Thursday, May 13, 2010

Customer Satisfaction: Job 1

It’s quite incredible, really. One of the biggest complaints I’ve heard from the workforce have been about the most important piece of the puzzle – the customer. It is absolutely true. Customer-induced stress is the one thing many employees will list as one of their biggest concerns. Sad. Without customers, we would have no business. Whether they are internal or external, customers are the reason we go to the office every day. If a business does not have enough customers, they focus on finding more. Keeping customers happy is the key to retaining customers.

There is actually a real bottom line benefit to keeping the customer happy. Companies with the most-satisfied customers have a track record for increasing their stock values over the past few years. Additionally, these companies have seen less volatility in their stock values, had lower turnover and are able to generate more cash, bringing products to the market faster. The link between customer satisfaction and a company’s stock values is stronger than you might think.

Looking at the information found at the American Customer Satisfaction Index website, you can find plenty of information on customer satisfaction for more than 200 companies. All this information is free too. The rankings were developed by the National Quality Research Center at the University of Michigan business school.

Conducting around 65,000 phone interviews a year, the National Quality Research Center asks consumers if they’ve used certain products or services recently. They follow up with the consumers to determine their satisfaction with levels of quality, reliability, and whether the good or services met their expectations. Further, the surveyors seek information about whether the consumers have had any complaints and the likelihood they will be repeat customers. The answers are ranked and tallied, creating an overall score for a company on a scale of 1 to 100, 100 being optimal. These scores are posted with company rankings and averages for industry groups.

What is really interesting about this survey is the correlation between happy customers and the firm’s stock prices. Investors should be very interested in this as well. Some of the reasons for the correlation between happy customers and happy shareholders are obvious. Satisfied customers tend to be more loyal. They share that loyalty with their friends. Fewer complaints from the customer means the employees have to devote less time to putting out such fires and warranty costs are lower.

Other reasons for this correlation are not so readily obvious. Companies with happier customers have lower employee turnover. There seems to be a pretty strong relationship between customer satisfaction and employee attitudes, which affect customer satisfaction – a doubled edged blade.

Happier customers also tie in with greater cash generation. Interestingly, a 1-point increase in the customer satisfaction rankings relates to an increase in cash flow into a company’s coffers of about 7%. Happy customers means more predictable cash flows and lower borrowing costs.

Better relationships with the consumers provide the company with greater flexibility on pricing. They can typically get away with price increases, which helps the bottom line. H.J. Heinz (HNZ), which has a 4-point lead over its peers in the University of Michigan customer-satisfaction rankings, was able to increase prices by 6% in the first quarter. This is far beyond any other large-cap food company.

Companies with high customer-satisfaction ratings seem to have an advantage when launching new products as well. Loyal customers are readily willing guinea pigs. Take Apple (AAPL ) for example. Because of the user-friendly design of the iPod, happy iPod customers have been buying other Apple products – iPhones and Macs. Although priced higher than comparable products, the happy consumer is willing to pay the price.

Customers are the very life-blood of any for profit organization. They are the reason there is a cash-flow in the first place. Customer satisfaction is built on a foundation comprised of many aspects. Indeed, it is hard to compensate for poor quality, just as it is difficult to overcome other missed opportunities. Still, the large picture of the customers’ satisfaction level should be forefront at every level of the corporate chain.