6th Jul 2010
Customer retention is more profitable than customer acquisition because the value of customers typically increases over time due to the following factors:
Summarised as the 3Rs (retention, related sales and referrals), and based on 30 years of research, Harvard concluded that ‘loyal’ customer behaviours explain differences in companies’ financial performance more than any other factor. They also point out that customer satisfaction is the main driver of customer loyalty.
The link between customer satisfaction and employee satisfaction has been recognised by the work of Harvard and others – Harvard labelling it “the customer-employee satisfaction mirror”. They have demonstrated not only that employee satisfaction typically produces higher levels of customer satisfaction (since more satisfied employees are more highly motivated to give good service), but also that higher customer satisfaction produces higher employee satisfaction since employees prefer working for companies that have high levels of customer satisfaction and low levels of problems and complaints.
More satisfied employees stay longer, keeping valuable expertise and customer relationships within the organisation. Conversely, high staff turnover has a negative effect on customer satisfaction.
Some companies have built fully validated models that precisely quantify the relationship between employee satisfaction, customer satisfaction and financial performance. These include the Canadian Imperial Bank of Commerce who built a service profit chain model demonstrating that each 2% increase in customer loyalty would generate an additional 2% in net profit. They also quantified the causal links in the chain back from customer loyalty to customer satisfaction and to employee satisfaction. For example, they found that to produce an additional 2% gain in customer loyalty an improvement of 5% in employee satisfaction was required.
An example from retailing is Sears Roebuck who, using similar profit chain modelling, demonstrated that a 5% gain in employee satisfaction drives a 1% gain in customer satisfaction which, in turn, leads to an additional 0.5% increase in profit.
Aggregate data from the American Customer Satisfaction Index (ACSI) have also demonstrated a very strong link between customers’ satisfaction with individual companies and their propensity to spend more with them in future. In fact every 1% increase in customer satisfaction is associated with a 7% increase in operational cash flows and the time lag is as short as three months, although this does vary by sector.
The University of Michigan has reported that the top 50% of companies in the ACSI generated significantly more shareholder wealth (Market Value Added) than the bottom 50%. Based on the ACSI database, a 1% increase in customer satisfaction drives a 3.8% increase in stock market value. Between 1997 and 2003 (a period that saw huge rises and falls in stocks) share portfolios based on the ACSI out-performed the Dow Jones by 90%, the S&P 500 by 208% and the Nasdaq Comp by 344%. Michigan University’s Professor Fornell asserts the reason for this is simply that satisfied customers reward companies with, among other things, their repeat business, which has a huge effect on cumulative profits.