Why customer satisfaction affects retention and profitability

Customer satisfaction is one of the most important concepts in marketing. While the ubiquity and exhaustive usage of the term has rendered it almost banal, it remains a cornerstone of successful business management and improvement.

The key to customer satisfaction is to provide customers with a product or service that matches or exceeds their expectations. The key to *superior* customer satisfaction is ensuring that your company provides greater customer value than the competition.

Connecting customer satisfaction with profitability

In an article published in the *Journal of Marketing* in 1994, Eugene W. Anderson, Claes Fornell, and Donald R. Lehmann (“Customer Satisfaction, Market Share, and Profitability: Findings From Sweden”) explore the connection between customer satisfaction and profitability.

Starting off, they make a distinction between the two fundamental forms of customer satisfaction: transaction-specific and cumulative. In the traditional consumer decision-making process, the final step is a post-purchase evaluation of the decision, and this is what determines the level of satisfaction related to a specific transaction.

What’s more interesting in the context of current, past, and future performance and profitability as the basis of any investments in customer satisfaction, though, is cumulative satisfaction, a more general assessment based on purchase experiences with a company’s product or service over time.

Against this background, the model employed in the article shows that profitability is positively affected by customer satisfaction, which, in turn, is positively affected by market expectations and experiences. Furthermore, current market expectations are positively related to historical expectations, as well as the market’s experiences with quality in the most recent period.

Quality, market expectations, and customer satisfaction

While perceived quality and customer satisfaction, unsurprisingly, have repeatedly been shown to go hand-in-hand, the two concepts are actually distinct from one another. A consumer can have a perception of the quality of a good or service without having any past experience with it; but the same cannot be said of satisfaction, which demands personal experience. Similarly, a perception of quality is current, whereas satisfaction is based on current experience along with past and expected experiences.

The results of the study show that quality, especially, but also expectations, positively impact customer satisfaction, and that customer satisfaction, in itself, is primarily a function of current quality and past satisfaction. Expectations, meanwhile, are shown to adapt slowly over time.

While the perception of current quality is the dominant factor, the findings also indicate that expectations are not especially volatile; changes in a firm’s reputation for providing quality typically do not occur abruptly.

Efforts to increase customer satisfaction, then, generally do not yield immediate results, requiring patience and a long-term perspective. This is why, according to the authors, resources expended to that end should be seen as investments rather than expenses, and why loyal and satisfied customers should be regarded as revenue-generating assets.

Connecting the dots and factoring in personal referrals

High levels of customer satisfaction overlap with customer loyalty, which protects the company from competitive operations, while also reducing the customers’ price sensitivity.

Another desirable consequence is positive word-of-mouth activity, as highly satisfied customers make recommendations to others, which, in turn, positively affects profitability. According to the book *Loyalty Myths*, acquiring a new customer costs five times more than retaining one. Furthermore, research has shown that the 80-20 rule tends to hold true for companies: that 20 percent of customers generate 80 percent of profits.

In their *Harvard Business Review* article entitled “To Keep Your Customers, Keep It Simple” from 2012, Patrick Spenner and Karen Freeman write that the way to produce “sticky” customers—customers who are likely to complete an intended purchase, repeat the purchase, and recommend it to others—is to make the customers’ purchase decision as simple as possible.

The Marketing 101 model of the consumer decision-making process (also mentioned above) begins with the recognition of a need or problem, which is followed by a search for information, an evaluation of alternatives, a purchase, and a post-purchase evaluation of the decision.

Spenner and Freeman argue that the level of simplicity in finding reliable information about a product and being able to compare purchasing options is what determines how likely it is that customers will become sticky. Elements that are important here, then, are the ease with which customers can find and navigate information about a brand, the trustworthiness of this information, and the ability to compare options.

The conclusion is that the companies that are most successful in terms of customer stickiness make the path to information and trust as personalized as possible. Considering the vast amount of information, reviews, opinions, and advertisements constantly presented to potential customers surrounding brands, products, and services, companies that can manage to make the pathway to purchase as personalized as possible are the ones who will realize the best results.

>One way to achieve a personalized pathway that helps potential customers simplify their purchasing decisions—and, theoretically, stick with a company—is to encourage customers to share recommendations of their products or services on social media.

This way, they become promoters providing trustworthy information and purchasing guidelines in their networks. They also invite their peers to engage in a discussion about the pros and cons of the good or service purchased, and about its advantages and disadvantages compared to competing offerings. Advocate marketing in the form of a recommendation and, perhaps, discussion about a product or service on prospective customers’ home turfs is a highly personalized way to influence purchase decisions and add to the potential consumers’ degree of confidence about their eventual purchases.

PwC’s Total Retail Survey 2016 shows that 78% of the consumers in the global sample studied are influenced in some way by social media, up 10 percentage points from the previous year. At 45% of the total, the aspect of social media that was the most influential was reading reviews, comments, and feedback. 

Similarly, a compilation on the subject by HubSpot from 2012, shows that people were 71% more likely to purchase based on social media referrals and that 90% believe brand recommendations from friends. 

>Think about it: When considering a purchase, what’s more encouraging than getting a recommendation from a friend?