This is guest post by Professor Mark Vandenbosch. Mark is the Kraft Professor of Marketing at the Ivey Business School. He has held visiting professorships at IMD in Switzerland and INSEAD in France. Much of his research focuses on intersection competitive positioning and effective customer interface strategies with his work appearing outlets ranging from Marketing Science to MIT/Sloan Management Review to the Wall Street Journal. He has worked extensively with major firms including Tetra Pak, Cisco Systems, Pirelli, Sony, Medtronic, ABB, IBM, Allianz, 3M, and Loyalty One.
You’d think if you were really good at what you do, you’d have satisfied customers. You’d think if your customers were satisfied, they’d buy more, be more loyal, tell others, and so on. You’d think you might gain market share. In other words, you might think higher customer satisfaction would translate into higher market share. You’d be wrong.
Turns out, the brands with the largest market share are not the ones with the highest customer satisfaction.
Take a look at the American Customer Satisfaction Index (ACSI) -- a number produced by number crunchers who’ve been monitoring customers’ satisfaction with some of America’s biggest product and service providers since the mid-1990s. With the University of Michigan and the American Society of Quality as founding partners, their analysis is pretty robust.
Here are some findings.
McDonald’s is by far the largest hamburger chain in the US (gazillions served). Its market share is two to three times larger than that of Burger King and Wendy’s, its nearest rivals. Yet, look at customer satisfaction and McDonald’s ranks third among the three.
Skeptics might argue that this story is all about timing – McDonald’s had a bad year, they might say. Except, McDonald’s customer satisfaction has ranked lower than Wendy’s in all 18 years of the ACSI data, and below Burger King in 17 of the 18 years. Yet throughout this time period, McDonald’s was the dominant market leader. If anything, it has become more dominant in the burger category over the years.
Ah, but that’s the fast food industry, where McDonald’s has been skewered and grilled in the media. This must have an effect on customer satisfaction measures.
Ok, so let’s look at other product and service categories. Let’s take retail pharmacy, for example, something the ACSI terms Health & Professional Care Stores. The results are broken out by the three largest chains, CVS Caremark, Walgreen, and Rite Aid as well as a fourth group that included an average of All Other chains surveyed. Which group topped the customer satisfaction poll? All Others. Just as it has each year since data in this category was collected in 2005. Customers were consistently more satisfied with smaller retail pharmacy chains.
Don’t like this category? Who scored highest in Land Line Phone Service? The All Other category. Wireless Telephone Services? All Others. Full Service Restaurants? You guessed it.
Across the ACSI database, in category after category, small players and “All Others” consistently outperform the major market share leaders in terms of customer satisfaction.
So the question is, why?
The answer lies in understanding the role of customer heterogeneity: the degree to which customers are different from one another. The reality for most firms is that they compete in markets where customers vary widely in their preferences. And in these markets, the higher the market share, the lower the customer satisfaction.
The logic for this is pretty straightforward. Customers prefer products that fit their needs – something that is tailored just for them. But since companies sell standardized products, customers can’t have exactly what they want. They have to choose the closest alternative. Often, that is the dominant brand. It’s good, but its not their ideal product. So they’re not hugely satisfied. Smaller market share brands don’t have that problem (or at least not as much) because they’re more focused on a specific customer need – so they get chosen by customers with that need.
The result is that on average, the satisfaction rating will be lower for brands with lots of customers than for smaller, more focused brands.
Q. What’s a surefire way to increase your customer satisfaction score?
A. Shrink market share by getting rid of your least satisfied customers.
So what does this mean for managers? Well, it doesn’t mean that you should stop trying to satisfy your customers. Nor does it mean you should stop trying to grow market share.
Trying to do better with your existing and potential customers always makes sense. Customer satisfaction is also a good metric to keep track of your progress (it helps answer an important question: are we moving in the right direction?). But be careful how you use the results. It’s best to separate returning and new customers; measuring your progress from a baseline for each. Also, be wary of head-to-head comparisons between different company units or even between your company and competitors (benchmarking may not be such a hot idea here).
Finally, keep in mind that in the current recessionary environment, it may be tempting to add customers, any customers. But as you do, you may be setting yourself up for a hit on your customer satisfaction numbers. Market share or customer satisfaction. Pick one.