Customer Satisfaction Index Measures Quality of Economic Output

Earlier today, I reported on the release of the American Customer Satisfaction Index (ACSI) for the first quarter of 2006, which found that customer satisfaction that quarter registered its largest increase since 2003 -- see "U.S. Customer Satisfaction Registers Big Jump."

 

I was curious about the rationale behind the index and its potential role as an economic indicator, so I arranged an interview with University of Michigan Professor Claes Fornell, head of ACSI and director of the National Quality Research Center. Following are his comments to me in question-and-answer format.

 

 

 

When introduced in 1994, the major objectives of the ACSI were to gauge the quality of economic output, as experienced by the users of that output, to contribute to a more comprehensive picture of the economy, to indicate how well (or poorly) our markets behave and to be a leading indicator of economic profits. The empirical evidence suggests that ACSI has lived up to these objectives and more. For example, not only is it a leading indicator of consumer spending and subsequent economic growth, it is also a leading indicator for profits and share prices.

 

To achieve these objectives, ACSI annually measures customer satisfaction with more than 200 companies in 45 industries and 10 economic sectors. In total, the ACSI collects about 80,000 interviews each year, asking these respondents about their satisfaction with the product and services they have consumed. Although the number of measured companies and industries varies slightly from year to year as a result of acquisitions, mergers, and new entries, the ACSI includes essentially the same group of companies with revenues totaling about 40% of the GDP.

 

 

 

Consumer utility, or customer satisfaction, is an important standard for economic growth and a prime driver of demand. ACSI is a complement to productivity. Productivity measures the quantity of economic output; ACSI measures the quality of economic output. A major purpose behind the development of ACSI was to make it possible to better balance quantity and quality. Clearly, economic growth would not be sustainable if we produced more quantity at a deteriorating level of quality. 

 

ACSI is used to predict consumer spending and GDP growth at the macro level. It is also used to predict stock performance for individual companies at the micro level.

 

 

 

Investors: They need to know the relationship between a firm’s current condition and its future capacity to produce wealth. The health of a firm’s customer base, as indicated by how satisfied customers are, says a great deal about the “current condition.”

 

Managers: They need to know how to improve the firm’s current condition by allocating scarce resources such that the strength of customer relationships is maximized.

 

Government: It needs to know how to best encourage economic growth, consumer utility, and living standards for its citizens.

 

Consumers: They should have a voice in measures that reflect their material living standards.

 

 

 

The ACSI combines two interrelated stages to arrive at ACSI scores: customer interviewing and econometric modeling.

 

The first stage in the process is customer interviewing. Customers are selected randomly from samples of U.S households. To be eligible for interview, a prospective respondent must qualify as the purchaser of specific products or services within defined time periods. Thus the definition of “customer” in the American Customer Satisfaction Index is an individual chosen randomly from a large universe of potential buyers who qualifies by recent experience as a purchaser/user of products or services of specific companies that supply household consumers in the U.S. Once identified, these customers are asked about various aspects of their experience with the identified product or service -- such as perceptions of quality and value, and repurchase intention -- as well as their satisfaction with the product or service.

 

Once these interviews are completed, the second, econometric modeling stage of the process is completed. The ACSI uses a model with measures of an index of satisfaction (ACSI) and related indices (i.e. quality, value, loyalty). These measures come from the manifest variables (survey questions) that are input into the model. Satisfaction (ACSI) is the hub of the econometric model. Because any one concrete measure of satisfaction, such as a single survey question, is at best a proxy for latent satisfaction, the ACSI uses several proxies that reflect overall consumption experience. These proxies are combined into an index on a 0 to 100 scale; a company’s ACSI score is thus a weighted average of the underlying survey variables that comprise the satisfaction latent.

 

 

 

We have found that a 100-point scale works well. It offers both enough discrimination and stability. Your point is well taken, though, and most other customer satisfaction scales are on a 2 point scale (satisfied, not satisfied) or 5-7 point scales. The difference between 69 and 63 is significant, both statistically and substantively. On the average, 1% increase in the ACSI score is associated with a 4.5% increase in the market value of equity. For most firms, that is a very large number.

 

 

 

ACSI is reported quarterly. There are many interesting results from the first quarter and we would direct you to the commentary (www.theacsi.org) on that. See for example, the commentary on Microsoft, cable TV, fast food, and for the economy at large.

 

AB -- 5/16/06