Friday, November 03, 2006

Morgan & Rego Study: Purpose and Methods for Study

OK, what follows are excerpts of my notes from reading this article.

The content was adapted from the article and I generally indicate with quotation marks where I've pulled direct quotes, but because these are from my informal notes I often cut-and-pasted from the article.

Purpose of Study

To determine which of the available customer feedback systems currently used by practicing managers (based on measures of customer satisfaction and loyalty) best predict a company's financial performance.


Data Set

The authors took data from the American Consumer Satisfaction Index (ACSI; provided by the National Quality Research Center at the University of Michigan), which closely matches satisfaction and loyalty data that companies would have available in their own customer feedback mechanisms. Since 1994, the ASCI has collected data from 50,000 consumers annually from 200 of the Fortune 500 companies from 40 different industries to measure consumer evaluations of these companies’ products and services. Utility companies were removed from the analysis because of their monopoly position and from private companies since their financial data was not available. 80 different companies were represented for 7 years (1994-2000).

Financial Performance Measures

There were 6 measures of financial performance:

- Tobin's Q. Compares a firm’s market value to the replacement cost of its assets; forward-looking financial market measure

- Net Operating Cash Flow. Measures a firm’s ability to generate cash; historical accrual accounting info-based measure

- Total Shareholder Returns. Measures firm’s ability to deliver value to shareholders by increasing price of firm’s stock and distributing dividends; forward-looking financial market measure

- Sales Growth. Measures increase/decrease in sales revenue; customer market-based measure

- Gross Margin. Ratio of gross profit to sales revenue; shorter-term

- Market Share. Percentage of sales a firm has relative to entire industry sales; customer market-based measure
Customer Feedback Measures

There were 6 measures of customer feedback:
- Average Customer Satisfaction Score (Satisfaction Measure). This is the mean score on the three specific indicators used to estimate the ACSI latent satisfaction index. The three measures are 1) overall satisfaction, 2) expectancy disconfirmation, and 3) performance versus their ideal product or service in the category.

- Top 2 Box Customer Satisfaction Score (Satisfaction Measure). This refers to the two highest-scoring points on the five-point scale that firms typically use to capture customer satisfaction. Because the ACSI uses 10-point satisfaction scales, this metric was operationalized as the proportion of customers surveyed that rated the firm in the top 4 points on the 10-point single-item “overall satisfaction” ACSI scale.

- Proportion of Customers Complaining (Satisfaction Measure). Number of consumers of a firm who voice dissatisfaction with the product or service versus those who do not. This was calculated using the ACSI “voice” variable that comprises two items that ask if the consumer has either formally (as in writing or by phone to the manufacturer or service provider) or informally (as to others) complained about the product or service.

- Net Promoters (Identified as Loyalty-based Measure; could also measure advocacy). Percentage of a firm’s customers who make positive recommendations of the company brand to others minus those who do not (NOTE: this differs from Reichheld’s definition since his refers to a likelihood to make a recommendation).

The net promoter score in this study utilized ACSI data concerning consumer responses to the questions “Have you discussed your experiences with [brand or company x] with anyone?” and “Have you formally or informally complained about your experiences with [brand or company x]?” The first question measures both positive and negative recommendations, while the second question measures negative recommendations. Net promoters computed as the number of a firm’s surveyed customers that reported discussing their consumption experiences minus the number of the firm’s surveyed customers that reported formally or informally complaining expressed as a proportion of the total number of a firm’s surveyed customers.

- Repurchase Likelihood (Loyalty-based Measure). Customer’s stated probability of purchasing from the same product or service provider in the future. This was taken from the ACSI that asks consumers to rate “How likely are you to repurchase this brand/company?”

- Number of Recommendations (Loyalty-based Measure; could also measure advocacy). This refers to the number of people to whom consumers of a firm’s product or service engaged in positive word-of-mouth (WOM) behavior as captured in the authors' net promoters variable report having recommended the brand or company. The ACSI question asks: "With how many people have you discussed [brand or company x]?” Authors averaged this metric at the firm level, representing the average number of people to whom the surveyed customers of a firm who engaged in positive WOM have recommended the brand or company.
Co-Variates and Other Industry Characteristics

To account for effects of other factors the authors identified a number of firm-level and industry-level co-variates: for the firm, number of business segments the firm competes in, the intensity of advertising and R&D expenses, and size of assets; for the industry-level, Hirschmann-Herfindahl index (HHI; because market structure can affect financial performance) and demand growth.

To control for other industry characteristics, “we included three dummy variables in our analyses: ACSI sector definitions to identify service-focused versus physical goods-focused firms, annual reports to identify firms that market direct to their end-user consumers versus those using intermediaries, and the ASCI survey data collection protocol to indicate firms that face longer versus shorter interpurchase cycles.”

OK, so basically the authors are going to take the six customer feedback metrics (3 satisfaction and 3 loyalty metrics) and see which of these best predict the six business performance measures.

We should note at this point that the "net promoter" metric in this study is not calculated in the same way as the Net Promoter Score, which is calculated by subtracting the number of detractors (0-6 on a 10-point scale indicating how likely a person is to recommend a company or brand to others) from the number of promoters (9-10), disregarding the number of passive responses (7-8).

Next, the results!

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