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
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