Will Your Satisfied Customers Really Pay More?
University of Mannheim
University of Mannheim
Wayne D. Hoyer
The University of Texas at Austin
Customer satisfaction has become an important focus of corporate strategy because higher customer satisfaction leads to greater customer loyalty which in turn can result in higher profits. However, because price plays a key role in determining profitability (i.e., a higher price means higher profit), an interesting question is whether there are certain factors which might allow companies to charge more for their products or services. One possibility is that when customers are satisfied, they might be willing to pay more for the product or service.
In light of this fact, this study examines the relationship between customer satisfaction and the customer’s willingness to pay. Two experimental studies show that satisfied customers are in fact willing to pay more. More importantly, this research shows that the relationship is not linear; rather, it has an inverse S-shaped form being concave for low satisfaction levels and convex for high satisfaction levels and relatively flat for medium satisfaction levels. This means that only highly satisfied customers are willing to pay more and very dissatisfied customers are definitely not willing. Moderate levels of satisfaction do not increase a customer’s willingness to pay substantially. Additionally, the second study examines this relationship over time and finds that cumulative satisfaction (based on repeated experiences with the product or service) has a stronger influence on willingness to pay than satisfaction from a single or specific product episode or service encounter.
Significance of the Research
For years, company executives and managers have trusted their intuition that higher levels of customer satisfaction will improve company performance. The basic belief is that “satisfied customers will come back; dissatisfied ones will not.” In support, some recent research does find that there is positive relationship between customer satisfaction and firm profitability (i.e., firms with higher levels of customer satisfaction do enjoy higher economic returns). However, our understanding of the factors which influence this relationship is still limited.
Some studies find that higher levels of customer satisfaction lead to higher levels of customer loyalty which in turn, leads to higher profits. Other studies find that satisfied customers can increase profitability by providing new referrals through positive word-of-mouth communications.
A notable question is whether customer satisfaction also affects the customer’s willingness to pay for the product or service. This relationship is critical because as mentioned above, price is a key determinant in the profitability equation. If companies can charge more for their products or services, this will lead to higher profits. There is a general belief that satisfied customers are willing to pay higher prices, but this is typically based on anecdotal evidence.
Despite the importance of this issue, price-related outcomes of customer satisfaction have been largely ignored in previous research. The current research tries to address this gap by testing the link between customer satisfaction and willingness to pay in two tightly controlled experimental studies. The focus is on three research questions: (1) Does customer satisfaction increase a customer’s willingness to pay? The answer to this question helps to increase our understanding of the link between customer satisfaction and profitability and has important implications for pricing practices. (2) If this relationship does exist, is it linear (i.e., increasing satisfaction increases willingness to pay) or does it have some other form (i.e., the impact of customer satisfaction on willingness to pay differs at various levels of customer satisfaction)? Understanding the functional structure of this relationship is important for managers to determine an aspired level of customer satisfaction. (3) Does the relationship between customer satisfaction and willingness to pay change over time? Examining dynamic aspects help managers to determine whether to focus on individual transactions (as is often done) or cumulative satisfaction over time.
Implications for Marketing Practice
This research has important implications for setting prices and for efforts to increase customer satisfaction. Specifically, managers may be more able to charge a premium price for their product or service if they have a high level of satisfaction in their customer base. It is important to note that this does not mean selectively charging more satisfied customers a higher price; rather, that having a large segment of highly satisfied customers may enable a company to charge higher prices in general.
Moreover, there are situations in which companies may be able to charge higher prices to highly satisfied customers. Although this is generally not the case in consumer goods marketing, this is definitely a possibility in markets where prices are not standardized but, rather, are negotiated with individual customers (e.g., marketing of customized products or professional services). In such cases, the current findings suggest that a higher level of customer satisfaction puts the firm in a stronger position to negotiate prices with their clients.
Furthermore, marginal payoffs from increasing customer satisfaction appear to occur only at very high levels of customer satisfaction. However, generating high levels of customer satisfaction often involves significant costs associated with higher quality of goods and services provided. Managers therefore need to consider whether it is financially viable to strive for very high levels of customer satisfaction for certain customers or customer segments. A possible solution is to differentiate the firm’s customers with respect to the aspired level of customer satisfaction. Specifically, companies might strive for very high levels of customer satisfaction for their most highly valued customers but accept a lower level of satisfaction for their less valued customers.
Finally, when attempting to measure and/or increase customer satisfaction, companies should focus on cumulative satisfaction rather than transaction-specific satisfaction. In business practice, many companies measure customer satisfaction based on specific transactions (i.e., the most recent purchase or service encounter). This research suggests that longer term cumulative satisfaction is more relevant since it is the stronger driver of customer behavior (which in this study was willingness to pay).
Homburg, Christian, Nicole Koschate, and Wayne D. Hoyer (2005), “Do Satisfied Customers Really Pay More? A Study of the Relationship Between Customer Satisfaction and Willingness to Pay,” Journal of Marketing, 69 (April), 84- 96.
Homburg, Christian, Wayne D. Hoyer, and Nicole Koschate (2005), “Customers’ Reactions to Price Increases: Do Customer Satisfaction and Perceived Motive Fairness Matter?” Journal of the Academy of Marketing Science, 33 (1), 36- 49.