In 2006, a study published in the Journal of Marketing reported an astonishing correlation: Companies that most satisfied customers outperformed the market to a huge degree.
The study looked at companies rated by the University of Michigan's American Customer Satisfaction Index (ACSI), dividing them into quintiles. The stocks of those companies in the top 20% outperformed the Dow Jones Industrial Average by a whopping 93%, doubled the performance of the S&P 500, and almost tripled that of the Nasdaq.
How do top-ranking companies profit through good service? The recent American Express Global Customer Service Barometer study found that most consumers are willing to spend 9% more, on average, at a retailer with top-notch service. That can deliver a big boost to the bottom line. Conversely, bad experiences had previously driven 81% to vow never to do business with a company again.
So which companies are producing both smiling customers and smiling shareholders? Well, recent ACSI data rated Netflix (Nasdaq: NFLX ) best among online retailers. When the company experienced an outage one day last year, it emailed its customers an apology and offered each a 2% refund of its monthly fee.
Consumer Reports magazine recently offered a "Naughty and Nice" listing of companies that were good and bad at customer service. The nice list included Southwest Airlines (NYSE: LUV ) and Amazon.com (Nasdaq: AMZN ) . Southwest was cited for offering free checked bags, a rarity in the air these days. Amazon.com owns Zappos.com, frequently named as one of the best in customer service, with its free shipping and easy, free returns. Amazon was also a high scorer in ACSI's data.
Denizens of the naughty list included SanDisk (Nasdaq: SNDK ) and Verizon Wireless, the joint venture of Verizon (NYSE: VZ ) and Vodafone. Verizon Wireless has doubled its early termination fee to $350 for many customers, while SanDisk issues rebates in the form of gift cards with no cash value, requiring holders to buy more SanDisk merchandise.
Companies that displease customers can lose them entirely. Even worse, customers often spread the word about bad experiences, as my colleague Rick Munarriz did regarding his experience with Comcast (Nasdaq: CMCSA ) . He's not alone -- Comcast has been voted America's "worst company" by The Consumerist web site, because of poor service and steep costs.
As investors, we can make more money by focusing on companies that are pleasing their constituents, rather than driving them away.