Customer Satisfaction and Firm Profits in Monopolies: A Study of Utilities

Abstract

There is a growing body of evidence that customer satisfaction is predictive of firms’ future financial performance. However, studies of this relationship have been limited to competitive markets, and monopolistic markets have been largely ignored. This study explores the large and important utilities market and exploits its unique regulatory requirements that generate detailed and reliable operating and accounting data to examine the overall relationship between customer satisfaction and utility profit and establish the causal mechanisms involved. Using data from U.S. public utility firms, the authors show that even when customer satisfaction does not affect future revenues, it does positively predict future profitability by reducing utility firm operating costs. More specifically, they find that higher satisfaction reduces the costs of utility firm distribution, customer service, and sales and general administration expenses. These findings and additional post hoc evidence are consistent with the notion that customer satisfaction (1) generates efficiency-enhancing benefits for utility firms by lowering the direct and employee engagement costs of dealing with dissatisfied customers and (2) fosters greater trust and cooperation from customers. This study has important implications for both managers and regulators and provides important new insights for market-based asset theory and regulatory economic theory.