Relationship between Loyalty and Profitability
The nominatives are benefits to the consumer, such as a restaurant meal, which is then divided by the denominatives. These are the sacrifices a consumer makes, such as price paid, time and effort. If the consumer believes that they got value out of the encounter, the relationship moves on to how satisfied they are. Defections analysis shows that “continuous improvement in service quality is not a cost but an investment in a customer who generates more profit than the margin on a one-time sale” (Reicheld and Sasser 1990 p. 107).
Figure.3 below, shows that as defection rates are lowered from 20% to 10%, “the average life span of its relationship with a customer doubles from five years to ten and the value of that customer more than doubles” (Reicheld and Sasser 1990 p. 107). The link between defections analysis also stems all the way through to profitability, as shown by MBNA America “a 5% improvement in defection rates increases its average customer value by more than 125%” (Reicheld and Sasser 1990 p. 107). The relationship between Service Quality and Satisfaction has been written on by Liljander and Strandvik (1994).
Their model also looks at the arguments against the link between Service quality
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Oliver (1997 p.13) defines satisfaction as “the consumer’s fulfillment response. It is a judgment that a product or service feature, or the product or service itself, provided (or is providing) a pleasurable level of consumption-related fulfillment, including levels of under- or overfulfillment”. “The current satisfaction paradigm is based on the assumption that customers’ actions are based on their perception of quality and satisfaction, that they are free to act and choose, and that a loyal customer is more profitable than a less loyal customer.
” (Storbacka, Strandvik and Gronroos 1994 p. 21). Hill and Alexander (2006 p. 1) argue that, “it is becoming accepted that there is a strong link between customer satisfaction, customer retention and profitability. Griffin (2002 p. 191), agrees that “People whose problems and complaints have been handled effectively become your most loyal customers. ” As shown above, there are more than a handful or authors that agree with the link in the (SPC).
However, it is in the opinion of Keiningham, et al (2005 p.145) that Customer satisfaction and customer loyalty are linked, however, “the linkage is not straightforward and it isn’t linear”.. Keingham, etal (2005 p. 145) also suggest that, “the relationship between satisfaction and loyalty, we need to think of satisfaction as falling into one of three general categories: dissatisfied, merely satisfied, and delighted. It is not until customers are delighted that satisfaction influences customer loyalty. Jones and Sasser (1995), explain how the competitive environment in different industries can have an affect on the relationship.
As Figure. 5 below shows, “As the steep curve for the automobile industry shows, completely satisfied customers are – to a surprising degree – much more loyal than satisfied customers”. Jones and Sasser (1995 p. 89). It could be argued that from this research, the satisfaction measurement scale could be seen as a weak model to measure satisfaction, as ‘4’ on the satisfaction scale could be viewed as disproportionate between ‘3’ and ‘5’. Reichheld (2003 p. 49) states, “An even less reliable means of gauging loyalty is through conventional customer-satisfaction measures.
Our research Indicates that satisfaction lacks a consistently demonstrable connection to actual customer behavior and growth. However, Jones and Sasser (1995 p. 95) state that, “Measuring customer satisfaction is one of the safest ways to obtain this information. ” A discovery by Xerox has shattered the conventional wisdom; they found that totally satisfied customers were six times more likely to repurchase Xerox products than its satisfied customers. “Merely satisfying customers who have the freedom to make choices is not enough to keep hem loyal.
The only truly loyal customers are totally satisfied customers” Jones and Sasser (1995 p. 91). Although customer satisfaction plays a significant role in customer retention, the reality is that not every customer can be satisfied and, worst of all, not every satisfied customer can be retained. ” (Woo and Fock 2004, p. 187). Griffin (2002 p. 2) goes on to argue that, “Satisfaction alone is not enough to build a loyal customer base”. Heskett, Sasser and Schlesinger (1997 p. 22) go as far as to argue that, “of all the links in the service profit chain, this one has proven the least reliable”.
The above authors suggest that the link in the relationship is weak and that satisfaction is not enough to gain loyalty. There are many arguments that both agree and disagree with this relationship. For instance, Zineldin (2006 p. 433) argues that ,”Indeed there is a positive impact of customer loyalty and retention on company profitability. ”
Whilst keingingham, et al (2005 p. 144) states simply that, “Loyalty does not equal profitability”. Other well documented arguments that agree with the link suggest that, “As a customer’s relationship with the company lengthens, profits rise. ” (Reicheld and Sasser 1990 p.105). Reichheld (1990 p. 105) also states that “Companies can boost profits by almost 100% by retaining just 5% more of their customers. ”
A factor which determines whether or not a relationship is maintained between a consumer and a service is whether or not it can withstand ‘critical episodes’. “Longevity can also originate in relationship intrinsic factors such as the relationship strength and the handling of critical episodes during the relationship. ” P. 29 “When analysing relationship intrinsic factors we also have to consider how critical episodes are handled (Storbacka, 1994b).
” (Storbacka, Strandvik and Gronroos 1994 p. 30). Storbacka, Strandvik and Gronroos (1994), state that a critical episode is defined as an episode in the relationship that is of up most importance. A triumphant critical episode can fortify the relationship so that it may withstand negative episodes in the future. It can be suggested that these critical episodes could reinforce the loyalty in the relationship, leading to increased profits in the long term. Loyalty models have been developed which argue the relationship between Loyalty and Profitabilty.
Dick and Basu (1994) model on attitudinal and behavioural loyalty can be used to analyse the strengths and weaknesses in the relationship. Attitudinal loyalty occurs when a customer has an emotional or psychological attachment to a business. (Bowen and Chen 2001. ) It can be argued that attitudinally loyal customers are a disadvantage and an advantage at the same time, as they may think highly of a business and recommend it to friends but feel as though it is too expensive for them (Bowen and Chen 2001). Behavioural loyalty on the other hand, is based on measureable behaviours and is more long term (Hobbs and Rowley 2008).
