Customer service drives share price growth


There is now growing evidence that companies with better customer service metrics achieve higher stock market growth.  Using different customer satisfaction indices, two separate studies demonstrate a clear correlation between improved share price or returns and better customer service rankings, in the UK as well as the US.
  • Watermark Consulting found that over 5 years, the Top 10 publicly traded companies in Forrester Research’s annual Customer Experience Index ranking achieved total returns 128% better than the bottom 10.  
  • The CFI group found that over 12 years a stock portfolio using the American CSI grew by 390% compared to a 7% loss on the S&P500.  They have also used the ICS CSI in the UK which outperformed the UK’s FTE100 index.
This is backed up by other industry observers – for example the LA Times report on home improvement companies.  At the same time the new global management accountancy body is advocating the need for better measures of non-financial assets, such as customer relationship and the knowledge of employees. See article

Have you seen other evidence? – please email  editor@planningforum.co.uk

The Forester Research Index

The analysis from Watermark Consulting uses Forrester Research’s annual Customer Experience Index ranking.

From 2007-2011, the customer experience Leader portfolio outperformed the broader stock market, generating cumulative total returns that were 27% better than the S&P 500 Index and 128% better than the customer experience Laggard portfolio.

This pecking order of performance held true even on an annual basis.  In all but one of the five years, the Leader portfolio outperformed the index, which in turn outperformed the Laggard portfolio.

Watermark Consulting’s very first Customer Experience Stock Performance Analysis was conducted back in 2009. They look at the cumulative stock returns for the Top 10 and Bottom 10 publicly traded companies in Forrester Research’s annual Customer Experience Index ranking. Watermark defines these two groups as the Leaders and Laggards, respectively.

They then compare the total return from investing in an equally-weighted, annually readjusted portfolio of customer experience Leaders to that for customer experience Laggards and the broader market (as reflected by the S&P 500 index).

As they say “The pattern evident from this analysis has been remarkably consistent.  For five years running now, we see that companies which bring great customer experiences to the marketplace are being rewarded – by consumers and investors.”

Why? because the “leaders” are enjoying the benefits of customer loyalty and the laggards are eroding business value by creating experiences that are “rife with friction” See their original report online: http://www.watermarkconsult.net/blog/2012/02/01/the-roi-of-a-great-customer-experience/

The Customer Satisfaction Index

In 2000, the CFI Group created a stock portfolio to examine the relationship between customer satisfaction and financial success in the short and long term, using data from the American Customer Satisfaction Index (ACSI), and the National Customer Satisfaction Index UK (NCSI).

According to the study, "the cumulative return of a $100 investment in the ACSI fund from April 2000 to April 2012 was $490, a gain of 390%. By comparison, the S&P 500 returned only $93, a 7% loss. In the United Kingdom, the NCSI portfolio earned a return of 59% from April 2007 to June 2011, and the FTSE 100 had a negative return of 6%."  In addition, higher levels of customer satisfaction are tied to high levels of positive case flows with low volatility, and positive earnings surprises.

University of Michigan professor and ACSI founder Claes Fornell attributes the correlation to the influence customer satisfaction has on retaining customers and driving loyalty. Investors hate risk, and a company with strong customer retention is one where risk is diminished. "Companies with highly satisfied customers generate superior returns because customer satisfaction is critical for repeat business, and that type of business is usually very profitable," Fornell said in a press release. "That is, loyal customers tend to be highly profitable as long as their loyalty comes from their satisfaction and not because prices are low."
See source: http://www.peppersandrogersgroup.com/blog/2012/07/report-ties-customer-metrics-t.html

Home Depot  shares rise 75% in a year against an average 17% for the S&P 500

The evidence provided by these two stock market analyses, is backed up by other industry observers.   For example in August 2012, the LA Times reported that home improvement giants such as Home Depot Inc. and Lowe's Cos. are ramping up their customer service in a big way.  At the same time, over the last year, the price of Home Depot shares have increased 74% and Lowe's shares have gained 35%, while Standard & Poor's 500 index has climbed 17%.  On one day, Home Depot's shares gained 3.6% after reporting that its net income rose 1.7% for its fiscal second quarter compared with the same quarter last year. The company, citing the uncharacteristically warm spring, said consumers spent more money fixing up their homes.

So what have they been doing?  Directing store clerks to spend more time with customers, improving the information and advice they offer in online catalogs, installing Wi-Fi computer service in stores and improving do-it-yourself instructions. They are coming up with ways to reach consumers with smaller budgets through multiple avenues, mostly online.  How-to workshops have largely moved to YouTube channels, and photos on Facebook and Pinterest, an online photo-sharing pin board, have replaced clippings from a magazine or catalog.


Report by Paul Smedley
September 2012

Thank you to Martin Hill-Wilson, CEO at Brainfood Consulting and speaker at the Planning Forum’s annual conference, for sourcing these research results, as part of the summer project work being undertaken by Planning Forum members into a new generation approach to customer experience improvement and quality.  If you missed the Big Interview with him, you can catch it on online at CCF


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Take a look at these articles, videos and links
Customer 3.0 - end to end customer experience
Editor’s choice: Top Ten Articles for September/October 2012
Employee Engagement - a high return on a low investment
See the latest articles on Quality & Customer Experience
Why CEOs require better measures of customer value


 

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