ACSI: Customer satisfaction decline continues — here’s a big reason

Overall customer satisfaction in the United States is at a troublesome low.

That’s according to the national American Customer Satisfaction Index, which continues to decline, slipping 0.5% to 73.3 (out of 100) in the fourth quarter of 2021. It is the lowest level since 2005.

The ACSI has been a national economic indicator for 25 years. It measures and analyzes customer satisfaction with more than 400 companies in 47 industries and 10 economic sectors.

The ACSI noted that, during much of the 1990s, there was a sharp decline in customer satisfaction. But as businesses began to realize that customer loyalty was often contributing more to profits than increased market share, there was a shift toward a greater focus on customer satisfaction and the index increased sharply over many years.

However, as companies modified their attention and resources from customer satisfaction as a key performance indicator (KPI) to other key measures and devoted more effort to enhancing “the customer experience,” the rate of customer satisfaction improvement slowed, then flattened, and subsequently turned negative.

ACSI has declined sharply since 2018, falling nearly 5%. Because ACSI is an indicator of the quality of economic output, this is problematic with respect to economic growth, corporate profitability, consumer utility and inflation.

“COVID-19 has obviously played a role in recent satisfaction slumps,” said Claes Fornell, founder of the ACSI and the Distinguished Donald C. Cook Professor (emeritus) of Business Administration at the University of Michigan. “However, since both the flattening and subsequent decline in customer satisfaction began before the pandemic appeared, there are several factors at play.”

The most important factor is deteriorating quality, as judged by consumers, according to Fornell.

“While widespread, it’s most pronounced in services,” he said. “Due to the pandemic, the problem has been amplified by a lack of product availability, supply issues, and labor shortages.”

ACSI tracks quality, as experienced by the consumer, as well as satisfaction. Quality has dropped 5.2% since 2018, including a decline of 3.3% since 2020. Changes in quality are important for determining inflation. The consumer price index (CPI) is adjusted for quality changes but only for a small fraction of the included products and services. ACSI measures quality for all 47 industries it tracks. According to the Bureau of Labor Statistics, inflation is up by 7.5% on an annualized basis, somewhat higher than the annualized GDP growth.

So, why are customers so dissatisfied with the economy and with the products/services they buy? Much of the answer lies in the difference between the quantity of economic output and the quality of economic output. GDP is mostly about the former, ACSI is mostly about the latter. In all probability, inflation is even higher than 7.5% if more fully adjusted for quality decline.

ACSI quality data suggest that actual annualized inflation is probably about 10% at this juncture. That would put its increase greater than that of both GDP and wage growth – not a sign of a healthy economy.

Paradoxically, the U.S. economy suffers from a decline in customer satisfaction and a deterioration of the quality of economic output at a point when demand is greater than supply. As a result of the latter, buyers lose power relative to sellers. Customer satisfaction also matters less for business when demand is greater than supply. Quality suffers, and inflation increases. The challenge for economic policy is how to turn these things around.

The national ACSI score (or ACSI composite) is updated each quarter based on annualized customer satisfaction scores for all sectors and industries.