Summer 2009 – The Ultimate Performance Metric

A misunderstood and undervalued business measure, customer
satisfaction can be used to predict customers’ likelihood to shop
again, buy more or to remain loyal to your company in the future.

By Larry Freed

From Wall Street to Main Street, looking at the connection between revenue and the bottom line is the norm. Revenue is an excellent indicator of past and current performance, but e-retailers are struggling in an economic downturn to identify key indicators of future success.

In a landmark ongoing study, researchers at the University of Michigan have conclusively established a crucial—and very strong—connection between customer satisfaction and a company’s financial future, whether the markets are up or down. Companies that perform well on the University of Michigan’s American Customer Satisfaction Index (ACSI) enjoy better revenues, profits, loyalty, word-of-mouth recommendations and return visits. They even achieve higher stock prices. The University of Michigan’s findings have been corroborated by other universities, and the findings are consistent: high customer satisfaction, when measured accurately, predicts success.

Why Customer Satisfaction?
Most e-retailers know the importance of online metrics in managing their business. Online marketers tend to know a lot about their shoppers’ basic behaviors: where they came from, which pages they clicked on, how much they spent and what they abandoned in their cart. There is no question that all of these metrics—clicks, hits and revenue—reveal a great deal about the state of the industry and of an individual company, as does reviewing the rate and trajectory of growth or decline. However, there have typically been severe limitations to understanding what is fueling the growth or decline, the conversions or cart abandonments and the changes in traffic. That’s where understanding customer satisfaction of online shoppers comes in. It’s the difference between behavioral and attitudinal data. You need both to succeed online—and you can’t fully understand one without the other.

A world-renowned economics professor at the University of Michigan was the first to create a methodology that measures customer satisfaction in such a way to predict customers’ likelihood to shop again, buy more or to be loyal to the company in question. Used as a leading macro- and micro-economic indicator by governments around the world, the ACSI methodology has been proven again and again in extensive, academic, peer-reviewed research to be a predictive indicator of customers’ future behaviors. A January 2006 article in The Journal of Marketing even highlighted the connection between the ACSI and future stock prices: an ACSI-based portfolio substantially beat the market and has for more than eight years in a row, in both up and down markets.

In other words, the higher your online customer satisfaction, the more likely your customers are to buy from you, recommend you and be loyal to you.

In fact, the stakes are very high: in a recent study of the Top-100 online retailers (as determined by sales volume), a single-point increase in customer satisfaction predicted an average increase of nearly 9 percent in online sales year-over-year (according to the Top-100 E-Retail Index, May 2009).

Moreover, our research shows that a highly satisfied online shopper is 71 percent more likely to purchase online from the retailer than a dissatisfied online shopper. It has traditionally been difficult, if not virtually impossible, for a multichannel retailer to quantify the value of the online shopping experience at the store level, but we find that a highly satisfied online visitor is 44 percent more likely to purchase offline and 72 percent more likely to recommend the website. These figures help to quantify the multichannel value of the website.

There can be no doubt that when measured correctly, customer satisfaction tells you what customers will do and why they will do it, allowing companies to have a powerful tool at their disposal to predict the future.

Metrics That Work
What do I mean when I say, “when measured correctly”? There is no shortage of ways to track online customer satisfaction, but you need online metrics that track it in a way that is credible, reliable, accurate, precise, actionable and predictive. These online metrics also need to be continuously gathered and dealt with promptly. If any of these qualities are missing from a metric or suite of metrics, a company cannot expect to be able to positively impact the bottom line.

It’s never been easier to collect voice-of-customer feedback, but the challenge is putting that feedback into a scientific context that helps companies know how to predict and shape customer behavior in the future. Any measure worth tracking should meet all of the following criteria:

Credible – How widely accepted is the measure? Does it have a good track record of results? Is it based on a scientifically and academically rigorous methodology? Will management trust it?

Reliable – Is it a consistent standard that can be applied across the customer lifecycle and across multiple channels? When all remains the same, do we get the same results with every measurement? (If my watch is correct today, but isn’t tomorrow, it isn’t reliable.)

Precise – Is it specific enough to provide insight? Does it use multiple related questions to deliver greater accuracy and insight? (A watch without a minute hand may be accurate, but without the precision of the minute hand, it does us little good.)

