A near-consensus among business and marketing professionals seems to have emerged: the expectations of consumers are rising rapidly, dramatically, and across the board. The specter of “sky-rocketing customer expectations” is often referenced as a warning to marketing professionals and companies as a whole: fail to meet these lofty and ever-increasing consumer demands, and it could mean financial doom.
“To understand more fully the modern economy, and the firms that compete in it, we must measure the quality of economic output, as well as its quantity.” Claes Fornell, Chair of the Board and Founder, American Customer Satisfaction Index, 1996
This ACSI Matters Blog is a modified excerpt from the ACSI expert team‘s 2020 book – The Reign of the Customer: Customer-Centric Approaches to Improving Satisfaction – covering 25 years of data, insights, tools, and managerial implications related to customer satisfaction and customer asset management.
So how and why did the ACSI project emerge?
How and why was the ACSI project created? How does ACSI measure consumer satisfaction with individual companies, industries, and economic sectors? How has it evolved over the course of a quarter of a century since its beginnings in 1993-1994?
A clear notion of how and why the ACSI was created and how it measures satisfaction across the U.S. economy and around the world provides the foundation for a deeper understanding of important and enduring purposes of consumer insights and customer satisfaction measurement. In turn, this information will enhance the insights and lessons derived from 25 years of ACSI data that is so widespread in the popular press (e.g., Wall Street Journal, Forbes, Fortune, Newsweek) and myriad academic journals (per Google Scholar, more than 13,000 articles have referenced the ACSI).
In the early 1990s, researchers at the American Society for Quality (ASQ) – a prominent professional association founded shortly after World War II with the goal of advancing quality improvement principles and practices within economies around the world – recognized the need for a comprehensive, national measure of quality for the U.S. economy. Only with such a measure, so it was thought, could a clear understanding of how well the U.S. economy was performing be achieved. ASQ began by investigating whether a national, cross-company, cross-industry measure of quality already existed, and if not, whether its development was feasible.
With the help of a team of experts on the topic, ASQ examined numerous approaches to quality measurement and determined that no standardized measure of quality existed that could be applied to the multitude of diverse products and services offered within a modern economy. More specifically, while many different quality measures existed, none was designed to effectively compare and benchmark these measures across distinct industries and categories (e.g., goods vs. services, cars vs. consumer-packaged goods, or to aggregate them into a national index of quality (i.e., an economy-wide, macroeconomic view of quality). However, one potentially useful model that was being implemented outside the U.S. at the time was brought to the attention of ASQ: the Swedish Customer Satisfaction Barometer (SCSB).
A few years before ASQ began its search, in 1989, Swedish economist and professor at the University of Michigan in the United States named Claes Fornell had designed and launched a national index of customer satisfaction for the Swedish economy, a project called the Swedish Customer Satisfaction Barometer (SCSB).
The ACSI Matters has an interview with Claes Fornell.
Fornell had spent the first decade of his academic career writing extensively on the topics of customer satisfaction, consumer complaint behavior, the economic impacts of customer relationship management, and advanced statistical analysis of consumer survey data. It was this expertise that had led him to conceive and create the SCSB.
With support from the Swedish government, which had seen its economy struggle with increased competition and slower growth throughout much of the 1970s and 1980s as the effects of the European Common Market became fully apparent, the SCSB was the first project to apply a single, standardized statistical model for measuring both quality and customer satisfaction across the diverse sectors of a large national economy. In its first year, the SCSB successfully measured satisfaction with nearly 100 Swedish companies across 28 distinct consumer industries, interviewing approximately 25,000 customers of these companies in the process. Ultimately, it was this model that would attract the attention of ASQ, be chosen as the best alternative for measuring quality and satisfaction in the U.S., and be transported across the Atlantic to be applied to the larger U.S. economy as the American Customer Satisfaction Index (ACSI).
It was on the basis of the SCSB project that the ACSI was founded in Ann Arbor, Michigan, by a group of professors at the University of Michigan’s Business School (now the Stephen M. Ross School of Business), under the direction of Fornell. With funding from ASQ, the University of Michigan, and several other organizations, an extensive “first wave” pretest of the ACSI was conducted in 1993. Analysis of these results confirmed what had previously been discovered in Sweden: that a cross-industry, cross-sector measure of the quality and satisfaction of a nation’s economic output was indeed possible, providing highly informative results about the conditions of the economy.
