investasidirancang untuk meningkatkan produktivitas dapat mengurangi tingkat kualitas

kustomisasi perusahaan dapat menawarkan.

Hal ini sering penting untuk menyesuaikan layanan untuk memenuhi kebutuhan dan
preferensi individu. Sifat situasional dari banyak layanan berarti ukuran banyak yang lebih kecil
dan fleksibilitas yang lebih besar pada bagian dari personil. Seperti di atas, akan ada sedikit
kesempatan untuk meningkatkan produktivitas melalui metode tradisional dalam pelayanan
intensif tenaga kerja dan biaya untuk meningkatkan baik kustomisasi dan standardisasi secara
bersamaan akan tinggi, y> 0 (Baumoi et al., 1989).
Ketidakterpisahan produksi dan konsumsi, serta intangibility, jasa membuat standarisasi
kualitas yang lebih sulit dan mahal untuk meningkatkan tetap menjaga kualitas kustomisasi, y>
0 barang Diproduksi umumnya lebih setuju untuk metode tradisional pengendalian kualitas dan
lebih mungkin untuk menikmati aspek penurunan biaya-dari peningkatan kualitas. The "quality
is free" argument is largely based on assembly line methods for removing defects early in the
production process and thereby reducing subsequent costs to the firm. When customers are
involved in the process, as they are in many services, it is not as straightforward to apply these
assembly line methods. Hence, as the service component of a firm's offering increases, we
expect the difficulty of improving quality to increase.
4.2. Usefulness of the Goods-Services

Classification in Testing Propositions 1 and 2 The proposed classification scheme has the
benefit of utilizing available data, providing a first test of the model's propositions, and
advancing debate as to whether a firm should emphasize both customersatisfaction and
productivity. Of course, these benefits must be weighed against potential limitations. For
example, many goods firms bundle a substantial service component with their offerings and
services often have many characteristics that are amenable to standardization. Hence, the
empirical work based on this Scheme should be evaluated subject to the extent to which
customer satisfaction with goods is relatively more dependent on standardization and
Satisfaction with services is dependent on customization.
The implications of the classification scheme are
36

summarized in Table 1. For goods, productivity and customer satisfaction are more likely to be
compatible. The association between customer satisfaction and productivity should be relatively
more positive (less negative). As tradeoffs between customer satisfaction and productivity are
expected for services, the observed association between the two should be relatively more
negative (less positive).
In terms of profitability, customer satisfaction and productivity should both be associated with
high economic returns. However, as tradeoffs between customer satisfaction and productivity
are expected for Services, the association between changes in customer satisfaction and
productivity-the interaction-and profitability should be more negative (less positive) for services
than for goods.
5. Data
To test the hypotheses, we require measures of customer Satisfaction, productivity, and profits.
For the first measure, we utilize annual indices of customer satisfaction made available by the
Swedish Customer Satisfaction Barometer (SCSB) from 1989 to 1992. The SCSB is an ongoing
project managed by the National Quality Research Center (NQRC) at the University of Michigan
Business School and the Center for Studies of Quality and Productivity at the Stockholm School
of Economics. The firms included in our study are all major competitors in the following
industries: airlines, automobiles, banking, basic foods, charter travel, clothing retail, department
stores, furniture stores, gas Stations, insurance (life/auto/business), mainframe computers, PCs,
newspapers, shipping, and supermarkets. The Companies surveyed in each industry are
Table 1 Summary of Empirical Hypotheses
TradeOffs he association between changes in customer
Hypothesis: satisfaction and changes in productivity should be
more negative (less positive) for Services than goods Profjt The association between simultaneous
changes in both
Hypothesis. Customer satisfaction and productivity-the
interaction-and profitability should be more negative (less positive) for services than for goods
MARKETING SCIENCE/Vol. 16, No. 2, 1997
Copyright (C) 2001 All Rights Reserved
 ANDERSON, FORNELL, AND RUST Customer Satisfaction, Productivity, and Profitability

