The Correlation between Customer Satisfaction and Companies Profits
Introduction
From economists’ point of view, customer satisfaction is a manifestation of products and services inputs; however, the inputs may not improve the profitability of a firm. A company needs substantial investments to attain high customer satisfaction, which reduce its profits. Nevertheless, most studies indicate that customer satisfaction is significantly linked to a company’s current or future performance. Many businesses commit themselves to customer satisfaction. Several mission statements, as well as marketing plans, precisely focus on customer satisfaction, for instance, by having compensation systems that integrate satisfaction metrics into their dividend measures and commercials that declare customer satisfaction prizes. Customer satisfaction is currently the common method utilized in organizations’ determinations in assessing and managing customer loyalty.
Current Situation
It is regarded that highly satisfied clients make a business to thrive. Nevertheless, practically, it is not a simple process. In many organizations’ association between their customer satisfaction rates for a particular period as well as the respective stock performance, averagely, satisfaction accounts for only 1% of the variation in their profit. Customer satisfaction is anticipated to impact performance, in the long run, thus, examining satisfaction and profit rates for the same year does not correctly demonstrate the entire relationship. There is a positive, statistically significant correlation between satisfaction and an organization’s profit. The problem, nevertheless, is that the association between customer satisfaction and customer spending behavior is precisely weak (Evanschitzky, Wangenheim, & Wunderlich, 2007). Variations in customers’ satisfaction levels illustrate less than 1% of the disparity in changes in their share of category spending. The association is statistically significant, but it is not managerially important.
Analysis of Issues
Different kinds of research reveal three vital issues that have a strong negative influence on transforming customer satisfaction into positive business results.
Reduced Prices and Customer Satisfaction
Managers normally consider high customer satisfaction assessments to be generally healthy for business. Nevertheless, the profits are not definite. Managers reduce their dedication of resources to increasing customer satisfaction levels since they are not able to measure the cost related to raising customer satisfaction grades correctly. They are not able to determine precisely the value of such an increase. Therefore, the returns on such investments are usually insignificant. On the other hand, improved satisfaction raises sales returns, but the extra cost usually outweighs the profits. Moreover, low prices as a factor that motivates customer satisfaction justify this case (Goodman, 2009). Generally, satisfaction and price are inversely related. Therefore, reduction of price appears to be a simple way of improving satisfaction levels. However, for most products and services, the possibility of lowering price while remaining profitable is limited, and reduced prices are usually not good for companies. Although customer satisfaction and profitability are not equally exclusive, their alignment is not necessary. Managers usually have several competing options for enhancing satisfaction. For instance, they can offer a better customer experience or more advanced commodities, as not all options are beneficial. In addition, not every customer can be profitably contented. Some customers are not ready to pay the required price for the level of service that is provided. Others want a level of service that equalizes any income they offer. Managers need to comprehend the profit impact of their determination of enhancing customer satisfaction. Therefore, this information helps them in to making the right decisions for their business, which might sometimes be difficult (Evanschitzky, Wangenheim, & Wunderlich, 2007).
Satisfaction and Market Share
Since increased satisfaction levels are considered to lead to higher customer spending, individuals anticipate a strong positive association between satisfaction and market share, which is practically opposite. Increased satisfaction is a strong negative forecaster of future market share. Several organizations with low relative satisfaction levels possess the largest market shares in their businesses. This is because the wider an organization’s market appeal relative to the provisions of rivals, the lower the degree of satisfaction appears to be. Attainment of market share normally emanates from the attraction of clients whose needs are not fully aligned with the firm’s main target market. Therefore, smaller niche organizations are capable of serving their customers well. In addition, firms with a large market share, in contrast, are required to serve different types of clients (Novak, Sparl & Azman, 2015).
