By Vikas Mittal

Recently, one of my academic colleagues said: “Customer satisfaction is so yesterday. There are so many new metrics like customer engagement. It’s high time we abandon customer satisfaction.” That same afternoon, I was in a meeting with the vice president of strategy for an engineering company with approximately $10 billion in revenue, who said, “Our board wants to increase sales, margins and stock price, so they need to see improvements in promoter scores. That’s what they want, and that’s what we will deliver.”

Both conversations got me thinking about the value of different customer metrics. Executives are confronted with a variety of metrics, such as customer satisfaction, complaints, recommendations, repurchase and net promoter scores. Which metric should they adopt? The market for ideas is efficient and evolving. On the one hand, we should embrace the notion that new customer metrics keep surfacing. On the other hand, executives need an evidence-based approach to separate the wheat from the chaff.

To select the right customer metric, executives need to consider two factors. First, they should focus on a customer metric that is an enduring practice, not a fad. Rather than over-simplifying, a customer metric should mirror the complexity of a customer-centric firm, the needs of its customer base and the ability to implement specific customer-based initiatives. An enduring customer metric will not be a magic bullet. Second, an enduring metric should show evidence for improving sales, margins, cash flow and market share. By adopting and improving scores on the customer metric, executives should show demonstrable improvement in sales, margins, market share and other financial metrics.

Customer Metrics that Matter for Financial Outcomes

At the crux of measuring customer metrics—whether net promoter scores, engagement or satisfaction—is the belief that improving these scores will improve financial outcomes for a firm. How true is this belief, and is it supported by evidence? If the evidence does not support a link between a customer metric and financial outcomes, what good is the metric as a strategic planning tool?

A 2006 study of 80 different companies over six years (1994-2000) sought to answer this question. The authors of the resultant paper, “The Value of Different Customer Satisfaction and Loyalty Metrics in Predicting Business Performance,” statistically compared the ability of several survey-based customer metrics to predict key financial outcomes. They compared five customer metrics: average customer satisfaction, customer complaints, repurchase intentions, net promoter score and word-of-mouth recommendations. They wanted to answer one question: Do any of these customer metrics statistically predict sales growth, gross margin, net operating cash flow, market share and shareholder return?

Before you read any further, do a thought experiment to test if you have a bias. Which one did you pick as being best able to predict these financial outcomes? The table below shows the results.

Only three metrics—customer satisfaction, repurchase intention and complaints—predict sales growth and gross margins. When it comes to operating cash flow and shareholder return, only customer satisfaction has any predictive ability.

The only customer metric that predicts and improves all five financial outcomes is customer satisfaction. The next-best metric is repurchase intention, predicting three of the five outcomes. Whether a board wants to grow sales, improve gross margins, increase cash flow, expand margins or create shareholder value, the one customer metric to grow is customer satisfaction.

Net promoter scores were related to zero out of five financial outcomes. Another study in the Journal of Marketing, “A Longitudinal Examination of Net Promoter and Firm Revenue Growth,” examined results from 21 companies and more than 15,000 interviews to find the same conclusion. “Managers have adopted the net promoter metric for tracking growth on the basis of the belief that solid science underpins the findings and that it is superior to other metrics. However, our research suggests that such presumptions are erroneous,” the authors of that study write.

Fad and Enduring Practices

Management fads are simple, prescriptive, falsely encouraging and lack scientific evidence for their efficacy, yet most followers believe they work. Net promoter scores are not backed by any credible evidence of financial predictive ability but have caught on because they seem simple (one item measures it all), prescriptive (you can compute the promoter score for every customer segment) and falsely encouraging (increasing promoter score is believed to increase sales, revenue, share and profits).

In contrast, customer satisfaction is backed by credible evidence and provides a well-established framework for customer-based execution and strategy. To pull it off, an executive must work with trained statisticians to identify key drivers of satisfaction, understand their relative weights, derive the link between customer satisfaction and financial outcomes, and then make investments to improve key attributes. None of this is simple, nor does it provide false encouragement that satisfaction is the cure-all remedy. Research on customer satisfaction shows that very high satisfaction can be costly for companies, and satisfaction has differential effectiveness for different outcomes.

Satisfaction Mismatch

A 2017 study published in the Journal of the Academy of Marketing Science, “Do Managers Know What Their Customers Think and Why?,” examined 70,000 customers and 1,068 managers from 97 different companies to determine if manager perceptions of customer satisfaction are aligned with customer perceptions. The study showed three results: First, managers overestimate the extent to which customers are satisfied and loyal. Second, managers underestimate the extent to which customer satisfaction drives complaints and loyalty by almost 40%. Third, when manager perceptions are misaligned with customer perceptions, customer satisfaction suffers.

For customer-based strategy, these findings mean that not only are most customers less satisfied than managers believe, but most managers underestimate the loyalty benefits of satisfying customers. This leads to further declines in customer satisfaction. Disheartened, managers chase fads like net promoter scores, which lead to further declines in customer satisfaction. Caught in a vicious trap of chasing fads, executives let customer satisfaction, a proven metric, suffer and negatively impact customers and investors.

Now What: Back to Basics

Rather than chasing fads, executives will benefit from going back to basics that help them measure customer needs. To fully incorporate customer needs in the planning process, executives should use a holistic approach that provides concrete guidance for customer-based execution and strategy. Such an approach—measuring customer satisfaction and its components—paints a realistic portrait of customer needs. For senior executives, it provides a roadmap for financial management by predicting sales, margins, cash flow, market share and stock market value. Thus, customer satisfaction can serve as the one metric that advances the cause of customers and shareholders in unison.

