Customer satisfaction to forecast spending

Research by Roland Rust

Economists may have found their crystal ball. According to new research from Roland Rust, Distinguished University Professor of Marketing at the University of Maryland’s Robert H. Smith School of Business, a major marketing variable – customer satisfaction – holds the key to what’s next for the U.S. economy.

Rust and co-authors Claes Fornell of the University of Michigan and Marnik Dekimpe of Tilburg University in the Netherlands used data from the American Customer Satisfaction Index to forecast future growth in consumer spending, a huge portion of the U.S. GDP (70 percent by some estimates) and therefore an accurate gauge of the overall health of the economy.

“We’re telling decision makers what’s going to happen to consumer spending,” Rust said. “If consumer spending is likely to go up, business decision-makers might spend more, hire more people, build up production, advertise more, etc., if they know they are heading into an attractive business environment. Policy-makers can use this to determine stimulus funding or interest rates cuts. Bottom line, people can use this model to make smart decision about the allocation of resources.”

The researchers show that change in overall customer satisfaction has a significant impact on future consumer spending: happy, satisfied customers will increase their spending and in turn pull the economy up with their purse strings. But willing consumers also must have the ability to spend – the researchers had to include adjustments for household debt-service ratios in their model to account for the impact of the recent financial/housing crisis. Even with these considerations, the relationship between satisfaction and future spending remained strong.

This is the first time the role of marketing has been tied to predictions about the economy and the results are more than twice as accurate as any previous attempt to predict consumer spending. Using this model, an economist can forecast 35 percent of the change in consumer spending three months in the future. By contrast, the closely followed Index of Consumer Sentiment explains only about 14 percent of the one-quarter-ahead variation in the growth of total real personal consumption expenditure. Other models that used consumer credit and income to predict future spending explain less than 10 percent.

“We’re clearly saying that there are marketing-related variables that can play a role in predicting what aggregate consumption is going to do,” says Rust. “It’s more of a predictive tool than anything else. It’s not really that we’re telling people how to satisfy customers – or even that they should or shouldn’t. It’s more after they’ve done it or not, here’s what’s going to happen.”

Michigan’s Fornell has been collecting customer satisfaction data since 1994 when he published the first quarterly American Customer Satisfaction Index, an economic indicator based on modeling customer experience with the quality of goods and service purchased in the United States. For this study, the researchers analyzed the relationship between the ACSI and discretionary consumer spending by developing an econometric model using the index data along with data from the U.S. Bureau of Economic Analysis measuring discretionary consumer expenditures and real personal disposable income; the Consumer Price Index from the Bureau of Labor Statistics; the Index of Consumer Sentiment from the University of Michigan; and the Debt Service Ration and real consumer credit based on total consumer credit outstanding from the Federal Reserve.

“That was key element to have in our model,” Rust said of the consumer debt element. “We tried to keep the model simple – have as few variables as possible – but it turned out that without that variable we would have missed the past few years by quite a lot because of that variable becoming pretty important for a lot of people.”

Not only are the research findings important for the economy in general, they also have big implications for marketing. Better understanding of consumer spending growth should result in companies making better marketing plans and more accurate sales forecasts, which in turn should lead to better decisions in all major areas of marketing, including product development, pricing, promotion, distribution, capacity planning and staffing decisions.

“The Effect of Customer Satisfaction on Consumer Spending Growth,” was published in the February 2010 issue the Journal of Marketing Research. For more information about this research, contact Roland Rust.