Does Customer Satisfaction Matter in Monopolies like Energy Utilities?

Does customer satisfaction matter in monopolistic markets where customers have no real choice, no ability to “punish” the company by defecting and switching to a competitor? This question at the intersection of marketing, economics, and public policy has long puzzled both researchers and practitioners. Now, we have an answer.

Analyzing American Customer Satisfaction Index (ACSI) data, a recent academic article¹ seeks to answer this question by focusing on U.S. public utilities – a classic natural monopoly – and delivers a rigorous, data‑rich, and theoretically insightful answer (Bhattacharya, Morgan, and Rego 2021). The authors’ central finding is at the same time both intuitive and surprising: customer satisfaction significantly increases future utility profits, though it does so not by allowing price increases or increasing consumer demand, but by reducing operating costs.

The article begins by noting that in competitive markets, the link between customer satisfaction and firm performance is well established. Substantial research (much of it using ACSI data) has illustrated that high and/or increasing customer satisfaction drives increased firm profitability. The authors outline four theoretical pathways through which satisfaction typically affects firm profitability: Increased demand, which in competitive markets often follows high/increasing customer satisfaction; reduced consumer price sensitivity (i.e., the firm’s ability to raise prices); lower fixed production costs; and lower variable operating costs. In competitive markets, all four of these pathways may be (and often are) operative at the same time, funneling customer satisfaction to firm performance.

However, companies in monopolistic industries – such as energy utilities – operate under conditions that are often assumed to undermine and block these typical mechanisms. That is, the first three pathways are unlikely to be operative, as customers cannot switch providers easily, have little incentive to reduce or increase consumption based on satisfaction (i.e., demand is inelastic), prices are generally set by regulators instead of the free market, and production costs are largely fixed and technologically determined. Given these unique industry features, energy utility executives often feel uncertain about whether investments in customer experience and satisfaction actually “pay off” and prove worth the cost.

The authors hypothesize that only firm operating costs – especially those related to customer service, distribution, and administrative functions – are likely to be affected by customer satisfaction. A series of qualitative interviews with managers conducted by the authors reinforce this view. Managers report that dissatisfied customers generate more complaints, require more service interactions, and generally create stress and inefficiency for employees. Satisfied customers, by contrast, are more cooperative, more trusting, and more willing to adopt cost‑saving technologies such as smart meters or paperless billing.

To empirically explore the above, the authors use a rich dataset including ACSI customer satisfaction scores for all publicly traded U.S. utilities (2001–2017); audited cost, revenue, and operational data; outage and quality data; financial and firm‑level control variable data; and U.S. Census demographic data (along with additional sources of data used in a variety of robustness checks).

As expected, the authors find no effect of customer satisfaction performance on unit sales or energy utility rates (prices). These findings are expected and align with industry regulatory constraints and the inelastic nature of energy utility demand. They reinforce the longstanding idea that customer satisfaction does not function in monopolistic markets in the same manner as in competitive markets.

However, the authors find that customer satisfaction does negatively predict future costs and that the effect is concentrated in “satisfaction-varying operating costs” (SVOC).² The authors find that customer satisfaction significantly decreases each of distribution costs, sales and general expenses, and customer service costs. In total, the authors estimate that a one‑point increase in customer satisfaction as measured by ACSI (on a 0-100 scale) reduces operating costs by roughly $29 million for the average utility. In turn, and due to these decreased costs, the authors find a positive and significant effect of satisfaction on next‑year profits for utilities.

These findings are reinforced by the authors through the supplementary findings that satisfied customers file fewer complaints, require fewer service interactions, and are more cooperative with maintenance and technology upgrades.

Overall, these findings challenge the assumption that higher service quality necessarily increases system costs, and does so in a way that may hold little pay-off for industries like energy utilities. Instead, satisfaction is found to lower costs, aligning firm and customer incentives even in monopolies. The findings have important implications for a variety of industry stakeholders.

For utility managers, these findings suggest that customer satisfaction should be tracked as a key performance metric, that investments in customer satisfaction can yield substantial cost savings. They also suggest that customer experience and satisfaction initiatives should be aligned with technology adoption efforts (e.g., smart grids, advanced meters).

For regulators, the findings indicate that customer satisfaction should be considered a recoverable cost, rather than a dubious investment with (potentially) limited or no pay-off. On the contrary, customer satisfaction provides a low‑cost, high‑value indicator of consumer welfare that extends beyond just outages and prices. As such, regulators should consider incorporating satisfaction metrics into performance‑based regulation.

In summary, Bhattacharya, Morgan, and Rego deliver a compelling demonstration that customer satisfaction matters even in monopolistic markets like energy utilities. Their central insight – that satisfaction enhances profits by reducing operating costs – opens new avenues for marketing theory, regulatory economics, and managerial practice. As they conclude, customer satisfaction is “a valuable asset even in a regulated monopolistic market,” and its efficiency‑enhancing benefits deserve far more attention than they have historically received.

¹Bhattacharya, A., Morgan, N. A., & Rego, L. L. (2021). Customer satisfaction and firm profits in monopolies: A study of utilities. Journal of Marketing Research, 58(1), 202-222.
²These SVOC include total operating expenses incurred in customer service, accounting, and collection activities for residential customers. Specifically, the SVOC include costs incurred in (1) customer records and collection expenses, (2) meter reading expenses, (3) miscellaneous customer accounts expenses, and (4) supervision expenses.