When executives chase fads instead of staying focused on customer satisfaction, customers lose with lower satisfaction, investors lose with lower financial performance, and the firm loses to competitors. To avoid this trap, executives need to remind themselves that their main objective is to satisfy customers and create value for investors, not chase fads.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at the Jones Graduate School of Business at Rice Univeristy. 

This article first appeared American Marketing Association's Marketing News as​ Which Customer Metric Best Predicts Financial Performance?

By William M. Arnold 

Recent media attention questions the future of shale oil production in the U.S. Will capital discipline put a brake on growth or will domestic production rise to the point of undermining prices again? As so often in business, it’s the investors who will make the call. 

In the first inning of the shale boom, from 2009 to 2014, the mostly small players raced to lock up prospects by leasing land and drilling — but not necessarily completing — wells. These are the “DUCs” (drilled but uncompleted) described in many articles.

It was a land grab of epic proportions, the energy equivalent of “shooting the moon” in a card game of hearts. But even before the oil price collapse in late 2014, that strategy caused problems for overextended companies, such as Oklahoma’s Chesapeake Energy Corp.

In the second inning, from early 2015 to mid-2017, bravado turned into bankruptcy for hundreds of players and there was incessant pressure on suppliers to reduce costs. But the collapse of market prices also provided the focus that was missing in the early years.

Companies had to concentrate on their best prospects and exert cost discipline in all operations. Good operators found, sometimes to their surprise, that they could operate profitably with prices in the range of $40 to $50.

We are in the third inning now, with apparent oil price stability of $60 to $65 in the U.S. and topping $70 for North Sea-based Brent. Investors won’t tolerate backsliding to the practices of the first inning and will demand that producers, well, produce. They can complete those DUCs and use the cash flow to finance further activity.

Performance in future innings will depend on geology, technology, operational efficiency, OPEC and capital availability.  

Mother Nature was fickle in how she placed resources. To deal with that, companies continuously develop and apply technology to compensate. Horizontal drilling and fracking enabled production from rock-hard, linear formations rather than the “straw in the glass of Coke” that many people understand oil production to be. 

While there are concerns about rising costs from equipment and service suppliers, the industry continues to innovate with more wells on a single platform and increasingly apply sophisticated data analytics.

They have even found they don’t need to import trainloads of fracking sand from Michigan; there is plenty of sand in West Texas that meets specs.

Saudi Arabia has made disproportionately large cuts to its production to balance markets and persuade even non-OPEC countries such as Russia to participate. This is in contrast to the end of the first inning, when OPEC thought a price collapse would kill off the shale revolution in the U.S.

For more than a year, Saudi Aramco has been in discussions for an initial public offering (IPO) that reportedly might cover about 5 percent of its reserves, for about $100 billion. That has been postponed until 2019.

Saudi has a stake in keeping prices high to get the best valuation for that IPO. The question is the extent Saudi Arabia and OPEC are willing to be the swing producers to accommodate unprecedented levels of U.S. production.

Capital availability is the final element, and it covers a lot of actors. Traditionally, investors bought shares in the majors because of their long-term record, potential upside from exploration and portfolio balancing from the midstream (pipelines) and downstream (refining and marketing).

This model came under attack in 2011 when activist investors persuaded ConocoPhillips and Marathon to break up into separate companies focused on either exploration or refining. Investors increasingly want to develop their own risk portfolios, not have company management do it for them.

The shale play brought in new investors who wanted to stake qualified management teams who were unencumbered by legacy assets. They sought returns that were closer to 20 percent than the more modest returns of the majors.

What we now have is a wider range of investors with risk profiles along a spectrum. Some want steady income, stock buybacks and reliable dividends. Others want even less volatility and may settle for utility returns, which they see as possible as domestic oil production takes on manufacturing characteristics. Still others want to support higher-risk return investments, whether in West Texas or East Africa.

The reality is that market conditions, attitudes of investors and operational performance will determine U.S. oil production in the next few innings. OPEC can accept this or make a “lose-lose” decision; again.

William M. Arnold was a professor in the practice of energy management at the Jones Graduate School of Business at Rice University. 

This article first appeared on The Hill as Shale Boom Is In The 3rd Inning; Investors To Decide How The Game Plays Out. 

By Vikas Mittal

Nonprofit organizations differentiate themselves from traditional businesses by their profit focus. Of course, businesses are customer-focused — they exist to make money from their customers. Nonprofits believe they exist to fulfill a mission and vision and to meet every stakeholder’s needs. All too often fulfilling the mission becomes a self-fulfilling prophecy that distracts nonprofits from meeting the needs of their customers. Confusing myriad stakeholders, such as employees and suppliers, with customers, nonprofits can become internally focused, dedicating themselves to costly initiatives that consume organizational resources but do not improve customer satisfaction.

Nowhere is this more evident than in one of the largest nonprofit enterprises worldwide, the U.S. K-12 public school system. The superintendent of an underperforming school district told me the district’s strategy was based on key initiatives, such as “data-driven decision-making” and “aligning cultural values.” The former initiative led millions of dollars to be dedicated to data management systems, and the latter led to extensive training and countless culture-building exercises. Proud of its investments, the district leadership remained puzzled as to why its customers — students and parents — were leaving the district for private, charter and home-schooling options.

We conducted a district-wide study to measure the state of parent satisfaction in the district. It revealed low parent satisfaction driven by low academic standards, perceptions of unsafe schools and perceived lack of parent engagement. When asked about the disconnect, the superintendent responded, “Of course we care about parents. That is why we are completely focused on data-driven decision-making and cultural alignment. These initiatives reinforce our mission to become the best school district possible.”

What’s causing the disconnect? The school district started with its mission, not with the needs of its customers. This systematically subordinated the customers’ needs to the mission, values and vision of internal stakeholders — teachers, staff and administrators. Though all the stakeholders claimed to care about customers, they were really driven by an inward-looking approach. As a result, the district invested more in internal initiatives that did little to satisfy customer needs. Dissatisfied, the customers migrated to other providers. This migration only dampened the morale among front-line employees, with the district declaring an intensifying need for cultural alignment. The downward spiral of lowered customer satisfaction, followed by the launch of internally focused initiatives, continued unabated, even as a growing number of students and parents sought to explore other options.

The way out of this spiral involves embracing lessons learned from successful businesses.

Define Your Customer, Unambiguously

Strong organizations are customer-focused. They do not confuse their customers with other stakeholders — even as they recognize the importance of other stakeholders in satisfying customer needs. While it is fashionable to lump all stakeholders in the same bucket and treat them as customers, it is strategically dysfunctional to equate customers with other stakeholders.

Consider a nonprofit such as a hospital. Nurses, physicians, pharmacists, administrators and suppliers are a hospital’s stakeholders. Its customers include patients and their families. Most stakeholders are a component of the value chain that should satisfy customer needs. Every nonprofit should ask itself: “Mission aside, whose needs does the nonprofit organization exist to serve?” Hospitals exist to serve patients, not physicians or nurses. Schools exist to serve students and their parents, not staff and administration.

Start by Satisfying Customer Needs

Satisfying customers’ needs should be the starting point for conceptualizing any nonprofit organization, not a distant byproduct of activities, processes and initiatives.

Profit-oriented businesses are much better at starting with their customers’ needs. Walmart understands the importance of satisfying its customers through low prices, convenience and variety. Amazon starts with the premise that it is critical to satisfy its customers through convenience and competitive pricing. Apple satisfies its customers through innovative products, online engagement and unparalleled service. For these businesses, the linkage of customer satisfaction with sales, profits and shareholder value is clear.

Nonprofits have a harder time understanding the benefits of satisfying their customers, but they should not. A strong body of evidence shows that patient satisfaction is associated with increased compliance, better clinical outcomes and improved patient health. In education, our research shows higher parent satisfaction is associated with improved academic performance, lower dropout rate and higher student retention. These nonfinancial outcomes are critical to the survival of nonprofits, and they are driven by customer satisfaction.

Identify Satisfaction Drivers

Smart businesses have a clear understanding of their satisfaction drivers. Walmart, for example, understands that overall customer satisfaction is based on low prices, convenience and variety. Many nonprofits have very little, if any, insight into the drivers of their customers’ overall satisfaction. Hospitals may not understand the relative weight of the check-in process, physician interaction, nursing support or the cleanliness of facilities as drivers of overall patient satisfaction. Public schools may not know the relative importance of family engagement, safety, academics, extracurricular activities, school leadership, teachers and academic standards.

Nonprofits should identify the drivers of overall customer satisfaction and ascertain their relative importance to achieve high levels of customer satisfaction. The process of identifying satisfaction drivers cannot be accomplished by ad hoc engagement initiatives, focus groups or one-off surveys. Rather, it entails a structured and systematic survey process to listen to the customer’s voice and measure overall satisfaction, satisfaction drivers and customer loyalty.

To illustrate this process, my colleagues at Rice University and Texas A&M University conducted a nationally representative study of more than 7,000 parents of schoolchildren to measure overall satisfaction and its drivers. Overall satisfaction was found to be unambiguously associated with student retention, academic performance and attendance. Overall satisfaction with schools was found to be driven by family and community engagement, school safety and academics. Interestingly, extracurricular activities did not drive overall satisfaction.

These results suggest public schools need to focus on family and community engagement, followed by safety and academics to improve satisfaction. The study identified several levers for improving family and community engagement, including creating opportunities for parents to be involved in school activities and give input on important school policies, as well as communicating with parents.

What Now?

Nonprofits that start with the fundamental premise of satisfying their customers’ needs will also prioritize initiatives that support a customer focus. Their planning process will provide concrete guidance for a customer-based execution and strategy that clearly measures customer satisfaction, identifies satisfaction drivers and provides a roadmap for achieving meaningful outcomes on the customer’s behalf. For such an enlightened nonprofit, customer satisfaction serves as the focal metric that singularly advances the cause of customers while also aligning other stakeholders.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at the Jones Graduate School of Business at Rice Univeristy. 

This article first appeared American Marketing Association's Marketing News as What For-profit Businesses Can Teach Nonprofits About Customer Satisfaction.

Based on research by Douglas A. Schuler, Nicolas M. Dahan and Michael Hadani

• Codes of conduct for corporate political activity involve a high degree of managerial discretion, which makes them vulnerable to abuse. 
• While government regulations require transparency and limit the methods corporations can use to influence policymakers, the rules are often vague or easily skirted. 
• Corporate spending on political activity has only increased since a 2010 Supreme Court ruling lifted limits on campaign contributions. 

Joseph Cassano was generous with his friends in Washington. The former AIG executive personally donated more than $10,000 to Connecticut Senator Chris Dodd, for example, when the lawmaker was chairman of the Senate Banking Committee.

But that amount is negligible when compared to the more than $180 billion in taxpayer money AIG later received as a bailout. As head of the insurance giant’s financial products division, Cassano appeared to topple the first domino in the global financial crisis of 2008, leading Vanity Fair to dub him “the man who crashed the world.”  

Cassano may have emerged as a clear villain in the 2008 meltdown, but a murkier issue is whether corporations and policymakers should be so closely intertwined in the first place. Corporate wining and dining of political figures is nothing new, of course, but it’s become more of a hot-button issue in recent years, thanks in part to high-profile scandals like AIG’s. 

Should corporations involve themselves in politics at all? And if so, how should corporate political activity be governed? These are the questions Rice Business Professor Douglas A. Schuler set out to answer in a recent journal article, co-authored with Nicolas M. Dahan at California State University, Monterey Bay and Michael Hadani of St. Mary’s College of California. 

The implications of corporate political activity are immense — especially following the Supreme Court’s 2010 Citizens United v. FEC decision, which eliminated limits on corporate campaign contributions as long as they were independent of a party or candidate. That ruling has resulted in corporate donations of millions of dollars to so-called PACs, or political action committees, since the ruling. 

Donations of this scale raise eyebrows — and more questions, Schuler and his team say. Do firms have a legitimate right to influence public policy? Is there a point where they become excessively influential? These questions underlie the viability of democracy as a whole, they argue. Some scholars believe that the disproportionate power of corporate interests can generate public decisions that undermine the common interest and can ultimately cause economic stagnation and the decline of nations. 

So what’s the solution? Do we need more government oversight of corporate political activity? The researchers point out that the U.S. has long had legal standards governing such activity, from the 1946 Federal Regulation of Lobbying Act to the 2007 Honest Leadership and Open Government Act, plus a host of court decisions over the years. The existing regulatory framework sets fundamental requirements of transparency and limits the methods corporations can use to influence policymakers. 

But these regulations may not go far enough, the authors caution. For one example, most of the safeguards operate only on the federal level. On the state level, regulations can be loose or vague — or strict but easily skirted, as the federal safeguards themselves can be. 

On the other hand, corporations could be expected to govern their own political activity. In fact, that’s what the majority opinion in Citizens United argues — that corporate political activities can and should be assessed and controlled by corporate boards. 

Most large firms have already created codes of conduct for governmental affairs. But putting those codes into practice involves a high degree of managerial discretion. And that, the authors say, creates a similarly high risk of abuses, as AIG’s misdeeds demonstrated. In addition, the process of influencing public policy encompasses a long and complex web of interactions: everything from campaign contributions to lobbying to public relations and grassroots campaigns. This makes it virtually impossible for shareholders and their boards to monitor political activity closely. 

Even if corporate boards and executives are able to monitor political activity, it’s more likely than not that they’ll have no idea what they’re looking at. In a 2001 survey of public affairs professionals at Fortune 100 firms, 77 percent said they believed their top executives had little understanding of the political environment and how it impacted their firms — a “dangerous state of ignorance,” according to the survey’s authors. 

Schuler and his colleagues concluded it was “highly doubtful” that most corporations would keep close enough tabs on their own political activities. The best chance of ensuring ethical levels of corporate political influence, they said, would be to require stricter government regulation, especially in making these activities transparent. 

Before the Citizens United decision made it easier for corporations to influence politics, corporate political activity was already problematic and prone to abuse, as crises like the AIG collapse made clear. Quoting John C. Coates, a law and economics professor at Harvard Law School, the authors concluded: “Shareholders were not able to protect themselves from misuse of corporate funds for political purposes prior to Citizens United, and the risk of such misuse has increased as a result of the decision.” 

Douglas A. Schuler is an associate professor of business and public policy in the Jones Graduate School of Business at Rice University.

To learn more, please see: Dahan, Nicolas M., Michael Hadani, and Douglas A. Schuler. 2013. The Governance Challenges of Corporate Political Activity. Business & Society 52 (3): 365-387.

By Vikas Mittal

Wells Fargo recently paid a $185 million fine and fired 5,300 employees for opening customer accounts, many of them fake. The employees did this to achieve the goal of building customer loyalty through cross-selling. Under the credo "cross-selling to current customers helps strengthen their relationship with the Wells Fargo," employees were incentivized to show results (i.e., open more accounts). Interviews with employees showed they felt pressured to open more than two million deposit and credit card accounts without customer authorization.

On September 9, a former Volkswagen engineer pled guilty in the emissions-cheating case. The reason for this illegal behavior: an attempt to build customer loyalty by showing customers (unsubstantiated) enhanced product performance. Essentially pressured to increase sales and customer retention, engineers installed illegal software that showed the vehicles had lower emissions. Now Volkswagen has been barred from selling diesel vehicles in the United States, and VW America is offering a $2,000 customer loyalty incentive toward the purchase or lease of any new VW gasoline or hybrid model.

When asked, CEOs of most companies say improving customer satisfaction and customer loyalty is an imperative for their companies. And why not? Activities that create value for customers are core to the definition of marketing. How, then, do we end up with a situation where employees behave in ways that are detrimental to customer value and to the employee’s own welfare?

As the above examples show, when companies focus on customer loyalty at the expense of customer satisfaction, they hurt both their employees and their customers. CEOs and CMOs can become too focused on customer loyalty behaviors: more sales, more retention, more cross-selling, more share of wallet. Sometimes this focus can be so strong that employees feel they can bypass customer satisfaction and focus directly on customer loyalty. This can be a mistake. Customer satisfaction is the foundation of customer loyalty.

Companies benefit when their employees are focused on increasing customer satisfaction. When customers are satisfied, they will be naturally inclined to become loyal to the company. This puts in place a virtuous cycle of ever-increasing satisfaction and loyalty. However, when companies focus only on customer loyalty, they can do things to actually dissatisfy customers. This is what seems to have happened at Wells Fargo and Volkswagen.

So, what are three lessons we can take away from Wells Fargo and Volkswagen to avoid the trap of spurious loyalty?