the largest share firms such that cumulative share is approximately 70%.
The SCSB begins with a computer-aided telephone Survey designed to obtain a
representative sample of customers for each firm. Potential respondents are selected on the
basis of having recently bought or used a company's product. To participate, each respondent
must pass a battery of Screening questions. The questionnaire employs 10-point scales to
collect multiple measures for each construct. This approach results in over 25,000 observations
per variable from which annual indices are constructed. Approximately 200 observations are
used to estimate each index. Fornell (1992) describes the latent variable estimation of the
indices,
The SCSB measures are matched with economic returns data for publicly held firms-
specifically, return on investment (ROI) and labor productivity (sales per employee) for each
firm.

6. Model Specification Issues

6.1. Approach to Testing the Tradeoffs Hypothesis The hypothesis states that we should expect
a positive association between customersatisfaction and productivity for goods, while the
association between the two should be negative for services. To test the hypothesis, the
following model will be estimated:
h PRODt = (YGooDs + CSERvices
+ fooDs(1 - SERVICE) in SAT
- fiservices(SERVICE) In SAT -- e. (8)
where
SAT = customer satisfaction for firm i at time t,
PROD
productivity for firm i at time t,
SERVICE = binary variable (0 = good, 1 = service),

Constant,
The financial data for the firms were collected with the aid of a grant from the Marketing Science Institute.
'Given the large dispersion in productivity numbers, natural logarithms are taken of the variables.
MARKETING SCIENCE/Vol. 16, No. 2, 1997
f = slope coefficient,
= error term = n -- pe 1 + uit such
that n, ~ N(no).
E,
t

For the tradeoffs hypothesis to be accepted, the difference between the association of
satisfaction with productivity for goods and that for services should be negative and significant,
fooops - BSERVICES < 0.
However, in estimating specifications such as (8) with Cross-sectional, time-Series data, it is
necessary to control for factors that can lea d to violations of the asSumptions of Ordinary Least
Squares (OLS). First, omitted factors correlated with both the dependent and independent
variables may lead to biased estimates. In particular, m, captures several unobserved
parameters of the model (eg, y, s, ), with the exception of e and d. The former, e, is captured
by whether the firm is a service or goods firm and o. is part of the random error term. Serial
correlation of the errors is a Second potential source of bias. Finally, measurement error and
random environmental shocks may create correlation between the residuals and the
independent variables.
A Series of methodological approaches for addressing potential Sources of bias have gained
wide acceptance in marketing (Jacobson 1990a, 1990b, Boulding 1990; Boulding and Staelin
1993; Erickson and Jacobson 1992). A cogent summary of these methods is provided by
Boulding and Staelin (1995). Accordingly, to control for unobserved fixed effects we considered
the efficacy of transforming the specification given by Equation (8) via first differences. To
investigate the possibility of serial correlation, we considered quasi-first-differencing or p-
differencing. Finally, to Control for potential measurement error and random effects (eg,
contemporaneous shocks) we applied an instrumental variables approach (Reirsoi 1941).
Following Boulding and Staelin (1993) and Erickson and Jacobson (1992), we chose as
instruments lagged values of all right-hand-side variables from periods i-2 or t-3 as appropriate.
However, Hausman's specification test indicates that violations of OLS due to measurement
errors in the variables are not a significant concern (H = 0.449). Hence, the findings presented
below control for fixed effects via first-differencing and serial correlation via p-differencing. After
following these
Copyright (C) 2001 All Rights Reserved
 ANDERSON, FORNELE AND RUST Customer Satisfaction, Productivity, and Profitability

the largest share firms such that cumulative share is approximately 70%.
The SCSB begins with a computer-aided telephone survey designed to obtain a
representative sample of customers for each firm. Potential respondents are Selected on the
basis of having recently bought or used a company's product. To participate, each respondent
must pass a battery of Screening questions. The questionnaire employs 10-point scales to
collect multiple measures for each construct. This approach results in over 25,000 observations
per variable from which annual indices are constructed. Approximately 200 observations are
used to estimate each index. Fornell (1992) describes the latent variable estimation of the
indices.
The SCSB measures are matched with economic returns data for publicly held firms-
specifically, return on investment (ROI) and labor productivity (sales per employee) for each
firm.

