Customer Satisfaction and Costs of Selling and Producing

Abstract

Whereas most empirical research on customer satisfaction explores its impact on either investor sentiment or operational performance, few studies directly examine its impact on the costs incurred by the firm. Accordingly, the authors draw on the Motivation-Opportunity Ability framework to outline hypotheses about the effects of customer satisfaction on the cost of selling (COS) and the cost of producing (COP). Using almost two decades of data comprising 1022 observations from 115 firms, the authors find that on average higher customer satisfaction significantly lowers COS. This effect is stronger for firms that have lower stock returns or stock returns volatility, or higher inventory slack. In addition, the impact of customer satisfaction on COS is stronger if the firm is in an industry with higher growth or lower turbulence. Interestingly, customer satisfaction significantly lowers COP only for firms that have lower stock returns or stock returns volatility, or higher inventory slack. The authors conclude by calculating the cost elasticities of customer satisfaction and discussing the dollar impact of increases in customer satisfaction on COS and COP.