One year later, in 1994, the baseline ACSI study was produced. This first wave of the ACSI study measured satisfaction with seven sectors of the U.S. economy, 30 industries, and approximately 180 large business-to-consumer (B2C) companies. The study has been replicated each year since, with fresh results collected and released throughout each calendar year. And as we show in our recently released book in 2020 – The Reign of the Customer: Customer-Centric Approaches to Improving Satisfaction – when reviewing the methods and models of the ACSI, the study has grown significantly in the intervening 25 years.
The central purpose motivating Fornell to create the ACSI was simple and relates to the mission that originally sent the American Society for Quality (ASQ) on its search for a national index of quality. This objective remains important to better understanding the modern economy. While nations had for many years (since at least the 1940s, and in some cases earlier) measured the quantity of output produced within their economies through a variety of different metrics (and continue to do so today), they had up until the 1990s predominantly ignored a more elusive, but arguably more important feature of sustainable economic growth – the quality of output.
In Sweden, for example, the SCSB was created with the explicit goal of increasing the quantity of economic output in that country, and thus its Gross Domestic Product (GDP) growth, but doing so by measuring, monitoring and improving the quality of that output as perceived by consumers. This would, it was hoped, increase consumer demand. The quality improvements were thus intended to make struggling Swedish firms more competitive both domestically and internationally by better pleasing consumers and inspiring them to spend more with domestic firms.
By the 1980s and 1990s many companies had begun to measure customer satisfaction internally (along with related “consumer insights” and the “voice of the customer” (VOC)). However, lack of access to this data and the disparate research methods (e.g. different survey items, samples, timeframes, statistical methods) used to conduct measurement across these companies, coupled with divergent quality of the resulting output, made comparison and aggregation of the data to the macro level impossible. In short, new economic realities were increasing competition dramatically and making quality and innovation more important than ever, but standardized data permitting a clear understanding of the quality of goods and services being produced were largely unavailable.
It was from within this context that Fornell recognized that growing domestic and global competition demanded a clearer idea of the factors that satisfied increasingly powerful consumers. What motivated these consumers to open their wallets to spend money on certain brands of goods and services more so than others? Measuring satisfaction (alongside its drivers and outcomes) in a systematic, standardized fashion across the entirety of a national economy would provide vital information for fully understanding the health of companies, industries, and entire economies from the perspective of the ultimate and most important judge, the individual consumer. Clearly this perspective is more relevant than ever today, and will likely become even more so in the future as ongoing changes in the global marketplace appear to be dictating.
As the Information Age has evolved from science fiction to a fully developed reality over the last few decades, consumers now have more choice and greater power than ever before. The internet revolution has profoundly changed how buyers and sellers relate to one another, and in the amount of leverage and power held by consumers. The changes ushered in as part of the Information Age have given consumers many new advantages. These include: greater access to information about specific products and services prior to purchase and consumption; greater access to information about alternative suppliers (sellers) of goods and services; an increased ability to punish sellers through more impactful complaint behavior and word-of-mouth; and an increased ability to more directly influence new product/service offerings (i.e. co-production of goods and services). These changes have forced companies to reconsider how they measure and manage their performance, and to focus more on the voice of the customer.
Whereas companies – and national economies in their entirety – once relied almost exclusively on measures like labor productivity, market share, revenue growth, profitability, stock market valuation, and gross domestic product as performance indicators, these days in a more state-of-the-art analysis companies rely on external, customer-facing measures and the linkages between these measures and financial performance.
Indeed, practices like customer relationship management, customer asset management, and concepts like “customer-centricity” today occupy a central place in the discourse of performance precisely because of this changed landscape. More and more, measuring consumer satisfaction and related consumer perceptions and insights is viewed as a vital, necessary activity for the firm hoping to adequately compete for buyers in increasingly-competitive free markets. The same imperative holds for the national economy looking to compete in an environment with fewer boundaries and obstacles to free trade.
As an excerpt from Chapter 1 (Defining Customer Satisfaction: A Strategic Company Asset?) of our book – The Reign of the Customer: Customer-Centric Approaches to Improving Satisfaction – this ACSI Matters Blog provides a brief history of the ACSI. The findings and lessons in the book delve deeper into the ACSI and the half a century of results and implications. These findings reinforce the continued and growing importance of customer satisfaction and its measurement in the global marketplace.
The angry restaurant patron. The irritated airline passenger. The retail customer screaming about a return or refund. Every company worries about complaining customers. They can be loud, disruptive, bad for employee morale, and have a huge impact on companies. But are customer complaints as damaging as they seem? A new study in the Journal of Marketing (JM) turns its lens on customer complaints, performing the largest scientific study ever to understand how they affect companies’ performance (JM is published by the American Marketing Association and AMA is cross-promoting the research as Learning to Love Your Complaining Customers).
