Importance of customer satisfaction

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Customer satisfaction is a key and valued outcome of good marketing practice. According to Drucker (1954), the principle purpose of a business is to create satisfied customers. Increasing customer satisfaction has been found to lead to higher future profitability (Anderson, Fornell, and Lehmann 1994), lower costs related to defective goods and services (Anderson, Fornell, and Rust 1997), increased buyer willingness to pay price premiums, provide referrals, and use more of the product (Reichheld 1996; Anderson and Mittal 2000), and higher levels of customer retention and loyalty (Fornell 1992; Anderson and Sullivan 1993; Bolton 1998). Increasing loyalty, in turn, has been found to lead to increases in future revenue (Fornell 1992; Anderson, Fornell, and Lehmann 1994) and reductions in the cost of future transactions (Reichheld 1996; Srivastava, Shervani, and Fahey 1998). All of this empirical evidence suggests that customer satisfaction is valuable from both a customer goodwill perspective and an organization's financial perspective.

A firm's future profitability depends on satisfying customers in the present - retained customers should be viewed as revenue producing assets for the firm (Anderson and Sullivan 1993; Reichheld 1996; Anderson and Mittal 2000). Empirical studies have found evidence that improved customer satisfaction need not entail higher costs, in fact, improved customer satisfaction may lower costs due to a reduction in defective goods, product re-work, etc. (Fornell 1992; Anderson, Fornell, and Rust 1997). However, the key to building long-term customer satisfaction and retention and reaping the benefits these efforts can offer is to focus on the development of high quality products and services. Customer satisfaction and retention that are bought through price promotions, rebates, switching barriers, and other such means are unlikely to have the same long-run impact on profitability as when such attitudes and behaviors are won through superior products and services (Anderson and Mittal 2000). Thus, squeezing additional reliability out of a manufacturing or service delivery process may not increase perceived quality and customer satisfaction as much as tailoring goods and services to meet customer needs (Fornell, Johnson, Anderson, Cha, and Everitt 1996).


While it seems clear that increasing customer satisfaction is beneficial to a marketing manager, how to measure it is less clear. Customer satisfaction has been studied from the perspective of the individual customer and what drives their satisfaction (Oliver and Swan 1989; Oliver 1993; Fournier and Mick 1999) as well as from an industry-wide perspective to compare customer satisfaction scores across firms and industries (Fornell 1992; Anderson, Fornell, and Lehmann 1994; Fornell et al. 1996; Mittal and Kamakura 2001), while other research has examined customer satisfaction in a single organization (Schlesinger and Zornitsky 1991; Hallowell 1996; Loveman 1998) or across several organizations (DeWulf, Odekerken-Schröder, and Iacobucci 2001). In addition, specific tools for measuring customer satisfaction have been developed in the past, including SERVQUAL (Parasuraman, Berry, and Zeithaml 1988, 1991). Thus, there exists an ample literature on which to draw when attempting to measure customer satisfaction.

In attempting to measure customer satisfaction, it is possible that attributes can have different satisfaction implications for different consumer and market segments - the usage context, segment population, and market environment can influence satisfaction and product use (Anderson and Mittal 2000). Failure to take into account segment-specific variation may lead a firm to focus on the wrong aspect for a given set of consumers (Anderson and Mittal 2000). Furthermore, consumers with similar satisfaction ratings, yet different characteristics, may exhibit different levels of repurchase behavior (Mittal and Kamakura 2001). It is clear, then, that market and consumer segments should be important factors to consider when measuring customer satisfaction and its implications.

Garbarino and Johnson (1999) did consider segments in the customer base in their study of satisfaction where they analyzed the different role played by satisfaction between low relational and high relational customers. Their study, however, involved customers from only a single organization. Our approach extends this work by studying customers from multiple organizations, and shares some similarities with Anderson and Sullivan (1993) with respect to the type of analysis and sampling methods. The goals of their research, however, were to study the antecedents and consequences of customer satisfaction rather than investigate how different types of satisfaction may influence the overall measure of customer satisfaction. In addition, our theoretical approach shares some similarities to Hutchison, Kamakura, and Lynch (2000) who posited that unobserved heterogeneity is a problem for interpreting results from behavioral experiments. The basic point of their argument is that aggregation may create effects that do not exist in any segments, or may mask effects that do exist. The present study makes a similar point and provides an analytical method for overcoming such a problem. Kekre, Krishnan, and Srinivasan (1995) examine heterogeneity of effects across individual customers of a single company using a random effect ordered profit model. These models are similar to the hierarchical linear models considered here, and a single customer could be considered a subunit.

3.3.1 Sub segments vs. Subunits

Other authors have examined the heterogeneity of customer satisfaction effects. Danaher (1998) shows how latent class regression can be used to segment customers and estimate regression effects by segment simultaneously. Our work is different in that we assume pre-defined subunits - our concern is not to define segments that have different effects. For the problems examined here, the subunits already exist. Danaher (1998) identifies segments of customers (end users) who place different emphasis on different service attributes. Malthouse (2002) defines such a process as sub segmentation. A firm has targeted a market segment and acquired customers/end users. It then sub segments these customers/end users from a market segment into smaller, more homogeneous groups based on some criteria such as utility for aspects of the product in the case of Danher (1998).

An important conceptual question concerns when one approach should be preferred over the other. We make two points in response to this question. First, the pre-defined subunit approach to studying heterogeneity is more appropriate when the resulting managerial actions will be implemented at the subunit level. Second, managerial actions implemented at the subunit level are most reasonable when there is homogeneity within a subunit and heterogeneity across subunits; when this is not the case the organization should seek actions that can be implemented for sub segments of customers within a subunit. We give several examples to illustrate these points.

Consider the case of a newspaper owner, discussed in more detail below. An owner in the U.S. has multiple newspapers and wants to know whether to invest in improving either the service or the content of its individual papers. Investing in content could involve hiring additional reporters so that local news can be covered more thoroughly, adding pages to existing sections, adding special-interest sections, etc. For most newspapers in the U.S. these actions would have to be taken at the subunit level. One might object by suggesting, for example, that large metropolitan newspapers (which represent only a small percentage of U.S. newspapers) could improve content for specific suburban communities by hiring reporters and adding customized local sections. We would argue that the suburban "zone" would be a subunit.

A second example can be when actions primarily involve reach media. If a company is communicating a single message with, for example, television, newspapers, billboards, etc., the message must be tailored to the subunit reached by the media. A third example is managerial actions that are most naturally applied at the subunit level of retail stores, car dealerships, supermarkets, and bank branches, as discussed previously. A corporation could send employees of certain subunits, but not all, for specialized customer service training programs. Corporations often choose where to locate subunits, and might opt for more expensive locations in regions where "convenience" is more important. In addition, pricing strategies often must be executed at the subunit level (Singh, Chintagunta, and Dube 2002).Of course; there are numerous examples of situations where customer sub segmentations are more appropriate. See Danaher (1998) or Malthouse (2002) for further discussion and examples.

The present research represents the first study of which we are aware to measure customer satisfaction from a representative sample of customers who are in turn from a representative sample of organizations in a single industry. The analysis was replicated in a second industry to confirm that the findings are not unique to a single industry.