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Analysis of the Effect of Happiness on Customer Satisfaction

Conference Paper · October 2010

DOI: 10.13140/2.1.3874.8485

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 Analysis of the Effect of Happiness on Customer Satisfaction
Boris Herbas-Torrico1*, Björn Frank1, Gulimire Abulaiti1, and Takao Enkawa1
1. Tokyo Institute of Technology, JSQC (Japan), herbas.b.aa@m.titech.ac.jp

Summary
Does people’s happiness influence their evaluation of products and services? This article is
an attempt to address this question. Using multi-industry data collected in China, Japan, and
Thailand, a non-recursive model of the formation of customer satisfaction is estimated using
two-stage least squares regression (2SLS). The results show significant positive bidirectional
effects between happiness and customer satisfaction in numerous analyzed countries and
industries, supporting the theories discussed in this paper. Based on these results, implications
for managers and policy makers are suggested.

Keywords
Customer Satisfaction, Happiness, Two-Stage Least Squares, Consumption, and Quality

1. Introduction

Have you ever wondered why poor people sometimes seem more satisfied with their old
black and white TVs than richer people with their new flat screen TVs? This question gave
birth to our research which seeks to understand the role of people’s happiness in the
evaluation of products and services.
The most widely used measure for the consumer evaluation of products and services is
customer satisfaction. Customer satisfaction is important to firms because it strongly affects
long-term sales and profits (Anderson et al., 1994). As firms seek to optimize customer
satisfaction, they have to know its determinants. Current marketing models of the
determinants of customer satisfaction are based on the idea of unbounded rationality of
consumers as decision makers. Unbounded rationality implies unlimited computation capacity,
limitless knowledge, and endless time (Gigerenzer and Todd, 1999). However, people have
bounded rationality and use their feelings for decisions and judgments (Schwarz and Clore,
2003). In this article, we will thus explore the role of feelings in the formation of customer
satisfaction.

1
 Pioneer research in this area indicated that moods positively affect the evaluation of
products (Isen et al., 1978), shopping experiences (Swinyard, 1993), and customer satisfaction
(Sherman et al., 1997). These studies developed only partial and intuitive theories and tested
their theories with a very limited number of products. In order to overcome these limitations,
our study will combine ideas from these studies and extend them to build a comprehensive
theory on the influence of moods on customer satisfaction. Moreover, we will be the first to
test such a theory across several industries and countries to verify whether it is universal.
As a measure of moods, we will choose happiness for which researchers have developed
reliable measures and knowledge on its determinants. According to Layard (2002), happiness
means feeling good, enjoying life, and feeling that life is wonderful. Unhappiness means
feeling bad and wishing things were different. Similarly, Vermunt et al. (1989) define
happiness as an emotional state which is sensitive to sudden mood changes.
Besides arguing that happiness should affect customer satisfaction, we will argue that
happiness should conversely influence customer satisfaction. Figure 1 summarizes our
research model. As standard regression cannot correctly estimate such a so-called non-
recursive model with a circular dependency, we will use two-stage least squares (2SLS) as our
method of estimation. We will test our hypotheses with the use of self-reported data on
happiness and customer satisfaction in ten industries from China, Japan, and Thailand. Our
analyses are thus intended to contribute to marketing capabilities in the countries of ANQ
organizations.

Income
Satisfaction

Perceived
Quality New Theory Proposed
+
+ + H1 Stress and
+ - Anxiety

+ Perceived + Customer
Happiness
Value Satisfaction
+
H2 Assertiveness
+ +
Quality
+ -
Expectations

Uncertainty
Intolerance

Evaluation of Products and Services Subjective Characteristics

[Anderson and Fornell (2000)] [Veenhoven (1988), Frey and Stutzer (2002), Argyle and Lu
(1990), Scitovsky (1976)]