6. Model Specification Issues

6.1. Approach to Testing the Tradeoffs Hypothesis The hypothesis states that we should expect
a positive association between customersatisfaction and productivity for goods, while the
association between the two should be negative for services. To test the hypothesis, the
following model will be estimated:
hin PRODt = algooDs + asERVICEs
+ foops(1 - SERVICE) ln SAT
+ pservices(SERVICE) In SAT + et (8)
where
SAT = customer satisfaction for firm i at time t,
PROD = productivity for firm i at time t,
SERVICE, = binary variable (0 = good, 1 = service),

COnStant,
The financial data for the firms were collected with the aid of a grant from the Marketing Science Institute.
"Given the large dispersion in productivity numbers, natural logarithms are taken of the variables.
MARKETING SCIENCE/Vol. 16, No. 2, 1997
B
re

= slope coefficient, et - error term = m, + pet 1 + ult such

that ni, ~ N(n,a,i).
For the tradeoffs hypothesis to be accepted, the difference between the association of
satisfaction with productivity for goods and that for services should be negative and significant,
foooDs - pservices s 0.
However, in estimating specifications such as (8) with cross-sectional, time-series data, it is
necessary to control for factors that can lead to violations of the assumptions of Ordinary Least
Squares (OLS). First, omitted factors correlated with both the dependent and independent
variables may lead to biased estimates. In particular, m, captures several unobserved
parameters of the model (eg, , , ), with the exception ofe and 6. The former, e, is captured by
whether the firm is a service or goods firm and o. is part of the random error term. Serial correla
tion of the errors is a second potential source of bias. Finally, measurement error and random
environmental shocks may create correlation between the residuals and the independent
variables.
A series of methodological approaches for addressing potential sources of bias have gained
wide acceptance in marketing (acobson 1990a, 1990b, Boulding 1990; Boulding and Staelin
1993; Erickson and Jacobson 1992). A cogent summary of these methods is provided by
Boulding and Staelin (1995). Accordingly, to control for unobserved fixed effects we considered
the efficacy of transforming the specification given by Equation (8) via first differences. To
investigate the possibility of serial correlation, we considered quasi-first-differencing or p-
differencing. Finally, to control for potential measurement error and random effects (eg,
contemporaneous shocks) we applied an instrumental variables approach (Reirsol 1941).
Following Boulding and Staelin (1993) and Erickson and Jacobson (1992), we chose as
instruments lagged values of all right-hand-side variables from periods t-2 or t-3 as appropriate.
However, Hausman's specification test indicates that violations of OLS due to measurement
errors in the variables are not a significant concern (H = 0.449). Hence, the findings presented
below control for fixed effects via first-differencing and serial correlation via p-differencing. After
following these
137
Copyright (C) 2001 All Rights Reserved
 ANDERSON, FORNEL AND RUST Customer Satisfaction, Productivity, and Profitability

steps, the final number of usable observations for this analysis is 170.
6.2. Approach to Testing the Profitability
Hypothesis A useful approach to testing the second hypothesis, the profitability hypothesis,
is to include an interaction effect between customersatisfaction and productivity, as well as their
respective main effects, in a profitability equation. For all firms, the direct association of both
variables with ROI is expected be positive. In the case of services, however, we expect the
interaction between the two to be more negative (less positive) in its association with ROI.
The preceding discussion leads to the following translog specification for the base model,
against which the appropriateness of allowing different parameters for goods and services will
be tested:
n ROI o -- fisAT ln SAT -- PROD ln PROD
+ psAT><PRoD ln SAT ln PROD + e,
(9)
where
RO = return on investment for firm i at time t,
SAT = customer satisfaction for firm i at time t,

