Friday, November 03, 2006

Morgan & Rego Study: Discussion & Implications

Discussion & Implications

Why is the study important? Here are the factors that the researchers identify. First, the authors link customer feedback measures with previously unexplored measures of financial performance, like Total Shareholder Return and Sales Growth. Their findings that Average Customer Satisfaction Scores and Top 2 Box Customer Satisfaction Scores actually do predict sales growth directly counter Reichheld’s claim that they do not. Their findings also counter previous findings that found no relationship between certain variables (for example, average customer satisfaction and gross margins were not found to be significantly related in past research but were found to be so in this research). There is also a positive relationship between customer satisfaction and market share. All of this is to say that a firm’s ability to satisfy its customers has an important impact on that firm’s business performance.

Second, this study shows the impact of customer complaining behavior on business performance. Previous research suggested that firms should try to actually increase the number of customer complaints so that the concerns of these “at-risk” customers can be better addressed. While there was one positive relationship between complaining behavior and market share (that is, more complaining behavior, more market share) the results of this study suggest that these complaints have not been adequately “heard” by the company, or if they have been “heard,” then the firm’s attempts to address the concerns have not counter-acted the negative effects of the customers’ complaining behavior on subsequent business performance. NOTE: The positive relationship between market share and complaining behavior is not surprising given Robert East’s work that suggests companies with higher market share tend to have both more positive AND negative WOM.

Related to this point about complaining behavior, the authors state that existing research by TARP (1986) suggests that customer complaints aren’t a good indicator of customer satisfaction but the authors state that the results of this study suggests that monitoring customer complaints provide insights into customer satisfaction and is valuable for predicting future business performance (the evidence for this is that the customer complaining variable and the other two satisfaction metrics were correlated with one another, and further there were similar patterns in the regressions across all three satisfaction measures).

Third, the study sheds new light on the relationship between customer loyalty and business performance. First, this study found that repurchase likelihood is related to a firm’s business performance which increases confidence in the current managerial practice of paying attention to repurchase likelihood. Second, the study also sheds light on the significance of positive consumer recommendations. In short, the authors argue that focusing on likelihood to recommend is not as useful as focusing on repurchase likelihood. (Other authors argue that you need to focus on recommendation likelihood because repurchase likelihood gets confused by inertia, indifference, or exit barriers that the company puts in the way to make it harder for customers to switch brands [see Reichheld, 2003, p. 48]).

The good news is that customer feedback systems can help a firm implement planning and control measures as there are metrics that help a company to predict business performance. Which ones to use, though, then becomes the issue. This study finds that the three customer satisfaction metrics and the repurchase likelihood metric (loyalty) are the best ones. The average number of recommendations seems only to have a positive impact on future market share and have a negative impact on future gross margins. The authors contend that the net promoter metric seems to have no predictive value at all. The data from this study suggests that increasing the number of promoters will not help the company’s business performance. Rather than focusing just on the net promoter score, companies should focus on a “scorecard” method that includes the following four metrics: average customer satisfaction, Top 2 Box satisfaction, proportion of customers complaining, and repurchase intent.

OK, now we'll discuss the limitations of this study, future avenues for research, and the researchers' conclusions.

Reichheld, Fredrick E. 2003. The one number you need to grow. Harvard Business Review (December) 46–54.

TARP. 1986. Consumer Complaint Handling in America: An Update Study. Technical Assistance Research Programs, White House Office of Consumer Affairs, Washington, D.C.

*** Information in this post adapted from Morgan, N. & Rego, L. Marketing Science, Vol. 25, No. 5, September–October 2006, pp. 426–439.