Figure 1 – Research Model and Hypotheses

2. Development of Hypotheses

This section will develop our hypotheses as presented in Figure 1. Our first hypothesis is
that happiness positively influences customer satisfaction. This effect should be caused by the
2
following three psychological phenomena.
First, happiness leads to a positive bias in memory selection, that is, positive moods affect
the recall of positive memories (Taylor, 1982). Moreover, positive moods positively influence
the retrieval of situational cues available for processing (Swinyard, 1993), the speed of
retrieval of happy memories (Bower, 1981), the percentage of pleasant experiences (Bower,
1981), and the selection or retrieval of shopping cues (Swinyard, 1993), which, in turn, affects
customer satisfaction (Rust and Oliver, 2000).
Second, happiness leads to a positive bias in the evaluation of experiences, that is, happier
people perceive events more positively (Diener et al., 1997). Furthermore, positive moods
have an effect on the evaluation of outcomes (Lyubomirsky and Ross, 1999), shopping
experiences (Swinyard, 1993), and product performance (Isen et al., 1978). These evaluations
directly affect customer satisfaction (Babin and Darden, 1996).
Third, according to Lyubomirsky and Ross (1999), positive moods have a positive effect on
the evaluation of options, which is optimism. Specifically, people in a good mood tend to
make more optimistic judgments, using less critical modes of information processing (Baker
and Nofsinger, 2002), judging life events more optimistically with “rose-colored glasses”
(Bower, 1981). Thus, optimism positively influences customer satisfaction (Stauss and
Neuhauss, 1997).
Hypothesis 1: Happiness has a positive effect on customer satisfaction.

Conversely, customer satisfaction should also positively influence happiness. Sirgy et al.
(1998) argued that satisfaction with all life domains affects happiness. As people constantly
use products and services, their use is an important life domain. Customer satisfaction should
thus contribute to happiness. Holbrook (1986) proposed such effects, and Raaij (1986) also
showed that happiness results from purchase satisfaction. Similarly, Frank and Enkawa (2009)
showed that changes of the average customer satisfaction in a nation affect life satisfaction.
Hypothesis 2: Customer satisfaction has a positive effect on happiness.

3. Analytical Model

Our two hypotheses suggest a circular dependency between happiness and customer
satisfaction. Mathematically, these two effects can only be estimated with two equations
containing separate information beyond customer satisfaction and happiness. The theory of
simultaneous equations prescribes conditions determining whether such a so-called non-
recursive system of equations is identified and can be estimated (Woodridge, 2002).
In order to fulfill these conditions, it is important to find at least one variable that only
influences customer satisfaction but not happiness, and vice versa. Hence, we built an
analytical model containing not only happiness and customer satisfaction, but also some of

3
their important determinants with a high likelihood of influencing either customer satisfaction
or happiness, but not both of them. As determinants of customer satisfaction, we thus included
perceived quality, perceived value, and quality expectations, which comprise the famous
American Customer Satisfaction Index model (Anderson and Fornell, 2000). As determinants
of happiness, we included income satisfaction (Frey and Stutzer, 2002), stress and anxiety
(Veenhoven, 1988), assertiveness (Argyle and Lu, 1990), and uncertainty intolerance
(Scitovsky, 1976). While the determinants of customer satisfaction deal with the evaluation of
products and services, the determinants of happiness deal with subjective characteristics.
Hence, they are relatively independent. Our model in Figure 1 has the following notation:

CS  11Quality  12 PV  13QExp  14 Happiness  11

Happiness  25 IncomeSat  26 Stress & Anx  27 Assert  28UncInt  29CS  21

where CS: customer satisfaction; Quality: perceived quality; PV: perceived value; QExp:
quality expectations; Happiness: happiness; IncomeSat: income satisfaction; Stress&Anx:
stress and anxiety; UncInt: uncertainty intolerance; : regression coefficient; µ: error.
The model is non-recursive (µ 11 and µ 21 are correlated), over-identified, and with
autonomous equations, that is, each equation in the simultaneous equation model has meaning
in isolation from the other equations of the system (Wooldridge, 2002). The most appropriate
methods for solving such systems are two-stage least squares regression (2SLS) and
maximum likelihood estimation. In our study, we used 2SLS which it is more robust against
specification errors (Woodridge, 2002). This may be beneficial as the complexity of consumer
research makes that virtually no model explains all of the variance in the dependent variable.

