The Effects of Measurement Alternatives on the Forward-Looking Properties of Customer Satisfaction Measures

Abstract:     
We test the effects of measurement alternatives on the forward-looking properties of customer satisfaction measures using data from a company in the homebuilding industry for the period 2001-2004. We find that: (1) Customer satisfaction measures provided by a boutique customer research firm that specializes in the homebuilding industry are leading indicators of future performance, as measured by higher referrals, revenues, and profits, and lower warranty costs, but the customer satisfaction measure provided by a national multi-industry customer research firm is not, for reasons that seem to relate both to content and timing of measurement; (2) despite long (i.e., multi-year) gaps between consumers' purchases in the homebuilding industry, the lags between improvements in customer satisfaction and those in financial performance are relatively short; (3) improvements in customer satisfaction provide diminishing returns to financial performance; and (4) the Net Promoter score (Reichheld, 2006), a heavily promoted performance metric derived from customer satisfaction measures, does not appear to be a useful predictor of future performance.

Keywords: business model, nonfinancial performance measures, customer satisfaciton, employee satisfaction

JEL Classifications: M41

Working Paper Series