Are customer satisfaction and profitability linked?

[ralphsulser]

"Extreme examples:"
Betamax versus VHS
Apple versus Microsoft

And don't forget "Hair nets versus Hair spray"

Costs of implenting and maintaining ISO/TS systems may excite customers, but negatively impact profit.
Smoking will cause cancer if you do it long enough, or live long enough.

Also your biggest customer may want you to take on anothe job which is a negative margin, but you do it to keep the business. So now your average margin is decreased. Just citing potential causes not linked to profitability.

 

[Craig H.]

Re: Not Linked - The facts

I believe that there is a link, but....

Let's say we could build a regression model of profitability for a particular business. We would, of course, have to find a numerical way to measure satisfaction that makes sense for a particular business or industry. For some industries, customer satisfaction would be a major player in the equation, especially where there are higher margins and a lot of repeat business potential, IMHO (some chain restaurants come to mind). For other industries, say ones that sell commodities, the satisfaction "index" might equal the price "index" - in other words, price is what drives satisfaction.

So, to coin a great mealy-mouth phrase:

Are Customer Satisfaction and Profitability linked?

Yes, but it depends...

I suspect that over the long term, the relationship might be closer. And, how about a follow up question - Is profitability linked to the customers' perception of value?

FWIW

Craig

 

[Marc]

Link vs. Effect

Regarding your last statement, I don't understand it. There's an "effect" (customer satisfaction to profits) but no link?

OK - let me put it this way...

With respect to the thread question: If there is a link between two factors, when one does something the other reacts. There is correlation. If there is an effect of one factor on another, no correlation is implied as it is part of a system so its effect may be negated.

I interpret it this way because the implication is, particularly in the examples you cited from a Google search, that increased customer satisfaction correlates with increased profitability. In some cases this is true and in some it is not.

On the other hand I will agree that one can use the term 'link' loosely as long as one clarifies that there are many, many 'links' to profitablility none of which necessarily correlate mathematically. Just because a company increases customer satisfaction does not indicate a trend in profitability will result. In the same vein, if one increases run rate, profitability is not necessarily affected because the run rate increase may induce more defects (as an example), increasing costs and decreasing profitablilty. One may say there is a 'link', but what does that mean? It means only that run rate has an effect upon profitability.

 

[db]

Re: Link vs. Effect

OK - let me put it this way...

With respect to the thread question: If there is a link between two factors, when one does something the other reacts. There is correlation. If there is an effect of one factor on another, no correlation is implied as it is part of a system so its effect may be negated.

I interpret it this way because the implication is, particularly in the examples you cited from a Google search, that increased customer satisfaction correlates with increased profitability. In some cases this is true and in some it is not.

On the other hand I will agree that one can use the term 'link' loosely as long as one clarifies that there are many, many 'links' to profitablility none of which necessarily correlate mathematically. Just because a company increases customer satisfaction does not indicate a trend in profitability will result.

I voted that they are linked, but as Marc stated, the link is loose. In fact, I think there might be a closer link between lack of profitability and customer dissatisfaction.

 

[ccochran]

Howdy,

This is one of the most complex threads I've seen lately. There's nothing easy about the question. I have no empirical data to offer, only gut feeling and anecdotal experience.

In the short term, I do not believe there is a positive correlation between customer satisfaction and profit. Indeed, you can imagine a *negative* correlation, because many of the activities and processes that drive customer satisfaction can also drive up costs. An example of this are the many companies that are shifting their call center and customer service activities to India. This practice often irritates customers, because they perceive the communication to be more difficult and the responses scripted. Thus their customer satisfaction is lower. The company has reduced it's costs, though. So, for the short term, profits go up while customer satisfaction goes down.

In the long term, I believe a positive correlation exists between customer satisfaction and profit. Once a company irritates enough customers, their customers simply don't come back. Customers will find a different supplier. In the face of declining revenue, it becomes very difficult for the company to sustain profit. Unless the company cuts costs faster than it loses revenue, its profits go down. Companies that have invested in processes and activities that preserve and enhance satisfaction, however, will find increasing revenues as they attract new customers. If they are able to control their costs, then their profits will go up.

The time horizon seems to be the key here:
Short term = no relationship or negative correlation between CS & profits
Long term = Positive correlation between CS & profits

Again, I don't have data supporting any of this. And I meant no offense to Asian Indians with my example above.