Experts have urged managers to level their performance relative to high-satisfaction brands. The contention is that customers judge an organization’s performance not just by the performance of direct rivals but also by the service they receive from the best organizations in other groups. This might be true; however, the comparison has no impact on managers. The “best-in-class” illustrations signify niche brands in groups with a large number of clients. Managers can obtain knowledge from their reports but attempting to attain the satisfaction levels of such ‘best-in-class’ niche brands can be counterproductive for several companies. Moreover, improved customer-satisfaction levels usually occur because of the reduction in market share. Therefore, managers need to care about customer satisfaction as they seek market share growth. They are also required to find the right balance between customer satisfaction levels and broad customer acceptance (Goodman, 2009). Many businesspersons normally anticipate customers to spend more on favorite brands in the category. Therefore, an organization’s percentage of happy clients or promoters is not important. The important measure is the relative rank that a company’s brand satisfaction level symbolizes compared with its rivals.
The Significance of Leading the Market
The main reason organizations assess satisfaction is the conviction that higher scores lead to a greater share of a client’s wallet. Nevertheless, the truth is that understanding customers’ satisfaction level does not reveal any information regarding the way they will divide their spending amount to the different brands utilized. Therefore, variations in customer satisfaction levels are unlikely to have a significant influence on the share of category spending clients assign to an organization’s brand. Devotion to a single-brand has been substituted with the commitment to several brands in several sectors. Because of the divided loyalty, more clients partially defect, offering more of their business to a rival, than fully absconding a business or brand. Therefore, enhancing clients’ share of spending with a company’s brand represents a greater chance compared to determinations to enhance customer retention (Zhang & Pan, 2009).
Due to the weak association between satisfaction and share of wallet, managers usually fail to recognize what their organizations need to do to acquire a greater share of clients’ spending. Managers suppose that clients who rank themselves as fully content are more likely to offer a big share of their spending in the category to their brand. Therefore, managers usually evaluate their degrees of satisfaction as the percentage of clients who grade their satisfaction at the highest level. The challenge of only considering an organization’s satisfaction is that it is a poor sign of the relative preference of clients toward the brands they utilize.
For several businesses, clients share their spending among various competing brands. However, not all brands are equal in satisfying customers. Although the notion of ranked satisfaction appears radical, it indicates that satisfaction is relative to competitive options. In addition, the link between satisfaction and share of wallet is a function of satisfaction’s association with the relative rank. Alteration of total satisfaction rates to relative ranks accounts for over 20% of the disparity in clients’ share of category spending. This is good considering that complete satisfaction levels justify merely 1% of the disparity in the share of wallet (Chi & Gursoy, 2009).
Conclusion
No organization can exist without satisfied clients. However, trying to enhance satisfaction in a wrong way can have a negative impact on a company’s financial status. Therefore, although satisfaction is vital, an effective business strategy as well as fiscal oversight remains essential to business. This study indicates that there is not one right way of enhancing satisfaction. Various tactics are essential based on the profiles of an organization’s clients and the type of the competitive environment. In addition, sometimes it is important to agree to lower average satisfaction levels to attain a greater market share by attracting a larger, different client base. Luckily, several issues raised can be addressed, and managers are supposed to identify and handle every issue that has a negative influence on the relationship between satisfaction and company profitability. Improving the rates of satisfaction levels can be a valuable element of an organization’s strategy, but it is not necessary since it is not usually compatible with market share growth.
References
Chi, C. G., & Gursoy, D. (2009). Employee satisfaction, customer satisfaction, and financial performance: An empirical examination. International Journal of Hospitality Management, 28(2), 245-253.
Evanschitzky, H., Wangenheim, F. V., & Wunderlich, M. (2007). An Examination of the Links between Employee Satisfaction, Customer Satisfaction, and Profitability: A Time-Series Analysis. AMA Winter Educators’ Conference Proceedings, 18374-375.
Goodman, J. A. (2009). Strategic Customer Service : Managing the Customer Experience to Increase Positive Word of Mouth, Build Loyalty, and Maximize Profits. New York: AMACOM.
Novak, A., Sparl, P., & Azman, S. (2015). Impact of customer satisfaction on financial results of car servicing companies: findings from Slovenia. E+ M Ekonomie a Management, (3), 113.
Zhang, C., & Pan, F. (2009). The impacts of customer satisfaction on profitability: a study of state-owned enterprises in China. Service Science, 1(1), 21-30.