What’s good for shareholders? Satisfied customers, or something else?

There’s an idea that comes around from time to time that satisfied customers indicate a good investment. It sounds almost axiomatic, something that should be true and appears to be self-evidently true. However, as in science, ‘should be true’ does not cut much ice when it comes to equity investments. Is this something that can be measured? Can customer satisfaction and high returns for

shareholders

be shown to correlate, let alone an actual causality?

The funny thing is that as soon as I start examining the idea, counterexamples start occurring to me entirely automatically! There are businesses with which I am personally delighted as a shareholder but with whom my experience as a customer is not quite in the same league, to put it mildly. India’s most profitable private sector bank is the first name I’d put on this list, but it’s certainly not the only one.

Most people who give this issue any thought conclude that if customer satisfaction works as an indicator of investor returns, it must be doing so because it is a leading indicator of future profitability. Even those who are not investors would understand that the primary driver of investors’ returns is the company’s financial results, along with other information like industry and business outlook, management quality, regulatory environment, the current stock price etc.

If you think about it, all this data and information is irrelevant by itself. After all, it’s all information about the past, by definition. However, what you, as an investor, should be interested in is the future. The money you will make depends on how a company will do in the future and what will happen to its stock price. Since you cannot know the future, you use past information as a proxy for the future. If a company has been growing its profits in the past, it will likely do so in the future. If the management has run the company well in the past, then there’s a likelihood that it will continue to do so in the future. Although we seldom think of equity research in these terms, it’s a way of foretelling the future.

Customer satisfaction should give a clue to the future. However, I’m using the word ‘should’ again. When I look at the actual experiences of

customers vs shareholders

, then something less cheerful suggests itself. While it’s nice to have customers who are satisfied, it’s even better to have customers who are unable to walk away. Businesses love customers who cannot go away no matter how dissatisfied they are. You can’t choose and switch to another bank easily. You cannot walk out to another electricity distribution company. Note that these are licensed businesses where the government acts as a gatekeeper. Telecom companies were in the same category, but then number portability changed the game.

As I’m writing this column, Facebook and its other services are just recovering from an hours-long worldwide shutdown. Are you going to switch to alternatives for Facebook, Instagram and WhatsApp as a result? For those enmeshed deep into using these services, the idea is unthinkable. A company like Facebook doesn’t have customers; it has hostages. At least that’s true of people who use the services, but not the real customers, who are the advertisers.

All this brings one to the uncomfortable conclusion that companies with customers who are hostages are as good (or better) bet for investors than those who have satisfied customers. At the end of the day, a profitable business is one that can ensure that customers keep paying it while it spends as little as possible on them. Happy customers are one way of doing it, but customers tied to you is another. As the example of telecom companies and number portability shows, regulatory authorities have to recognise this and find a way around it. Bank account portability? Is that an idea whose time should come?

(The author is the founder and CEO of Value Research)