Accurate – Is the measurement correct? Is it representative of the entire customer base, or just an outspoken minority? Do the questions capture self-reported importance or can they derive importance based on what customers say? Does it have an acceptable margin of error and realistic sample sizes? (Most customers will report that a lower price is important to them, but lowering the price may not induce them to buy.)

Actionable – Does it provide any insight into what can be done to encourage customers to return to the site, buy again or recommend it? Does it prioritize improvements according to biggest impacts? (A methodology without actionable insight helps us keep score, but it doesn’t help us improve results.)

Predictive – Can it project future customer behaviors based on their satisfaction with the site visit? (The goal is to invest our efforts in those things that will yield value. Without predictive capability we are left to shoot at our targets in the dark.)

Metrics that don’t have the above-listed qualities can do more harm then good. They will provide you with a false sense of security that will lead you to make bad decisions based on bad data—if you put garbage in, you get garbage out.

You Can’t Manage What You Can’t Measure
In many cases, customer satisfaction data has taken a back seat to other kinds of metrics. But if metrics don’t provide a complete picture, a business is hamstrung: it can’t manage what it can’t measure.

A good customer satisfaction methodology can help address all of the following common problems faced by online retailers:

Companies have reams of customer data but no idea what to do with it – Computers and the Internet make it easy to collect all kinds of customer behavioral data, but the result is often piles of numbers and yardsticks without any insight into what they mean or how they can help move the needle. Customer satisfaction can help businesses prioritize what will most influence customer behavior.

The metrics show what the customer is doing, but not why he or she is doing it – Many measurement systems reveal nothing about the driving factor behind behaviors. Following site visitor paths throughout a web session will show where a customer has been and what he or she bought, but it provides no information about the customer’s website experience, satisfaction or loyalty. Did they visit 15 pages because they were incredibly engaged or because they couldn’t find what they were looking for? Tracking sales data is absolutely essential, but it doesn’t grant insight into what they didn’t buy, why they didn’t buy it or what it will take to get them to buy it next time. Customer satisfaction metrics answer those crucial “why” questions and allow managers to make decisions accordingly.

If there are satisfaction metrics in place, they are not consistent and scientific – Medical diagnostic tools stand up to the rigors of science and academia. The health of a business deserves the same sort of scrutiny. A scientific approach helps create consistency and predictability as managers determine the cause-and-effect relationship between customer satisfaction and future behaviors. A consistent metric allows for benchmarking over time and against others that are competitors or best in class.

The value of a website is measured only by its sales or its ability to generate leads – The website should be integrated with the rest of your business’s channels. Even if a consumer doesn’t execute a purchase on your site or submit a request for more information, their experience will shape their future buying decisions and their overall impression of your company. Customer satisfaction metrics will allow a business to understand what needs to be done to ensure that those decisions and impressions are favorable, and to maximize the value of the online channel to their organization overall.

Most metrics provide only an instant snapshot of customer behavior without long-term implications – Just as it’s important to measure website traffic on a continuous basis, companies should be measuring customer satisfaction continuously to observe the impact of seasonality, competitive activity and other changes in the market that affect the demand for their products and services (e.g., high gas prices, legislative changes, seasons or holidays).

Most metrics look at the past, but reveal nothing about the future – Most web metrics have no predictive qualities. Sound investments are based not only on what the customer has done in the past, but on what she will do in the future. You need a metric that is linked to future behaviors (such as likelihood to return to the site, recommend it or buy again) and future financial performance. Driving a car forward while looking only in the rear-view mirror invites disaster; similarly, businesses cannot only rely on making decisions based on the past.

A Business-wide Priority
In the current hyper-competitive environment, customer satisfaction monitoring is the single most important tool for separating companies that will succeed from those that will fail. The pace of evolution in the Internet age necessitates immediate action because the customer will not wait. They’ll just find a more satisfying experience elsewhere on the web after being frustrated by your site.

A satisfied customer is a customer that will return, buy again and tell people about a company. A dissatisfied customer has the power to tell millions of people about their bad experience and prevent hundreds of thousands of people from interacting with a given business in the future. This kind of power is reason enough to make customer satisfaction a business-wide priority.

Larry Freed is an expert on online customer satisfaction. He is also president and CEO of ForeSee Results, a market leader in customer satisfaction measurement. He can be reached at Larry.Freed@ForeSeeResults.com.