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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

of 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

on 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

of 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

of 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

Bas

elin

eQ

4/19

94Q

1/19

95Q

2/19

95Q

3/19

95Q

4/19

95Q

1/19

96Q

2/19

96Q

3/19

96Q

4/19

96Q

1/19

97Q

2/19

97Q

3/19

97Q

4/19

97Q

1/19

98Q

2/19

98Q

3/19

98Q

4/19

98Q

1/19

99Q

2/19

99Q

3/19

99Q

4/19

99Q

1/20

00Q

2/20

00Q

3/20

00Q

4/20

00Q

1/20

01Q

2/20

01Q

3/20

01Q

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01Q

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02Q

2/20

02Q

3/20

02Q

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02Q

1/20

03Q

2/20

03Q

3/20

03Q

4/20

03Q

1/20

04Q

2/20

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3/20

04Q

4/20

04Q

1/20

05Q

2/20

05Q

3/20

05Q

4/20

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1/20

06Q

2/20

06Q

3/20

06Q

4/20

06Q

1/20

07Q

2/20

07Q

3/20

07Q

4/20

07Q

1/20

08Q

2/20

08Q

3/20

08Q

4/20

08Q

1/20

09Q

2/20

09Q

3/20

09Q

4/20

09Q

1/20

10Q

2/20

10Q

3/20

10Q

4/20

10Q

1/20

11Q

2/20

11Q

3/20

11Q

4/20

11Q

1/20

12Q

2/20

12Q

3/20

12Q

4/20

12Q

1/20

13

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

Mo

re B

arr

iers

F

ew

er

Barr

iers

Sw

itch

ing

Barr

iers

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

AC

SI

= 0

-100 S

cale

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 A

vera

ge R

eta

il Gas P

rice*

*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

Bas

elin

eQ

4/19

94Q

1/19

95Q

2/19

95Q

3/19

95Q

4/19

95Q

1/19

96Q

2/19

96Q

3/19

96Q

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2/20

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3/20

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4/20

07Q

1/20

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2/20

08Q

3/20

08Q

4/20

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1/20

09Q

2/20

09Q

3/20

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4/20

09Q

1/20

10Q

2/20

10Q

3/20

10Q

4/20

10Q

1/20

11Q

2/20

11Q

3/20

11Q

4/20

11Q

1/20

12Q

2/20

12Q

3/20

12Q

4/20

12Q

1/20

13

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%

An

nu

aliz

ed

, Se

aso

nal

ly A

dju

ste

d R

ate

of G

row

th

% 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%

An

nu

aliz

ed

, Se

aso

nal

ly A

dju

ste

d R

ate

of G

row

th

% 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

$500A

pr-

00

Mar

-01

Feb

-02

Jan

-03

De

c-0

3

No

v-0

4

Oct

-05

Sep

-06

Au

g-0

7

Jul-

08

Jun

-09

May

-10

Ap

r-1

1

Mar

-12

Feb

-13

Cu

mu

lati

ve P

erf

orm

ance

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 of 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

of

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

Cu

sto

mer

Sati

sfa

cti

on

(C

SI)

by S

tore

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

opportunities 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

G

LA

NC

E

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

TH

E N

UM

BE

RS

+$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