Measure Customer satisfaction
Hurdle in the measurement of Customer Satisfaction Goodwill
Method of Customer Satisfaction Goodwill calculation
Important Factors
Whether the push is driven by internal or external stakeholders, top management is being exhorted to establish a process for quantitatively determining the level of satisfaction among the firm’s customers.
A recent survey found that “information about customer satisfaction is highly valued by the largest percentage of executives, even more than the traditional management gauges of financial performance and operating efficiency.”
With the growing amount of time and resources that have been going into the measurement of customer satisfaction, it is not surprising that questions are being raised about whether these commitments are truly worthwhile.
What is the financial value of a one-point improvement in a satisfaction score? Some studies have been able to show evidence of benefits to business operating results that can accrue from a high level of customer satisfaction
Impact of Customer Satisfaction:
a) Customer Feelings Improved;
b) Immediate Increase in Sales volume;
c) Longer-term financial impacts such as increasing sales in years.
Why you measure Customer satisfaction?
Now let’s return for a moment to why firms pursue customer satisfaction. The customer satisfaction is based on the belief that satisfied customers are “worth more” to the firm. That is, they are widely expected to:
*Buy more or buy higher value product
*Less cost to serve
*Willing to pay proportionately higher
*Retained for life (max)
*Increase advocacy rate
*Decrease customer accusition rate
*Review product
*Better & Faster response to promotion
Hurdle in the measurement of Customer Satisfaction Goodwill
Linking satisfaction to financial performance can be at least partially explained by the fuzziness of the customer satisfaction construct. Each company tends to have its own definition, using different inputs and procedures to operationalize the term. Thus, a finding of no correlation between a company’s satisfaction scores and its profitability may simply be due to poor satisfaction measures being used.
The development of the American Customer Satisfaction Index may help the efforts to link satisfaction to financial performance, since there is now one standardized measure available for benchmarking.
Actually, one could argue that true customer-satisfaction tracking demands more, not fewer, customized measures, since each customer may consider different inputs and/or weight them differently. However, any implementation of customized measures could actually confound the efforts to link satisfaction to performance measures across multiple companies.
A second complication stems from the fact that the economic benefits of customer satisfaction, since the benefits are not necessarily turned into profit within the immediate accounting period.
To the degree that the last category is significant, the correlation between current satisfaction and profit-type measures will be distorted.
Finally, satisfaction computations most often give equal weight to all customers, regardless of their relative profitability to the firm and service cost. Hence, in an effort to raise satisfaction, the firm may take actions that could end up worsening profitability.
For example, those patrons who only buy a few items in a store want the checkout lines to be short. Adding dedicated checkout stands for these customers will likely bring about an increase in their satisfaction but you should also consider about generating a “double-whammy” of increasing costs while serving particular segmet of customers.
“The only profit center is the customer.”
By Peter Drucker
In this spirit, I believe that you can treat the customer satisfaction as you do other profit-driven investment such as in terms of its net present value (NPV) and/or return on assets employed (ROA).
Method of Customer Goodwill calculation
For firms to be able to look at customer satisfaction in NPV or ROA terms, the key necessary tool is customer lifetime value (CLV). Long used by the direct mail industry among others, this indicator directly assesses the financial value of each individual customer.
Under this models, a customer represents a source of future revenues that depend on the time frame that he/she is retained and the dollar rates of purchase per period. For each future period, these revenues are reduced by the total costs of acquiring, retaining, and fulfilling the customer.
This is added the additional cash flows that come from such derived sources as secondary purchases and referrals of other potential customers. In many cases, rather than doing a customer-specific calculation, average CLV’s are computed for customer segments.
-So First calculate the average CLV, or
-Net present value of each customer, then
-Total NPV of the firm in particular time frame
NPV = sum of (CLVi) or sum of (CLVs * Cx Ns)
(Note: CLVs* is the average CLV across all customers in a segment and Ns is the total number of
customers in that segment)
Important Factor
In order to obtain the So, rather than continuing to define customer satisfaction as an index of multiple inputs, what is proposed here is that you can split the inputs into two streams.
The first stream, containing opinions on specific quality and service levels, will provide input for changes in marketing activities – product/service features, ad themes, etc. The second stream should directly provide all the inputs to the CLV calculations. Examples of the types of questions that provide direct connection to the NPV are:
*What are the chances that you will purchase again in the next “x” months?”
*How much will you likely buy in the next “x” months?
*Of your category purchases in the next “x” months, what percent will be from us as your provider?
*If our brand were not available, what would you do?
*How likely would you be to refer an associate to our firm?
However, the CLV, like any measure of future intentions, is temporal. Customers’ future purchases, their probability of making a successful referral, and the other components of CLV will change with their experiences and state of mind. Consequently, CLV should be considered as a variable that needs to be tracked, constantly fluctuating in value as opinions and intentions change.
Then too, you will be asking customers about their intentions. That means there is still the need to connect reported intentions with ultimate behaviors, and to track the objective measures of customer experience such as response and service times, completion and error rates, etc.
The inputs to our CLV calculations should not be the raw reported intentions, but adjusted values that account for customer tendencies to misstate their realized rates.
For example: Expected Value of the retention rate = a function of (reported intent to repeat, historic repeat rate for different intentions levels, the firm’s achieved performance on objective satisfier dimensions).
The focus on consumer intentions will also have to be expanded to include potential customers as well as active ones. While satisfaction among active patrons has some impact on the number of customers that will be acquired, many will arrive at your doors without a referral. For a given desired target group, sampling will have to be done and measures established that will help forecast these numbers of new customers. Thus, the firm will need to include questions such as:
“Have you heard of our firm/brand/product?”
“What are the chances that you will visit our store in the next week?”
Once you have set up the procedures for sampling the inputs, you can then connect any proposed change in the marketing variables under control of the firm to the corresponding impacts they are expected to have on CLV factors.
For example, a considered price change should impact rates of current and future purchase, retention and referral rates, as well as the rate of acquisition of new customers. Knowing the resources required to implement the change, you can then calculate the new NPV as well as an associated ROA.
Summary
If you are to make progress in tying customer satisfaction to strategic performance consider shifting the organization from SBU’s (Strategic Business Units) to SCu’s,(Strategic Customer Units.) and for any further assitance please feel free to contact me (its Free).
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