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High Customer Satisfaction = High Stock Price?
By Jon Menaster | May 19, 2007
One of my favorite consumer blogs is Consumerist.com, which has tons of interesting stuff to read every day. Yesterday they strayed from the norm a little bit and posted a piece about the stock market, entitled “How To Beat The Stock Market: Buy Companies With High Customer Satisfaction Scores”. The post has received 16,000 page views and over 600 diggs (in just one day!), and it highlights a study published in the Journal of Marketing which found that
companies at the top 20% of the the American Customer Satisfaction Index (ACSI) greatly outperformed the the stock market, generating a 40% return.
The study starts out by stating that it has found a strong relationship between customer satisfaction and market value of an equity. That basic assumption does make sense; if customer’s weren’t satisfied with a particular company, factors such as word of mouth spread by the Web would start to undermine that company’s sales. That gradual reduction in sales because of a persistent lack of customer satisfaction would then begin to negatively affect the stock price of that company. The confusing part of it all, to me anyway, is what exactly constitutes a happy customer? It means different things to different people, and each industry.
After asking that question, I decided to go poke around the American Customer Satisfaction Index’s web site, in hopes of better understanding how it maintained its listing and what got a company into the top 20% of the index. According to the methodology page, the ACSI is compiled by
The American Customer Satisfaction Index uses customer interviews as input to a multi-equation econometric model developed at the University of Michigan’s Ross School of Business. The ACSI model is a cause-and-effect model with indices for drivers of satisfaction on the left side (customer expectations, perceived quality, and perceived value), satisfaction (ACSI) in the center, and outcomes of satisfaction on the right side (customer complaints and customer loyalty, including customer retention and price tolerance).
(Check out the Methodology page for more info)
So it’s econometrics - which I was informed was the most hated of all economics classes as a college student! Either way while I would certainly agree that higher customer satisfaction is one element that can help a company to isolated itself from its peers and stand out; I’m not sure if that’s going to always lead to higher stock prices. I certainly wouldn’t make an investment modeled after that idea.. it’s too easy to look back at what happened and find reasons for it, and there’s no guarantee this reasoning will hold up in the future! But you should really read the study for yourself and decide…
Here is a link to the study in PDF if you want to read it for yourself!
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