It looks more towards frequent repeat purchases rather than a strong emotional attachment to the brand. (Uncles, Dowling and Hammond (2003). Loyalty as behaviour is the result of the customer being repeatedly satisfied. Heskett et al (2008) argue that loyalty results directly from customer satisfaction. However, Palmer, McMahon-Beattie, and Beggs (2000) argue that “loyalty based on repeated behavior is fragile. ” (p. 388). Keiningham, Vavra, Aksoy, and Wallard (2005) argue that it is wrong to presume that repeat purchase equals loyalty.
Dick and Basu (1994) argue that loyalty is viewed in terms of the strength of relationship between attitude and behaviour and that that true loyalty must consist of both attitudinal and behavioural elements. Griffin (2002) also argues that attachment to a company (attitude) and repeat purchase (behaviour) is necessary for loyalty. However, Keiningham, et al (2005 p. 144) argues that, “for many companies, the majority of customers who would be considered both attitudinally and behaviourally loyal would not be profitable”.
Modelling consumer types has also been developed whilst trying to understand the relationship. Jones and Sasser (1995) have commented on this area in detail. Jones and Sasser (1995) The model categorises customer by; satisfaction, loyalty and behaviour. The model can be linked to the loyalty – profitability relationship by evaluating the groups. Terrorists are, “customers who have had a bad experience and can’t wait to tell others about their anger and frustration” Jones and Sasser (1995 p. 97).
It can be argued that in the long-term, terrorists can affect consumers and potential consumers relations with an organisation through passing on their bad experience. Whereas, Jones and Sasser 1(995 p. 96) states that, “the loyalist is a customer who is completely satisfied and keeps returning to the company”, agreeing with the link in the ‘SPC’, as Griffin (2002 p. 5) states, “The longer a customer remains loyal, the more profit a business can reap from the single customer. ” Apostles are those customers that are so satisfied and loyal that they go out of their way to promote the company.
“In fact, the only path to profitable growth may lie in a company’s ability to get its loyal customers to become, in effect, its marketing department. ” (Reichheld 2003 p. 49). The mercenary is a customer who “defies the satisfaction-loyalty rule: He may be completely satisfied but exhibit almost no loyalty” (Jones and Sasser 1995 p. 97). This argues against the satisfaction-loyalty link in the (SPC). Hostages are individuals that “experience the worst the company has to offer and must accept it” (Jones and Sasser 1995 p. 97).
“Too often ‘hostages’ customers are read as loyal customers” (Keiningham, et al 2005 p. 89). In finding out what creates a hostage consumer, the literature has stumbled upon a key point which again has found a weakness in the (SPC), that although a consumer is neither satisfied, nor voluntarily loyal, they are still spending money with the firm. ” Keiningham, et al (2005 p. 7) goes onto argue that, “the real solution rests in knowing the value of each customer and then focusing loyalty efforts on those customers who are the most valuable.
” It could be argued, that the following can be derived from the literature on the relationship, that “True loyalty clearly affects profitability. While regular customers aren’t always profitable” (Reichheld 2003 p. 48). Heskett, Sasser and Schlesinger (1997 p. 21) found that a, “5 percent increase in customer loyalty could produce profit increases of from 25 percent to 85 percent” “While the relative importance of these effect varies from industry to industry, the end result is that longer term customers generate increasing profits” (Reichheld and Sasser 1990 p.
107). Heskett, Sasser and Schlesinger (1997 p. 199) also go on to state that, “customer loyalty is one of the most important drivers of service profit chain performance”. Authors that argue against the relationship have argued that, “long-term relationships are not a sufficient prerequisite for customer relationship profitability” (Storbacka, Strandvik and Gronroos 1994 p. 34). (Hill and Alexander 2006 p. 19) suggest, “The concept of loyalty is rooted in the past, emphasizing characteristics such as allegiance, duty, obligation and devotion.
It is totally unrealistic for most commercial enterprises to expect their customers to have such feelings towards them. ” According to (Keiningham, et al 2005 p. 16), “the exuberant way in which management has endorsed the potentials of customer loyalty can hardly be fathomed, let alone be overstated”. Keiningham, et al (2005 p. 28) goes onto argue that, “the results are clear: Despite all the time and money spent to enhance loyalty, customer loyalty is more difficult to find than ever”.
There has clearly been a lot of research done on the subject of service quality and its link to profitability. The links in the ‘SPC’ have shown how providing good service quality can lead to developing a profitable customer, and to a degree, a profitable customer for life. Helgesen (2006 p. 261) states that, “there seems to be a positive relationship between customer satisfaction and customer loyalty, and there also seems to be a positive relationship between customer loyalty and customer profitability”.
Whilst Bolton (1998 p. 63), reveals that, “Customers who have longer relationships with the firm have higher prior cumulative satisfaction ratings and fewer/smaller subsequent perceived losses associated with subsequent service encounters”. However, when relating the ‘for life’ part of the statement to the relationship between service quality and profitability, there has been little research to suggest obtaining it guarantees a ‘profitable customer for life’, Keiningham, et al (2005 p.
14) states that, “Mainstream marketing has only recently discovered the concepts of customer lifetimes and lifetime values”. Based on our study,we can conclude that customer service is an important driver of customer equity and as such should be a high priority when attracting and keeping the right profitable customers. Andreassen and Olsen (2008 p. 320) customer service has an impact on customer satisfaction directly, while indirectly affecting relative attractiveness and commitment through satisfaction”. Andreassen and Olsen (2008 p. 320)