Could some of the most in-demand housing markets be cooling off?
Who Cares About J.D. Power?
The short answer about whether J.D. Power scores matter to wall Street: NO. If you look at earnings per share or ROI, no correlation exists between J.D. Power and any other measure of customer satisfaction.
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Let's say your company did great in the J.D. Power rankings, or maybe it stunk up the neighborhood. Or perhaps the survey didn't reach your city, or your firm lacked enough closings to appear in the database. No matter. You have thrown a lot of resources at the customer satisfaction issue. It has cost you time, money, frustration and turnover, but if you're like most builders, you have improved your customer satisfaction scores. The increase in overall J.D. Power ratings and the scores for the NRS Award in Homeowner Satisfaction prove this. That feels great, and you can go a long way on a deep faith that this will pay off, but people are asking if high J.D. Power ratings produce tangible results. We have little more than anecdotes, common sense and the experience of other industries that might translate to home building.
TrueNorth field consultants conduct training sessions with builder employees across the country every week. A year ago, they rarely heard anyone mention J.D. Power. Now, they hear it all the time. They also relate how builder personnel hear about J.D. Power from customers. Salespeople say customers come in with a printout of the rankings for their city and ask a lot of questions. Prospects start with a positive view of a high-scoring builder, but a low score creates an awkward situation. What do salespeople say? Many attack the survey's relevance and validity - probably the worst thing they can do.
Field superintendents and service managers report that customers "hold our J.D. Power score up to us." An upset customer challenged one high-scoring builder: "Is this how the number-one company in J.D. Power treats its customers?" A low-scoring builder in another city was told, "You didn't do so well on J.D. Power. Now I know why. I'm looking forward to filling out that survey."
Add up all of this, and we can make the highly unscientific, statistically shaky proclamation that "something's afoot." J.D. Power's impact in years one, two and three was a slow, steady progression. The increase in impact on builder behavior this year shapes up as exponential. By year five, J.D. Power could become a significant factor driving buyer behavior. It looks like customers care.
What about employees? Do they care where the company finishes in the J.D. Power rankings? Our TrueNorth guys hear from them in spades. Incredible pride and excitement from those whose companies did well. Disappointment, frustration and sometimes outright embarrassment from those whose companies tanked. People want to work for companies that do well and have good reputations.
I once worked for a builder where you risked your health by wearing a cap or shirt with its logo in public. My wife came home upset one day after spending an hour listening to a table full of restaurant patrons complain about my employer. Over a period of years, that situation completely reversed, so much so that I sold four houses in two years at youth hockey games just from people asking about the logo on my jacket. What a change. How differently it made me feel about my company. How much more it made all of us want to get to work every day and do our best. And don't think this can't affect suppliers and trades. They respond differently to a top scorer than they do to a bottom scorer, especially when it comes to attitude, response time and service.
But what about the bottom line? What about bankers, in-vestors and Wall Street? Do they care? I had fascinating conversations on this question with three top housing industry analysts. It would make for an interesting column full of quotes, but I'll keep it simple for now, leave the analysts anonymous and sum up their comments.
The short answer about whether J.D. Power scores matter to Wall Street: no. At least not now. If you look at earnings per share, return on investment or any other measure of return, no correlation exists between J.D. Power and any other measure of customer satisfaction.
It was interesting, though - the more we talked, the more the possibilities emerged. There seemed to be a consensus among the analysts that patterns could develop that would tell investors J.D. Power does matter. Its survey results might predict the ongoing strength of the customer base, the ability to generate referrals, the ability to attract and keep the best employees, and the ability to withstand product liability litigation.
Paul Cardis of NRS Corp. reports that in his company's statistical study of customer satisfaction, builders in the top half closed 61% more homes than builders in the bottom half. That huge difference interested the analysts, but they quickly pointed out it doesn't say anything about profit and return.
Cardis also cites a University of Michigan research study showing that customer satisfaction might affect sales up to three times more in home building than in any other industry. But take a quick look at other industries. Target is burying Kmart. Why? They have the same products, and Kmart is cheaper, but Target beats Kmart hands down in service and customer friendliness. The Home Depot killed off Builder's Square in similar fashion. Southwest and JetBlue are humiliating the "Big Six" airlines. Southwest made more money in the past 10 years than the Big Six combined. Sure, Southwest has low prices, but you can go to Orbitz and get similar prices from the majors. Southwest wins because it has treated customers better than anyone else has for 20 years.
Customer satisfaction is a major factor in every success story in other industries, but will Wall Street ever see this connection in home building? The analysts made good points about whether the power of the brand ever can be as strong for a home builder. And when land (or lot) deals still determine so much of profitability and when location remains a dominant buying factor, how can customer satisfaction make that much difference?
The real story will be told during the next serious turndown in the industry. Let's say business falls off 20% nationwide. If customer satisfaction really matters, the top scorers should fall off less or maybe not at all. In fact, if other builders drop out, market share for high-satisfaction builders should increase.
I have one last indicator that I think is the most revealing. I recently got a phone call from the CEO of a huge builder that did not fare well in the J.D. Power ratings or TrueNorth's 0-10 interpretation of them. He was not happy with J.D. Power, nor was he happy with me. He has a lot of questions about how J.D. Power conducts its survey and why the results don't always correlate with his data. I pointed out that many others share those concerns.
But our hour-long discussion made something perfectly clear to me. The CEO's company has performed so well financially that he could have been smug, going with the analysts' contention that customer satisfaction really does not matter to "the Street." Yet he does care - a lot. He wants his company to do better and score better. It's a top priority for the firm. Our conversation warmed considerably when we transitioned into a discussion about how builders can raise customer satisfaction scores, J.D. Power or otherwise. There are specific, definable, measurable steps you can take. That will be the subject of my final column on J.D. Power, in the December issue.