Customer Satisfaction and Future Financial Performance Discussion of are Nonfinancial Measures Leading Indicators of Financial Performance? An Analysis of Customer Satisfaction

Abstract

Ittner and Larcker's paper is one of the first to empirically examine the relation between customer satisfaction measures and economic variables like customer retention, future sales, and stock price. The theory is that more-satisfied customers will return (with their friends) and buy again in the future. Under generally accepted accounting principles, neither these future revenues nor their capitalized values appear on firms' financial statements. Moreover, the current and past expenditures made to generate customer satisfaction are treated as expenses, not as assets. Customer satisfaction measures therefore are hypothesized to be indicators of future revenue, and perhaps future profits. It is hard to find fault with this argument. In fact, the paper does not provide any theories or arguments that suggest anything otherwise. The apparent virtues of customer satisfaction measures are well recognized by companies, and many companies cite customer satisfaction as a primary objective in their mission statements. They expend resources to collect customer satisfaction data for their own internal purposes and increasingly are tying executive compensation to customer satisfaction measures