4. Survey Design and Data Collection

To empirically test our hypotheses, we designed a written questionnaire containing

questions on the constructs of our research model. Adopting Likert-type scales from the
literature, we measured happiness, customer satisfaction, perceived quality, perceived value,
and quality expectations on 10-point scales (Anderson and Fornell, 2000) and income
satisfaction, stress and anxiety, assertiveness, and uncertainty intolerance on 5-point scales
(Hofstede and Hofstede, 2005; Lim, 2008). Regarding customer satisfaction and its
determinants, we asked respondents to indicate their attitudes with respect to the firm which is
their primary provider of goods and services in an industry. We repeated these questions for
four product industries (automobile, mobile phone, personal computer, and shampoo) and six
service industries (bank, fast food restaurant, hairdresser, hospital, mobile carrier, and
supermarket). The questionnaire asked respondents to skip questions if they have not used a
certain product or service in the recent past.
In order to include many industries in our survey, we only used single-item scales for our

4
constructs. Our constructs are quite simple, and consumers regularly use them to evaluate
products and services and their personal well-being. Hence, consumers are able to answer
these questions with relatively high precision, and their measurement can be considered
sufficiently reliable (Abdel-Khalek, 2006; Anderson and Sullivan, 1993). Compared with
multi-item measurement in a single industry, our approach of single-item measurement in
multiple industries has the advantage of verifying whether results can validly be generalized.
Therefore, our scale design has the important benefit of ensuring high external validity.
We also made sure to use scales which have been shown to have a stable meaning among
languages (Anderson and Fornell, 2000; Veenhoven, 2000). First we developed the survey in
English and then translated it to Chinese, Japanese and Thai. With our questionnaire, we
collected data from Chinese consumers in Beijing, Shanghai, Wuhan, and Ürümqi from
September 2008 to March 2009. From October 2008 to February 2009, we collected data
from the Japanese cities of Tokyo, Nagoya, and Toyama. In February 2009 we collected data
from Chiang Mai in Thailand. Table 1 illustrates the demographic sample distribution. Our
samples are well balanced across gender in all countries (52.9% males and 47.1% females).
20 to 29 year-old consumers account for more than half of the sample (55.3%).

Table 1 – Demographic Sample Distribution

All Countries China Japan Thailand

N % N % N % N %
Male 1354 52.9 512 51.6 738 59.2 104 32.4
Gender
Female 1205 47.1 480 48.4 508 40.8 212 67.6
10-19 177 6.9 87 8.8 75 6.0 15 4.7
20-29 1414 55.3 584 58.9 571 45.8 259 80.7
30-39 388 15.2 135 13.6 212 17.0 41 12.8
Age
40-49 275 10.7 100 10.1 173 13.9 2 0.6
50-59 217 8.5 65 6.6 149 12.0 3 0.9
60+ 88 3.4 21 2.1 66 5.3 1 0.3
Total 2559 100 992 100.0 1246 100.0 321 100.0
Note: N = Sample size.

5. Results

Before estimating our research model as shown in Figure 1, we admitted effects of the
determinants of customer satisfaction on happiness, and vice versa. The corresponding
coefficients were not significant in all cases. This shows that our chosen determinants of
customer satisfaction [happiness] do not influence happiness [customer satisfaction]. Our
models are thus over-identified and can be correctly estimated with 2SLS regression.

5
 Based on the pooled dataset of customer responses for all industries, our 2SLS regression
of the research model is controlled for the effects of age, gender, country, and industry. Table
2 shows the results of the analysis testing hypothesis 1. Happiness has a significant positive
effect on customer satisfaction in all countries and the pooled dataset of all countries.
Hypothesis 1 was thus supported. Happiness is a valid determinant of customer satisfaction.
With the same control variables, Table 3 shows that customer satisfaction positively affects
happiness in all countries and the pooled dataset. Hence, hypothesis 2 is supported. These
results give support to our assumption of a reciprocal dependency between happiness and
customer satisfaction.

