Are there economic benefits to improving customer satisfaction? Many f
irms that are frustrated in their efforts to improve quality and custo
mer satisfaction are beginning to question the link between customer s
atisfaction and economic returns. The authors investigate the nature a
nd strength of this link. They discuss how expectations, quality, and
price should affect customer satisfaction and why customer satisfactio
n, in turn, should affect profitability; this results in a set of hypo
theses that are tested using a national customer satisfaction index an
d traditional accounting measures of economic returns, such as return
on investment. The findings support a positive impact of quality on cu
stomer satisfaction, and, in tum, profitability. The authors demonstra
te the economic benefits of increasing customer satisfaction using bot
h an empirical forecast and a new analytical model. In addition, they
discuss why increasing market share actually might lead to lower custo
mer satisfaction and provide preliminary empirical support for this hy
pothesis. Finally, two new findings emerge: First, the market's expect
ations of the quality of a firm's output positively affects customers'
overall satisfaction with the firm; and second, these expectations ar
e largely rational, albeit with a small adaptive component.