Effects of customer satisfaction on the company's sales success

Table of contents:

List of abbreviations:

1 Objective
1.1 Procedure

2 Customer Satisfaction
2.1 Definition and development of Customer Satisfaction
2.2 Effects of customer satisfaction on the company’s sales success
2.2.1 Cost reduction in marketing and distribution
2.2.2 Flexible price
2.2.3 Motivation of the employees
2.2.4 Cross-Selling
2.2.5 Customer Loyalty

3 Procedures for measuring customer satisfaction
3.1 Objective procedures for measuring customer satisfaction
3.2 Subjective procedures for measuring customer satisfaction
3.2.1 Implicit methods for measuring customer satisfaction
3.2.2 Explicit methods for measuring customer satisfaction
3.2.2.1 Ex ante/ex post measurement
3.2.2.2 Ex post measurement
3.2.2.2.1 One-dimensional ex post measurement
3.2.2.2.2 Multidimensional ex post measurement
3.3 Comparison evaluation

4 Proceeding of a Customer Satisfaction Survey
4.1 Determination of the investigative step and ultimate goal
4.2 Explorative phase
4.3 Method of survey
4.3.1 Choosing the method of the Customer Satisfaction Survey
4.3.2 Target group
4.4 Pre-test
4.5 Informing the customers
4.6 The questionnaire
4.6.1 General principles
4.6.2 Types of Questions
4.6.3 Design of the Questionnaire
4.6.4 Layout
4.6.5 Accomplishment of the customer satisfaction survey

List of illustrations:

Illustration 1: The cycle of good service

Illustration 2: Procedures of measuring of customer satisfaction

Illustration 3: Comparison evaluation

Illustration 4: Development of a CSS

List of abbreviations:

illustration not visible in this excerpt

1 Objective

The following report describes the theoretical context of customer satisfaction, different methods of measuring customer satisfaction and the process and results of XYZ (thereafter called XY) customer satisfaction survey. The results of this analysis support the management in improving cooperation with customers by pointing out strengths, weaknesses and general tendencies of their business relationship.

1.1 Procedure

First of all the author will give a general introduction about the company XY, in specific about the mill direct department of XY in Carol Stream, IL. After the definition of customer satisfaction, the author will focus on effects of customer satisfaction on the company’s sales success. Here the author will explain five reasons that profits are linked to customer satisfaction. The theoretical part of the project ends with the description of both objective and subjective methods of measuring customer satisfaction. The second part of this project points out the process of XY Customer Satisfaction Survey ((thereafter called CSS) as well as the analysis of the data. Closing the author will give some examples of improvement and provide conclusions.

As requested by XY, the author will not use any other company names to protect the data privacy.

2 Customer Satisfaction

In this chapter the author will define customer satisfaction and focus on effects of customer satisfaction on the company’s sales success. In addition, the author will explain five reasons that profits are linked to customer satisfaction.

2.1 Definition and development of Customer Satisfaction

In today's literature there are divergent opinions about the definition of customer satisfaction. The most frequently accepted theory represents the statement that it is understood generally as the result of a complex psychological comparison process: The customer compares his noticed experiences after the use of a product or a service, the so-called actual performance, with his expectations, desires, individual standards or another comparison standard before the use.

If the underlying target performance is achieved or even exceeded, satisfaction develops for the customer. In this context satisfaction is often distinguished as the emotional reaction to a cognitive comparison process¹.

Satisfaction is actually a positively occupied psychological phenomenon and describes feelings such as fulfillment, happiness, joy, gratification or general well being². The origin of the explanation can be found in the behavior sciences, in particular in the Social Psychology.

The customer feels high satisfaction, if the actual achievement of the product exceeds its expectations. Discontent develops if the enterprise fails to achieve the required goal. If the product fulfills the minimum expectations, the customer has a neutral reaction. In this case, however, the danger exists if the customer notices the achievement of the enterprise as interchangeable he may place future orders with the competitors. Therefore, a company’s highest goal should always be exceeding the expectations of the customer.

2.2 Effects of customer satisfaction on the company’s sales success

Satisfied customers are repeat customers. Thus customer satisfaction forms one of the most important foundations of the long-term business success of an enterprise. Given the current stagnant business environment, a competitive market makes it hard to find customers and more importantly difficult to gain long-term customer relationships. This is to be seen not only before the background of the increasing interchangeability of products and services, but also regarding the increasing cost and profit pressures in many corporations. Empirical investigations occupy the clear connection between customer satisfaction and customer relationships and the business profits .³

Enterprise may not value a customer by the limited sales volume of an individual purchase, but after the entire accumulated volume of the life cycle of a customer relationship. One must learn that instrumental marketing is no longer sufficient, but relations marketing to the customer is becoming more important.

Because of those specified and evident reasons it is essential to regularly survey customer satisfaction in order to be able to react fast and efficiently. If necessary, to adjust the services to meet the desires and expectations of its customers. The survey results must also be analyzed to determine the core competency of a company and its weaknesses. This information can be used to identify competitive advantages over the rivals.

Altogether there are at least five main reasons that profits are linked to customer satisfaction:

2.2.1 Cost reduction in marketing and distribution

Empirical results prove the fact that it is five times more expensive to win a new customer than to keep an existing customer.⁴

Furthermore, the cost of distribution as a portion of the transaction is reduced with an increasing duration of the business relationship. The support of an existing customer thereby causes importantly fewer costs than acquisition of a new customer. In addition, a further economic bonus is to be obtained. Positive word of mouth from existing customers, who are satisfied with the enterprise, provides free advertisement. Over time a business can get a significant number of additional customers without large marketing expenses through this strategy.⁵

2.2.2 Flexible price

High customer satisfaction makes higher prices possible. The customer is willing to pay more for reduced risks.

Content and enthusiastic customers react less sensitively to price increases. Just a few customers would end a long-term and fruitful relationship with a supplier, because of a price increase of 5 %. One determined for example that content customers are willing to pay for good service up to 9 % higher prices⁶. However, one has to consider, that a flexible price always depends on the industrial sector.

2.2.3 Motivation of the employees

An enterprise which is focused on the customer must give their employee’s, who are in daily contact with the customer, appropriate free space, so that they can react to the desires of the customer. These responsibilities must be defined to ensure that all employees understand their role. An employee with sufficient authority can prevent the disappointed customers from leaving. The employee knows that he can do something to correct the situation. Only content and motivated employees are able in the long term to achieve high-quality goals.

Schlesinger and Heskitt explained the relationship they believe exists between satisfied customers and satisfied employee in their construct called Cycle of Good Service. The cycle suggests that satisfied customers tolerate higher margins that can be used to pay the employees higher salaries. The higher pay boosts employee morale, reducing employee turnover. With more tenured employees servicing customers, there is greater likelihood of better satisfying customers, and so on and so on. In the end, the organization following this philosophy ought to be more successful and ultimately more profitable, a truly win-win-win situation.⁷

illustration not visible in this excerpt

Illustration 1: The cycle of good service (Schlesinger and Heskitt, 1991)

2.2.4 Cross-Selling

Cross-Selling consists of the marketing of similar services to a customer who already purchases existing products and services from the company. Customers usually prefer to buy from their business partner, if the business partner brings new or improved products to the market.⁸

In particular the strong competition as well as the larger selection and interchangeability of the products and services make long-term growth and a high company’s rate of return to the enterprises more difficult. For the reaching of these goals therefore so-called defensive strategies (increase of the customer satisfaction and the development of change hurdles) must be used in place of offensive strategies (finding new customer). Since, as previously mentioned, developing a relationship with a new customer is very expensive in comparison to expanding an existing customer relationship through Cross-Selling and repetition purchases.⁹

