Customer Service: When Service Means Survival

Posted on February 18

Corporate managers tend to focus on the importance of good customer service, but money managers haven’t paid nearly as much attention to service when picking stocks.

A 2006 study by University of Michigan Ross School of Business Professor Claes Fornell, who directs the National Quality Research Center, found that his group's quarterly release of customer service ratings had little immediate impact on stock prices. But Fornell and other researchers have found that investors can profit over the longer term from the scores, known as the American Customer Satisfaction Index (ACSI).

Related story: Customer Service in a Shrinking Economy
Table: Will Better Scores Boost Shares
Video: Customer Service and Investing

While BusinessWeek's rankings are derived from J.D. Power customer satisfaction data (see When Service Means Survival and this year's list of customer service champs), academics studying the connection between customer service and stock performance have often used the publicly available ACSI data, which goes back to 1994. A recent study—conducted by Vanderbilt University’s Owen Graduate School of Management Professor Bruce Cooil and four co-authors—looked at the predictive value of quarterly customer satisfaction scores from 1996 through 2006. Buying all of the companies with high scores wasn’t a consistent winning strategy. But a portfolio of companies whose ACSI scores had risen over the past year and were above the national average far outperformed the market, gaining an average 1.08% per month. Over the 10-year period, the portfolio more than tripled, gaining 212% while the Standard & Poor's 500-stock index rose 105%. Companies whose scores had declined and were below average lagged the market, losing 2%.

For the current market, the study also uncovered a more sophisticated strategy that could reduce risk. An investor who bought the above-average and rising-score portfolio and simultaneously sold short the below-average and falling group had slightly better performance over the 10-year period with much less volatility.

Each quarter’s release of ACSI scores, generated from telephone polling of about 65,000 consumers a year, covers different sectors. Fourth-quarter scores, released on Feb. 17, included traditional retailers, banks and insurance companies, and e-commerce vendors. Of 65 company scores released, 13 public companies outpaced the national average of 75.7 with scores that had also risen over the previous year—including Kroger, CVS, and MetLife. Twelve public companies underperformed the national average with scores that had also declined, including Macy's and Aetna.

The link between ACSI scores and stock prices continued in the most recent downturn, according to Fornell. For example, retailers that improved ACSI scores in 2008 saw share prices fall 30%; the S&P 500 declined 38%. Merchandisers with declining scores saw shares plunge 57%. “Companies that improved customer satisfaction were punished less,” says Fornell.

See an expanded version of this table

WILL BETTER SCORES BOOST SHARES?

When a company’s customer satisfaction score has improved over the prior year’s results and is above the national average (currently 75.7), studies show its shares have a good chance of outperforming
the broad stock market in the long run.

By Aaron Pressman