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Customer Satisfaction: A Key Element for an Effective Business Strategy

Forrest V. Morgeson III, Ph.D. Director of Research, American Customer Satisfaction Index

San Juan, Puerto Rico September 12, 2013

ACSI

American Customer Satisfaction Index TM

• 1. ACSI Overview

Snapshot of the ACSI

• Established in 1994, ACSI is the only standardized measure
• f customer satisfaction in the U.S. economy, covering more

than 230 companies in 45 industries and 10 economic sectors; companies measured account for roughly one-third of the U.S. Gross Domestic Product (GDP)

• A quarterly measure of the national economy’s health;

complementary to measures such as productivity, unemployment rate, and inflation rate

• ACSI results are based on interviews of consumers; database

contains information from nearly 2,000,000 customer interviews

Snapshot of the ACSI

• Adopted in 1999 by the U.S. federal government as the “gold

standard” measure of citizen satisfaction; state and local government services also measured

• 100+ departments and agencies of the U.S. Federal

Government measured on an annual basis

• Results from all surveys are published quarterly in various

media and on the ACSI website, www.theacsi.org

United States Mexico Colombia

Puerto Rico

Barbados Brazil South Africa Indonesia Singapore Malaysia Turkey Sweden United Kingdom Portugal South Korea

Methodology Adopted Internationally

Peru

• 2. ACSI Methods and Models

The Changing Economy

The Old World Mass Production and Consumption of Commodities The New World Increasingly Customized goods, services and information

• The buyer drives the economy
• The buyer drives the firm

MORE … … buyer power LESS … … monopoly power MORE … … buyer information … global competition … services … market economies

NEEDED: New Customer-Centric Measures

• about the economy
• about the firm

Implications of the New Economy

Satisfaction Theory and Measurement

• “Customer satisfaction” is a concept that has dominated

marketing research over the past several decades

• However, how to measure satisfaction precisely and

accurately, and in a way that is operational and that maximizes its ability to predict future consumer behaviors is far more complicated

• Customer satisfaction (ACSI) in the ACSI model is

embedded in a system of cause and effect relationships. Survey items are included in the questionnaire measuring satisfaction, as well as items that influence and are influenced by satisfaction

• The ACSI model produces variable scores to show “how

the company is doing,” and variable impacts to show “how the company can improve”

Why Measure Satisfaction?

National Economy

• Measure and

monitor national economic performance

• Consumer

Spending and GDP growth

• International

competitiveness

• Measure and

monitor firm performance

• Forecast

revenue/profit/ stock market growth

• Industry

competitiveness

• Measure and

monitor government performance

• Efficiently allocate

scarce government resources

• Build trust and

loyalty among citizens

The Firm The Government

ACSI Sectors and Industries

Hotels Limited-Service Restaurants Full-Service Restaurants Newspapers Motion Pictures Broadcasting TV News Software Fixed Line Telephone Service Wireless Telephone Service Cable & Satellite TV Energy Utilities Supermarkets Gasoline Stations Department & Discount Stores Specialty Retail Stores Health & Personal Care Stores Banks Life Insurance Health Insurance Property & Casualty Insurance Airlines U.S. Postal Service Express Delivery Local Government Federal Government

Accommodation & Food Services Information Utilities Finance & Insurance Transportation & Warehousing Public Administration/ Government

Retail Brokerage Travel

E-Commerce

Hospitals

Health Care & Social Assistance

National ACSI

Manufacturing/ Durable Goods E-Business

Personal Computers Electronics (TV/VCR/DVD) Major Appliances Automobiles & Light Vehicles Cellular Telephones News & Information Portals/ Search Engines Social Networking

Manufacturing/ Nondurable Goods

Food Manufacturing Pet Food Soft Drinks Breweries Cigarettes Apparel Athletic Shoes Personal Care & Cleaning Products

Retail Trade

The Latent Variables

• Customer Expectations
• Overall Quality

– Product Quality (for selected sectors) – Service Quality (for selected sectors)

• Perceived Value
• Customer Satisfaction
• Customer Loyalty
• Customer complaints

Customer Expectations

• Customer Expectations are based on the customer’s

anticipation of the quality of goods and services, based

• n expectations of:

– Overall expectations (considering all things, how high were your expectations?) – Customization (will the goods or services fit the customer’s needs?) – Reliability (how often will things go wrong with the goods or services?)