2.2.5 Customer Loyalty

The performance of all business ultimately depends on their success in keeping customers - lengthening the lifetimes of their customers. A customer’s lifetime is the period of time, or the number of purchase cycles, a customer stays with an organization before taking its requirements to another supplier. Generally, the longer the lifetime, he more valuable the customer.¹⁰

Extensive studies - in particular of REICHHELD/SASSER - resulted, that an increase of the customer relationship (equivalent to a decrease of the drift) by five percent can result an increase of the profit 25 to 85 percent in depending on the industry.¹¹

3 Procedures for measuring customer satisfaction

The below diagram gives an introductory overview of the basic approach for evaluation of customer satisfaction.

illustration not visible in this excerpt

Illustration 2: Procedures of measuring of customer satisfaction (Simon, Hermann/Homburg, Christian, 1998)

One can identify from the preceding diagram that customer satisfaction is divided between objective and subjective evaluation.

3.1 Objective procedures for measuring customer satisfaction

Objective procedures are based on the view of objective indicators, i.e., they aim at the direct observation from data, from which one believes to be able to determine the degree of customer satisfaction. It is assumed that the subjective perception of the customer cannot affect the result. Since discontent of the customer leads to drift and satisfaction of the customer makes them repeat customers, (as evident in the illustration on page seven) aggregated data such as turnover, market share, drift -, repeat purchase and recovering rate is used as indicators for satisfaction/discontent. However, the measurement of these values to identify the satisfaction of current customers is insufficient, because they are exposed to different competitive forces in the market, which could mask true customer satisfaction. In addition the necessary data (e.g. over market shares in certain product sections) is available with a time lag to the enterprise, so that any discontent uncovered by the data will be addressed too late.

3.2 Subjective procedures for measuring customer satisfaction

Contrary to the objective methods, subjective procedures for the measurement of customer satisfaction gather personal individual psychological circumstances and the associated behaviors. The satisfaction level is mainly measured by questioning consumers and salesmen. Thereby no directly observable values are determined, other than the satisfaction indicated in the response.

In principle two procedures can be differentiated (represented as in the illustration seven): It concerns on the one hand the characteristic-supported procedures, and on the other hand around the event-oriented procedures, in that the supplier-customer interaction is divided into individual episodes.¹²

The event-oriented procedures are characterized by the fact that the satisfaction felt by the consumer is based on the perception and psychological processing of concrete events during a transaction.

One of the most important is the Critical Incident Technique, which is suitable particularly in the services sector as an instrument for the determination of customer expectations and problems. In principle the technique applicable with production enterprises on the assumption that satisfaction is produced not only by the products and services of an enterprise, but also by the entire transaction process between supplier and customer. This procedure is characterized by verbal questioning of standardized questions to critical events of the business relationship. Critical events are characterized as incidents, which the customer keeps in mind both as unusually negative or unusually positive perceptions.¹³

The analyzing of certain events of the customer relationship can be helpful by resulting in an increase of efficiency of the enterprise. However, such methods are unsuitable for a global measurement of the customer satisfaction.

Only the characteristic-supported procedures can provide a global measurement of the customer satisfaction, which we will focus on now.

[...]

¹ Simon, Hermann/Homburg, Christian (1998), S. 44.

² Scharnbacher, Kurt./Kiefer, Guido. (1996), S. 5

³ Simon, Hermann/Homburg, Christian (1998), S. 19 6

⁴ Müller/Riesenbeck (1991), S.69

⁵ Homburg, Christian (1995), S.2

⁶ Vara, Terry (2000) S. 13

⁷ Vavra, Terry (2002) S.7

⁸ Schneider, Willy (2000), S.40

⁹ Scharnbacher, Kurt /Kiefer, Guido (1996), S.15

¹⁰ Vavra, Terry (2002), S.8

¹¹ Reichheld/Sasser (1990), S.105

¹² Simon, Hermann/Homburg, Christian (1998) S.48

¹³ Hinterhuber, Hans /Handlbauer, Gernot/Matzler, Kurt (1997), S. 64 11