Correlation Between Customer Satisfaction & Market Performance

Svc_vs_dow_spx
Here’s an interesting thesis on how to beat the market: Buy Companies With High Customer Satisfaction Scores.

Longtime readers may recall we looked at a related issue back in 2005: Consumer Issues and Investors.   

The consumerist summarizes the findings:

Using a back-tested paper portfolio and an actual case, the authors of a study published in the Journal of Marketing found that companies at the top 20% of the the American Customer Satisfaction Index (ACSI) greatly outperformed the the stock market, generating a 40% return.

The portfolio outperformed the Dow Jones Industrial Average by 93%, the S&P 500 by 201%, and NASDAQ by 335%.

Obviously, there are entire dectors that this has very little to do
with where companies that have little or no contact with the public or
consumers. (Think behind the scenes tech providers like Akamai, mining
companies, business servies providers, etc.) or monopoly businesses,
such as utilities, where customer satisfaction has little do to with
revenue and earnings.

A potential issue in the analysis is the relatively short period under
study: It was from 1996-2003. I’d like to see the same analysis over a
much longer time period — 30 or 40 years (if the data is even
available). Also, the period under study is somewhat aberrational — it
included a giant bubble and market crash.

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Click for larger charts:

Cumulativereturns
graphic courtesy of Journal of Marketing

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But the basic underlying concept is valid: What is the relationship between customer satisfaction and market value of equity? The authors found a strong relationship:

[Academic literature] points to a significant relationship between customer satisfaction and economic performance in general, but less is known about how the satisfaction of companies’ customers translates into securities pricing and investment returns, and virtually nothing is known about the associated risks. The tacit link between buyer utility and the allocation of investment capital is a fundamental principle on which the economic system of free market capitalism rests. The degree to which capital flows from investors actually move in tandem with consumer utility is a matter of significant importance because it is an indication of how well (or poorly) markets truly work.

However, efficient allocation of resources in the overall economy and consumer sovereignty depend on the joint ability of product and capital markets to reward and punish companies such that firms that fail to satisfy customers are doubly punished by both customer defection and capital withdrawal. Similarly, firms that do well by their customers would be doubly rewarded by more business from customers and more capital from investors.

Fascinating stuff. Perhap’s this explains what happened to Dell’s share price.

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Sources:
Customer Satisfaction and Stock Prices:High Returns,Low Risk
by Claes Fornell, Sunil Mithas, Forrest V.Morgeson III, & M.S.Krishnan
Journal of Marketing
Vol.70 (January 2006),3–14
http://www.marketingpower.com/content30985.php

How To Beat The Stock Market: Buy Companies With High Customer Satisfaction Scores
The Consumerist, 05 17 2007
http://consumerist.com/consumer/personal-finance/how-to-beat-the-stock-market
-buy-companies-with-high-customer-satisfaction-scores-261282.php

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Friday Night Jazz: Metheny Mehldau

MethmehlPat Metheny is one of those guitarists that was always interesting, but he never really floated my boat. His style is kinda New Age-y, a bit too cold/technique focused for my preferences. I can see why some people say he is an acquired taste.

However, a friend in the music industry (with meticulous taste) had recommended his latest album with pianist Brad Mehldau (Metheny Mehldau Quartet) to me, and on his suggestion, I gave it a whirl. 

It is a delightful surprise.

It is an eclectic disc, ranging from a mix of jazz fusion, acoustic, Celtic, pop, Asian-tinged (41 string guitars!) to Brazilian music. Somehow, this odd and always changing mix seems to work on nearly every track.

This is the second pairing of Metheny and Mehldau colloboration, the first being Metheny/Mehldau.
The pairing works well. Mehldau brings a degree of warmth and intimacy
often missing from more traditional Metheny recordings.   

Metheny frequently returns to his earlier electric jazz guitar style, but it seems to work so much better in this quarter than any previous work I’ve heard from him. Its worth checking out.

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For those interested in how this pairing came about, there is a two part interview with Metheny and Mehldau after the jump . . .

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