A few years ago, Snapchat lost $1.3 billion in market value in a single day after a Kylie Jenner tweet about unhappiness with the app’s new layout. She simply said: “Sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad.” Jenner had long been one of Snapchat’s most influential users and her words had immediate consequences. While Jenner has a larger audience than most users, social media gives all complaining customers a chance to be influencers. In our social media era, even one unhappy customer can damage brand reputation, slow sales, and harm a company’s market value
But are complaining customers always a drain on sales and damaging for employees’ morale? As it turns out, customers who lodge complaints are not a lost cause. They can still be satisfied and remain loyal if their complaints are handled well. Regrettably, companies rarely handle complaints consistently, partly because they don’t know how.
Our research team analyzed relationships between customer complaints, complaint handling by companies, and customer loyalty to inform companies how to manage customer complaints much better and more consistently. We studied data from the American Customer Satisfaction Index (ACSI) regarding behaviors of 35,597 complaining customers over a 10-year period across 41 industries.
Our study finds that the relationship between a company’s complaint recovery and customer loyalty is stronger during periods of faster economic growth, in more competitive industries, for customers of luxury products, and for customers with higher overall satisfaction and higher expectations of customization. On the other hand, we also find that the recovery–loyalty relationship is weaker when customers’ expectations of product/service reliability are higher, for manufactured goods, and for males compared to females.
From these results, we draw two key conclusions. First, companies need to recognize not only that industries vary widely in the percentage of customers who complain (on average, about 11.1 percent), but also that economic, industry, customer-firm, product/service, and customer segment factors dictate the importance of complaint recovery to customers and their future loyalty. Companies should develop complaint management strategies accordingly.
Secondly, the financial benefits of complaint management efforts differ significantly across companies. Since complaint management’s effect on customer loyalty varies across industries and companies offering different kinds of goods, the economic benefit from seeking to reaffirm customer loyalty via complaint recovery varies as well. Through this study, these performance factors can be identified and considered when designing a company’s complaint management system.
Without context, our conclusions suggest that a profit-maximizing strategy simply requires that managers understand the impact of complaint recovery on customer loyalty in their industry. Added to this complexity, however, is the reality that profitability is not evenly distributed throughout the customer base. Companies need to implement complaint management systems that make it easier for front-line employees to respond to complaining customers in ways that optimize customer satisfaction, customer loyalty, and the economic contribution of customers.
Without a deeper understanding of the boundaries of the complaint handling–customer loyalty relationship and the effects of economic, industry, customer-firm, product/service, and customer segment factors, companies will likely allocate cost estimates to complaint management that are too low for the required recovery actions or customer loyalty estimates that are too high, or both, instead of achieving an optimal point of recovery-loyalty yield.
Achieving an optimal recovery-loyalty yield is more advantageous than adopting the mantra that the customer is always right. It is a folly to believe that the customer is always right. Economically speaking, the customer is only “right” if there is an economic gain for the company to keep that customer. In reality, some complaining customers are very costly and not worth keeping.
Forrest V. Morgeson III, G. Tomas M. Hult, Sunil Mithas, Timothy Keiningham, and Claes Fornell, “Turning Complaining Customers into Loyal Customers: Moderators of the Complaint Handling – Customer Loyalty Relationship,” Journal of Marketing (https://journals.sagepub.com/doi/pdf/10.1177/0022242920929029).
Since 1994, the American Customer Satisfaction Index (ACSI) has conducted millions of interviews with American consumers regarding their experiences with major consumer goods and services companies. As we commemorate ACSI’s 25th anniversary, the expert team at the ACSI (Claes Fornell, Forrest Morgeson, Tomas Hult, and David VanAmburg) published a book – The Reign of the Customer: Customer-Centric Approaches to Improving Satisfaction – that takes a look back and examines the major findings from the invaluable, incomparable ACSI source of consumer insights and information.
Rather than the book being a mere retrospective, the authors use 25 years of ACSI findings to inform best practices for improving the consumer experience, better satisfying customers, and achieving profitable customer loyalty – today and into the rapidly changing future. The Reign of the Customer helps managers understand where we were, where we are today, and where we are heading tomorrow in providing exceptional customer experiences.
As a part of the book, we included an interview with Professor Claes Fornell, one of the book’s coauthors and the Founder of the American Customer Satisfaction Index. The question and answer session with Dr. Fornell is included here.
Question: When you founded the ACSI more than 25 years ago, what was your primary goal? What did you hope the project would provide that didn’t already exist (to researchers, companies, policymakers, etc.)?
