Customer Satisfaction and Cash Flow Stability

Value LeveragingGruca, T.; Rego, L. · 2005Journal of Marketing
Topicscustomer satisfaction·acsi·cash flow·shareholder value·cash flow volatility·hierarchical bayes

Imagine you must decide whether customer satisfaction belongs in your financial case for marketing investment. Your finance team calls it a soft metric with no clear tie to cash flow. Satisfaction here means a firm's score on the American Customer Satisfaction Index. Should it go into the case and into finance's forecasts?

Higher customer satisfaction predicts faster-growing, steadier cash flow the next year.

Data chart

Each satisfaction point is linked to more and steadier cash flow

For a one-point rise on the 100-point American Customer Satisfaction Index: extra next-year net operating cash flow for the sample's average firm, in millions of dollars, and the reduction in next-year quarterly cash flow variability relative to the whole market's variability, in percent.

+55Million dollars more cash flow next yearfor the average firm4%Lower cash flow variability next year,at minimum
  • Each point predicts $1.01 more cash flow per $1,000 in assets.

Higher customer satisfaction is associated with both more next-year cash flow and lower cash flow variability.

Associations from 840 firm-year observations for growth and 735 for variability across 23 industries, 1994-2002. The $55 million illustration applies to a firm with about $54 billion in assets; the scalable estimate is $1.01 per $1,000. Variability compares quarterly standard deviation divided by average cash flow with the equivalent whole-market measure, represented by the Wilshire 5000 index. The paper interprets its estimate as more than 4% lower variability, not exactly 4%; the underlying log-scale estimate is -.04129. Source basis: paper pp. 119 to 120, 124 to 125, 127.

Data chart

Satisfaction improves cash flow forecasts

Average size of the forecast miss as a percent of the actual value, for next-year cash flow growth and variability, when each forecast predicts the three most recent years held out from its fitting data; lower is better.

Financial inputs onlyFinancial inputs plus satisfactionCash flow growth forecast error19%26%Cash flow variability forecasterror38%45%
  • Compare the forecast errors within each outcome.

Adding satisfaction to financial inputs reduces forecast error for both cash flow growth and variability.

Predictions for the three most recent years held out from the data used to fit each forecast. Exact errors: growth 25.58% with financial inputs only and 19.33% with satisfaction added; variability 44.59% and 37.74%, respectively. Both rows measure forecast error, not the size of satisfaction's cash flow benefit. Source basis: paper p. 126 and Table 7, p. 128.

Action guide

  1. Make every satisfaction investment case cover growth and stability.Satisfaction is linked to both, and the two may trade off, so agree with finance which matters more for shareholder value.
  2. Test satisfaction in finance's forecasts before adopting it.Have finance add it to forecasts built on current cash flow and earnings, and compare errors with and without it.
  3. Base category assumptions on your own evidence.Because the link with growth varies by product type, have finance and category teams test it by category before replacing a firmwide assumption.

Evidence

  • Each extra point of customer satisfaction is associated with about $1.01 more net operating cash flow the next year per $1,000 in assets, roughly $55 million for the sample's average firm.
  • Each point is also associated with more than 4% lower cash flow variability the next year, measured as how much a firm's quarterly cash flow varies relative to the market's.
  • Forecasts of the three most recent years, built from earlier data, have a lower average error for both outcomes when they include satisfaction. The growth error falls from about 26% to about 19%.
  • Firm differences account for about 53% of the spread in cash flow growth, and industry differences about 35%. For cash flow variability, industry accounts for about 54%.
  • Satisfaction has stronger links with cash flow growth and stability for frequently purchased products than for expensive, rarely purchased ones. For automobiles and long-distance telephone, the link with growth is negative; low switching costs may explain the telephone result. In hotels and airlines, satisfaction may build loyalty and reduce customers' focus on price.

Key takeaway

Treat customer satisfaction as a leading indicator of cash flow growth and stability.

Limitations

The evidence covers large US firms that sell to consumers, in 23 industries the American Customer Satisfaction Index tracked from 1994-2002, not smaller, private, business-to-business or non-US firms. The links do not show cause, and industry patterns were not tested one by one.

Source

Gruca, T., & Rego, L. (2005). Customer Satisfaction, Cash Flow, and Shareholder Value. Journal of Marketing, 69(3), 115-130. https://doi.org/10.1509/jmkg.69.3.115.66364.

Exact values behind the rounded figures: $1.01 more next-year net operating cash flow per $1,000 in assets and the paper's $55 million illustration for a firm with $54 billion in assets; 25.58% and 19.33% growth forecast errors, and 44.59% and 37.74% variability forecast errors; growth variance shares of 52.73% for firms and 34.98% for industries, and a 53.92% industry share of variability variance.