Craig

~~~~~~~~~~~~~~~~~~~~~~~~~~~
Craig Cochran
Center for International Standards & Quality
Georgia Institute of Technology

 

[Mike S.]

Seems like some folks look at the word "linked" as an absolute, that if there is ever even one case where a direct cause and effect relationship cannot be proven then it cannot be said that the two things are "linked". By this definition, very, very few things can be said to be "linked". And in my experience almost no one uses such an absolute definition of the word "linked". Again, while cigarette smoking or obesity may be "linked" to heart disease, there is no 100% absolute guarantee, yet how often do we hear they are "linked". In my small mind, at least, I did not intend it this way -- the "absolute" definition - I don't know if Kevin did or not. I will be the first to admit, and already have, that there is no 100% guarantee of satisfied customers resulting in profitability.

But is there anyone here who believes that there is rarely or never a significant relationship, or effect, or connection, or association between customer satisfaction and profits?

 

[Rob Nix]

I find it will be hard to make a reply without stepping all over the feet of all the other contributors (repeating the same things), but I voted there is no link; assuming "link" = "correlation", as Marc states.

For one thing, customer satisfaction is such a broad term. 1) Broad in the sense of what the customer is satisfied with, for example. If the satisfaction category is purchase price, it may be a negative correlation; increased profit margins for us equals higher prices for them. If the satisfaction category is quality, it may or may not correlate depending on what it took the company to achieve said quality. 2) Broad in the sense of which customer (end user, purchasing, integrater, etc.) is targeted adds even more variables.

Last year, our profits were higher than the previous year, yet our customer satisfaction survey averages were lower than the previous year. Since both indices have several contributing factors, there MAY be some "link" somewhere, (was the economy a factor in both?) but certainly there is no assignable positive or negative correlation.

One study showed that on a beach somewhere, when ice cream sales went up, so did strokes. Was the ice cream somehow linked to strokes? Could it be that temperature played a role in both?

And regarding customer loyalty, my favorite quote is, "customer loyalty is the perceived absence of a better alternative".

As Craig states, this truly is a complex issue.

Also, regarding Mike's thought on "absolute" links. Well that seems an extreme as well. Everything is linked to some minute degree to everything else (e.g. six degrees of separation). There is also no 100% correlation. So we are having fun playing in the sand between the water and the grass.

 

[Mike S.]

Regarding “correlation”: First of all, there are varying degrees of correlation. Secondly, I was always taught that even in the event of a strong correlation, that correlation does not mean cause-and-effect. IMO it is fair to say there is a positive correlation between customer satisfaction and profitability, and we can debate on the strength of that correlation. However, by agreeing with the previous statement you are not necessarily saying that one causes the other.

You could say that there was a correlation between the weather in Moscow and the success of the staring pitchers for the New York Yankees last year and you might be correct, but few would suggest a cause-and-effect relationship.

 

[Marc]

What is the 'Link' and what does it mean? What's your point?

Mike - you can fuss all you want, but please do one thing: Please explain what the link is, your definition of what a link is, what the link means and what it has to do with profitability. Please show numbers. A Google search as you did above as 'proof' is simply silly. It shows nothing more than that people have web sites and books which discuss it and teach it.

Rather than debate the term link, you might also try a new poll asking if customer satisfaction correlates with profitability and ask for numbers as evidence.

I watched this 'requirement' come out of QS-9000. It was a joke then and it's a joke now. What company or person DOESN'T want customer satisfaction from the company or person they deal with? I do business with a lot of compaies which don't at all satisfy me, but they typically have the product I want at the price I want. I may like company 'B' better, but their price is too high or their warranty is too short, or something like that. I do NOT like Staples here locally. The employees, as often as not, are rude and slow. But I typically won't drive an extra 10 miles to to nearest Office Depot or Sams Club.

The data shows that customer satisfaction in most companies has stayed about the same for nearly 10 years whereas the profitability of most companies has varied often significantly. At the very least I believe one can comfortably say customer satisfaction will rarely make or break a company.

 

[Mike S.]

Re: What is the 'Link' and what does it mean? What's your point?

Mike - you can fuss all you want, but please do one thing: Please explain what the link is, your definition of what a link is, what the link means and what it has to do with profitability. Please show numbers. A Google search as you did above as 'proof' is simply silly. It shows nothing more than that people have web sites and books which discuss it and teach it.

I watched this 'requirement' come out of QS-9000. It was a joke then and it's a joke now. What company or person DOESN'T want customer satisfaction from the company or person they deal with? I do business with a lot of compaies which don't at all satisfy me, but they typically have the product I want at the price I want. I may like company 'B' better, but their price is too high or their warranty is too short, or something like that. I do NOT like Staples here locally. The employees, as often as not, are rude and slow. But I typically won't drive an extra 10 miles to to nearest Office Depot or Sams Club.

Fuss? I thought it was debate, which was encouraged here in the Cove.

You might note that I never said I was providing "proof" of anything -- that is your word, Sir, not mine. I provided some limited amount of "numbers" or "data" -- as you requested, if memory serves. Sorry that you found my data "silly". Are all the Cove members who voted that they believe there is a link/association/correlation/etc. also silly? I won't work to provide any more data or "numbers" as you ask as you will probably simply refer to that as "silly" or "a joke", too. You have your strong opinion, I have mine. I will debate but I won't resort to insulting your "data" or anecdotal evidence, though.

In reality I think you and I agree to some extent. You said: "Granted if you alienate your customers you're going to loose business and will eventually go out of business, but I don't see that as the 'one' significant factor. It has an effect, but is not a link per se."

We agree there can be an "effect" that is not the "one" and only factor. Common ground! And that's no joke.