Table 2 – Effect of Happiness on Customer Satisfaction:

Standardized Regression Coefficients

Method of All Countries China Japan Thailand

   
Independent Variable
Estimation

Happiness 　　　.095*** 　　　.100*** 　　　.080*** 　　　.132***

Perceived Quality 　　　.548*** 　　　.458*** 　　　.599*** 　　　.497***

2SLS Perceived Value 　　　.213*** 　　　.285*** 　　　.179*** 　　　.212***

Regression Quality Expectations 　　　.042*** 　　　.050** 　　　.026** 　　　.049*

Adjusted R² 　　　.564 　　　.561 　　　.579 　　　.530

Sample Number 2559 992 1246 321

Notes: *p < .05; **p < .01; ***p < .001 (2-tailed). Control variables in all models:
0/1 dummy variables for age, gender, country, and industry.
2SLS Regression: Two-Stage Least Squares with instrumental variables: income satisfaction,
stress & anxiety, assertiveness, and uncertainty intolerance.

Table 3 – Effect of Customer Satisfaction on Happiness:

Standardized Regression Coefficients

Method of All Countries China Japan Thailand

   
Independent Variable
Estimation

Customer Satisfaction 　　　.133*** 　　　.153*** 　　　.124*** 　　　.135***

Income Satisfaction 　　　.411*** 　　　.444*** 　　　.364*** 　　　.529***

Stress & Anxiety 　　 -.075*** 　　 -.023* 　　 -.100*** 　　 -.110***

2SLS
Assertiveness 　　　.132*** 　　　.117*** 　　　.130*** 　　　.055***
Regression
Uncertainty Intolerance 　　 -.034*** 　　 -.003 　　 -.053*** 　　 -.013

Adjusted R² 　　　.224 　　　.277 　　　.194 　　　.387

Sample Number 2559 992 1246 321

Notes: *p < .05; **p < .01; ***p < .001 (2-tailed). Control variables in all models:
0/1 dummy variables for age, gender, country, and industry.
2SLS Regression: Two-Stage Least Squares Regression with instrumental variables:
perceived quality, perceived value, and quality expectations.

6
6. Conclusions

In this research we created and integrated theory suggesting the existence of a reciprocal
relationship between happiness and customer satisfaction. To test this theory, we proposed a
non-recursive statistical model (Figure 1) and collected consumer data from China, Japan and
Thailand. Using 2SLS regression, we found positive significant bidirectional effects between
happiness and customer satisfaction in all countries, which confirmed our theory.
Our results showed that the strongest effect of happiness on customer satisfaction is present
in Thailand, followed by China and Japan. Conversely, the effect of customer satisfaction on
happiness was strongest in China, followed by Thailand and Japan. These results suggest that
country characteristics might moderate this effect. More research is necessary to better
interpret these results.
Our results have important implications for managers and public policy makers.
Managers should understand that customer satisfaction not only depends on the classical
determinants of customer satisfaction (quality, perceived value, culture, etc.), but also on other
determinants such as happiness. Hence, changes in customer satisfaction should not be
interpreted as strictly due to changes in quality or price. They may be due to emotional
changes independent of products and services. Besides, international and regional differences
in customer satisfaction may not be due to differences in product or service performance, but
due to different levels of happiness. Managers might consider correcting for this effect when
benchmarking their performance in different international markets by comparisons of
customer satisfaction.
Policy makers should understand that economic changes or welfare policies which affect
happiness also affect the utility that people derive from consumption, that is, customer
satisfaction. For example, the current global economic recession created weak job and
housing markets, and thus affected people’s happiness (Gallup, 2010). We showed that this
may influence customer satisfaction, and the recent literature suggested that changes in
customer satisfaction influence spending behavior and thus economic growth (Fornell et al.,
2010). Hence, developments and policies affecting happiness may affect the overall economic
performance via the happiness – customer satisfaction chain.
Future research should study the influence of factors moderating the strength of the
bidirectional effects between happiness and customer satisfaction. Despite our promising
results, further research might consider double-checking the validity of our conclusions by
using a methodology involving multi-item measurement.

7
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