PROD = productivity for firm i at time t,

fo = constant,
coefficient for variable,
-
variable are

ea = error term = m + pet - 1 + u, such that

1, - N( ).
As before, violations of the assumptions of OLS were considered. Once again, both first-
differencing and pdifferencing are employed. As in the case of Equation (8), Hausman's
specification test indicates that violations of OLS due to measurement errors in the variables are
not a significant concern in estimating Equation (9). The number of usable observations
following these steps is 126.
Given the estimation procedure, deleting observations with missing values reduces the dataset by multiple
observations for each missing value (eg, if four rounds of data are required to estimate the model, four observations
are lost for every missing value of ROI).
138

7. Findings
7.1. Testing the Tradeoffs Hypothesis Estimation of Equation (8), after first-differencing and p-
differencing for the reasons detailed above, yields the results summarized in table 2. As shown,
the asSociation between satisfaction and productivity for goods is positive and significant at
0.94 (the standardized coefficient is 0.15). The association between satisfaction and productivity
for services is negative and significant at -10.81 (the standardized coefficient is - 0.30). The
tradeoffs hypothesis, which states that the association for services should be significantly less
positive, cannot be rejected as the difference in the slopes for goods versus services, -11.75 (=
0.94 - 10.81), is negative and significant (t = -4.35, p < 0.01). Hence, not only is the association
between customer satisfaction and productivity iess positive for services, but the association is
actually significant and positive for goods, and significant and negative for services. This finding
implies that services exhibit "tradeoffs," while goods do not, given that increases (decreases) in
customersatisfaction are associated with decreases (increases) in productivity for services.
7.2. Testing the Profitability Hypothesis Table 3 summarizes the estimation results pertaining to
the profitability hypothesis.
The first column presents the base specificationestimates, the second column allows for
differential effects of goods and services, and the third column includes the hypothesized
interaction term. In addition
able 2 esting the Tradeoffs Hypothesis: Estimation of
Equation (8)
independent EStimate
Variable Coefficient (Standard Error)
fe000s 0.94* (0.43) PSERVICES 0.81}1-( * 2.42) p - 0.09 R2 O.22
Notes: i) Depedent variable is productivity; ii) m = 170; iii) indicates p < 0.10; iv) p is the first-order autocorrelation
(estimated via Hildreth-Lu).
MARKETING SCIENCE/Vol. 16, No. 2, 1997
AYAM -- AL NA

*&opyright-6-2004 l-ATM Rigi f Rese wed - - - - - - swr or now on-r- ---------->

 ANDERSON, FORNELL AND RUST Customer Satisfaction, Productivity, and Profitability
able 3 Summary of Estimation Results for Profitability Hypothesis
(Specification 2) (Specification 3) (Specification 1) Differential Slope Differental Interactio
Base Effects for Goods Effects for Goods Specification- WerSUS Services WerSUS Services
Equation (9) Coefficient Al GOOds Services GOOds ServiCeS
ft 0.17* 0.3 O24* 19* (0.09) (O12) (0.4) (0.10) 0.08 0.08 O 10* 0.09 (0.02) (004) (0.05) (002) noo-sa - 0.49 - 040
145* - 107
(0.70) (0.73) (0.88) (1.39)
- O 39 - 045 - O 45 R2 0.2 0.3 O 5
0 70 428*
Notes; n = 126; "indicates p < 0.10; the standard deviations are in parentheses; p is the first-Order auto Correlation
(estimated Via Hildreth-Lu); F... - IS the Chow test of an unrestricted (current Column) versus the base specification
(column 1) specification With r restrictions,

