Some Stocks Sport a Big Advantage

When we think about companies in which we might invest, we tend to think about business models, growth rates, and profit margins. We think about the CEO and debt levels, and recent news. That's all good. But we shouldn't overlook a key factor that can be a powerful competitive advantage: customer service.

If a company has or is known for poor customer service, that can hurt it. Recall how we're often reminded that someone who has a bad experience will tell lots of people about it. Well, they'll tell people about good experiences, too.

The folks at Forrester Research recently surveyed more than 4,500 people about their experiences with companies. They found that consumers tell more people about a bad experience than about a good one. In a separate study, Forrester found that good customer experiences create loyalty and turn customers into referral sources for future business. Interestingly, this latter survey, reported in 2009, also found that this phenomenon was stronger than it was last year, suggesting that good customer service is growing in importance.

Potential losers from poor service
This spells trouble for those companies with poor service. Which firms are those? Well, MSN Money recently unveiled its "Customer Service Hall of Shame," a few members of which I've put below. I've also included their stock returns over the last year and their star rating from our Motley Fool CAPS community to give you an idea of how attractive our members think each company is.

Hmm ... clearly, these are not among the most attractive stocks right now to Foolish investors, especially given their weak returns lately.

What makes a winner
On the other hand, here are some companies that earned good marks for customer service:

Notice a couple of things here. First, CAPS members don't like Netflix and Amazon much better than Capital One or Comcast. Why is that? Well, remember that the ratings don't reflect the company's quality, but instead simply suggest the stock's potential to outperform the S&P 500 as decided by the CAPS community. So, investors might be bearish on some companies due in part to poor service, while they might be bearish on seemingly great companies simply because the stock price seems to have gotten ahead of itself. Amazon.com and Netflix are likely in that camp.

Second, good service by itself won't necessarily protect a stock from falling. Several of the top 10 companies, including Costco and Southwest Airlines, have suffered severe losses during the bear market.

What to do
Nevertheless, the positive impact of good customer service will inevitably have an impact on a company's long-term financial performance. Remember that good service is likely to keep and attract customers, while poor service is likely to drive some away.

Also, look for signs that companies are actually responding to bad customer service scores. Dell, for example, had poor customer service marks several years back, but has worked to improve them. Comcast has also been working on that, improving its call-center software and adding call centers. Both companies, along with many others, now routinely scan the Internet for people relating bad experiences, so that the wrongs can be righted.

So, when you go about your stock evaluations, spend some time looking at a company's customer service. It may make the difference in finding a great investment.

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