Customer Satisfaction and Retention

Customer Satisfaction

Southwest Airlines (SWA) has built a culture around customer service and customer satisfaction. While the corporate verbiage comes easy, meaningful results are more difficult to achieve. However, there is good evidence to support Southwest Airlines’ efforts. As shown above, SWA has the highest customer satisfaction rating among airlines in an industry that is well below average in customer satisfaction. Another customer performance metric is the customer complaint rate. This is shown above in comparison for other airlines. Some might say “So what?” Does this extra effort and high customer satisfaction scores contribute to higher profits?

Customer Satisfaction and Customer Retention

Customer retention is an important customer performance metric that is a function of customer satisfaction and dissatisfaction. When customer retention decreases, a business has to spend more to attract new customers to replace them—often with customers that buy less than the customers they replaced. There are two ways to estimate customer retention. The first is simply to track customers that are retained from one year to the next. This requires waiting to the end of each year to measure this metric. The second way is to survey a sample of customers and ask them how likely they are to repurchase. This provides a timely metric to track increases or decreases in likely customer retention before year-end. Either metric provides an estimate of overall customer retention.

Customer Retention and Customer Life

Customer retention has a direct relationship to customer life. In the example below an estimated customer retention rate of 67 percent corresponds with a 3-year customer life. The longer a business can retain a profitable customer, the more profitable that customer becomes. A business that can improve customer retention from 67 percent to 75 percent will extend the customer life from 3 years to 4 years. As shown below, there is an exponential effect on both customer life and customer lifetime value as customer retention improves. For Southwest Airlines, higher customer satisfaction scores translate into higher levels of customer retention and profitability.

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