to the coefficients and their associated standard errors, the table provides an estimate of the
first-order autocorrelation, p, the R', and a restricted-unrestricted F test (Chow test) to assess
each specification against the base specification in the first column.
The specification allowing for differential effects for goods and services is not found to be a
significant improvement over the base specification (F - 0.70). Hence, we do not show separate
main effects for customer Satisfaction and productivity in column 3 (estimation of the "full" or
"saturated" model produces an identical substantive result). The specification with the
hypothesized interaction term (Specification 3) is found, however, to be a significant imp
rovement over the base specification (Specification 1), F = 4.28.
In the final specification, presented in column 3, the coefficient for the direct association
between customer satisfaction and RO is found to be positive and significant at 0.19. The
coefficient for the direct association between productivity and ROI is also found to be positive
and significant at 0.09. The interaction between customer satisfaction and productivity is found
to be positive and significant for goods at 1.45, yet negative
MARKETING SCIENCE/Vol. 16, No. 2, 1997

and insignificant for services at -1.07. The difference between the two coefficients is significant
at the 0.01 level. Hence, simultaneous changes in both customer Satisfaction and productivity
are significant and positively associated with economic returns for goods, while the association
is significantly less positive for Services. In fact, the interaction for services is negative, albeit
slightly insignificant (p value of 0.2), implying that the overall relationship is concave
downwards. Taken together with the findings of the first test, this Suggests support for the
argument that tradeoffs are more likely for services than goods.
To see what this might mean for different types of firms, consider that the marginal impact or
"average elasticity" of ROI with respect to satisfaction for goods is fisar + fisAT-PROD (Average
Productivity) = 0.19 + 1.45(0.05) = 0.265, yet only 0.14 (= 0.19 - 1.07(0.05)) for services.
Similarly, the elasticity of ROI with respect to productivity for goods is fisAT + sisATxPROD
(Average Satisfaction) = 0.09 + 1.45(0.007) = 0.10 and 0.08 (= 0.09 1.07(0.007)) for services.
Accordingly, a simultaneous 1% increase in both customer satisfaction and productivity should
be associated with an increase of 0.365% in ROI for goods, but only a 0.22% increase for
services.
8. Discussion As a means of illustrating the importance of understanding the association
between productivity and customer Satisfaction, it is instructive to ask: in which industries do
firms with the greatest economic returns also exhibit high productivity, high satisfaction, or both
simultaneously? To gain insight into this question, we partition each industry into high/low
satisfaction and high/low productivity firms based on a firm's relation to the industry median for
each measure in a given year. We then calculate the average ROI for firms in each of the four
resulting partitions. Figure 2 shows the strategy combination for which average ROI is highest.
The firms in the cell with high customer satisfaction and high productivity that exhibit higher
than average (for their industry) ROI come from goods industries such as automobiles, basic
foods, mainframe computers, and PCs. This quadrant also contains clothing
39
Copyright (C) 2001 All Rights Reserved
 ANDERSON, FORNELL AND RUST Customer Satisfaction, Productivity, and Profitability
Figure 2 Strategy Combination That Earned the Greatest Average ROE
for Firms in Different indistries

High Low Productivity Productivity

Automobiles Basic Foods Ardanes High Personal Computers Banks Customer Matfra ters Charter Travel
Clothing Stores Furniture Stores Satisfaction Mail Order Shipping
insurance
Low Department Stores
Gas Stations Supermarkets Customer Newspapers Satisfaction

