Customer Satisfaction, Productivity, and Profitability: Differences Between Goods and Services

There is widespread belief that firms should pursue superiority in both customer satisfaction and productivity. However, there is reason to believe these two goals are not always compatible. If a firm improves productivity by “downsizing,” it may achieve an increase in productivity in the short-term, but future profitability may be threatened if customer satisfaction is highly dependent on the efforts of personnel. If so, there are potential tradeoffs between customer satisfaction and productivity for industries as diverse as airlines, banking, education, hotels, and restaurants. Managers in these types of service industries, as well as goods industries in which the service component is increasing, need to understand whether or not this is the case. For example, if efforts to improve productivity can actually harm customer satisfaction—and vice-versa—the downsizing of U.S. and European companies should be viewed with concern. It follows that developing a better understanding of how customer satisfaction and productivity relate to one another is of substantial and growing importance, especially in light of expected continued growth in services throughout the world economy. The objective of this paper is to investigate whether there are conditions under which there are tradeoffs between customer satisfaction and productivity. A review of the literature reveals two conflicting viewpoints. One school of thought argues that customer satisfaction and productivity are compatible, as improvements in customer satisfaction can decrease the time andeffort devoted to handling returns, rework, warranties, and complaint management, while at the same time lowering the cost of making future transactions. The second argues that increasing customer satisfaction should increase costs, as doing so often requires efforts to improve product attributes or overall product design. A conceptual framework useful in resolving these contradictory viewpoints is developed. The framework serves, in turn, as a basis for developing a theoretical model relating customer satisfaction and productivity. The model predicts that customer satisfaction and productivity are less likely to be compatible when: 1) customer satisfaction is relatively more dependent on customization—the degree to which the firm's offering is customized to meet heterogeneous customers' needs—as opposed to standardization—the degree to which the firm's offering is reliable, standardized, and free from deficiencies; and 2) when it is difficult (costly) to provide high levels of both customization and standardization simultaneously. To move forward from the model's propositions to the development of testable hypotheses, we argue that services are more likely than goods to have the preceding characteristics. Hence, tradeoffs between customer satisfaction and productivity should be more prevalent for services than for goods. Although this classification is not precise—many services are standardizable and many goods have a service component—it has the advantage of allowing an initial test of the propositions. The empirical work employs a database matching customer-based measures of firm performance with traditional measures of business performance, such as productivity and Return on Investment (ROI). The central feature of this database is the set of customer satisfaction indices provided by the Swedish Customer Satisfaction Barometer (SCSB). The SCSB provides a uniform set of comparable customer-based firm performance measures and offers a unique opportunity to test the study's hypotheses. The findings indicate that the association between changes in customer satisfaction and changes in productivity is positive for goods, but negative for services. In addition, while both customer satisfaction and productivity are positively associated with ROI for goods and services, the interaction between the two is positive for goods but significantly less so for services. Taken together, the findings suggest support for the contention that tradeoffs are more likely for services. Hence, simultaneous attempts to increase both customer satisfaction and productivity are likely to be more challenging in such industries. Of course, this does not imply that such firms should not seek improvements in both productivity and customer satisfaction. For example, appropriate applications of information technology may improve both customer satisfaction and productivity simultaneously. The findings should provide motivation for future research concerning the nature of customer satisfaction and productivity, as well as appropriate strategy and tactics for each one. It is worth emphasizing that this is an issue that is not only important today, but certainly will become even more important in the future. As the growth of services continues and world markets become increasingly competitive, the importance of customer satisfaction will also increase. To compete in such a world, firms must strike the right balance between their efforts to compete efficiently and their efforts to compete effectively.