How Customer Approval Can Affect Company Stocks

There are many things that affect stock prices, which is why its often difficult to understand the market. Press releases, dividend announcements, employee layoffs, accounting errors, executive scandals, contract problems, and other factors can influence whether or not a company’s stocks perform well. Companies spend a lot of time, energy, and resources maintaining the value of their stocks. But one thing they often overlook is the importance of their customers.

Factors That Influence Stock Prices

While we all wish there was a nice, neat equation for predicting the growth and contraction of stock prices, there’s simply no such luxury. There are only a handful of people who understand the market well enough to make a living buying and selling shares, including penny stocks, but it’s certainly possible.

All of that to say this: stock prices – while often predictable to some degree – tend to ebb and flow without much warning. That’s because the following factors could be in play at any given moment.

  • Company performance. How a company is doing obviously has a huge impact on stock valuation. Things like earnings and profits, dividend announcements, new contracts, new products, changes in leadership, employee layoffs, and just about anything else can influence a stock’s trading price.
  • Industry trends. Because companies within the same industry tend to move in similar directions, larger industry trends can influence individual company stocks. Sometimes the relationship is indirect, though. For example, if two companies are fierce rivals and one company releases some bad news, the other company could experience a positive jolt.
  • Economic factors. Larger economic factors obviously have a huge role in the valuation of stocks. These factors include things like inflation, interest rates, economic outlook, and changes in policy.
  • Investor confidence. When you zoom out and look at stock investors as a whole (independent of a single industry or company), you can see how bullish and bearish tendencies influence stock prices.

And while these factors are written about in financial textbooks and stock market publications, there’s another important element that is frequently ignored. That element is customer approval or satisfaction – and it has a lot to do with how stocks perform in the long run.

The Role of Customer Approval

stock market screens at NASDAQ.
Wall of NASDAQ stock market screens.

Customer approval is the lifeblood of any business success, yet so many companies ignore the relationship between customer satisfaction and stock growth. This is something Netflix just recently learned the hard way.

In Netflix’s most recent earnings report – Q2 2016 – the company revealed that it added just 1.54 million new subscribers, which was well below its projections of 2.5 million new customers. This slowed growth is, as Netflix readily admits, directly correlated to price increases.

But what’s really interesting to analyze is how this weakened customer approval influenced their stock. Just hours after the Q2 report was made public, the stock tumbled a steep 14 percent.

While this is just one isolated case study, it’s indicative of a much larger trend. Company stock prices are often heavily influenced by both positive and negative customer approval.

This idea is further supported by a well-cited study that looked at the relationship between customer satisfaction and financial success through the creation of a hedge portfolio in which stocks were traded in response to variations in the American Customer Satisfaction Index (ACSI).

The takeaway was rather clear: Customer attitudes improve and deteriorate based on positive and negative differences they notice in the company. These changes don’t happen overnight, but they ultimately have a noticeable impact on quarterly reports.

Customer Service: A Top-Down Priority

The C-suite has their eyes most fixed on company stock prices. [The ACSI report] may drive home the point that customer metrics aren’t just the domain of customer service and marketing, CRM expert Elizabeth Glagowski says. The CFO, investor relations, and even the board of directors now have some skin in the game when it comes to customer strategy. And the more players taking a customer focus, the more likely it is to become a truly customer-focused organization.

Is your organization treating customer service as an isolated responsibility that only a few individuals within the organization are tasked with? If so, something needs to change. Customers have the potential to influence every aspect of your business success – stock valuations included. Everyone from the C-suite to the mailroom needs to understand the importance of putting customers first.

Melissa Thompson
Melissa Thompson writes about a wide range of topics, revealing interesting things we didn't know before. She is a freelance USA Today producer, and a Technorati contributor.