stores and mail order, both of which are a mixture of goods and service and both have gained
from increased automation. Insurance is an interesting anomaly, until one realizes that
productivity in insurance is measured by total assets relative to the number of employees rather
than current sales. In light of this situation, it seems reasonable that the highest asset insurance
companies would be those best at Satisfying and, therefore, retaining their customers.
It is worth emphasizing that it is only for industries in this top-left quadrant that the firms with
the highest returns are also found to exhibit the very highest levels of both productivity and
customer satisfaction in their industry. In all other cases, the highest levels of productivity and
customersatisfaction in a given industry are found in off-diagonal cells. This suggests further
support for the notion that these "off-diagonal' industries are ones in which it is difficult-or
undesirable-to achieve Superiority in both satisfaction and productivity.
For the "purer" services-such as airlines, banks, charter travel, and shipping-the highest ROI
firms exhibit relatively high customer satisfaction, but reiatively low productivity. High relative
productivity and low relative customer satisfaction are associated with high economic returns for
firms competing in department stores, gas stations, and newspapers. It is interesting that two of
these latter industries are retailers, and all share a common characteristic in that they each
face limited competition due to the importance of iocation. Perhaps, for these services,
customization provides fewer benefits to the firm relative to standardization.
The Supermarket category is the only instance in which firms earning the highest returns
actually have lower levels of productivity and customersatisfact ion. We regard this particular
case as an anomalous occurrence due to an artifact. In this highly concentrated industry, one
particular firm has a strong location advantage mixed with substantial political appeai, giving it a
degree of monopoly power that allows it to earn high profits. At the same time, one of the
remaining two firms experienced financial difficulties in two of the four years spanned by the
study. In the other two years, the high satisfaction, high productivity quadrant was associated
with the highest returns for this industry.
Although it is fundamentally descriptive, Figure 2 also has a normative flavor that should be
noted. The pattern of industries suggests that customer satisfaction and productivity may only
be compatible for industries with a substantial goods component. In terms of the dual nature of
quality, these would be industries in which customer satisfaction is highly dependent on
standardization quality. In other industries, where customersatisfaction is more dependent on
dimensions of quality that are more difficult to standardize, or must be customized, firms may be
more successful by focusing on customer satisfaction. The theoretical framework suggests that,
even if customization is relatively more important, profit-maximizing firms may choose to offer
relatively low customersatisfaction-via offering low customization quality-and exhibit relatively
high productivity, if the cost implications of allocating effort to standardization quality are
relatively attractive.
In addition, the nature of the industries in the bottom half of the diagram suggests that
pursuing productivity may possibly require some degree of monopoly protection. In the case of
department stores and gas stations this may come from location. This is consistent with the
notion that customer satisfaction is iess important when there are significant switching barriers
(Fornell 1992). When switching barriers are less significant, it becomes more important to
defend current customers through customer satisfaction.
MARKETING SCIENCE/Vol. 16, No. 2, 1997

- Copyrig 2004 All :Rights-Reserved

 ANDERSON, FORNELL AND RUST Customer Satisfaction, Productivity, and Profitability

9. Summary and Conclusions Although there is widespread belief that firms should be superior
on both customersatisfaction and productivity, it may be more difficult to pursue both
simultaneously when it is important to customize market offerings to better meet customers'
needs. The findings presented here suggest that this may be particularly true for industries in
which service by personnel plays an important role. As services have come to dominate the
world's developed economies, such tradeoffs require greater understanding-especially as the
trend toward services shows no signs of abating (Shugan 1993).
While the empirical work considers differences between goods and services, it is important to
recognize the role of the dual nature of quality-standardization versus customization-in
determining whether there will be tradeoffs in any given industry. The analytical portion of the
study suggests that customersatisfaction and productivity are less likely to be compatible when:
(1) customer satisfaction is relatively more dependent on customization as opposed to
standardization; and (2) when it is difficult (costly) to provide high levels of both customization
and standardization simultaneously. If such tradeoffs are driven by differences in the importance
of customization and standardization, future research may wish to overcome the coarse
categorization procedure of the current study and find more direct measures of standardization
and customization quality to test the analytical framework's implications.
Of course, the preceding does not imply that firms should never seek opportunities that lead
to improvements in both productivity and customer satisfaction. Rather, it is important to
consider the risks and costs involved and the interrelationship between the two, particularly as
the importance of services and customer relationships grows. Superiority in both will likely be
achieved through the application of a single process to produce a broader variety of products
meeting a wide variety of customer needs. For example, appropriate applications of information
technology (Pine et al. 1993, Bessen 1993) may help a firm to become both more productive
and more effective in satisfying its customers. Information technology may allow a firm to offer
services for the bulk of its customers
MARKETING SCIENCE/Vol. 16, No. 2, 1997

