Research Links Customer Satisfaction to Stock Returns

According to research from the University of Michigan, customer satisfaction is directly linked to stock market performance.

Companies with high scores on the American Customer Satisfaction Index (ACSI) and the National Customer Satisfaction Index UK (NCSI-UK) produce higher stock returns than competitors and greatly outperform market indices.

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

“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 finds 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. The study findings were released today, July 5.

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.

The American Customer Satisfaction Index (ACSI) is a national economic indicator of customer evaluations of the quality of products and services available to household consumers in the United States.

The Index was founded at the University of Michigan’s Ross School of Business and is produced by ACSI LLC. This methodology has been adopted worldwide as a leading macro- and micro-level indicator by universities, governments, and countries including the United Kingdom’s National Customer Satisfaction Index (NCSI-UK), Sweden, Singapore, Korea, Turkey, South Africa, Mexico, Colombia, Dominican Republic, Indonesia, and Barbados.

Founded in 1988 by University of Michigan professor Claes Fornell, CFI Group is a global organization in customer satisfaction measurement and management.