Value of customer satisfaction

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Value of customer satisfaction

Customer satisfaction is one of the burning issues in businesses today. To invest or not to invest into CS improvement? Many companies are still in doubt whether their investment will pay off at the end of the day. Using quantified examples and appropriate methodology, Cisco and IBSG (Internet Business Solutions Group) have drawn up a report with their point of view on this subject to debunk myths about customer satisfaction.


Customer Satisfaction Myths

What enterprises are worried about is how they would measure the actual profitability of investment into customer satisfaction as well as revenue growth. Due to the cost, it is natural for them to feel uncomfortable about the unknown. Will customer care exceed customer expectations and turn out to be a waste of resources? Another myth is that the clients will remain loyal no matter what – even if the customer experience is negative.

Moments of truth

They say that a good customer is the one who criticizes – and a bad customer is the one who simply leaves without a word. This means that you will be clueless about what went wrong unless someone tells you exactly what they need. According to Cisco, research showed “that 72 percent of customers who have a negative customer service experience either reduce their overall engagement with the bank or switch banks altogether. It also indicates that 87 percent customers who had a positive customer experience either made a purchase decision or increased their overall engagement with the bank”.

Figure 1: Moments of truth

Figure 1: “Moments of truth” in retail banking customer service.

The reason to leave

Another research showed that almost two-thirds of dissatisfied customers replace companies with their competition when they experience poor service, and the rest abandon purchase altogether. This is alarming especially in fast-growing economies such as China, Russia, India, Mexico, etc.

Figure 2: Impact switching to competitor

Figure 2: Impact of poor customer service on rate of switching to a competitor.

Customer satisfaction proved to have an impact on Customer Lifetime Value (CLV):

“CLV is the present value of total profits generated by a customer (net of acquisition costs) and is based on the profits earned from a customer, customer acquisition costs (CAC), the cost of capital, industry growth, and the customer retention rate.

CLV is highly sensitive to changes in customer revenues and retention rate, both of which are dependent upon customer satisfaction. If organizations are successful at attracting customers and increasing transaction intensity (either higher transaction frequency or average size of transaction), CLV will increase. For subscriber-based organizations, customer retention is the key metric impacting the long-term value of firms, as monthly revenues generally do not vary significantly. Lastly, customer satisfaction (and, as a result, customer loyalty) mainly impacts CAC, and can greatly impact CLV.” (Cisco Report)

The result of research conducted for a retail bank which included “hypothetical assumptions for revenue per customer, margins, customer acquisition costs, and retention rate” proved that changes in customer loyalty, or customer retention rate, have a high impact on CLV (See full Report for details on key assumptions.).

“At an 85 percent retention rate, CLV is estimated at US$1,052 per retail banking customer (see Figure 4). If the bank is successful in increasing the retention rate by 5 percent, CLV can increase by 45 percent, to $1,530. On the other hand, CLV could decline by 26 percent, to $777, if the customer retention rate decreases by 5 percent,” the Report says.

Figure 4: Retention

Figure 4: Impact of changes in retention rate on customer lifetime value: retail banking.


Vulnerability to Customer Churn

Having in mind Maslow’s Hierarchy of Needs (1943), research also showed that certain industries would be more vulnerable to churn resulting from poor customer service.  Customer churn refers to customer turnover or customer defection, the loss of clients or customers.

Figure 6: Maslow's pyramid

Figure 6: Maslow’s hierarchy of human needs.

The research has only updated the theory for the 21st century – adding retail, means of communication, banking and insurance, and cable TV to the survival/physiological needs.

The industries which proved to be very vulnerable to this economic phenomenon are retailers, banks, ISPs, wireless telecom operators, home telecom service providers, satellite cable providers, life insurance providers, hotels, utility companies, airlines, and other (source: Accenture Global Consumer Research, 2010).


Key takeaways

All in all, the research demonstrated that customer service is important in CLV and those organizations which improve it expand their customer base with more success than those which do not, having more sales from existing customers and building loyalty. The benefit of customer satisfaction is that when increased, it reduces churn and creates shareholder value.

And the key takeaways for the car industry? Learn from big companies. BMW USA is pushing their dealerships to use texting to contact service customers. The recent endorsement of advantageTXT shows that BMW USA is confident in the potential of texting. Contacting your service customers with advantageTXT has proven again and again to increase CSI. As we all know, an increase in CSI decreases customer churn. If BMW can benefit from advantageTXT, so can any other dealer.

Big names may not be in your industry, but in the end – it is all business. Customers demand being treated with respect and they value customer satisfaction more than you could ever imagine – so use this piece of information wisely – to your advantage.


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Pero Krpan is a VP and co-founder of AdvantageTec. Pioneer of online leasing and founder of Quick Max leasing software and co-founder of KnowMe, the phone tracking service. For 21 years he has managed several dealerships for FirstAmerica Automotive, AutoNation, Sonic, Penske and a few smaller dealer groups. As a native of Yugoslavia, with a BS from University of Sarajevo, he has done quite well as an expert in texting, mobile and local software solution products focused on automotive industry.