1. Don’t try to improve customer loyalty at the expense of employee welfare, or vice versa.

Both employees and customers are critical stakeholders for a firm’s long-term valuation. A 2016 study in the Journal of Marketing Research examined data from 4,643 firms spanning 1994 to 2010. The goal of the study was to understand the association between a firm’s employee-oriented achievements and customer-oriented achievements. Only companies that simultaneously achieved superior customer-oriented achievements and employee-oriented achievements had higher long-term financial values. Shareholders understand and expect firms to watch out for the interests of both stakeholders.

The implication is to incentivize employees to engage in activities that increase customer satisfaction—not spurious loyalty—so that firms can reap the benefits of increased customer satisfaction. One of those benefits is an increase in real customer loyalty. Customer loyalty, without customer satisfaction, can be deleterious to a firm and its employees.

2. Employee activities affect firm performance through customer satisfaction.

There seems to be a belief that, somehow, satisfied or engaged employees can directly affect firm performance, bypassing customer satisfaction. Rigorous scientific research, however, has debunked this notion.

A recently published study in the Journal of Marketing Research found that employee engagement affects firm performance, but only through customer satisfaction. Analyzing data from 120 different companies over two time periods, the research study showed that the benefits of employee engagement on firm performance are delivered through customer satisfaction. In other words, only if employee engagement leads to customer satisfaction would firm performance be enhanced. CEOs who are interested in enhancing firm performance need to understand the implications of this finding.

The implication is to focus on increasing employee engagement via activities that enhance customer satisfaction. If you engage your employees to directly affect customer behaviors but ignore customer satisfaction, your company will not improve its performance. Worse yet, the quest for spurious loyalty will erode customer satisfaction and motivate employees to do illegal/unethical activities.

3. Improved customer satisfaction improves firm performance through real, not spurious, loyalty.

What do satisfied customers do differently than dissatisfied customers? This question has been answered in many marketing studies. Relative to dissatisfied customers, customers who are more satisfied are more likely to:

• Have a higher share of wallet for your brand,
• Repurchase your brand at a higher rate,
• Display higher cross-buying of different products and services,
• Engage in more positive word of mouth for your brand.

These loyalty behaviors help lower the costs of customer acquisition and improve the base of retained customers. No wonder, customer satisfaction is king!

In life, there are no shortcuts. This is true for companies hoping to build true customer loyalty. True customer loyalty must be based on customer satisfaction. Spurious loyalty, like a sugar rush, can feel good, but it is ultimately dissatisfying and bad for your health.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at the Jones Graduate School of Business at Rice Univeristy. 

This article also appeared on American Marketing Association's Marketing News as Avoiding the Trap of Spurious Loyalty: Lessons from Wells Fargo and Volkswagen.

Q&A with Rice Business Professor Hajo Adam (former Rice Business professor) 

While a spoonful of sugar does indeed help the medicine go down, a smidge of angry dust can actually sweeten the outcome of business negotiations, recent research shows.

In a new paper coauthored with Jeanne Brett of Northwestern University titled “Everything in Moderation: The Social Effects of Anger Depend on Its Perceived Intensity,” former Rice Business Professor Hajo Adam suggests that successful negotiators should consider not just whether to show ire – but exactly how.

“Scholars have repeatedly asked if it is good or bad to express anger in negotiations,” the authors write. “The current research indicates that negotiators should not just contemplate whether or not to express anger toward others, but also how to express anger toward others."
 
The researchers found that as displays of anger intensity increased, the concessions made also increased. But at a certain point, as anger intensity visibly spiked, concessions from the other negotiator dropped. 

So moderation, a lifelong ambition for many in their personal lives, also is key in deal making. Adam discussed his findings with Rice Business Wisdom.

RBW: People have a hard time defining moderation in terms of diet, but it is vital for overall health. How can we find the right temperature for anger when conducting a negotiation?

HA: It depends on your goal for the negotiation. If your goal is to establish a good relationship with your counterpart, research shows that expressing anger will generally prevent you from reaching that goal. If your goal is to gain some concessions from your counterpart, research shows that expressing anger with moderate intensity can enable you to reach that goal. If your anger becomes too intense, however, it will start to backfire. The key is to convey that you are angry in a way that is sufficiently clear, but without being inappropriate. Where exactly that threshold lies likely depends on the negotiation context, the relationship between the negotiators and the negotiators themselves.
 
RBW: Is the ability to moderate anger displays a skill that can be learned, or an art that only a few can finesse?

HA: I have not done research on this specific question. However, I have run studies in which we simply instructed participants to express anger and gave them some specific recommendations about how to do so. Most of our participants were undergraduates, so presumably they were not very experienced with expressing anger in negotiations. However, on average, they were still able to follow our instructions and express anger in order to extract larger concessions from their negotiation counterparts.

RBW: Are there applications for experimenting with anger expression in other arenas in life? 

HA: I think it would be interesting to explore the effects of expressing anger of different intensity levels in other areas as well. For example, prior research shows that police interrogators or bill collectors need to get angry to perform well at their jobs. It is possible that in these situations, anger displays of high intensity are more effective than anger displays of low or medium intensity.
 
RBW: Other areas of your research in business negotiations indicate that being unpredictable can help in gaining the upper hand. Is a measure of anger part of that approach, or to be used separately?

HA: In our previous research, we actually manipulated being unpredictable by having negotiators oscillate between expressing anger and happiness throughout the negotiation. So in a way, we manipulated emotional unpredictability, and anger was very much part of that approach.
 
RBW: If both sides have these skills, how do you avoid coming to a stalemate?

HA:  I am not sure I would call these behaviors “skills,” but as long as the anger expressions are kept at a reasonable level, it will hopefully not detract too much from a meaningful discussion of the negotiation issues, so that an impasse can be avoided. Of course, if both parties get very frustrated and start yelling at each other, the conflict can escalate quickly and a stalemate becomes more likely. If time allows, I would recommend taking a break to calm down and restart the negotiation with cooler heads.
 
