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Customer Satisfaction; How good is good enough?

By Pete Babich
Total Quality Engineering Inc., 1992
Introduction
As a result of Total Quality Management
activities, more and more companies are
conducting surveys to measure their
customer satisfaction. Companies are even
advertising survey results. Companies are
very proud of their product's 90% customer
satisfaction levels. Still others boast of 95%
satisfaction. Intuitive logic says the higher
the satisfaction level, the better product.
The business question, however, is how
much satisfaction is good enough? Should
your company invest $100,000 to improve
satisfaction from 95% to 98%? As the
Quality Manager of the San Diego Division
of Hewlett-Packard (HP), I had these
questions put to me by our management
team, and I was hard-pressed for answers.
After an extensive literature search, I learned
how studies showed that it's five times more
costly to recruit a new customer than it is to
keep an old customer, and that dissatisfied
customers tell eight to twenty people about
their bad experiences while satisfied
customers tell only three to five.
These were all interesting facts, but they
didn't satisfy my analytical peers. My
engineering experience has shown that
mathematical modeling provides significant
insight into complex problems, so I decided
to develop a customer satisfaction model.
Defining customer satisfaction
The first step in the modeling process was to
define customer satisfaction. Companies do
this in many different ways. Most surveys
ask the customer to grade his or her
satisfaction on a one-to-five or one-to-ten
scale, where the highest number typically
has a description like "highly satisfied." On
the one-to-five scale, companies define
customer satisfaction as the percent of
customers rating their satisfaction a four or
five. On the wider scale, satisfaction is
generally defined as the percent rating their
satisfaction higher than six.
HP's surveys used a simpler definition. A
satisfied customer is one who would
recommend our product to a friend. This
seemed to make sense. For some of our
mature products, as much as 70% of
purchases were made because of prior
positive experiences or referrals from
associates.
Customers who said they would recommend
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the product to a friend typically add

comments like "And have done so many
times" and "I will only buy HP products."
The small percent of respondants who said
they would not recommend the product
included negative comments such as "I will
never buy HP again!" In almost all cases,
the negative response correlated to a
hardware or software problem or to a
misconception of product expectations. Our
follow-up efforts allowed us to retain many
of these customers, but some didn't even
want to talk to us. Since our surveys only
sampled customers, we had to assume that
there was a finite group of customers who
switched brands due to dissatisfaction with
our product.
Customer dissatisfaction
The concept that satisfied customers
continue to purchase products from the same
company and dissatisfied customers will buy
from another is the fundamental premise of
my model. Even if your company has no
direct competitors, customers purchase
substitute products if they are dissatisfied
with your product. For example, assume
that only one airline company existed:
Terrible Airlines. Although Terrible
Airlines has a monopoly on air travel if its
customers were not satisfied they would
avoid Terrible Airlines and travel by train or
car. The main point is that customer
satisfaction is measured on a relative scale.
It is based on the alternatives customers
perceive they have.
Figure 1 shows my customer satisfaction
model. It assumes a closed system of three
suppliers providing products of comparable
performance and price to a growing
customer base. Customers purchase one
product during each time period. If they are
satisfied with the product, they will always
purchase their next product from the same
supplier. If they are dissatisfied, they will
always purchase their next product from one
of the other two suppliers.
The algorithm to determine how dissatisfied
customers choose their next supplier is a key
part of the model. A simple algorithm
would be to split them equally between the
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other two suppliers. This makes for simple

