The Customer Profitability Implications of Customer Satisfaction

Posted: 10 Dec 1997

See all articles by George Foster

George Foster

Stanford Graduate School of Business

Mahendra Gupta

Washington University, St. Louis

Date Written: January 1997

Abstract

Alternative schools of thought exist about the relation between quality and profitability. The "quality is free" school argues that outlays on improving quality consistently yield positive returns. An alternative (economics) perspective is that firms can make outlays on quality that do not yield positive returns. Beyond a certain point the returns from increasing quality do not exceed the costs. This paper presents evidence consistent with the economic school. We analyze customer satisfaction and customer profitability data for a beverage distribution company. Time-series, cross-sectional and lead-lag tests are presented. We find that customers who are more satisfied with the distributor have higher unit volume purchases but not higher profits (net of customer service costs) to the distributor. The findings have importance for the selection and evaluation of programs designed to improve customer satisfaction, and for the design of performance measures in general and balanced scorecards in particular.

JEL Classification: M40, M46

Suggested Citation

Foster, George and Gupta, Mahendra R., The Customer Profitability Implications of Customer Satisfaction (January 1997). Available at SSRN: https://ssrn.com/abstract=45941

George Foster

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-2812 (Phone)
650-725-7979 (Fax)

Mahendra R. Gupta (Contact Author)

Washington University, St. Louis ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4565 (Phone)
314-935-6359 (Fax)

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