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Year of the Customer - Why it makes sense to get the Right Customer Metrics on the Scorecard

The Great Debate between Regulators and Investors

In theory some of the recent scandals in corporate performance should have thrust customer issues to the front and centre for all executives and boards. However, there is a great debate playing out in Australia between certain parts of the investment community, regulators and boards that may be holding back some businesses from greater customer measurement and focus. The story so far: Since the Hayne Banking Royal commission in Australia, one regulator, APRA, has taken a strong stance saying at least 50% of senior executive rewards should be based on Non-Financial metrics like Customer Satisfaction, Complaints and Risk Measures. In response many market analysts have been expressing a desire to exclude these measures and return to purely financial measures like Total Shareholder Returns and Return on Equity. The investment community argues that the other customer metrics are too loose (easy to manipulate) or don’t align with shareholder goals.

In this paper we’ll set out to prove why the right customer metrics, measured in the right way, are absolutely aligned with shareholder outcomes. Firstly, we’ll explore why the distrust exists about these measures. Next, we’ll describe the body of proof that shows that some customer measures align with shareholder goals and lastly, we’ll explore some alternative metrics that could be used instead of surveys and customer ratings which clearly align with financial performance.

Investor Suspicion

We don’t blame investors for being suspicious of customer metrics used to reward senior executives. Many of the metrics used in the past or proposed are sample based and lack transparency. Where boards use scores from some form of customer satisfaction or NPS survey, the sampling methodology and techniques are critical if they are to be credible. We have all experienced biased samples such as post call surveys only triggered when accounts are updated (so loaded towards resolved transactions) or agents promoting surveys when they know they have had a good outcome.

In some countries there are established customer measures run independently such as the “American Customer Satisfaction Index” or JD Power’s ratings. In Australia, there are a few public measures like the Morgan banking customer poll but the methodology isn’t transparent and decisions such as pricing and interest rates seem to have a great impact which makes some executives nervous as to how they can be used. There is no dominant index or poll that crosses industries. Other metrics such as internal complaint levels are open to interpretation because companies define complaints differently, so investors suspicion is understandable.

Even metrics like NPS are not trusted by the investment community. Though some companies claim that every 1% movement in NPS has a direct financial value (see Telstra’s analysis), this correlation isn’t well accepted by investors. Many believe you can “trick” NPS by doing things like lowering prices or over-servicing, so they aren’t convinced that this aligns with shareholder returns. In one example, a large telco in Australia, needed to improve NPS quickly to hit executive pay bonus benchmarks, so they quickly constructed an outbound calling program that made small positive offers to customers to thank them for their support. Unsurprisingly NPS rose quickly, and they achieved the benchmark. However, other key financial measures didn’t move over time as this was a form of “sugar hit” from this activity. In the next section we’ll look at why use of the right metrics may cause better alignment with shareholder returns than investors realise.

Hidden Alignment

Investors are always looking for hard financial metrics like revenue, cost and profit. However, often they don’t recognise that investment in customers, done the right way, can deliver financial returns. Research at Michigan Business School tracked the share performance of the companies in the American Customer Satisfaction Index.

They found that an improved ACSI score was later followed by improved share performance. The ACSI performance was a lead, rather than a lag, predictor of improved financial performance. Intuitively that makes sense: happier customers buy more, complain less and stick around. The evidence was so clear that the business school set up an investment fund using ACSI trends to target investments. The fund was successful but then the regulators moved in and closed the fund as the managers were seen to have data not available to the market. Perhaps that is even more substantial proof that the right customer metrics can align with financial performance.

The investment community finds it hard to recognise this alignment of customer measures and performance for two reasons. Firstly, there have been too many customer measures (like NPS), that have claimed causality to improved financial performance but without cast iron proof. Markets hate “leaps of faith” of these non-financial measures. Secondly, the analyst community likes to see hard revenue increases or more customers before they will re-rate a stock. One answer to that is to publish the links between customer satisfaction and revenue behaviours e.g. loyalty, share of wallet. This could allow analysts to factor earlier causality into their models.

Different Measures Needed

We think some alternative customer metrics will make it easier for analysts to understand alignment between customer and financial performance. The simplest of these that we have rarely seen used is “contacts per X (or thousand X)”. Here “X” is a critical driver of revenue in the business such as number of accounts or customers. In insurance this might be contacts per policy and in airlines contacts per seat booked. This measure tracks how complex the business is to deal with and clearly aligns to areas of cost. Making the business easier to deal with and reducing manned contact delivers benefits to the customer and shareholder. Amazon has been using a contacts per unit of order measure for many years as a measure of its effectiveness with customers. Fewer contacts means happier and lower cost customers. This is a simple way to align customer and shareholder metrics. It sounds easy but of course there are many other factors to consider such as which contact mechanisms to use (calls/emails/chat etc) and how to measure them from a customer perspective.

In industries with an external complaints body (ombudsman), then the volume of

ombudsman complaints is also a very effective measure. It indicates how easy the business is for customers and costs associated with poor service. Unlike an internal complaint measure, the external complaints are much harder to game. They also have clearly published costs and agreed standards for escalation. The external complaints per 1000 customers can be a very useful “external” measure of customer performance that has a clear alignment to cost. For example, in the last decade all three major utilities in Australia went through major retail billing system replacement projects. In each case these drove up contacts per customer and ombudsman complaints per customer. These indicators clearly aligned with other key financial metrics such as cost to serve and customer churn rates. During these periods the financial performance deteriorated, and these indicators gave a clear explanation of the reason. Yet, the market didn’t track or show interest in these measures.


The push by regulators to have more customer measures and reporting should be a positive for customers. However, to gain acceptance by the investment community companies will need to be transparent in how these measures work. They should also consider measures such as contact and complaint rates that align to costs as well as providing an indicator of complexity for the customer. We’re happy to explain more about these ideas. For more information email us at or call 03 9499 3550 or 0438652396.

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