RBW: Once anger displays enter the negotiation, how do negotiators decide if they are facing healthy bargaining tactics or behavior that is simply outlandish?

HA: As mentioned above, where exactly that threshold lies likely depends on the negotiation context, the relationship between the negotiators and the negotiators themselves. For example, in some of my early work I show that expressing anger of moderate intensity elicits larger concessions from European-American counterparts – but the same anger expressions backfire and elicit smaller concessions from East Asian counterparts. So contextual factors can always influence how much anger is perceived as appropriate.

RBW: Is there anyone in the public eye who is particularly good or bad at this moderation?

HA: Nobody comes to mind because we do not often see famous people in actual negotiation situations. High stakes negotiations usually take place behind closed doors.
 
RBW: I distinctly remember when my three-year-old saw a bicycle, she reminded me how much she loved me, and then she asked for the bike. I knew I was being had, and that I was headed for a lifetime of shrewd negotiation. So she didn’t get the bike. Still, if she'd thrown a fit, I'd have been even less inclined to give in. If she had deftly applied just a touch of anger, though, might she have gotten that bike?

HA: Yes, this is exactly in line with our research. Throwing a fit is akin to expressing high-intensity anger. We perceive it as inappropriate, and in the case of our children, we also want to teach them that this behavior is unacceptable, so we are even more motivated to not concede but stand our ground instead.
 
RBW: Why do we seem to have to devolve to get what we want? Where is it that one learns that some petulance works better than "kissing up"? 

HA: To be clear, I see expressions of anger as a last resort in a negotiation. In general, I recommend a more positive approach. However, when you see that a more positive approach is not working, but you need to reach a deal because you do not have any alternatives, then you need to resort to other tactics in order to move the negotiation forward. Expressing anger can be one such tactic. Without it, your counterpart may not realize that you are not happy with how things are going. So it is important to communicate your discontentment – either verbally and explicitly, or more subtly through emotions like anger.

Hajo Adam is a former assistant professor of management at Jones Graduate School of Business at Rice University.

Based on research by Jing Zhou, Neil Anderson and Kristina Potočnik

• Current research in workplace innovation and creativity needs comprehensive review to determine what elements are lacking.
• Researchers can benefit from a framework that can structure future inquiry.
• Despite shortcomings, research in innovation and creativity is essential to helping organizations stay relevant.

Innovation and creativity are crucial tools that all businesses need in order to prosper. Research into how these tools work covers a broad area and crosses various disciplines. In the past, much of this research has been divided: One side looked at innovation, which focuses on how ideas are implemented, while the other examined creativity, which focuses on coming up with new ideas. Rice Business Professor Jing Zhou and colleagues addressed this divide by reviewing research going back a little more than a decade, looking for key measures that could be used as guidelines for future research.  

Zhou and her colleagues began their work by reviewing the practical and theoretical perspectives of innovation and creativity in the workplace. They then created a framework for future research after identifying prominent theories. 

Before getting started, however, they needed clear definitions for both innovation and creativity. Creativity, Zhou proposed, centers on idea generation. It’s the first step toward innovation. Innovation, she concluded, stresses the implementation of ideas. This happens at different levels: individual, team, organization, or across multiple levels. 

At the team level of innovation, research has progressed significantly, the authors found. They suggest that researchers now focus on other aspects of team-level research, such as team environment, leadership and facilitators of workgroups.

At the organizational level, Zhou and her colleagues found that numerous studies looked at the factors that influence innovation. But, they concluded, there’s still very little conceptual explanation for how individual creative attempts become organizational innovation. 

The team’s review reveals the enormous strides that researchers have made in the field of creativity and innovation in recent years, and clarifies how their studies have been used by different organizations. 

Despite advances in the field, however, there are still shortcomings. Many studies, for example, are hampered by problematic research approaches. Some lack theoretical groundwork and few take an inclusive approach to multi-level studies. 

Zhou and her colleagues argue that addressing these limitations would be a tremendous leap forward in understanding creativity and innovation in the workplace. Without innovation, companies can’t prosper and progress. The same holds true for academic research into these lifelines of business success: It will need to expand and dig deeper or cease to be relevant in practice.

Jing Zhou is the Mary Gibbs Jones Professor of Management and Psychology in Organizational Behavior at the Jones Graduate School of Business of Rice University. 

To learn more, please see: Anderson, N., Potočnik, K., & Zhou, J. (2014). Innovation and Creativity in Organizations: A State-of-theScience Review and Prospective Commentary. Journal of Management, 40(5), 1297-1333.

By Vikas Mittal

Many managers believe that the only way to get customers to pay more is to load their products and services with more and more features.

This is the classic value trap — provide more benefits to extract higher prices. Another approach — cost-plus pricing — relies on providing customers with justifications for price increases; justifications such as increased labor costs, inflation and higher raw-material costs.

Price increases, done incorrectly, often result in customer dissatisfaction and brand switching. It’s no wonder raising prices is a stressful, contentious and unpleasant process. When harried, some firms avoid raising prices by taking “self-harming” measures, such as reducing head count, lowering product quality and reducing services.

Such drastic actions may not always be necessary. Research on consumer reaction to pricing has identified several factors that can help firms to decrease customer price sensitivity. Reducing price sensitivity can enable firms to raise prices without negative side effects.

Four Levers for Raising Prices

1. Time your increases wisely.

Several studies have examined customer price sensitivity relative to economic cycles. The main result of a major study in the U.K. was that long-term price sensitivity of customers tends to decrease during economic expansions. Customers are more price-sensitive during economic contractions. These results have also been documented in a meta-analysis, where researchers summarized results of 81 different studies. While this may seem intuitive, firms often fail to take advantage of economic cycles to manage their pricing strategy. Firms may be more prone to give price cuts during recessionary periods to retain or gain customers, they should also recognize decreased long-term price sensitivity during expansion periods.