Overall Quality

• Perceived Quality measures the customer’s evaluations
• f the experienced quality of goods or services:

– Overall quality (considering all things, how high was the quality?) – Customization (how well did the goods or services fit the customer’s needs?) – Reliability (how often did things actually go wrong with the goods or services?)

Perceived Value

• Perceived Value measures quality received relative to

the price paid, and vice versa:

– Quality given price (given the price paid, how would you rate the quality?) – Price given quality (given the quality received, how would you rate the price paid?)

Customer Satisfaction

• Customer Satisfaction (ACSI) measures the customer’s

cumulative satisfaction. Three aspects of customer satisfaction are measured:

– Overall satisfaction (considering all your experiences to date, how satisfied are you?) – Confirmation of expectations (considering all of your expectations, to what extent has the company fallen short

• f your expectations or exceeded your expectations? )

– Comparison to ideal (how well do you think the company compares with an ideal organization?)

Complaints and Customer Loyalty

• Customer Complaints are the percentage of customers

who voice their dissatisfaction.

– This is the only single-item variable in the ACSI model, and is reported as a percentage

• Customer Loyalty is measured by repurchase intention

and price tolerance:

– Repurchase intention (the next time you buy, how likely is it to be from the same company?) – Price tolerance (how much could the company raise its prices before you would definitely not be a customer any longer?)

The Standard Model

Customer Expectations

• Satisfaction
• Comparison w/ Ideal
• Confirm/Disconfirm

Expectations

Perceived Overall Quality Perceived Value Customer Complaints Customer Loyalty

• Repurchase Likelihood
• Price Tolerance

(Reservation Price)

• Overall
• Customization
• Reliability
• Overall
• Customization
• Reliability
• Price Given Quality
• Quality Given Price
• Complaint Behavior

Customer Satisfaction (ACSI)

The original, standard ACSI model, designed to be generic enough to measure consumer satisfaction with a vast majority of consumer experiences

• 3. Results and Lessons

ACSI National Quarterly Scores

70 71 72 73 74 75 76 77

Baseline Q4/1994 Q1/1995 Q2/1995 Q3/1995 Q4/1995 Q1/1996 Q2/1996 Q3/1996 Q4/1996 Q1/1997 Q2/1997 Q3/1997 Q4/1997 Q1/1998 Q2/1998 Q3/1998 Q4/1998 Q1/1999 Q2/1999 Q3/1999 Q4/1999 Q1/2000 Q2/2000 Q3/2000 Q4/2000 Q1/2001 Q2/2001 Q3/2001 Q4/2001 Q1/2002 Q2/2002 Q3/2002 Q4/2002 Q1/2003 Q2/2003 Q3/2003 Q4/2003 Q1/2004 Q2/2004 Q3/2004 Q4/2004 Q1/2005 Q2/2005 Q3/2005 Q4/2005 Q1/2006 Q2/2006 Q3/2006 Q4/2006 Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013

ACSI 1994 to Q1 2013

ACSI Sectors and Industries (Q212-Q113)

Cooperative Utilities 83 Investor-Owned Utilities 77 Municipal Utilities 76

76.6

Airlines 67 Consumer Shipping 82 U.S. Postal Service 75 76 Computer Software 74 Fixed-Line Telephone Service 65 Internet Service Providers 68 Subscription Television Service 72 Wireless Telephone Service 80 Full-Service Restaurants 77 Hotels 80 Limited-Service Restaurants

Energy Utilities 77.4 E-Business 74.2 Manufacturing/ Nondurable Goods 81.9 Information 72.3 Public Administration/ Government 68.8 Health Care & Social Assistance 80.0 Transportation 73.6 Accommodation & Food Services 78.9 Retail Trade 76.6 Finance & Insurance 75.4 Manufacturing/ Durable Goods 83.0 E-Commerce 81.1

73 Internet News & Information 79 Internet Portals & Search Engines 69 Internet Social Media Federal Government 68.4 Local Government 69.1 Department & Discount Stores 77 Gasoline Stations 73 Health & Personal Care Stores 77 Specialty Retail Stores 78 Supermarkets 77 78 Internet Brokerage 82 Internet Retail 76 Internet Travel 77 Banks 82 Credit Unions 72 Health Insurance 81 Life Insurance 78 Property & Casualty Insurance Automobiles & Light Vehicles 84 Cellular Telephones 76 Televisions & Video Players/Recorders 86 Major Appliances 81 Personal Computers 80 Apparel 79 Athletic Shoes 80 Breweries 81 Food Manufacturing 83 Personal Care & Cleaning Products 83 Soft Drinks 84 82 Ambulatory Care 78 Hospitals

Monopoly Power

Monopoly Power:

• Internal Revenue Service

High Barriers to Switching:

• Airlines
• Cable TV
• Cell Phone Service

Does customer satisfaction have to matter to the monopolist?

