On April 15, 1912, the White Star Line’s luxury passenger liner RMS Titanic struck an iceberg off Newfoundland. The ship sank in two hours and forty minutes, taking the lives of over 1,500 passengers and crew. The sinking stunned the world because Titanic was not only the largest passenger ship in the world at the time, but every aspect of her design was intended to make the ship “unsinkable”. So certain were the architect (who was on board when the ship sank) and operators of the ships invulnerability that they disregarded the recommendation of the builder to carry sufficient lifeboats for all aboard by using a new (and more expensive) type of davit and carried only enough for about half those on board. The rest is history.

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What has this got to do with customer service? Quite a lot, according to Stefan Michel of the Thunderbird School of Global Management. Michel has coined the phrase “The Titanic Effect” to describe companies who are steaming along blissfully unaware that they are sailing through a sea of customer dissatisfaction icebergs, utterly convinced that everything is fine and that they are not subject to or impacted by customer satisfaction issues. Often with similarly spectacular results.

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In a brief podcast interview with the Wall St Journal, Michel outlines the common indications that a company may be cruising into an iceberg:

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• Customer service process improvement processes that do not include sales, marketing or top executives in a meaningful way.
• A tendency to rush to fix the blame instead of the problem.
• Making the same service mistakes over and over again.
• Employees who are frustrated with their inability to meaningfully resolve customer issues.

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Michel speaks in terms of a process he calls “service recovery” and gives a few examples of companies who suffer from the Titanic Effect, and some who have avoided the icebergs. Worth a listen. You can also read a companion article by Michel and co-authors David Bowen and Robert Johnston here.

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The lesson here is that 3/4 of the iceberg is under the water and it is all too easy to ignore it until it is too late.

It seems intuitive that satisfied customers are good for business. Customers who have good things to say about our products and services and who return to purchase again and again are normally thought of fondly as a very good thing. Certainly disappointing customers or, worse, angering them by providing service that fails to meet their expectations is considered a poor idea. But is there any hard evidence that improving customer satisfaction actually improves the bottom line? Does the value of a company rise with improving customer satisfaction?

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It turns out that there is a substantial volume of research that indicates that just such a relationship does exist, and that the financial impact of improving customer satisfaction can be significant. A 1999 study entitled “Customer Satisfaction and Shareholder Value” by Mazvancheryl, Anderson, and Fornell established that a 1% improvement in customer satisfaction (as measured by the American Customer Satisfaction Index) produces a 2.75% increase in a firm’s market capitalization. This may not sound like a lot, but for a large company it can be enormous. For example, Microsoft Corporation has a market capitalization of approximately $256 billion (June 2008). A 2.75% improvement in Microsoft’s ACSI rating translates into more than $7 billion of additional shareholder value.

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A study by Gruca and Rego entitled “Customer Satisfaction, Cash Flow and Shareholder Value” concludes that “The positive effects of customer satisfaction on future cash flows are both statistically significant and managerially relevant. For the average firm in our sample, a one-point increase in customer satisfaction translates into a $55 million increase in net operating cash flow in the next year. That same one-point increase in customer satisfaction results in a reduction in the variance of future cash flows of more than 4%. Such outcomes boost the value of a firm to its shareholders.”

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These are big numbers. And they clearly demonstrate that customer satisfaction improvement programs are not just a good idea, they are also a good investment.