Does customer satisfaction lead to profitability? The mediating role of share-of-wallet

Abstract

Purpose - Many researches have proposed a virtuous chain of effects from improved customer satisfaction to profits. In particular, satisfaction is thought to improve share-of-spending, which in turn leads to higher customer revenue and customer profitability. This paper aims to examine these proposed linkages using data from the institutional securities industry. Design/methodology/approach - The data used in the analyses were collected as part of an ongoing telephone satisfaction survey of 81 clients of an institutional securities firm across two continents (North America and Europe). Mediation analysis was used to test the hypothesized effects. Findings - Customer revenue was found to correlate negatively with customer profitability for unprofitable customers, and positively for profitable customers. Research limitations/implications - One of the limitations of this research is that it tests the propositions within a single industry. Future research should attempt to replicate these findings in other contexts. Practical implications - A simplistic focus on improving customer satisfaction for all customers in order to improve share-of-wallet and customer revenue does not seem to represent the best management approach to maximize overall firm profitability. In fact, it could actually result in a negative return on investment. Therefore, customers should first be segmented by their profitability to the firm before expending resources to improve customer satisfaction and share-of-wallet. Originality/value - The results of this paper challenge the conventional belief that customer satisfaction should lead to customer retention in turn, resulting in customer revenue and ultimately customer profitability. The findings indicate that this may not always be true.