Are customer satisfaction and profitability linked?

[Marc]

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

See http://www.washingtonpost.com/wp-dyn/articles/A24190-2004Jan17.html

Low customer satisfaction yet high profits.

I await your response: 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.

 

[db]

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

See http://www.washingtonpost.com/wp-dyn/articles/A24190-2004Jan17.html

Low customer satisfaction yet high profits.

I await your response: 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.

I think the higher level of competition, the greater the link will be. If I run a monopoly, then I do not care about customer satisfaction. Introduce competition, then I know that customer dissatisfaction will drive my customers to the competition. Profitability may have to be sacrificed in order to maintain market share. However, if we get too many competitors, then I might not be able to profitably compete, regardless of my customer satisfaction.

Therefore, I think the link between profitability and customer satisfaction must be competition.

 

[ccochran]

Dave,

I think you've hit on something! Yes, competition seems to be the key. The ability of the customer to readily switch to the competition is also key. Marc alluded to this in his Staples example. He's not readily able to switch to the competition because of the distance to the competitor, so he labors with poor service and low satisfaction. If an Office Depot (or some similar joint) opens on the opposite corner, though, there's a good chance that Staples will lose his business.

The other big variable is time. Even when customers can make immediate shifts to other suppliers, many won't simply due to habit. It may take sustained low satisfaction over a period of time to motivate change in entreched habits.

No data, but an interesting discussion...

Craig

 

[db]

Dave,

I think you've hit on something! Yes, competition seems to be the key. The ability of the customer to readily switch to the competition is also key. Marc alluded to this in his Staples example. He's not readily able to switch to the competition because of the distance to the competitor, so he labors with poor service and low satisfaction. If an Office Depot (or some similar joint) opens on the opposite corner, though, there's a good chance that Staples will lose his business.

Craig

I remember a pizza place in my home town. Owned by a fellow for years. He retired and sold to someone else. The new owner made no real changes because the business was quite profitable. After a few years, he sold to a someone else. The new guy immediately raised the prices, and began to cut corners (payed the help less, cut back on toppings, etc.). There was an immediate increase in profits. However, customer satisfaction dropped. Folks (including me) quit ordering, sales plummeted, and all of the increased profitability was eventually lost. The previous owner ended up getting the place back by default. He returned to the old standard (although he didn't drop the price). Customers came back and profitability increased.

I work with automotive tier companies. Many of them will tell you that they make a decent profit on the parts, however the CSRs eat away most, or all of that profit. They would like to drop that customer, but the options are limited. The cost of customer satisfaction is too high for some, and they close.

Two cases. One where customer satisfaction was the key to profitability, and the other where customer satisfaction was the key to unprofitability. Is there a link....absolutely! But, the link is different in various sectors, and even within businesses within a sector. The difference is based on three factors:

1) Customer requirements (How picky are they?)
2) Competition (How much, and how do they respond to #1)
3) Individual (How do I respond to #1 and #2?)

Books have been written on the linkage (or lack of) between Customer Satisfaction and Profitability. Business schools make a living arguing both sides. #3 above is why we can't reach a consensus. Each individual will respond to #1 and #2 differently, and there is no correlation factors that can be drawn on a bunch of crazy people.

 

[Craig H.]

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

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.

Ahhh, but Marc...

Not wanting to start a "side debate", much less a fight, might I point out that, since you DO go to Staples, they satisfy your needs - in this case convenience seems to play a big part in your "office supply satisfaction" equation. If they moved to the other side of Sam's, then Sam's would satisfy your needs then, right?

So, I think we all are having trouble communicating on two levels - what does a link mean (coorelation vs. causation) and what, exactly, is customer satisfaction? How do we effectively measure it?

Should we even bother?

Again, it depends on the situation.

Craig H.

 

[Joe Cruse]

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

Ahhh, but Marc...

Not wanting to start a "side debate", much less a fight, might I point out that, since you DO go to Staples, they satisfy your needs - in this case convenience seems to play a big part in your "office supply satisfaction" equation. If they moved to the other side of Sam's, then Sam's would satisfy your needs then, right?

So, I think we all are having trouble communicating on two levels - what does a link mean (coorelation vs. causation) and what, exactly, is customer satisfaction? How do we effectively measure it?

Should we even bother?

Again, it depends on the situation.

Craig H.

Craig, his Perceived Satisfaction is what counts, isn't it. That's what I get from the standard, that we are to look at the customer's perception of satisfaction, and according to Marc, his perception is not one of satisfaction.

You nailed it with the correlation vs. causation thing. They are not the same, but the word "link" is often used for both, especially if one has an agenda to push (global warming studies, drug products, etc). Correlation has varying degrees, but does not mean an effect produced, if I'm not mistaken. Causation, also with varying degrees, does denote an effect.

Joe

 

[Mike S.]

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

I await your response: 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.

Perhaps you did not read my previous post. I'm not taking the bait. I've clearly stated my position and it is obvious that I'm not so far out in left-field that no one else agrees with me. Seems that a good portion of Cove folks and various business experts agree with me, and some with you. And even we two have some common ground. So what? This is not the Supreme COurt and no one will be declared "the winner". Anything further I say to support my position that is directed to you will IMO only serve to inflame you further and result in more name-calling and insults directed my way, which I can do without. For whatever reason you single me out of a crowd and resort to nastiness, we can't seem to have a civilized debate of any length. I wish it weren't so. Good day. :truce:

 

[Mike S.]

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

You nailed it with the correlation vs. causation thing. They are not the same, but the word "link" is often used for both, especially if one has an agenda to push (global warming studies, drug products, etc). Correlation has varying degrees, but does not mean an effect produced, if I'm not mistaken. Causation, also with varying degrees, does denote an effect.

Joe

Joe, you are, IMO, correct. When teaching basic statistics to my people I used to have a simple saying I taught the group, "Correlation does not necessarily equal cause-and-effect".

And IMO db made a great point that competition is certainly a factor in the link/association between customer-satisfaction and profits.

 

[Simon Timperley]

Probably the only way to answer this question is on an individual business basis rather than trying to come up with global consensus on the big question.

i.e. in my experience of my organisation we can directly link customer satisfaction and profitability and we can determine that a 5% increase in criteria X of the range of criterias that are important to our customers gives us an increase in profit of 0.1% and if we increase criteria y by same it gives us 0.3% increase in profit.

Or not as the case may be.

There's no doubt that some organisations can and do make the above link.

My one penny worth.

Simon

 

[Joe Cruse]

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

And IMO db made a great point that competition is certainly a factor in the link/association between customer-satisfaction and profits.

Mike, the only problem I have with that is when competition not only decreases profits, it drives some out of business.

Sure, bad business/quality practices may be a large factor in a company not being able to keep up with competition and not being able to make a profit while satisfying the customer. But there have likely been some businesses that could not satisfy a customer while making a profit, and competition (with a different set of rules-no safety/enviro/worker pay) took the business.

In the US, there are examples of commodities out there where foreign competitors were able to drive pricing down to below the point that US firms could make the commodity and see any profit. I'm sure there are reverse examples of this. Some of the issues in not being able to keep up may not be related to bad business practices (safety and environmental compliance, wages, workers comp, etc).

Joe