnose customer relationships as economic assets. Integrating financial and nonfinancial information, we were working hard to focus time, energy, and resources on the areas that most affect the economic results of our clients. The idea was that they should profit from lower customer churn, higher employee satisfaction, and higher stock prices—by learning how to invest in and grow the customer as an asset. Essentially, it comes down to being able to do the following: (1) pinpoint which aspects of the product, service, marketing, etc. have the greatest effect on customer satisfaction; (2) estimate the expected financial returns from improved satisfaction; and (3) understand what actions to take and how to best create strong customer bonds.
WHAT'S GOOD, WHAT'S BAD?
At the heart of the matter is the relationship between customer satisfaction and worker productivity and between quality and productivity. How to best balance the two? My own feeling was that there was too much focus on productivity and that too many service companies behave as though they are manufacturers. Improving productivity isn't always for the good, even though it's almost always portrayed that way. In a way, it's strange that we have come to believe that a certain direction of change is always good or always bad. When the stock market goes up, that's good. Consumer spending is good for the economy; government spending is bad. When prices of goods go up, that's bad. On the other hand, when housing prices go up, that's good. When productivity goes up, that's good too. When interest rates go up, that's bad.
This is silly, of course. If prices go up, that's good for the seller, not for the buyer. When interest rates go up, that may be good for the lender, not for the borrower. When home prices go up, that's good for the home owner, but not for the home buyer. But why isn't productivity always good? Isn't it always desirable to be more productive? Well, it depends on what the costs are. Doing more with less, which is what productivity is, can lead to higher unemployment and less customer service. Obviously, if we fire 10 percent of our workforce and the remaining 90 percent keep production going at the same level as before, productivity has improved. But in a service economy, it is more difficult to maintain quality while producing more with fewer people. Especially when the service itself is labor intensive and requires a good deal of personal attention. In manufacturing, it is more feasible to replace labor with new technology. In order to demonstrate what the effects were, I worked with a couple of prominent researchers—Roland Rust of the University of Maryland and Eugene Anderson of the University of Michigan—to analyze data on customer service and productivity. We found that productivity and quality don't go hand in hand in the service sector. This wasn't particularly surprising to us and I don't think it's contradictory to economic logic. The important thing was to demonstrate that productivity increases don't always have a positive effect. In 2006, the United States had the weakest productivity growth in 10 years and the highest customer satisfaction levels in 12 years. Coincidence? Perhaps not. Now, consider that corporate earnings were strong, inflation was in check, unemployment was low, and the stock market strong, and perhaps the notion that productivity is the key to everything good deserves a bit of rethinking.
Excerpted from The Satisfied Customer by Claes Fornell. Copyright © 2007 Claes Fornell. Excerpted by permission of Palgrave Macmillan.
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