Claes Fornell: It was about that time 25 years ago when three big trends were beginning to become evident. The first was global competition, the second was the growth of services in most advanced economies, and the third was that consumers were beginning to be better armed with information (about purchase alternatives, prices, quality, etc.). These trends led to more buyer power and fewer monopolies in the overall economy. In other words, there was a major shift in power away from producers to consumers. It also meant that the conventional measures about the performance of firms and economies needed updating and change. At the company level, it was clear that the more we knew about how satisfied customers were, the better we could predict future revenue from repeat buyers. At the macro level, we could also infer what an increase (or decrease) in aggregate customer satisfaction meant for aggregate consumer spending. This was very important since consumers account for about 70% of gross domestic product in the U.S. It is not possible to have strong economic growth without robust growth in consumer spending.
Question: Have changes in the economy over the past 25 years impacted how customer satisfaction is measured?
Fornell: Yes. Just about every company now measures customer satisfaction in one way or another. That’s an important first step. The problem is that most companies still do not have enough quality in their measurements. Very little attention is paid to the integrity and properties of the measures. The concepts of reliability and validity seem foreign to many companies, which have led to measures that don’t reflect what they purport to measure and contain more random noise than authentic variation. Over the long run, this is, of course, untenable.
Question: Can you give us some idea of the economic and financial importance of customer satisfaction, both to companies and to national economies?
Fornell: Most companies depend heavily on repeat business. There are only a few things we consume only once. In a competitive market, where consumers have a great deal of choice, it is therefore necessary to make sure one has satisfied customers. Otherwise, they will go elsewhere. We can see the financial impact not only in revenue and profitability, but also in stock returns. For more than 15 years now, we have had a stock fund that invests in companies with superior customer satisfaction (as measured by the ACSI), with very good results. The stock portfolio of these companies had a return of 518% between March 2000 and March 2014. This is much better than the market. The S&P 500 went up only by 31% over the same period of time.
Question: Given that the ACSI has existed for 25 years, and that satisfaction measurement in general is more popular than ever, why do some companies (and even entire industries) continue to treat their customers so poorly (cable TV companies perhaps being an example here)?
Fornell: The major reason for this is some form of monopoly power. Despite what I said about the increase of competition in general, there are exceptions. There are markets where purchase alternatives are few and/or where the cost of leaving a company can be substantial. I would put cable companies in that category. In industries with few product and service options, customers have limited powers to punish offending companies.
Question: Finally, if you had one lesson or piece of advice from all of your research and all of your experience that you think would help companies most, what would that advice be?
Fornell: Let me answer by first saying what advice I would not give. For example, it is a folly to believe that the customer is always right. Economically speaking, the customer is only “right” if there is an economic gain for the company in keeping that customer. Some customers are very costly and not worth keeping. It is also not helpful to believe that customer loyalty is priceless and customer satisfaction worthless. Unless the company has a monopoly, loyalty can be very costly unless it is produced by customer satisfaction. If loyalty is gained by price discounts instead of having satisfied customers, for example, it is usually a path to failure rather than to healthy profits.
Book Author Biographies
Dr. Claes Fornell is D.C. Cook Distinguished Professor in the Ross School of Business at the University of Michigan (Emeritus). He founded the American Customer Satisfaction Index in 1994 and is hailed globally as “The Father of Customer Satisfaction.” Fornell’s work on systems for managing customer satisfaction has led to two U.S. patents. He has also founded several other customer-centric companies (CFI Group, ForeSee Results, Detroit Vineyards, and Exponential ETFs).
Dr. Forrest V. Morgeson III is a member of the faculty of Marketing in the Broad College of Business at Michigan State University and Director of Research at the American Customer Satisfaction Index. Morgeson’s first book, titled Citizen Satisfaction: Improving Government Performance, Efficiency, and Citizen Trust, was released in 2014 (Palgrave Macmillan). He has consulted with numerous corporations and governments in more than 30 countries.
Dr. G. Tomas M. Hult is Professor and Byington Endowed Chair in the Broad College of Business at Michigan State University and a researcher at the American Customer Satisfaction Index. Hult is a member of the Expert Networks of the World Economic Forum and United Nations / UNCTAD’s World Investment Forum. He is a Fellow of Academy of International Business and the 2016 Academy of Marketing Science Distinguished Marketing Educator.
David VanAmburg is Managing Director of the American Customer Satisfaction Index. As an expert in customer satisfaction, VanAmburg has lectured at the University of Michigan’s Ross School of Business and numerous venues internationally, addressing the relationships among satisfaction, quality, customer service, loyalty, and shareholder value. VanAmburg is regularly quoted and featured in numerous print and radio media, including Bloomberg, CNN, TIME, Wall Street Journal.