Based on research by Vikas Mittal and Eugene Anderson
Why Product Superiority Doesn’t Pay Off
- A product’s quality is not directly related to how profitable it is.
- Product performance, customer satisfaction and customer retention have a complex relationship with profitability.
- Knowing this, companies should make smart investments in areas that will maximize profits — and these areas are not always product quality.
Imagine you’re the CEO of a company that has just approved R&D for product improvements. You play the all-too-familiar riff — better product, we can charge more, customers will see more value, they will keep coming back and my company will make a lot of money. Higher profits, higher stock prices.
Not quite. The road from product quality to profitability is not what most CEOs envision. That’s why they can end up sapping profits and hurting both their customers and shareholders.
What a CEO needs to understand is her company’s satisfaction-profit chain: the correlation between how satisfied a consumer is with a product and how that affects customer retention and eventually a product’s overall profitability. For a long time, the relationship was assumed to be linear: The better the product, the higher the customer satisfaction. The higher the customer satisfaction, the higher the retention. The higher the retention, the higher the profit.
But research by Rice Business professor Vikas Mittal and Eugene W. Anderson, now the Dean at Syracuse University’s Business School, reveals something different. The relationship between customer satisfaction and product profitability, they found, is nonlinear and asymmetric. A better product, it turns out, does not guarantee a bigger profit.
Different product benefits translate differently to customer satisfaction. Think of a car. Benefits such as safety and reliability can prevent dissatisfaction, but they do not necessarily increase satisfaction. Other benefits such as interior styling and branding can really increase satisfaction, but they may not prevent dissatisfaction as much.
Companies that recognize that all product benefits are not the same — some are satisfaction maximizers, while others are dissatisfaction minimizers — can invest strategically to reinforce customer satisfaction.
But satisfaction alone isn’t necessarily enough. So businesses progress to the second link of the satisfaction-profitability chain: the prospect of bringing consumers back for more, or customer retention.
Although this varies by industry and market factors, a satisfied customer generally falls first into the “defection zone,” when she’s likely to decide if there is anything wrong with a product and if she likes it. Following this, Mittal and Anderson write, is the “consideration zone,” when she continues to be happy with the product, but is no more or less likely to change to something different.
Eventually, Anderson and Mittal write, the customer graduates to the “trust zone,” at which point she’s all but certain to stick indefinitely with a product or brand. Being happy with a purchase isn’t a straight line to lifelong fealty to a brand... but if that car keeps you happy for long enough, odds are you’ll buy a similar one next time around.
Return customers buy more things, and they buy them more often. Because they understand a company’s products and processes, they are easier and cheaper to maintain. As they have developed an affinity for an offering, they are more likely to recommend it to friends and family. They are a machine for revenue generation. That’s why companies that retain, maintain and sustain existing customers tend to do better than companies that are chasing new customers all the time.
It’s sort of like marital bliss. The payoff might not be immediate, but over time, as you sustain the relationship by making your customer (or your spouse) content, the rewards increase.
Getting the satisfaction-profit chain right, and knowing that a product is a good one, Anderson and Mittal write, still doesn’t directly translate into high profits. This is why it’s critical for companies to recognize these nonlinear relationships, investing in the products and product details that truly satisfy customers.
Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at Jones Graduate School of Business at Rice University.
To learn more, please see: Anderson, E. W. & Mittal, V. (2000). Strengthening the satisfaction-profit chain. Journal of Service Research, 3(2), 107-120.