that are amenable to standardization, but provide a more customized approach to those who
self-select into it (eg, ATM banking versus working directly with the bank's employees,
automated airline arrival/departure information versus use of an airline representative or agent).
Accounting for the impact of technology on the ability to improve both customization and
standardization quality appears to be an interesting direction for future research.
Future research may also wish to examine alternative measures of financial performance. A
particularly promising approach is Tobin's q, the ratio of market value to the book value or
replacement cost of the firm's tangible assets. Tobin's q has the advantage of imputing
equilibrium returns based on all information available to the capital market. Although the capital
market in Sweden is not large enough to pursue this approach, a study of this nature will be
possible in the near future using US capital market information and customer satisfaction
measurements currently being collected. One question of particular interest that could be
broached using Tobin's q is whether customer satisfaction is associated with persistent returns
or Ricardian Rents. Persistent returns might accrue to the firm if it owns resources difficult to
imitate-or resources for which imitation is uncertain (eg, when firm's possess asymmetric
information about the underlying relationships)that are instrumental in providing customer
satisfaction. Examples of such resources might include superior management, personnel
processes, reputable brand names, attractively located land, proprietary knowledge or skills,
and patent protection (Lippman and Rumelt 1982, Montgomery and Wernerfelt 1988, Simon and
Sullivan 1993). As persistence of earnings has been observed in many industries (Lipe and
Kormendi 1987), customer Satisfaction measures may prove useful in tracing the source(s) of
observed persistence back to such inimitable resources. Firms that are successful in increasing
customersatisfaction may do so as a result of building distinctive advantages in resources.
Finally, it is worth emphasizing that while the issue of tradeoffs between customer satisfaction
and productivity is important today, it is expected to become even more important in the future.
The growth in services over the past few decades is expected to continue
141
Copyright (C) 2001 All Rights Reserved
 ANDERSON, FORNELL AND RUST Customer Satisfaction, Productivity, and Profitability

(Shugan 1993). The implication is that more business transactions involve long-term
relationships that depend on satisfying customers, often by customizing the firm's market
offering, in order to retain them. A related reason is the increasing role of customersatisfaction
as a corporate strategy (Fornell 1992). In most developed countries, firms face slowing growth,
mature markets, and increasing foreign competition. This makes customers an increasingly
scarce resource pursued by an increasingly large number of aggressive Suppliers. As cost
structures make price competition difficult for many firms, pursuing customer satisfaction-
reducing price elasticities and retaining current customers-is becoming an increasingly attractive
alternative. To survive, firms must offer greater customization through differentiating products
and finetuning segmentation. And, as the importance of customer satisfaction continues to
grow, situations in which there is conflict between customer satisfaction and productivity are
likely to become increasingly common.
Appendix
Profit Function