Competition Drives Customer Satisfaction (2010 Scores)

Soft Drinks 84 Beer 82 Appliances 82 Personal Computers 78 Banks 76 Energy Utilities 74 Wireless Service 72 Airlines 66 Cable/Satellite TV 66

More Barriers Fewer Barriers

Switching Barriers

Mergers & Acquisitions

Some Key Mergers Captured in ACSI Exxon – Mobil Hewlett-Packard – Compaq Comcast – AT&T Broadband Daimler Benz – Chrysler Kraft – Nabisco Pepsi – Quaker Nestle – Ralston Purina Bank of America – Fleet Boston

• J. P. Morgan Chase – Bank One

74.2 73.6 73.0 74.6 72.1 73.9 72 73 74 75 Pre-Merger Year 1 Year 2

ACSI for Mergers Compared with their Industry Averages (Minus Mergers)

Industries (minus Mergers) Mergers

ACSI = 0-100 Scale Merger Year

• 1.3%
• 1.2%

Total = -2.5%

• 0.5%
• 0.8%

Total = -1.3%

Heavy Bank Merger Activity in Late 1990s

65 70 75 80 1994 1996 1998 2000 2002 2004 2006 2008 2010

ACSI Commercial Banks 1994 to 2010

Quality or Price?

• For many firms, marketing strategy is essentially the same

as pricing strategy. New customers are won, and existing customers retained, through adjusting prices throughout the customer life cycle

• However, while discounting can achieve short-term

improvement in customer satisfaction and/or loyalty, it is not sustainable in the long-term

• Price important for first purchase, but it takes good quality

to bring customers back again and again

The Story of Kmart

65 70 75 80 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Kmart Industry

Customer Satisfaction

.36 .76

On Average, Quality has approximately twice the effect of Value. QUALITY IS KEY!

Quality Value

Quality and Value

Price-Sensitive Satisfaction

65 70 75 80 85 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00

ACSI Gas $

U.S. Gas Prices and Gasoline Service Stations ACSI

Average Retail Gas Price*

*Inflation adjusted

Can Price Trump Satisfaction?

A Tale of Two Supermarket Retailers Quality Value Satisfaction Loyalty Industry 78 77 75 81 Company A 71 76 71 81 Company B 84 77 79 70

4(a). ACSI and Financial Returns (Macro)

ACSI Macro

70 71 72 73 74 75 76 77

Baseline Q4/1994 Q1/1995 Q2/1995 Q3/1995 Q4/1995 Q1/1996 Q2/1996 Q3/1996 Q4/1996 Q1/1997 Q2/1997 Q3/1997 Q4/1997 Q1/1998 Q2/1998 Q3/1998 Q4/1998 Q1/1999 Q2/1999 Q3/1999 Q4/1999 Q1/2000 Q2/2000 Q3/2000 Q4/2000 Q1/2001 Q2/2001 Q3/2001 Q4/2001 Q1/2002 Q2/2002 Q3/2002 Q4/2002 Q1/2003 Q2/2003 Q3/2003 Q4/2003 Q1/2004 Q2/2004 Q3/2004 Q4/2004 Q1/2005 Q2/2005 Q3/2005 Q4/2005 Q1/2006 Q2/2006 Q3/2006 Q4/2006 Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013

ACSI 1994 to Q1 2013

Growth in ACSI and GDP: 1997 – 2013 (Q1)

Source: GDP from U.S. Department of Commerce, Bureau of Economic Analysis

• 8%
• 7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% 7%

• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% Annualized, Seasonally Adjusted Rate of Growth

% Quarterly Change in GDP % Quarterly Change in ACSI

Growth in ACSI and Consumer Spending: 1995 – 2013 (Q1)

Source: Consumer Spending from U.S. Department of Commerce, Bureau of Economic Analysis

• 8%
• 7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% 7%

• 6%
• 4%
• 2%

0% 2% 4% 6% 8% Annualized, Seasonally Adjusted Rate of Growth

% Quarterly Change in Consumer Spending % Quarterly Change in ACSI (lagged)

• 24%
• 20%
• 16%
• 12%
• 8%
• 4%

0% 4% 8% 12% 16% 20%

Growth in ACSI and DJIA: 1995 – 2013 (Q1)

