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Customer Satisfaction, Productivity, and Profitability: Differences Between Goods and Services

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Author Info

  • Eugene W. Anderson

    (School of Business Administration, The University of Michigan, Ann Arbor, Michigan 48109-1234)

  • Claes Fornell

    (School of Business Administration, The University of Michigan, Ann Arbor, Michigan 48109-1234)

  • Roland T. Rust

    (Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee 37203)

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    Abstract

    There is widespread belief that firms should pursue superiority in both customer satisfaction and productivity. However, there is reason to believe these two goals are not always compatible. If a firm improves productivity by “downsizing,” it may achieve an increase in productivity in the short-term, but future profitability may be threatened if customer satisfaction is highly dependent on the efforts of personnel. If so, there are potential tradeoffs between customer satisfaction and productivity for industries as diverse as airlines, banking, education, hotels, and restaurants. Managers in these types of service industries, as well as goods industries in which the service component is increasing, need to understand whether or not this is the case. For example, if efforts to improve productivity can actually harm customer satisfaction—and vice-versa—the downsizing of U.S. and European companies should be viewed with concern. It follows that developing a better understanding of how customer satisfaction and productivity relate to one another is of substantial and growing importance, especially in light of expected continued growth in services throughout the world economy. The objective of this paper is to investigate whether there are conditions under which there are tradeoffs between customer satisfaction and productivity. A review of the literature reveals two conflicting viewpoints. One school of thought argues that customer satisfaction and productivity are compatible, as improvements in customer satisfaction can decrease the time andeffort devoted to handling returns, rework, warranties, and complaint management, while at the same time lowering the cost of making future transactions. The second argues that increasing customer satisfaction should increase costs, as doing so often requires efforts to improve product attributes or overall product design. A conceptual framework useful in resolving these contradictory viewpoints is developed. The framework serves, in turn, as a basis for developing a theoretical model relating customer satisfaction and productivity. The model predicts that customer satisfaction and productivity are less likely to be compatible when: 1) customer satisfaction is relatively more dependent on customization—the degree to which the firm's offering is customized to meet heterogeneous customers' needs—as opposed to standardization—the degree to which the firm's offering is reliable, standardized, and free from deficiencies; and 2) when it is difficult (costly) to provide high levels of both customization and standardization simultaneously. To move forward from the model's propositions to the development of testable hypotheses, we argue that services are more likely than goods to have the preceding characteristics. Hence, tradeoffs between customer satisfaction and productivity should be more prevalent for services than for goods. Although this classification is not precise—many services are standardizable and many goods have a service component—it has the advantage of allowing an initial test of the propositions. The empirical work employs a database matching customer-based measures of firm performance with traditional measures of business performance, such as productivity and Return on Investment (ROI). The central feature of this database is the set of customer satisfaction indices provided by the Swedish Customer Satisfaction Barometer (SCSB). The SCSB provides a uniform set of comparable customer-based firm performance measures and offers a unique opportunity to test the study's hypotheses. The findings indicate that the association between changes in customer satisfaction and changes in productivity is positive for goods, but negative for services. In addition, while both customer satisfaction and productivity are positively associated with ROI for goods and services, the interaction between the two is positive for goods but significantly less so for services. Taken together, the findings suggest support for the contention that tradeoffs are more likely for services. Hence, simultaneous attempts to increase both customer satisfaction and productivity are likely to be more challenging in such industries. Of course, this does not imply that such firms should not seek improvements in both productivity and customer satisfaction. For example, appropriate applications of information technology may improve both customer satisfaction and productivity simultaneously. The findings should provide motivation for future research concerning the nature of customer satisfaction and productivity, as well as appropriate strategy and tactics for each one. It is worth emphasizing that this is an issue that is not only important today, but certainly will become even more important in the future. As the growth of services continues and world markets become increasingly competitive, the importance of customer satisfaction will also increase. To compete in such a world, firms must strike the right balance between their efforts to compete and their efforts to compete .

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    File URL: http://dx.doi.org/10.1287/mksc.16.2.129
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 16 (1997)
    Issue (Month): 2 ()
    Pages: 129-145

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    Handle: RePEc:inm:ormksc:v:16:y:1997:i:2:p:129-145

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    Keywords: customer satisfaction; productivity; services versus goods;

