The Customer Profitability Implications of Customer Satisfaction
Posted: 10 Dec 1997
Date Written: January 1997
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: Suggested Citation