Customer satisfaction linked to share performance

Companies showing higher scores on the American Customer Satisfaction Index (ACSI) and the National Customer Satisfaction Index UK (NCSI-UK) are also producing higher stock returns than competitors and greatly outperforming market indices, according to a study from the University of Michigan.

The study examined the relationship between customer satisfaction and financial success by creating portfolios in which stocks are bought long or sold short based on performance in the ACSI and NCSI, which use the same measurement technology.

The cumulative return of a US$100 investment in the ACSI fund from April 2000 to April 2012 was US$490, a gain of 390%. By comparison, the S&P 500 returned only US$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%.

"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," said ACSI founder, Claes Fornell. "That is, loyal customers tend to be highly profitable as long as their loyalty comes from their satisfaction and not because prices are low."

The study also found that high levels of customer satisfaction lead to high levels of positive cash flows with low volatility, and increases in customer satisfaction are associated with subsequent positive earnings surprises.

However, the market fails to incorporate the full value of this intangible into stock valuations. Investors tend to react to the tangible results of customer satisfaction rather than information about customer satisfaction itself, which is why customer satisfaction funds have outperformed the market.