Especially in cyclical industries, such as oil and gas, firms should implement price increases during economic expansions. During these times, firms may want to tilt their focus toward managing customer value through non-price mechanisms. Lowering prices to retain or gain share may only train customers to become more price-sensitive. The costs and benefits of such a strategy should be carefully evaluated.

2. Focus on customer satisfaction.

In a classic study based on the American Customer Satisfaction Index (ASCI), the research team examined five years of data from several firms to determine the association between overall customer satisfaction and customers’ willingness to tolerate a price increase. Results showed that an increase in overall customer satisfaction decreased price sensitivity: “A 1% increase in customer satisfaction should be associated with a 0.60% decrease in price sensitivity.” Interestingly, the study also found an effect of competitiveness, as measured by industry concentration. It found highly satisfied customers of companies operating in highly competitive markets are less likely to tolerate a price increase. Identify customers who are highly satisfied, because they should be relatively more receptive to a price increase. If you decide to increase prices, do it in a way that analyzes and accounts for potential competitor responses. If you are in a market with many competitors, proceed with caution.

3. Build brand equity through advertising.

We all understand the difference between advertising and promotion. Advertising is communication designed to build unique, positive and strong associations with a brand in the minds of your customers. Promotions — discounts and giveaways — stimulate purchase behavior.

A long-term study of grocery store buyers showed that advertising helped build brand equity, customer loyalty and repeat brand purchases. In contrast, promotions prodded customers to become progressively more price-sensitive, harming long-term profitability. This is also consistent with another result: Price sensitivity for generic brands is typically higher than national brands, presumably because the latter have higher brand equity than the former.

Manage pricing strategy in conjunction with your advertising and promotion strategy. In many firms, especially B-to-B firms, pricing may be determined by the sales function while advertising is run by the communications group. Close cooperation between the two groups can be beneficial.

4. Tap into customers’ local identity.

A forthcoming paper in the Journal of Marketing showed that consumers with a stronger local identity are willing to pay more for products because of a sacrifice mindset. Once activated, a sacrifice mindset leads to lower price sensitivity, regardless of the origin of the products under consideration. As an example, management at a grocery store communicated with half its customers to activate their local identity. Then it raised prices for organic eggs, rice and milk. Results from this field experiment on actual purchase behavior showed that purchase quantities were less sensitive to price increases for the local identity group than for the global identity group.

Firms can use simple communication materials to prime a local identity among their customer base to decrease their price sensitivity. Global companies can execute these strategies without resorting to the costly approach of localizing production or positioning the company as having local roots.

Raising prices can be difficult. By linking price increases only to increased product performance, more features and higher value, firms may set themselves up for a vicious spiral of higher costs and higher prices. This can lead to feature fatigue, which can confuse and irritate customers. Raising costs can also erode long-term competitiveness.

Moreover, such an approach takes a very mechanistic and cognitive view of the customer. By expanding and linking their pricing tool kit to brand equity, customer satisfaction, customer identity and market factors, firms can view customers as complete human beings. These factors, when integrated into your pricing strategy, can build a longer-term approach to managing and mastering price increases.

Vikas Mittal is the J. Hugh Liedtke Professor of Management in Marketing at Jones Graduate School of Business at Rice University. 

This article first appeared American Marketing Association's Marketing News as Customer-Based Strategies For Raising Prices. 

James Quincey, head of the Coca-Cola Co., was being grilled about Diet Coke. 

The chief executive of the world’s largest soda company – its market capitalization is about $188 billion – was on an earnings call with analysts anxious to know what he was doing to save the iconic brand. Quincey had been talking up his massive firm’s bright future in its wide range of products, but then a question came up about plans to revive Diet Coke, sales of which had been in decline for years, losing out to non-soda competitors such as LaCroix and San Pellegrino. 

“What’s the picture of success?” an analyst asked. Would the new plan just stanch the bleeding? Or could the legendary brand actually grow again? 

Panic about Diet Coke’s fate has weighed on Coca-Cola’s stock price and given birth to hundreds of articles about the company’s “flat” earnings. But the truth is there’s opportunity in decline. In fact, some companies manage to increase profits even as sales drop. It’s a concept so counter to typical business thinking that the phenomenon is often overlooked.

“If your industry is shrinking, it’s tempting to spend money to get new customers,” says Rice Business marketing professor Amit Pazgal, who has studied increasing profits in declining markets. “But that can be expensive. It’s much better to spend on the customers you have left.”

Those faithful few can prove lucrative. Pazgal points to the cigarette industry as a powerful example. Its companies found ways to raise prices on their most loyal — and yes, addicted — consumers even as demand declined. When states started slapping new sin taxes on cigarettes, the tobacco companies added a little more to the price. Their least loyal, and likely most price-sensitive, customers had already quit the habit. That meant the companies were left with their best customers, many of them willing to pay more.

Not all declines, however, are ripe for reaping increased profits. According to Pazgal, demand needs to trail off. It can’t just plummet. The customer base needs a substantial number of loyalists who will stick with the brand through hard times. That way a business can steadily increase prices to the right consumers, even if there are fewer of them.

Diet Coke, as it turns out, has plenty of loyalists — people who turn down a Diet Pepsi at a restaurant or get grumpy when their home supply of Diet Coke runs low. One of the most famous Diet Coke fans is President Donald Trump, who reportedly downs 12 cans a day. People magazine has written about the drink’s “strangely dedicated fan base,” and the motto “My favorite color is Diet Coke,” has made its way onto T-shirts. 