ACSI Stock Portfolio vs. SP 500 Cumulative April 2000 – April 2013

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 Apr-00 Mar-01 Feb-02 Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May-10 Apr-11 Mar-12 Feb-13

Cumulative Performance

S&P 500 ACSI Stock Portfolio $509.83 $106.60

4(b). ACSI and Financial Returns (Micro)

Measuring Customers as an Asset

Aligning measures to maximize the firm’s performance

Voice of Customer Methodology-Driven Impact Analysis Financially-Driven Strategic Guidance

• Management Perspective
• Customer Interviews
• Model of Satisfaction
• Custom Questionnaire
• Causes and Consequences
• Quantify Improvements
• Special Analyses
• Benchmarking
• ”What to Do”
• Financial Impact
• Progress Monitoring
• What-If Analysis

Customer Satisfaction Management System

The Satisfaction-Profitability Chain

Drivers of Satisfaction

• Expectations
• Quality (Product, Service)
• Value
• Brand Image
• Employee Satisfaction

Customer Satisfaction Satisfaction Outcomes

• Customer Loyalty
• Word-of-Mouth
• Up/Cross-Selling
• Share of Wallet

Corporate Financial Performance

• Revenue Growth
• Market Share
• Earnings/Profitability

Stock Market Performance

• Higher Market Value
• Lower Volatility
• Lower Risk

What is CLV?

• Customer lifetime value (CLV) is defined as the dollar

value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship

• CLV quantifies the total value of the customer
• relationship. It recognizes that because retained

customers are “cheaper” than new customers (no advertising; fewer incentives), and because the retained customer becomes less expensive in the future (the discount rate), the strength of the customer relationship matters greatly

• CLV is calculated as:

Customer lifetime value ($) = Margin ($) * (Retention Rate (%) ÷ [1 + Discount Rate (%) - Retention Rate (%)])

What Role Does Satisfaction Play in CLV?

• As customer satisfaction increases, so too does the

customer retention rate. In turn, an increasing retention rate means a larger CLV, with each customer bringing more profit to the firm:

• In this example, based on ACSI data, an increase in ACSI
• f 10-points was shown to increase Retention by 6.5%. In

turn, CLV increased 33.4%, meaning that the average per- customer profitability increases by 33.4% as well!

ACSI Retention % Δ CLV ACSI +0 75.0% 0.0% ACSI +1 75.6% 2.8% ACSI +2 76.3% 5.6% ACSI +3 76.9% 8.6% ACSI +4 77.6% 11.7% ACSI +5 78.2% 15.0% ACSI +6 78.9% 18.3% ACSI +7 79.5% 21.9% ACSI +8 80.2% 25.5% ACSI +9 80.8% 29.3% ACSI +10 81.5% 33.4%

$0 $100 $200 $300 $400 $500 $600 65 70 75 80 85 90

00 01 02 03 04 05 06 07 08 09 10 11 12

Apple ACSI Apple Stock

Stock Price and ACSI: Apple

$0 $40 $80 $120 $160 $200 65 70 75 80 85 90

07 08 09 10 11 12

Netflix ACSI Netflix Stock

Stock Price and ACSI: Netflix

$0 $10 $20 $30 $40 $50 $60 $70 60 64 68 72 76 80

01 02 03 04 05 06 07 08 09 10 11 12

Home Depot ACSI Home Depot Stock

Stock Price and ACSI: Home Depot

$0 $20 $40 $60 $80 $100 $120

72 74 76 78 80 82 84

00 01 02 03 04 05 06 07 08 09 10 11 12

Costco ACSI Costco Stock

Stock Price and ACSI: Costco

• ACSI data has been used and examined in more than

3000 academic research articles over the past two decades

• In one study, customer satisfaction as measured by ACSI

was found to outperform other popular metrics – such as Net Promoter, customer complaints, “top-box” satisfaction, word-of-mouth/recommendation, and repurchase intention – in predicting financial outcomes

• ACSI is a leading predictor of the following measures of

financial performance (among others):

• Stock market returns
• Total shareholder returns
• Market value added (MVA)
• Return on investment (ROI)
• Annual sales/revenue growth
• Net operating cash flow

ACSI: Academic Power and Proven Performance

• 5. Case Studies

In-Depth Case Study:

The ACSI model in action: Results from an international retail client (confidential) measuring employee and customer satisfaction

– A department store client for more than a decade; approximately $1 Billion in annual sales internationally – The Challenge:

• Faced with aggressive competition from other big-box

retailers like Wal-Mart and Target

• Internal culture focused more on processes than on

customer needs

• Low morale and high turnover among floor employees
• Concerns about achieving profitability targets

– Initial actions taken:

• Employee Satisfaction (ESI) and Customer Satisfaction

(CSI) measurement developed for 70 largest stores; planning guides provided to each store manager

• Program extended to smaller stores

A Major International Retailer

– Initial levels of ESI and CSI were very low, but consistency

• f

improvements was remarkable – Despite some difficult market conditions, ESI and CSI trended upward; employee turnover stabilized

95% 100% 105% 110% 115% 120% 125% 130% Baseline 1 yr later 2 yrs later 3 yrs later 4 yrs later 5 yrs later 6 yrs later 7 yrs later 8 yrs later

Retail ACSI Growth Our client's CSI growth Our client's ASI growth

A Major International Retailer

What Was Done?

– ESI and CSI

• Metrics added to Balanced Scorecard report to managers
• Variable compensation tied to results and improvement

– ESI up by 9 points over eight years

• Significantly improved internal communications
• Involved employees in action planning
• Set clearer expectations about career development;

improved process for communicating job openings

• Created market-based comparison for compensation

– CSI up by 18 points over eight years

• Invested in external assessment program of merchandise
• “Forced” buyers to discuss merchandise with store

management

• Customized assortment based on store demographics
• Re-trained floor employees for customer-facing situations

r =.48

ESI and CSI found to be strongly correlated Customer Satisfaction (CSI) by Store Employee Satisfaction (ESI) by Store

ESI and CSI

Year 1 – Year 2 CSI Results Increase

11 Stores Rev.

25%

No Change

43 Stores Rev.

18%

Decrease

10 Stores Rev.

.73% – Relative change of CSI at the store level results in significant differences in financial performance across stores

CSI Change

The Financial Results

BRIEF CASE STUDY – Global Electronics Retailer

Situation

This leader in electronics retailing recognized the importance of gathering, analyzing, and using customer feedback. However, they acknowledged that they were missing

• pportunities to generate business improvements based on insights they could obtain

through a more systematic and scientific approach to gathering feedback.

Solution

Retailer implemented an enterprise-wide customer feedback insights system The system was designed to:

• Identify key customer insights that would have the greatest impact on

satisfaction

• Specify operational changes to be made as a direct result of these new insights
• Identify the role of employee engagement on overall customer satisfaction



Employee engagement was found to contribute 70% to customer satisfaction growth



Investments in employee training and new technology to engage customers more effectively



Identified high correlation between satisfaction with the equipment service center and future purchase and referral, thereby driving an investment in this area



Customer satisfaction increased 5% over the course of the program, boosting revenue by $1B annually.

AT A GLANCE

BRIEF CASE STUDY – Business Software Provider

Situation

A provider of business software faced increased competition and falling customer

• retention. They saw their share of wallet from existing customers threatened and sought to

take action before it impacted the bottom line.

Solution

Simply improving the software or lowering price was not the most efficient path to more satisfied, more profitable customers. Instead the highest impact recommendations included:

• Changing account management approach from product-centric to single point-of-

contact

• Instituting quarterly account review meetings to discuss needs and issues
• Empowering account managers and a streamlined negotiation process giving

them power to finalize agreements

BY THE NUMBERS



+$60M: Additional Revenue earned through customer retention



+13Pts: Overall improvement in customer satisfaction score



2.5x: Amount satisfied customers spend compared to dissatisfied customers



+13%: Increase in satisfaction with sales representatives



+11%: Improvement in satisfaction with the negotiation process

• 6. Final Thoughts

The Bottom Line for Management

• Buy customer loyalty with price incentives
• Try to exceed customer expectations
• Cut cost at the expense of customer relationships
• Poor measurement
• Confuse symptoms with causes
• Loyalty
• Complaints
• Recommendations

What Losers Do:

• Manage customer relationships as true economic

assets

• Balance productivity and service quality
• Connect operations - customer satisfaction -

financials

• Maximize customer complaints
• Earn loyalty of customers by satisfying them
• Balance customer satisfaction and market share

What Winners Do:

The Bottom Line for Management

THERE ARE NO SHORTCUTS If you don’t satisfy your customers, they will find somebody who will

As Long As Repeat Business is Important and Buyers Have Other Options…

For more information:

ACSI Website: www.theacsi.org Forrest V. Morgeson III Director of Research, ACSI fmorgeson@theacsi.org