Customer satisfaction delivers future cash flow


How can marketers better link their activities to the measures that matter most to CEOs?

That was the question asked by T. Gruco and L. L. Rego of the University of Iowa in 2003.  Even though the study is North American, and it took place in 2003, Return on Behavior Magazine believes you can benefit from reading this excerpt. In fact, we believe that the conclusion of their study is still very much valid today, and will be for years to come. 

Improve future cash flow
Since satisfied customers are less likely to defect and are more receptive to a firm's offerings, increases in customer satisfaction will improve a firm's future cash flow and diminish its variability over time. Increased and less-volatile cash flows, in turn, decrease the firm's cost-of-capital, thus further boosting shareholder value.

Using the American Customer Satisfaction Index (ACSI) and the COMPUSTAT database they compiled a nationally representative dataset, including 200 members of the Fortune 500, which spans the years 1994-2000. They estimated their model using a hierarchical linear model which allowed them to examine whether industry-level (i.e., market concentration) or firm-level (i.e., firm size) variations explain cash-flow differences.

Customer satisfaction creates shareholder value
Overall, they found that customer satisfaction creates shareholder value by significantly increasing a firm's cash flow and reducing cash flow variability.

More specifically, a one-point increment in a firm's customer satisfaction score - results in an increase of over 7% in a firm's future net operational cash flow.  And on top of that a decrease of 4% in its variability.

The resulting growth in cash flow and decrease in a firm's cost-of-capital will significantly influence its bottom line and value to shareholders.  Industry differences account for a significant portion of differences in future cash flow across firms: the influence of customer satisfaction on cash flow growth and variability is stronger for firms operating in more-concentrated industries. However, firm size does not have an impact on these relationships.

As managers seek to link their activities to the measures of most concern to top management, this study offers important evidence that investments in customer satisfaction represent resources well spent: satisfied customers are central to creating shareholder value.  

If you want to know more about how you can measure and react on customer satisfaction metrics, please contact TeleFaction