While much of companies’ recent focus has been on improving the customer experience to increase satisfaction, reducing costs is a rising priority. Indeed, marketing managers are always under pressure to implement marketing initiatives that produce desired product-market outcomes at lower costs. Of particular salience to marketing managers is the cost of selling (COS)—the expenditures incurred by a firm to persuade customers to purchase its offerings and to make it convenient for customers to do so. In fact, investors and analysts also closely track COS and generally view a reduction as a positive signal. While customer satisfaction is assumed to reduce a firm’s future COS, there is neither an empirical test of this assumption nor is it clear how this varies across firms and industries.
In a new Journal of Marketing study, our research team examines the impact of customer satisfaction on the future COS of a firm and the extent to which this impact is influenced by firm- and industry-level factors. Specifically, we hypothesize that satisfied customers respond in several beneficial ways—for example, spreading positive word-of-mouth and demonstrating higher willingness to pay—that enable a firm to reduce its expenses for persuading current and potential customers to purchase its offerings and also the expenses for making the purchases more convenient for customers. However, the extent of the reduction depends on a firm’s strategic focus, flexibility, and operating environment.
Analyzing almost two decades of data comprising 1,207 observations from 128 publicly listed US firms, we find that customer satisfaction has a statistically and economically significant negative impact on future COS. Specifically, a one-point increase in customer satisfaction can result in a reduction of almost US$130 million in future COS. That equates to nearly 3% of the future COS for a firm with approximately US$25 billion in sales. Given that cost reduction is a top priority for CEOs, this finding has direct communication implications for senior marketing managers because they can now articulate another economic value of customer satisfaction. Importantly, investors and financial analysts can also incorporate the effects of customer satisfaction on future COS in their firm valuation models.
Our results also identify specific conditions under which marketing managers can expect higher customer satisfaction to result in a higher or lower reduction in the different components of a firm’s future COS. First, we find that a firm’s strategic focus matters. While diversified firms enjoy a higher reduction in their future cost of persuasion, they struggle to utilize the benefits of higher customer satisfaction to lower their future cost of convenience. A direct implication for these firms is to evaluate their formal and informal mechanisms for sharing customer insights related to the provision of convenience. Such an exercise could identify specific steps to enhance the effectiveness of customer satisfaction in lowering the future cost of convenience.
Second, we also find a connection to strategic flexibility. Our results suggest that capital-intensive and leveraged firms should expect a lower reduction in their future cost of persuasion. To overcome this relative disadvantage, capital intensive firms can conduct cost-benefit analyses to explore potential payoffs from increasing the salience of their positive word-of-mouth for prospective customers and from increasing customer-facing opportunities for their employees. Similarly, leveraged firms should carefully assess whether their current systems and procedures are creating impediments to utilizing the benefits of customer satisfaction. It is plausible that diverting managerial attention to servicing high levels of debt leads to selling activities that do not consider higher levels of customer satisfaction.
Finally, we also demonstrate that a firm’s operating environment can influence the extent to which higher customer satisfaction can lower its future COS. Although firms in less concentrated industries enjoy a higher reduction in their future cost of persuasion, they should expect a lower reduction in their future cost of convenience. Thus, while our findings alert firms in such industries to the financial benefits of customer satisfaction, especially in terms of lowering the future cost of persuasion, they also highlight the need to re-evaluate firm efforts to understand customers in order to allocate spending to provide convenience. Furthermore, our results also indicate that firms in industries with lower growth and labor intensity should expect smaller reductions in the future cost of persuasion. These findings suggest that firms in such industries should carefully consider whether they are over-investing in selling efforts and not utilizing the benefits afforded by higher customer satisfaction.
Read the authors’ slides for sharing this material in your classroom.
From: Leon Gim Lim, Kapil R. Tuli, and Rajdeep Grewal, “Customer Satisfaction and its Impact on the Future Costs of Selling,” Journal of Marketing.
Go to the Journal of Marketing
Leon Gim Lim is Assistant Professor of Marketing, Tilburg University, The Netherlands.
Kapil R. Tuli is Lee Kong Chian Professor of Marketing, Singapore Management University, Singapore.
Rajdeep Grewal is Townsend Family Distinguished Professor and Area Chair of Marketing, Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC.