The Influence of Customer Satisfaction on Firm
Performance Under Electricity Monopolies and
Competitive Markets
By Mengfei Ding University of Groningen Faculty of Economic and Business
Department of Marketing Master Thesis Marketing Intelligence
June 2019
Supervisor: A. Bhattacharya Second Supervisor: F. Eggers
Poolsterlaan 30 9742KR, Groningen
ABSTRACT
It is widely recognized that economic growth and firm profitability are on the basis of acquiring and retaining customers, however, this might not hold among regulated companies. Therefore, a conceptual framework is proposed to analyses the effect of customer satisfaction on firm values in the electric provider and the differences between two types of companies in the energy market. Two distinct dimensions of firm values are identified: net profits and cost of goods sold. The proposed model is a fixed effect model tested with the unbalance panel data provided from J.D. Power, regarding the chosen measurement of firm performance, the results indicate negative effect on cost of both monopolies and competitors. Furthermore, this study also tests the effect on revenue, which shows a negative effect on revenue of both type of firms as well. Consequently, customer satisfaction can be seen as an important indicator guiding firms when evaluating performances.
Keywords: customer satisfaction, monopolies, competitors, profit, cost, revenue,
PREFACE
Before you start the reading journey of my thesis: The influence of customer satisfaction on firm performance under electricity monopolies and competitive markets, I would like to express my special thanks to my supervisor Abhi Bhattacharya for his excellent and professional guidance during my master thesis process and leading me to an interesting topic about customer satisfaction. I have been working on it from February until June 2019 as the final stage of my graduate study life in Marketing Intelligence at University of Groningen. I am glad that the master journey now comes to an end while I’m enjoying writing the thesis. During this 5 months, I have learned other models which are new to me and improved my analytic skills in academic research. Really appreciate the valuable and timely feedback from Abhi in every step of my thesis especially at the first two months when I was treating in China for an urgent back disease, he tried his best to match my time and gave me great encouragement which helps me a lot. In addition, I would like to thank my thesis mate Xueqi Li for the nice cooperation, time we spent together discussing issues and suggestions that you gave me.
Furthermore, I want to thank my second supervisor Felix Eggers in advance for reading and evaluating my thesis. Finally, I want to thank my family and friends for supporting me during this process.
I hope that you will enjoy reading my thesis! Mengfei Ding
Table of Content
1.INTRODUCTION ... 5
2. LITERATURE REVIEW ... 7
2.1 Customer satisfaction and firm value ... 7
2.2 Monopolies ... 8
2.3 Competitive markets ... 11
2.4 Conceptual model and Hypotheses: ... 13
2.5 Additional study ... 15 3. RESEARCH METHDOLOGY ... 16 3.1 Data ... 16 3.1.1 Data description ... 16 3.1.2 Missing values ... 16 3.2 Measurement ... 17 3.3 Model ... 19 4. RESULTS ... 20 4.1 Results on profit ... 20 4.2 Results on cost ... 21
4.3 Results on firm types ... 23
4.4 Additional studies ... 24
4.4.1 Results on revenue ... 24
4.4.2 Additional study of cost effect on customer satisfaction-Granger causality test ... 25
4.4 Results summary ... 25
5. CONCLUSION & DISCUSSION ... 26
5.1 Findings ... 26
6. LIMITATION ... 29
7. REFERENCES ... 30
1.INTRODUCTION
satisfaction and loyalty (Senia, 2002), due to the much higher fee to acquisition new customers than retention, companies turned to work harder on improving the existing customers. Therefore, managers are searching for ways to catch the most crucial factor to influence revenues towards electric markets. Framed by the concept of ‘offensive’ and ‘defensive’ marketing, scholars have studied the returns on factors such as service quality and advertising to outcomes such as loyalty, customer satisfaction and profits (Fornell & Wernerfelt, 1987). The measurements of companies’ performance could be influenced by customer satisfaction, however, customer satisfaction is always cited as a non-financial measure, therefore an absent of the proof linking non-financial and financial metrics is come into being, to fill this gap, several financial metrics are selected to measure the impact of customer satisfaction on performance. Substantively, the purpose of this study is to examine the links between customer satisfaction, firm profit and cost of goods, comparing both monopoly firms and competitor firms. This study tests the proposed model using data provided from J.D. Power that describe the dynamics in the U.S. electricity industry over a 6-year period from 2012-2017. It investigates serval key questions: What are the relationship between customer satisfaction and firm profits, cost and revenue of regulated electricity firms? Which type of firm will be more competitiveness in the whole market? Are there any differences of impact between regulated firms and unregulated firms? What would be the suggestions for both type of firms? Are there any prevenient input influence customers? If significant results are found exist, this would suggest for further effort in inspiration of how pursuing customer satisfaction will be best balanced with goals related to other performance measures, such as ROI and shareholder value.
2. LITERATURE REVIEW
2.1 Customer satisfaction and firm value
The effect of marketing on firm performance has been studied for many years, marketing strategies, sales promotions and other activities have been considered are based on marketing resources (Hooley, Greenley, Cadogan, & Fahy, 2005). Within the study stream, customer satisfaction has been served as a particular attention, as a dynamic market asset, customer satisfaction is shaped over by the actions of companies and consumers in the market. According to several researchers, customer satisfaction is usually classified as two perspectives: from a cognitive perspective, satisfaction is considered as the evaluation resulting from comparing customer’s expectations and their perceived value of the services truly received (Oliver & DeSarbo, 1988); from an emotional view, satisfaction can be understood as a positive emotional condition resulting from the previous consumption experiences (Roest & Pieters, 1997). The specific consumption emotions and feelings have an impact on customer purchasing intentions including word-of-mouth, customer loyalty and price sensitivity (Riadh, 2007). Overall, customer satisfaction can be conceptualized as the perceived value depending on assessment of the utility provided products or services (Vanessa, Patrick, & Pilar, 2006). Within the scope of this study, satisfaction is defined as the post-consumption affective responding by the residential energy customers. Firms who intend to maximize firm performances will particularly focus on achieving greater customer satisfaction through delivering value as a strong competitive advantage (Woodruf, 1997).
Profit: Among all the financial metrics, profit as a key financial benefit that measures
time series analyses revealing a positive relationship between changes in customer satisfaction and variations in firm level performance.
Profit can be calculated as revenue minus cost, under this there are two different profit, gross profit and net profit. Studies have found that both gross and net profits are positively influenced by changes in customer satisfaction, although many people believed there is a positive link between satisfaction and profitability Recent literatures revealed a more complex relationship than is often assumed that increasing satisfaction does not actually result in an increased in net profitability of customers (Rakesh, George, Mahendra, & Chakravarthi, 2008). For example, when customers start at a relatively low level of satisfaction, the opposite effect will appear, increasing the satisfaction of customers with lower level of satisfaction are more likely to offset by the cost of increasing their satisfaction, in the contrast, improving the highly satisfied customers will benefit more (Rakesh et al, 2008). Therefore, the cost of improving customer satisfaction might risk in outweigh the revenue growth for most customers. In conclusion, the more satisfied customers would generate a greater profitability than less satisfied customers. Fornell and Wernerfelt (1987,1988) found the impact of customer retention and concluded that marketing strategies can make a better use to keep existing customers than attracting new customers. Since satisfaction is an antecedent of keeping customer loyalty, reaching the maximum of satisfaction will increased tractions and willingness to purchase additional products or services (Anderson, Fornell & Rust, 1997; Zeithaml et al, 1996).
2.2 Monopolies
scholars (Chan, Hui, Lo, Tse, Tso & Wu, 2003) have pointed that customer satisfaction and loyalty are almost meaningless for those monopolies. Since behavioral loyalty is given due to extremely high switching barriers and a lack of competition, customer satisfaction is of no consequence to monopolies (Ittner & Larcker, 1996). Achieving higher level of satisfaction is hard for electric monopolies since most companies offered limited products to a heterogeneous market, in this way, enhancing customer satisfaction will not lead to a higher loyalty to firms. Chan et al. (2003) also stated monopolies to have relatively low customer satisfaction scores in comparison to those of firms operating in competitive markets. All of this implied that there is no need to strive for customer satisfaction in order to achieve well-pleasing performance among monopolies, in general, customer satisfaction will have a lower level compare to firms facing competition.
Economic theory suggests that monopolies would not have much to gain in terms of profit from improving satisfaction level since they are insulated from industrial competition, and will not affecting them to keeping a loyal customer base (Karlsen & Pettyfer, 2011). The lack of offerings in electric markets undermining the motivation of monopolies providing high quality of service or products which could better meet customers’ expectations, since keeping customer satisfaction can be viewed as an extra cost without additional benefits to firms. In fact, classical economists proposed that if a monopoly firm invests in creating or improving customer loyalty and satisfaction level, it would not only fail to benefit firm but would likely adding the cost of service for firm, resulting in a lower profit (Friedman, 1962). In this context, Baldwin and Cave (1999) suggested that the optimal level of operating for a monopoly utility would be to make sure a standard reliable supply of service, that providing customers with anything extra would be an unnecessary cost to firms. Besides, customers' willingness to pay extra for better service is limited, which also reflects monopolies do not need to reach a high standard of customer satisfaction since it requires extra costs that firm may take the consequences of the loss of profit.
aim to reach by the firm would be cumbrous and costly (Heskett, 1986) and altruistic (Fountain, 2001). Based on this, the following hypotheses is suggested:
H1: Under electricity monopolies, customer satisfaction has a negative effect on firm profits.
Cost of firms: Since profit is constitute by revenue minus cost, in this section, we will
examine the other factor measuring firm performance that influential by customer satisfaction under monopoly firms. Similar to firms in competitive markets, customer satisfaction realized by monopoly firms may help reducing costs of service since the firm would need to devote fewer efforts resolving complaints and rework (Huff, Fornell, & Anderson, 1996). The quality of suppliers could influence customer satisfaction and have a result on firms’ cost, for example, when consumer consider the number of supply interruptions such as blackouts at home and the time it takes the firm to contacts and re-establish with the supplier in case of interruption, as well as the instable voltage problem (Iberdrola, 2002). After customer experience too many power accidents or been through poorly conditions in the technical service quality and process quality, the accumulated sense of dissatisfaction will arise, especially when there is a gap between the price of electricity with the service they received. Customers may protest through various ways to protect their rights and interests, such as complaining to the relevant authorities or witting to the government. As a consequence, companies may need to spend extra money offset these negative effects and losses for customers which would increases unnecessary cost.
premise is customers agreed to install programmable communicating thermostats for this innovation, and shift up or down a few degrees every month to avoid high charges. Under such inconvenient conditions, only a small part of satisfied customers is willing to change, the rest of households are extremely opposed to this project that firms are forced to withdraw such changes. Based on this, I suggest:
H2: Under monopolies, customer satisfaction will have a negative effect on costs. 2.3 Competitive markets
After more than hundred years of universally accepted monopoly control, a form of competition among suppliers that offering socially-beneficial products appeared, these competitions emerged to produce electricity in the U.S due to the idea of retail electricity competition that raised in 1980s, households claimed that retailed electricity competition would not only cause price increasing and also decrease generation quality and electric reliability. Another issue is the difficult regulation of monopoly firms from rate regulation and control of electric generate efficiency (Lederer & Bouttes, 1991). As a result, a revolutionary idea has adopted to reflect the changed condition which is customer choice (Philip & Erin, 2015). After years’ operation, results showing that competition firms are successfully evolved, an increasing number of consumers embrace customer choice because its advantages in both price and services. With the development of energy markets, those utilities that managing in monopolistic environments are now exposed to free market competition.
firm, a virtuous circle is come into being, a good customer relationship lay the foundation for future customer loyalty and hence assist companies cut costs in maintaining loyal customers. To the contrary, when surrounding by more negative comments, it will greatly reduce the favorable impression in customers’ mind, as a consequence, customers who have not bought electricity from the firm before may stay away from it when there is a chance to switch.
Also, customer satisfaction had been shown to be positively correlated with happier and more satisfied employees, and will generate an increase in employee productivity through greater employee satisfaction (Schmit & Allscheid, 1995). Cost of labor accounting for a large proportion of the total expenditure, presumably, firm would then require fewer employees to achieve similar productivity levels which would lead to a decrease in the total operating costs for the firm. Comparing with monopoly utilities, customers are freely to churn between competitors, the main determinants of distribution operating costs are the total number of customers served in a region and simultaneous maximum demands (Burns & Jones, 1994). Following studies by Hellman (1972) and econometric analysis by Weiss (1975), number of customers could be viewed as the most important input when calculating costs, the incremental growth of customers will have a positive influence on costs, based on this, customer numbers of monopoly utilities are usually settled by different areas, competitor firms will in consequence have more flexibility on numbers of customers.
Based on this, I suggest:
H3: Other factors being equal, customer satisfaction will have a stronger effect on cost in competitive markets than monopolies.
2.4 Conceptual model and Hypotheses:
on profits and cost is tested with data under monopoly companies, second, there is a difference effect of customer satisfaction on cost through monopolies and competitors. Figure 1 is used to test whether customer satisfaction has a direct negative effect on profit under monopolies. The variable profit is measured by sales in the dataset, the following conceptual model and hypothesis is being showed:
Figure 1-effect of customer satisfaction on profit
H1: Under electricity monopolies, customer satisfaction has a negative effect on firm profits.
Figure 2 is used to test whether customer satisfaction has a negative effect on cost under monopoly firms. Another topic of interest from figure is whether there is a significant different between monopolies and competitors of the effect on cost, since we discussed in section 2.3, this relationship is expected to be moderated by the type of firms, it is predicted that the effect of customer satisfaction on cost among competitive markets is stronger than in monopolies. This leads to the following conceptual model and hypotheses:
Figure 2-effect of customer satisfaction on cost
H2: Under monopolies, customer satisfaction will have a negative effect on costs. H3: Other factors being equal, customer satisfaction will have a stronger effect on cost in competitive markets than monopolies.
Customer satisfaction -/monopolies Profit
Customer satisfaction +/- Cost
2.5 Additional study
Besides, we also interested in the impact of customer satisfaction on revenue since it refers to the business income in general, and equals to unit sales times price or costs plus profits, we have hypotheses the relationship between customer satisfaction with profit and cost, therefore, revenue will also be tested in next chapter as an additional variable.
What is also interesting in this study is the influence of previous input which means the costs used for construction and production may also generate an effect on customer satisfaction, where the cause of customer satisfaction is responsible for the effect on cost and the effect might partly dependent on the cause, so the causality will be examined in the next chapter. Thus, a Granger causality test will be performed according to Granger (1999), since granger defined causality relationship based on two principles: the cause happens prior to its effect; the cause has unique information about the future values of its effect, therefore, in this study we would test if there is a causal effect of cost on customer satisfaction, the purpose of this study is to clarify the relationship between level of customer satisfaction and costs, it is important because the construction investment in the early stage is likely to affect the quality of power transmission and electricity consumption, and thus more or less influence the daily life of customers. A better experience in electricity quality would help customers feel reliable and satisfied.
To have an overall conceptual frame, the following figure describe the relationship in this study.
Figure 3- conceptual model
3
. RESEARCH METHDOLOGYTo develop an explicit understanding of relationship between customer satisfaction and profits and cost, we formalize the preceding arguments. This chapter elaborates how the studies are designed.
3.1 Data
3.1.1 Data description
In this study, the dataset we used is provided from J.D. Power, an American-based global marketing information services company. J.D. Power is best known for its customer satisfaction research on various industries, since customer satisfaction is the only independent variable of this study, ratings are based on survey responses of randomly targeted customers, measured on a 1000-poing scale. The original dataset contains 449 observations, each observation consists of a firm, year, scores and the overall expenses or allowances in that specific year, such as sales, cost, etc. After cleaning missing values, the new dataset consists of a total 298 observations from year 2012 to 2017. Among all the firms, there are 204 monopoly firms and 82 competitive firms. The important variables that will be used in this study are: score, net income (profit), sale (revenue), cost of goods sold (cost), choice (type of firm), all the variables in this dataset are standardized first.
3.1.2 Missing values
after deleting those missing values we still have 298 observations for monopoly firms and 82 observations for competitive markets.
3.2 Measurement
To test the hypotheses, we need measures of customer satisfaction, profits, and costs. Lots of researchers have studied the determinants and measurements of customer satisfaction in the past few years (Fornell, 1992). Since we focus on the cumulative customer satisfaction, defined as an overall experience evaluation of the customers’ service consumption and purchase to date (Fornell, 1992), other studies that focus on transaction specific satisfaction are not be considered in this research (Oliver, 1997). Loyalty customer and repurchase decisions are on account of a broader sight and more variation in loyalty (Olsen & Johnson, 2003), overall cumulative satisfaction is more appropriate for our research. One direct method of measuring customer satisfaction that been using frequently is customer satisfaction score, it measures customer satisfaction with a business, purchase or interaction. In our dataset, the higher score represents a higher level of customer satisfaction of the company.
Dependent variables will be measured by profits of firm and the cost of goods of firm. As customer satisfaction increases, the model indicates that monopoly firms tend to spend less on cost to keep operation based on performance, we also suppose that effect on competitor firms will be much stronger than monopoly firms.
Besides, in this study we set 3 control variables that are list below:
Region: Based on our data from the United States, there are 50 states in U.S.A, due to the different levels of development in each state, some states may be richer or owned more population than other states, in our data, the region is divided into for parts, south, west, Midwest and east. As electronic firms will serve customers that gather in one area, there is one condition that sometimes the consumption level in rich areas will be significantly higher than other regions, or in an elderly city the situation might be quite different as well, in order to control for the demographic reasons, region has been selected as one of control variable.
Allowance for funds used during construction (uafudc): There are a big account of cost in equipment constructing needs to be calculated when maintaining the electric transaction or transportation. Allowance for funds used during construction represents the cost of financing capital construction projects is added to the cost of the asset, however, if taking all the compensation into account for the future revenue, this will affect the final profit of a firm, in this way, the allowance for funds during construction will be considered as a control variable.
For the control variables, we select assets and allowance for funds used during construction are measured as dollars, region will be divided into four parts, separately coded as East=1, Midwest=2, South=3, West=4.
There are different variables that are used for the analyses in this study. Therefore, an overview of all the variables is provided in table 1 below.
Table 1 definition of variables
Variable Definition Measurement
Customer satisfaction
How products and services supplied by
a company meet or surpass
customer expectation
Measured as score
Net Profit The amount of money remaining after deducted all the operating expenses, taxes and interest from a company’s total revenue
Cost of goods sold The direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good
Measured as dollars
Revenue Multiplying the price at which goods or services are sold by the number of units or amount sold
Measured as dollars Assets Any resource owned by the business Measured as
dollars Region Represent the physical geography of an
area
Coded as different region
Allowance for funds used during
construction
Account of cost in equipment constructing needs to be calculated when maintaining the electric transaction or transportation
Measured as dollars
Firm type Variable that represent whether a firm is regulated or unregulated
Coded as (1=monopoly, 2=competitors) 3.3 Model
According on Wang & Ho (2010), we consider the following panel data model with N observations and T time periods:
yit= Xit β + αi + uit for t=1, 2, …, T and i=1, 2, …, N (1-1) Xit= 1×K vector of explanatory variables, β = slope coefficient, uit=error term, αi=unobserved time-invariant individual effect.
Hence, in our study, formula 1 shows the effect on profit:
(Profit)it= (CS)it β1 + (AT)it β2 +(AF) β3+ αi + uit for t=1,., 6 and i=1,…, 204 (1-2)
Formula 2 shows the effect on cost:
(CostM)it= (CS)it β1 + (AT)it β2 +(AF) β3+ αi + uit for t=1,..,6 and i=1,…,204 (1-3)
(CostC)it= (CS)it β1 + (AT)it β2 +(AF) β3+ αi + uit for t=1,.., 6 and i=1,.., 82 (1-4)
To compare the effect between monopoly firms and competitive markets, a moderator should be created in evaluating the influence on cost. Based on this, we put forward another formula including firm type as a moderator:
(Cost)it=(CS)it β1 + (FT)it β2 + (CS)*(FT)* β3 +(AT)it β4 +(AF)it β5 + αi + uit for t=1,…,5
(1-5)
Profit = profit of monopolies, CostM = cost of goods sold of monopolies, CostC = cost of goods sold of competitors, FT= firm type, CS = customer satisfaction, AT = assets, AF = allowance for funds used during construction.
4. RESULTS
This chapter presents the results based on all the hypotheses. First the effect of satisfaction on profits is evaluated. Next, the effect of satisfaction on cost of both type of firms will be examined, the effect on revenue will also be taken into account here. 4.1 Results on profit
see if there is significant negative effect in this study, outcome of the relationship is provided in table 2.
Table 2-results on profit-monopolies
variables β -Estimate Std. Error P-value VIF
Score -0.0765 0.2943 0.7952 1.012
Assets 0.0302 0.0049 4.847e-09 *** 3.4814
Allowance -0.5101 0.4819 0.2914 3.4610
Sig level = ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05
Table 3-results on profits-competitive markets
variables β -Estimate Std. Error P-value VIF
Score -1.5530 1.9182 0.4212 1.0077
Assets 0.2955 0.0421 1.744e-09 *** 1.8457
Allowance -22.2874 8.5038 0.0109 * 1.8554 Sig level = ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05
From table 2, we can see that only two control variables are used in the model, which will be explained in next section. There are 39 monopoly firms have been tested with 204 observations across 6 years, the results showing that score has a negative effect on profit but not significant (p>0.05), which rejected H1 that customer satisfaction will have a negative effect on firm profit under monopolies. However, assets (β=0.0302) shows a positive effect and significant effect on profit, allowance for funds shows a negative (β=-0.5101) and significant effect on profit. The R square (R2=0.2712) shows a moderately goodness-of-fit. To avoid the multicollinearity problem, a VIF test has been conducted, from table 2 we can see that all of the VIF is smaller than 4, therefore there is no multicollinearity problem to concern.
Besides, we did another test among competitive markets for balance, as showing in table 3, however, effect on profits is still not significant (p>0.05), therefore, customer satisfaction will not affect firm profits as a whole.
4.2 Results on cost
besides, the effects between monopolies and competitive markets is also taken into account, more specifically, it is tested whether customer satisfaction will have a stronger effect on competitive markets than monopolies. First, the fixed effect model is performed between customer satisfaction and cost of monopoly firms to see if there is significant negative effect in this study, outcome of the relationship is provided in tables below.
Table 4 results on cost-monopolies
variables β -Estimate Std. Error P-value VIF
Score -3.5898 0.8148 1.908e-05 *** 1.0112
Assets 0.0647 0.0135 3.750e-06 *** 3.4814
Allowance 0.5154 1.3343 0.6998 3.4610
Sig level = ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05
Table 5 results on cost-competitive markets
variables β -Estimate Std. Error P-value VIF
Score -5.3292 0.9990 1.341e-06 *** 1.0077
Assets 0.0812 0.0219 0.00045 *** 1.8457
Allowance 4.5498 4.4289 0.3082 1.8554
Sig level = ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05
One thing that should be notice is region is disappear when dealing with competitors’ data, however, this could happen when the control variable does not change over time, but will cause unbalance when comparing with monopoly firms. Therefore, we decide to take out region in this study, for the research in section 4.1 as well.
long-term cumulative satisfaction with the firm will drive customers to become more loyal, the cost of both manual maintenance and service will be reduced.
From results of table 5, score still has a strong negative (β2=-5.3292) and highly
significant (p<0.05) effect on cost, which is larger that effect on monopolies, the R square is 0.401 showing a good fitness. On average, competitor firms would save $5.3292 when customer satisfaction goes up by 1 score. In this way, we can conclude that customer satisfaction indeed has a negative effect on cost for both type of firms, for more detailed comparison, a moderator has been created for different type of firms on comparing the effect on cost between monopolies and competitive markets.
4.3 Results on firm types
Table 6 results on cost-moderator effect
variables β -Estimate Std. Error P-value VIF
Score -4.0219 0.7373 1.227e-07 *** 1.0558
Assets 0.0731 0.0109 1.581e-10 *** 2.5028
Allowance 1.0002 1.2838 0.4367 2.6367
Firm type -0.5367 0.8882 0.5463 1.1839
Sig level = ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05
4.4 Additional studies 4.4.1 Results on revenue
Although revenue is not one of the hypotheses we study, it plays an important role when comparing cost and profit, therefore, an additional study was conducted for the effect of customer satisfaction on revenue. Fixed effect model is applied for the analysis. Since two of the previous control variable were taken out, we only keep assets and uafudc as control variables for consistence in this study. The outcome is provided in table 5.
Table 7 results on revenue-monopolies
variable β -Estimate Std. Error P-value VIF
Score -2.4856 0.7596 0.0013 ** 1.0112
Assets 0.1202 0.0125 < 2.2e-16 *** 3.4814
Allowance -2.7069 1.2439 0.0310 * 3.4610
Sig level = ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05
Table 8 results on revenue-competitive markets
variable β -Estimate Std. Error P-value VIF
Score -3.6542 0.9419 0.00025 *** 1.0077
Assets 0.1014 0.0207 6.752e-06 *** 1.8457
Allowance -9.8339 4.1756 0.02159 * 1.8554
Sig level = ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05
2010). Therefore, the future environmental quality would be significantly influenced by the energy consumption as well as the way of consumption (Stout, 1990). If customers know the firm they are contracting with is green in the power generation and distribution process, customers would happy about this consumption because they see those firms responsible for the nature environment. Adhering to an environmental friendly principle, total unit sales would hence decline as customers put energy saving in the first place, although customers satisfied with the company.
4.4.2 Additional study of cost effect on customer satisfaction-Granger causality test Table 9 Granger causality test
Models Res. DF F P-value
Model 1 288
Model 2 291 0.6379 0.5912
Sig level = ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05
From table 9, the p-value shows an insignificant value (p>0.05), which means we cannot reject the NULL that costs do not granger cause customer satisfaction, therefore, from the Granger causality test we can tell that the previous costs would not predict of level of customer satisfaction, in this way, the assume of a cyclical effect between cost and customer satisfaction is not supported. We only need to consider the single effect of customer satisfaction on cost which has been proved in this study.
4.4 Results summary
Table 8 results summary
Hypotheses Support Conclusion
H1 No ——
H2 Yes Negative effect
H3 No No difference effect
cost of both monopolies and competitive markets, furthermore, the impact in competitive markets are not showing a stronger negative trend comparing with monopolies.
5. CONCLUSION & DISCUSSION
This chapter discusses the results of studies in previous chapter, as a means of illustrating the importance of discovering the association between customer satisfaction and firm value, it is novel to gain insight in how would customers level of satisfaction impact on monopoly firms, when comparing with the entire electric market, what is the difference. The final section discusses managerial implications of this study.
5.1 Findings
Overall, the study shows the consistency of the satisfaction level of residential customers in the energy market as much on cost of the electricity provider, the outcomes are in line with the view of several researchers that through increasing loyalty, customer satisfaction helps to reduce costs (Reichheld & Sasser, 1990). Customer loyalty is one of the curial factor that firms try to achieve long-term success goal, while customer satisfaction can be used as a metric to achieve this goal. Among standards that measure the performance of a firm, firm profitability has been identified as a key metric, in our study, the results reveled customer satisfaction indeed has a negative effect on profit under monopolies, however, this effect is not significant, thus, the customer satisfaction are not affecting firm profit of monopolies in general. This would be with reason when customer satisfaction only measures as score, electricity firms provide not only the energy need but also the service assurance, such as response time and quality issues.
compete with the various companies in competitive environments and these companies are setting customer experience expectations. For last few decades, firms are only required to provide continuous electricity and cost stable, but with the increasing services targeted to the specific needs, customers want better responsiveness, for example, from programmable thermostats to “smart meters” which helps to customize household’s usage. What they expect is a firm act like their partner, but this always comes with an extra higher cost. Regulated utilities have to meet certain standards or face potential sanctions from regulatory agencies. Meanwhile, if utilities do not provide the service that customers are looking for, some other companies will and the utility will finally find itself losing loyal customers and, what’s more, revenue. For the competitive unregulators they are not under control of agencies, they have greater flexibility in terms of price, employees and settings in all aspects (Reichheld et al, 1990). Once customers keep a stable and loyal relationship with firms, they might get more rewards than regulated firms.
Furthermore, we tested the impact of customer satisfaction on firm revenue, the conclusion goes quiet opposite according to many literatures. We found the more satisfied with customers, the less revenue will firm get in the end. Which seems unreasonable in companies that is comprehensive, however, consider we are hypothesizing under energy companies, this make sense. The improved probabilities for decentralized production of electricity for customers is becoming less depend on large-scale suppliers, meanwhile connection to the public grid is better guaranteed for the security of supply or to optimize the individual production (Rolf, 1999). Hence, for those customers who used to rely on networking or electricity at home now facing more choices, this may reduce the amount of electricity consumption at home to some extent. On the other hand, since the two energy crises happened in late 1970s, some programs have been put forward for reducing demand of electricity usage, people who are environmental friendly are start to focus more on energy saving and protection, which directly leads to the decrease consumption of energy, purchase of electricity per unit will be lessen which finally cause the shrink in revenue in the end.
5.2 Managerial implications
Although there is widespread belief that firms should be superior on both firm value and customer satisfaction, it may be difficult to pursue both simultaneously for regulated energy utilities. First, we suggest that level of customer satisfaction indeed has a significant impact on cost among monopoly firms also competitive markets, hence, being a cost effective company would be great help in controlling expenses we still generate meaningful insights in a stronger effect on cost of competitive markets, since satisfaction improvement would not lead to a revenue increase, firms could focus on managing costs through satisfied customers.
6. LIMITATION
Like most studies, few limitations are existing when conducting this research thus need to be addressed in the future study. First, the measurement of customer satisfaction is only through the score given by J.D. Power, which greatly limits the customer's comprehensive evaluation of a company, score could be an important indicator when evaluating the firm but not knowing exactly which part of the process is better or worse in customers’ mind, for example, if the customer is satisfied with the service, but unsatisfied with the quality of the power, such as sudden power outages, this could neutralize the customer's score for the company, but given the different factors that each customer is interested in, if customers who focus more on the technical quality of electric, they are more likely to maintain a long-term good relationship with the company and therefore promote the company's profit growth.
Another limitation would be the calculation of costs, in this study we use cost of goods sold, but the overall cost of a firm contains wider factors such as cost of after-sales maintenance or the cost of manpower. Which includes a larger scale of the total cost of a firm, due to the given dataset, we are not able to collect all-sided data from companies, therefore could be biased when analyzing. It is reasonable to take other costs into account in future studies. This study offers some interesting insights for future research among monopolies and competitors and it is hoped to be useful for managers and regulators in energy area.
Finally, when dealing with the dataset, missing values are deleted for over 150 observations which leads to a relatively unbalanced dataset when comparing monopolies (N1=204) and competitive markets (N2=82), observations for competitive
markets are fewer, but due to the fixed dataset, we are not able to fill it by ourselves, hence, this could be an important factor when collecting and checking dataset.
7. REFERENCES
Anderson, E. W., & Salisbury, L. C. 2003. The formation of market-level expectations and its covariates. Journal of Consumer Research, 30(1): 115–124.
Anderson, E.W. 1996. Customer Satisfaction and Price Tolerance. Marketing Letters,7(3): 19-30.
Anderson, E.W., Fornell, C. & Rust, R.T. 1997. Customer satisfaction, productivity, and profitability: differences between goods and services. Marketing Science, 16(2): 129-47.
Anderson, E.W., & Sullivan, M. 1993. The Antecedents and Consequences of Customer Satisfaction for Firms. Marketing Science, 12(2): 125-143.
Bernhardt, K.L., Donthu, N. & Kennett, P.A. 2000. Journal of Business Research, 47(2): 161-171.
Bloemer, J.M., & Poiesz, T.B.C. 1989. The illusion of consumer satisfaction. Journal of Consumer Satisfaction, Dissatisfaction and Complaining Behavior, 2:43-48. Bloemer, J.M., Ruyter, K., & Peeters, P. 1998. Investigating drivers of bank loyalty: the complex relationship between image, service quality and satisfaction. International Journal of Bank Marketing, 16(7): 276–86.
Brown, R. E. 2008. Impact of Smart Grid on Distribution System Design. In Power and Energy Society General Meeting-Conversion and Delivery of Electrical Energy in the 21st Century, IEEE.
Chan, L. K., Hui, Y.V., Lo, H.P., Tse, S.K., Tso, G.KF., & Wu, M.L. 2003. Consumer Satisfaction Index: New Practice and Findings. European Journal of Marketing, 37(5/6): 872-909.
Engene, V. K. 2018. Environmental microbiology and metagenomics: The Brave New World is here, what’s next? Environmental Microbiology, 20(12): 4210-4212.
Evanschitzky, H., Ramaseseshan, B., Woisetschlager, D.M., Richelsen, V., Blut, M. & Backhaus, C. 2012. Consequences of customer loyalty to the loyalty program and to the company. Journal of the Academy of Marketing Science, 40(5): 625-638.
Ernst, H. 2002, Success Factors of New Product Development-a Review of the Empirical Literature. International Journal of Management Review, 4(1): 1–40. Fornell, C. 1992. A national customer satisfaction barometer: The Swedish experience. Journal of Marketing, 56: 6-21.
Fornell, C., & Wernerfelt, B. 1987. Defensive Marketing Strategy by Customer Complaint Management: A Theoretical Analysis. Journal of Marketing Research, 24 (4): 337-46.
Franklin, M., & Mackie, T. 2009. Electoral change: Responses to evolving social and attitudinal structures in Western countries. ECRR Press.
Gallarza, M.G. & Gilsaura, I. 2006. Value dimensions, perceived value, satisfaction and loyalty;an investigation of university students’ travel behavior. Tourism Management, 27-3: 437-452.
Granger, C.W.J., White, H., & Engle, R.F. 1999. Cointegration, Causality and Forecasting. Oxford, New Oxford, New York: Oxford University Press.
Hausman, J.A. 1978. Specification Tests in Econometrics. Econometrica, 46(6): 1251– 1272.
Herr, P. M., Kardes, F. R., & Kim, J. 1991. Effects of word-of-mouth and product-attribute information on persuasion: An accessibility- Diagnosticity Perspective. Journal of Consumer Research, 17(4): 454–462.
Hooley, G. J., Greenley, G. E., Cadogan, J.W. & Fahy, J. 2005. The performance impact of marketing resources. Journal of Business Research, 58 (1): 18-27.
Huff, L., Fornell, C. & Anderson, E.W. 1996. Quality and Productivity: Contradictory and Complementary. Quality Management Journal, 4, 22-39.
Iberdrola. 2002. Proyecto la voz del cliente, Revista de Comunicacio ́n Interna, 2: 18– 19.
Ittner, C.D. & D.F. Larcker. 1996. Measuring the Impact of Quality Initiatives on Firm Financial Performance. Advances in the Management of Organizational Quality, Vol. 1, Soumen Ghosh and Donald Fedor, eds. Greenwich, CT: JAI Press.
Jones, T.O. & Sasser, W.E. 1995. Why Satisfied Customers Defect. Harvard Business Review Publishing.
Lederer, P., & Bouttes, J.P. 1991. Electricity monopolies V Competition? Utilities Policy, 1(3): 212-219.
Mohammad A.K., & Noman, L. 2010. Environmental friendly solar energy in Pakistan's scenario. Journals & Books, 14(8): 2179-2181.
Morgan, G. & Engwall, L. 2002. Regulation and Organizations: International Perspectives. Routledge Advances in Management and Business Studies, Vol. 5. Oliver, R.L. 1997. Satisfaction: A Behavioral Perspective on the Consumer. New York: McGraw-Hill.
Olsen, L.L., & Johnson, M.D. 2003. Service Equity, Satisfaction, and Loyalty: From Transaction-Specific to Cumulative Evaluations. Journal of Service Research, 5(3): 184-195.
Pan, Y., Sheng, S., & Xie, F.T. 2012. Antecedents of customer loyalty: An empirical synthesis and reexamination. Journal of Retailing and Consumer Services, 19(1): 150-158.
Philip, R.C. & Erin, M.C. 2015. Evolution of The Revolution: The Sustained Success of Retail Electricity.
Rakesh, N., George, F., Mahendra, G. & Chakravarthi, N. 2008. Understanding customer level profitability implications of satisfaction programs. Journal of Business & Industrial Marketing 23(7): 454-463.
Reichheld, F. F., & Sasser, W.E. 1990. Zero Defections: Quality Comes to Services. Harvard Business Review, 68(5): 105-11.
Riadh, L. 2007. The Effect of Consumption Emotions on Satisfaction and Word-of Mouth Communications. Psychology & Marketing, 24(12): 1085-1108.
Richard, J.P. 2005. Merges in The U.S. Electric Power Industry. Journal of Network Industries, Vol 6, No 1.
Rolf, R. 1999. Price Points. Export Today. 15(5): 24.
Roest, H., & Pieters, R. 1997. The nomological net of perceived service quality. International Journal of Service Industry Management, 8(4): 336–51.
Rolf, R. 1999. Price Points. Export Today. 15(5): 24.
Schmit, M. J., & Steven P. A. 1995. Employee Attitudes and Customer Satisfaction: Making Theoretical and Empirical Connections. Personnel Psychology, 48: 521-536. Senia, A. 2002. Branding the utility, Utility Business, 5(7): 32–6.
Slater, S.F., & Narver, J.C. 2000. Intelligence generation and superior customer value. Journal of the Academy of Marketing Science, 28 (1): 120-127.
Stout, J.P. 1990. Strategies of reticence: silence and meaning in the works of Jane Austen, Willa Cather, Katherine Anne Porter and Joan Didion. Journal of bacteriology.
Vanessa, A.I., Patrick, H., & Pilar Z.C. 2006. Antecedents of customer loyalty in residential energy markets: Service quality, satisfaction, trust and switching costs. The service industries journal, 26 (2): 633-650.
Wang, H.J., & Ho, C.W. 2010. Estimating fixed-effect panel stochastic frontier models by model transformation. Journal of Econometrics, 57(2): 286-296.
Weiss, L. W. 1975. Antitrust in the electric power industry in: Phillips, A. (ed.), Promoting Competition in Regulated Markets. Brookings Institute, Washington, DC. Woodruff, R.B. 1997. Customer value: the next source for competitive advantage. Journal of the Academy of Marketing Science, 25(2): 139–53.
Yang, Z., & Peterson, R. T. 2004. Customer perceived value, satisfaction, and loyalty: The role of switching costs. Psychology & Marketing, 21(10): 799-822.
Ytiksel, A., & Rimmington, M. 2011. Tourist Satisfaction Tourist Satisfaction and Food Service Experience: Results and Implications of an Empirical Investigation. An International Journal of Tourism and Hospitality Research, 9(1): 37-57.
Zeithaml, V.A., Berry, L.L. & Parasuraman, A. 1996. The behavioral consequences of