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    Cited by:
    1. Fafaliou, Irene & Zervopoulos, Panagiotis, 2014. "Strategy in practice: a quantitative approach to target setting," MPRA Paper 54054, University Library of Munich, Germany.
    2. Zhang, Jason Q. & Craciun, Georgiana & Shin, Dongwoo, 2010. "When does electronic word-of-mouth matter? A study of consumer product reviews," Journal of Business Research, Elsevier, vol. 63(12), pages 1336-1341, December.
    3. Simon, Daniel H. & Gomez, Miguel I., 2005. "The Competitive Causes and Consequences of Customer Satisfaction," 2005 Annual meeting, July 24-27, Providence, RI 19371, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Gronroos, Christian & Ojasalo, Katri, 2004. "Service productivity: Towards a conceptualization of the transformation of inputs into economic results in services," Journal of Business Research, Elsevier, vol. 57(4), pages 414-423, April.
    5. Lewin, Jeffrey E. & Biemans, Wim & Ulaga, Wolfgang, 2010. "Firm downsizing and satisfaction among United States and European customers," Journal of Business Research, Elsevier, vol. 63(7), pages 697-706, July.
    6. Zhao, Y. Lisa & Di Benedetto, C. Anthony, 2013. "Designing service quality to survive: Empirical evidence from Chinese new ventures," Journal of Business Research, Elsevier, vol. 66(8), pages 1098-1107.
    7. Liu, Xiaohong & Zeng, Xianyi & Xu, Yang & Koehl, Ludovic, 2008. "A fuzzy model of customer satisfaction index in e-commerce," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 77(5), pages 512-521.
    8. Yuan-shuh Lii, 2009. "A model of customer e-loyalty in the online banking," Economics Bulletin, AccessEcon, vol. 29(2), pages 891-902.
    9. Volker Kuppelwieser & Merlin Simpson & Gabriel Chiummo, 2013. "1 + 1 does not always equal value creation: The case of YouTube," Marketing Letters, Springer, vol. 24(3), pages 311-321, September.
    10. Sheth, Jagdish N. & Sisodia, Rajendra S., 2002. "Marketing productivity: issues and analysis," Journal of Business Research, Elsevier, vol. 55(5), pages 349-362, May.
    11. Chenhall, Robert H., 2005. "Integrative strategic performance measurement systems, strategic alignment of manufacturing, learning and strategic outcomes: an exploratory study," Accounting, Organizations and Society, Elsevier, vol. 30(5), pages 395-422, July.
    12. Zeynep Ton, 2008. "The Effect of Labor on Profitability: The Role of Quality," Harvard Business School Working Papers 09-040, Harvard Business School, revised Jul 2009.
    13. Cecilia SILVESTRI, 2014. "Quality And Customer Satisfaction: Relationships And Dynamics. A Case Study," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 4(1), pages 5-21, March.
    14. Homburg, Christian & Kuehnl, Christina, 2014. "Is the more always better? A comparative study of internal and external integration practices in new product and new service development," Journal of Business Research, Elsevier, vol. 67(7), pages 1360-1367.
    15. Che-Ha, Norbani & Mavondo, Felix T. & Mohd-Said, Saad, 2014. "Performance or learning goal orientation: Implications for business performance," Journal of Business Research, Elsevier, vol. 67(1), pages 2811-2820.
    16. Zhou, Kevin Zheng & Brown, James R. & Dev, Chekitan S., 2009. "Market orientation, competitive advantage, and performance: A demand-based perspective," Journal of Business Research, Elsevier, vol. 62(11), pages 1063-1070, November.
    17. Steven, Adams B. & Dong, Yan & Dresner, Martin, 2012. "Linkages between customer service, customer satisfaction and performance in the airline industry: Investigation of non-linearities and moderating effects," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(4), pages 743-754.
    18. Mair, Johanna, 2002. "Value creation through entrepreneurial activity: A multiple constituency approach," IESE Research Papers D/468, IESE Business School.
    19. Bolton, R.N. & Lemo, K.N. & Verhoef, P.C., 2002. "The Theoretical Underpinnings of Customer Asset Management," ERIM Report Series Research in Management ERS-2002-80-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    20. Ndubisi, Nelson Oly, 2012. "Mindfulness, reliability, pre-emptive conflict handling, customer orientation and outcomes in Malaysia's healthcare sector," Journal of Business Research, Elsevier, vol. 65(4), pages 537-546.
    21. Freiesleben, Johannes, 2010. "Proposing a new approach to discussing economic effects of design quality," International Journal of Production Economics, Elsevier, vol. 124(2), pages 348-359, April.
    22. Johnson, Michael D. & Herrmann, Andreas & Gustafsson, Anders, 2002. "Comparing customer satisfaction across industries and countries," Journal of Economic Psychology, Elsevier, vol. 23(6), pages 749-769, December.
    23. Sharma, Arun & Sheth, Jagdish N., 2004. "Web-based marketing: The coming revolution in marketing thought and strategy," Journal of Business Research, Elsevier, vol. 57(7), pages 696-702, July.
    24. Ana B. Casado & Francisco J. Mas & Ricardo Sellers, 2004. "Third-Party Complaints And Firm Performance: An Application In Spanish Banking," Working Papers. Serie EC 2004-01, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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