What's The Connection Between Customer Satisfaction & Market Performance?

by: Barry Ritholtz

Here's an interesting thesis on how to beat the market: Buy Companies With High Customer Satisfaction Scores. The consumerist summarizes the findings: Using a back-tested paper portfolio and an actual case, the authors of a study published in the Journal of Marketing found that companies at the top 20% of the the American Customer Satisfaction Index [ACSI] greatly outperformed the stock market, generating a 40% return.

The portfolio outperformed the Dow Jones Industrial Average by 93%, the S&P 500 by 201%, and NASDAQ by 335%.

Click for larger charts:

graphic courtesy of Journal of Marketing


Obviously, there are entire sectors that have very little to do with this, companies that have little or no contact with the public or consumers (think behind the scenes tech providers like Akamai (NASDAQ:AKAM), mining companies, business services providers, etc.) or monopoly businesses, such as utilities, where customer satisfaction has little do to with revenue and earnings.

A potential issue in the analysis is the relatively short period under study: It was from 1996-2003. I'd like to see the same analysis over a much longer time period -- 30 or 40 years (if the data is even available). Also, the period under study is somewhat aberrational -- it included a giant bubble and market crash. 

But the basic underlying concept is valid: What is the relationship between customer satisfaction and market value of equity? The authors found a strong relationship:

[Academic literature] points to a significant relationship between customer satisfaction and economic performance in general, but less is known about how the satisfaction of companies’ customers translates into securities pricing and investment returns, and virtually nothing is known about the associated risks. The tacit link between buyer utility and the allocation of investment capital is a fundamental principle on which the economic system of free market capitalism rests. The degree to which capital flows from investors actually move in tandem with consumer utility is a matter of significant importance because it is an indication of how well (or poorly) markets truly work.

However, efficient allocation of resources in the overall economy and consumer sovereignty depend on the joint ability of product and capital markets to reward and punish companies such that firms that fail to satisfy customers are doubly punished by both customer defection and capital withdrawal. Similarly, firms that do well by their customers would be doubly rewarded by more business from customers and more capital from investors.

Fascinating stuff. Perhaps this explains what happened to Dell's (DELL) share price.


Customer Satisfaction and Stock Prices:High Returns,Low Risk
by Claes Fornell, Sunil Mithas, Forrest V.Morgeson III, & M.S.Krishnan
Journal of Marketing
Vol.70 (January 2006),3–14

How To Beat The Stock Market: Buy Companies With High Customer Satisfaction Scores
The Consumerist, 05 17 2007