Customer Satisfaction

What It Means

In business the term customer satisfaction refers to how well a customer’s expectations have been met by the product or service provided by a particular company. Customers experience satisfaction (or dissatisfaction) in response to not only the quality of a product but also the quality of service they receive, the atmosphere of the business in which they make the purchase, and various other intangible factors.

Business owners are increasingly aware that the success of their companies may depend to a significant extent upon whether they are able to attract and retain loyal customers. According to one estimate, the cost of attracting a new customer is five to seven times greater than the cost of retaining an established customer. Customer satisfaction is a key factor—some experts even argue that it is more important than price—in determining whether a customer will return to a business after his or her initial experience and whether the customer will be inclined to recommend the business to others.

Customer satisfaction is an abstract concept, and it is difficult to track. It is hard to know when a customer’s expectations have been met after he or she has walked out the door of your business, and it is also difficult to know when he or she has been disappointed. Research indicates that less than 5 percent of customers express their dissatisfaction directly to the company, but that the average dissatisfied customer does express his or her dissatisfaction to approximately nine other people, such as friends, family, and coworkers. In contrast, customers do not broadcast their satisfaction as widely as their complaints: it is estimated that satisfied customers tell approximately five other people about the excellent service they received or the terrific product they purchased. A business must give serious consideration to the way such word-of-mouth recommendations and criticisms will affect its financial performance. In general, it is widely believed that a company must figure out how to achieve a high level of customer satisfaction in order to be competitive in the marketplace.

When Did It Begin

The history of customer satisfaction has paralleled changes in the way goods are produced and changes in the relationship between the business and the customer. Before the Industrial Revolution introduced large-scale factories to Europe and America in the eighteenth and nineteenth centuries, goods and services were most often provided by small, independent shop owners and highly skilled craftspeople, who maintained direct personal contact with their customers. Although customers enjoyed having their individual needs catered to by these businesses, the cost of production was high, and many goods and services remained unavailable to anyone but the rich.

This dynamic was radically changed by the rise of factory manufacturing and particularly by the techniques of mass production that were pioneered by Henry Ford (1863–1947) in the American automobile industry in the early twentieth century. Mass production (which quickly spread to many other industries) brought a dramatic decrease in production costs (and therefore in sales prices), but it also lessened the importance of the individual customer. Even so, consumer demand for goods and services was high during the 1910s and 1920s, and the severe supply shortages brought on by the Great Depression (a period of worldwide financial decline that lasted throughout the 1930s) and World War II (1939–45) contributed to a widespread willingness among consumers to take whatever they could get.

Manufacturers and sellers in the United States maintained the upper hand over their customers until the 1980s, when an onslaught of foreign competition (especially from Japan) exposed the poor quality of American goods and services. With a plethora of new choices about how to spend their money, U.S. consumers gained a significant measure of power in the marketplace. American companies were suddenly forced to swallow the new wisdom: that quality matters and each and every customer is important.

More Detailed Information

Many companies are concerned about measuring the level of customer satisfaction they achieve and identifying the areas where they need improvement. The problem of how to measure and evaluate this psychological state has been the subject of extensive research since the mid-1990s. The primary tool used for measuring customer satisfaction is the survey, or questionnaire. Satisfaction surveys are conducted through the mail, telemarketing, the Internet, and other media. Customers are asked to fill out surveys in movie theaters, dentist’s offices, hotels, and many other businesses.

The questions in these surveys revolve around a number of components that make up a customer’s overall level of satisfaction with a purchasing experience. These include the following:

• Quality (the customer’s sense of how well a product is made, how well it will meet his or her needs, and how knowledgeable a salesperson was in recommending the product)
• Value (the customer’s sense of how much quality he or she received relative to the price)
• Time issues (whether the desired product was available, the salesperson devoted enough time to answering questions and to other aspects of service, and the customer was able to make the purchases with a minimum of waiting in line)
• Atmosphere (how clean, organized, and pleasant the store was)
• Service personnel (whether store representatives generally made a good impression and were appropriately dressed, polite, attentive, and helpful)
• Convenience (the store’s accessibility in terms of its location, parking, and hours of operation)

Customer-satisfaction surveys can help businesses meet a variety of objectives, such as understanding more precisely what customers need and expect; determining how well the business is performing to meet these expectations; setting priorities according to what is most important to customers; taking new initiatives to improve products or services according to customer feedback; and gauging customer response to a new product, service, or policy.

Consider the hypothetical example of Freddo’s Sandwich Shop. Freddo opened his shop a year ago, but business is still slow, and he does not know why. Are his prices too high? Are his sandwiches too ordinary? Are his employees unprofessional? Should he offer more desserts and specialty sodas? Freddo places a stack of satisfaction questionnaires at the cash register and promises 10 percent off the next sandwich to every customer who deposits a completed questionnaire in the suggestion box. Over the course of two weeks, he receives 100 questionnaires. In response to questions about the quality and price of his sandwiches, customers are overwhelmingly satisfied: they love the fresh ingredients and the variety of condiments available, and they believe the sandwiches are fairly priced, considering their hefty size. Most customers are too stuffed after the sandwich to think of dessert, and few say they would pay an extra dollar for a gourmet soda. Customers agree that the decor of the shop is charming, there are plenty of napkins available, they like the jazz music, and the bathrooms are well maintained. Four out of five customers also found the employees friendly, efficient, and helpful. So what was the problem? The reason customers named Freddo’s competitor, Sandwich Heaven, as their number one sandwich shop had to do with time. Most customers were trying to get a sandwich on a one-hour lunch break and were afraid of having to wait in a long line during the lunch rush. Sandwich Heaven took phone orders for sandwiches to go, but Freddo’s did not.

Eureka! In the past Freddo had feared that phone orders would confuse and slow down the sandwich-production system, so he had decided that the service was not important enough to include. But now, based on the questionnaires, Freddo knew that he needed to make phone orders a top priority in order to increase his business: he reorganized the employee schedule so that he could allocate an extra sandwich maker specifically for phone orders between the hours of 12 and 2; he bought a second cash register to be dedicated for phone-order pickups; and he put up a big sign and bought a radio advertisement that announced, “Now taking phone orders!” Soon phone orders began pouring in. Within a month Freddo had doubled his weekday business and more than paid off the investments in advertising and a second register.

Recent Trends

In 1994 the National Quality Research Center (NQRC) at the University of Michigan’s Ross School of Business established the American Customer Satisfaction Index (ACSI). The ACSI was the first national measure of quality in goods and services from the perspective of the customer.

To produce the index, the NQRC conducts nationwide telephone interviews with more than 80,000 consumers, asking questions about specific companies that are broadly representative of the spectrum of businesses that serve American households. It then processes the data it collects using a sophisticated analysis technique called “econometric modeling.” Based on the results of this analysis, the each company receives an overall customer-satisfaction score between 0 and 100, which reflects its place on the index.

The ACSI measures customer satisfaction on an annual basis for more than 200 companies in 43 industries (including airlines, banks, hotels, hospitals, apparel manufacturing, Internet search engines, wireless telephone service, and supermarkets), which are categorized among 10 economic sectors (such as Retail Trade, E-Commerce, Finance and Insurance, Public Administration, and Utilities).

ACSI scores serve as a tool for individual businesses to evaluate their performance relative to that of their competitors and develop strategies to improve their business strength. The NQRC contends that the ACSI can also be used to gauge the growth of the national economy, because customer satisfaction is linked to consumer spending trends (the more satisfied customers are with the overall quality of products and services, the more likely they are to spend, and vice versa).