math, but it doesn't follow intuitive logic.
Once burned, customers are more
discriminating with their next purchase.
They will conduct more research. They put
more value on their associates' experiences.
Complex models can be developed to
describe this process, but in general,
companies with bigger market shares will
have the largest absolute number of satisfied
customers and therefore have the most
referrals. This model assumes that
dissatisfied customers from one supplier will
be distributed to the other two suppliers
based on their current market share. The
model's equations are shown in figure 2.
The equations can easily be put into a
spreadsheet program to allow what-if
analysis. I created my model using
Microsoft Excel. The unit numbers can be
adjusted to show market share for each
supplier. Now that the model is defined, can
it provide insight into tough business
decisions? Figure 3 shows how a product
with 95% satisfaction would compete
against products with 90% and 91%
satisfaction. This example assumes equal
initial market share. Notice that after 12
time periods, the 95% satisfaction product
would basically own the market. Figure 4
shows how that same 95% satisfaction
product would stack up against products
with 98% and 99% satisfaction levels. In
this case, the product would have less than
10% share in 24 time periods.
Figure 5 shows the effect of a market
operating at lower satisfaction levels. It
takes the same satisfaction relationships as
shown in figure 3, but increases the
dissatisfaction levels by a factor of two. As
can be seen in both figures, supplier A
achieves market dominance in both cases,
but does so much faster in the higher
dissatisfaction case (figure 5). This
observation would imply that higher
satisfaction levels make a company more
resistant to competitive moves.
Playing with the model, one observes that
market growth (the G parameter) does not
have much effect unless it is greater than
20% per time period. Rarely does a market
grow that fast, so its effects can generally be
ignored. In high-growth markets it is
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reasonable to expect that initial purchases

are based more on advertising, availability
and price than customer satisfaction, but you
should not overlook the powerful position a
company can have because of high
satisfaction ratings of its other products.
The model predicts a final value of market
share based on fixed satisfaction levels. The
final value is achieved when dissatisfied
customers leaving one supplier are exactly
offset by dissatisfied customers arriving
from other suppliers. At equilibrium (A
t+1
= A
t)
a solution can be derived. I will not
prove the solution, but instead leave it to the
more adventurous reader. For the rest of us
trusting souls, the solutions are shown here:
A
(fv)
=(y+z-x)/(x+y+z)
B
(fv)
=(x+z-y)/(x+y+z)
C
(fv)
=(x+y-z)/(x+y+z)

Where (fv) = final value

These equations quantify the value of

customer satisfaction improvement. Just
about every person in Marketing can
estimate the value of a 1% change in market
share, and if you know how much
investment is required to obtain that 1%
share, you can make business decisions. For
example, assume a product has a
dissatisfaction level of 4% and 25% of those
people complain about noise. Fixing the
problem would require a $100,000
investment. Marketing concludes that every
1% share increase is worth $25,000 profit
per time period. Not many managers would
turn down an investment with that much
payback.
Summary
This customer satisfaction model is not
perfect, and it does not account for
technological advances. Customer
satisfaction is never static and, in most
cases, it is always getting better. The time
period needs to be defined for each product
category. Clearly people don't purchase a
new automobile every month. The model
does, however, provide a first-order method
of quantifying the long-term effect of
customer satisfaction. It points out the need
to measure not only your own customer
satisfaction, but also the satisfaction level of
your competitors. It is also one of the best
tools I have used to share the concepts of
customer satisfaction with new employees.
The model has reinforced my perception that
constantly improving customer satisfaction
is the best way to achieve business success.
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ABOUT THE AUTHOR

Pete Babich, MSEE, is the President of Total Quality Engineering, Inc., a company that
specializes in applying quality engineering principles to improve business competitiveness.
Formed in 1991, TQE provides software, training, and consultation in strategic planning (with
emphasis on Hoshin Kanri), product/process quality and reliability improvement, and customer
satisfaction measurement and improvement. Previously employed by Hewlett-Packard for
seventeen years, he held positions of R&D engineer, Reliability Engineering Manager, and
Quality Manager for the San Diego Division. He is an ASQ Certified Quality Engineer, ASQ
Certified Quality Manager, and a past Malcolm Baldrige National Quality Award examiner. The
author appreciates receiving your comments regarding this paper.
Pete Babich
President ph: +1 (858) 748-2916
Total Quality Engineering, Inc. fax: +1 (858) 748-0427
15997 Grey Stone Road e-mail: pbabich@tqe.com
Poway CA 92064-2363 Web: http://www.tqe.com
This paper may be copied and distributed to others provided it is copied intact and with no
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permission.