= 1 (1 - , + .jp"p -- c}
.. , + 2 -- 2 = ydbsqb |,
ay = constant,
e - relative importance of customization quality, 6 (0,1),
db = level of standardization quality, d. D 0,
d = level of customization quality, (b > 0,
f3 = price elasticity, B > 1,
The authors gratefully acknowledge the data provided through the funding of the Swedish Post and the Marketing
Science Institute, as well as the research support provided by the National Quality Research Center at the University
of Michigan Business School, the International Center for Studies of Quality and Productivity at the Stockholm School
of Economics, and the Center for Service Marketing and the Dean's Fund for Faculty Research at the Owen
Graduate School at Vanderbilt University. This paper has benefited substantially from the helpful suggestions of the
Editor, Area Editor, and two anonymous reviewers. The authors would also like to thank Jaesung Cha, Lenard Huff,
and Jay Sinha for their help in assembling the dataset.
142
Qpyright|22QQ1-AllRightRFyed
p = price, C = constant variable costs, c > 0, d = linear effect of standardization
---
quality levels on costs, d. D 0, - rate of acceleration in costs
for standardization quality, s > 0, - rate of acceleration in costs
for customization quality, e > 0,
y = tradeoffs coefficient, -oc < y < 0,
First-Order Conditions
drt f?-i dp -fat (1 - e)d, + edbpp - c.
+ at (1 - ed. + edip Pip - c = 0,
= (1 - ) - CI + - , - = 0, ,
drt ---
- T * - ddb. pc s 0.
Solving the above for p', d' and d yields expressions shown as Equations (4)(6).
Second-Order Conditions The determinant of the Hessian matrix is negative,
-(B - 1)a(1 - e)d: + ed:p" O 0

O ? O y

-( - )(B - 1)a(1 - e)d) + ed; p < 0

given A > 0, 2 - 0, . ? > 0, and 6 > 1 Under these same conditions, the first principal minors are negative, the
Second principal minors are positive, and, consequently, the Hessian is negative definite.
Proof of Propositions Proof is obtained through the construction of examples. The objective is to show that optimal
levels of productivity, E, and profitability, 7t, are increasing everywhere as the benefits of standardization, d, increase
(dat/do, D 0 & dE/d6, D 0), whereas changes in the optimal level of satisfaction depend on the relative size of the
model param eters: e, , and 24/ 2.
To thus end, we differentiate satisfaction with respect to the benefits of standardization,"d, yielding:
35" - 4(1_6) " YE 72; -
Hence, as the cost benefits of standardization increase, 6, f, customersatisfaction decreases if the marginal impact
of customization quality on customer satisfaction is large (eg, e - 1), the "tradeoffs coefficient" is positive, y > 0, and
large relative to the cost or "difficulty" of increasing customization, ... Conversely, if the relative
MARKETING SCIENCE/Vol. 6, No. 2, 1997
 ANDERSON, FORNELL AND RUST Customer Satisfaction, Productivity, and Profitability
importance of custom1zation is low (eg, e - 0), then customer satisfaction is increasing.
At the same time, productivity will be higher as the benefits of standardization increase:

6E 1 Jap''14-(1 - 6 - 4en. , er. 6, [D*c + /.</... -- y2 (*c + FC*)

- ap*"#A(1 --- ) - pec - s
- * {D"p
FC*

ap-fi - e) - ye [*c + FC* [ 2 -- ;

-H (1 - e)d + %}

st -f-1 -- : FC* + 2[*c + | |2P * 3

. The above inequality will hold given all second-order conditions are met and both demand, D, and fixed costs, FC,
are
greater than
ZerC)
.
Finally, profitability increases everywhere as the benefits of standardization increase:
87' - ap*To(p* c)(1 e) ye] + 2,
-
- == db > 0. y2 d
Derivation of Elasticities The model is a translog function of the following form:
G
in y = a + f2 in x1 + f2 in x2 + f(ln x) (in x2),
which, applying the exponential function yields:
(
y = ea + flnx + B2lnux2 + P3(ln x)(lnx2) (or) y = exix.a. -- 3.3).
1
The elasticity of y with respect to x is then:

: dy x1 a f3 ln x2 cx+ ibnx1 + B2lnx2 + B3(drux1)(lnx2) 21 ly y1 -- e

-
X f == + 3 ln x2.
Replacing y with ROI and the x's with satisfaction and productivity, we can use the same approach to determine
e
the elasticity of ROIwith respect to satisfaction (or productivity)yielding:
)
TRO SAT = BSAT + sPROD lin(PROD),
d
17ROI PROD = PROD + sATx PROD ln(SAT).
i
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