Such loyalists have helped keep Diet Coke one of the best-selling brands in the nation, even as soda consumption has fallen to its lowest level in three decades, and sales of calorie-free and unsweetened fizzy waters have doubled. Coca-Cola is clearly adapting to customer preferences by diversifying its portfolio with product acquisitions like the trending sparkling water brand Topo Chico.

In his call with analysts, Coca-Cola boss Quincey sounded enthusiastic about the potential of new Diet Coke flavors. The descriptive names — twisted mango, feisty cherry, zesty blood orange — were a clear bid to lure younger buyers. Yet the new offerings could also misfire with core Diet Coke drinkers who love their soda just as it is.

Understanding what keeps people hooked is key, says Christian Goy, cofounder and managing director of Behaviorial Science Lab in Austin, Texas, which provides companies such as Coca-Cola insights into customers’ priorities. 

“For loyal customers, what we can see and measure is how expectations are fulfilled and why,” Goy says. “What we’ve found is that sometimes a product fulfills one or two expectations very well. That’s the hook the company needs to play up to continue to be paramount in their minds.”

A declining market can be freeing for a company. It doesn’t have to pander to consumers who aren’t connected to the brand, the kind who will switch allegiances at the drop of a coupon. That’s one reason, research shows, that knockoffs of high-end luxury brands such as Louis Vuitton handbags are not necessarily harmful to a company: The fakes weed out consumers who are most motivated by price. 

Few companies, though, have the discipline to keep from chasing those price-sensitive buyers. That helps put downward pressure on prices, but it also means forgoing profits from loyal customers who wouldn’t mind paying a little bit more for a luxury handbag. 

Pazgal suspects the same is true for Diet Coke. While most businesses shudder at the prospect of managing a product’s long decline, Pazgal suggests, the journey itself can prove a worthy ride.

“Think before you leave,” he says. “Because it might still be profitable for another 20 years."

Citation for this content: MBA@Rice, Rice University’s online MBA program.

Based on research by Hajo Adam (former Rice Business professor), Otilia Obodaru (former Rice Business professor), Jackson G. Lu, William W. Maddux and Adam D. Galinksy 

• New research shows that foreign travel helps to strengthen our idea of ourselves – a notion called “self-concept clarity.”
• Living abroad helps build a clearer sense of self because it inspires us to better understand the differences between who we are and who we were taught to be.
• It’s not the number of countries visited, but the amount of time spent abroad that builds self-clarity. The longer the time in another country, the clearer the sense of self.

Imagine yourself on a singular adventure in a foreign country. The mere thought of it inspires a certain vitality: From Moses to Odysseus to Alexander the Great, leaders have traversed the horizon in order to become their true selves.  

Researchers have already documented how foreign experiences fire creativity, shrink prejudice and accelerate career success. But these studies are the embarkation point of a larger effort tracing the psychological ramifications of travel abroad. That research suggests we’re just beginning to learn how formative living in another country can be.  

In a recent study, former Rice Business professors Hajo Adam and Otilia Obodaru studied the role of experience abroad upon “self-concept clarity” ⁠— our inner concepts of ourselves. Living abroad, they hypothesized, boosts self-concept clarity because it challenges us to understand who we are ⁠— as opposed to who we were raised to become. The researchers believe that it isn’t how many countries one visits that prompts such reflection, but rather the intensity and length of time spent beyond borders. 

Why should any of this matter when it comes to business? Extensive research already links self-concept clarity to an array of positive outcomes from well-being to physical health. Moreover, Adam and Obodaru show that a strong sense of who you are and what you want also represents the kind of thinking critical to making smart decisions regarding career choices. Foreign travel, they posit, builds the clarity necessary to know what we really want out of our working lives.

To test their theory, Adam and Obodaru joined Adam G. Galisnsky of Columbia Business School, Jackson G. Lu of MIT's Sloan School of Management and William W. Maddux of the University of North Carolina's Kenan-Flagler Business School to conduct six studies involving 1,874 people, among them MBA students from various countries and participants online. The intricate investigation went through a series of different phases.

First, the researchers explored whether people who had lived abroad reported higher self-concept clarity than individuals who had not lived abroad. In addition, they examined if self-concept clarity was stronger for people who had lived abroad was stronger than for those who simply wanted to but had not yet done so. 

The research wasn’t limited to how the respondents saw themselves. Using a 360-degree rating system, the scholars compared the respondents’ self-image with their colleagues’ descriptions of them. Finally, the researchers studied whether deep and broad living experiences abroad were in fact an indictor of clearer decision-making capacity.

In virtually every study, the results echoed each other. Experience abroad increased the respondents’ self-concept clarity. This effect was not transitory, but shaped how the respondents constructed their identity over a period of time. 

Even on the best of adventures, experience in a new culture can be stressful. Yet the research shows that the challenge of living abroad offers powerful benefits. In contrast to the stress associated with disruptive experiences like losing one’s job or getting divorced, the researchers found that spending time abroad had a lasting positive value for a clear sense of self.

So the next time you plan a venture abroad ⁠— whether it’s a year in Paris or a prolonged work stint over the border ⁠— consider that your experience may not just be an adventure. It may mean more clarity about yourself and your next job. 

Hajo Adam and Otilia Obodaru are former assistant professors of management at Jones Graduate School of Business at Rice University. 

For more information please see: Adam, H., Obodaru, O., Lu, J. G., Maddux, W. W., & Galinksy, A. D. (2018). The shortest path to oneself leads around the world: Living abroad increases self-concept clarity. Organization Behavior and Human Decision Processes, 145, 16-29.