Common misconceptions about customer loyalty
Name
BUSI 3004 - Entrepreneurship for Small Business
Walden University
2022
Common misconceptions about loyalty
Loyalty is a direct result of satisfaction. This claim by Heskett et al. (1994) results from the
established relationship of the Satisfaction-Loyalty-Profit chain (SPC). The model assumes that
higher level of satisfaction leads to greater retention or loyalty. Hence marketers should
concentrate their efforts on improving product/service attributes, which mediated by satisfaction,
will end in loyalty. The first issue with this approach is the fact that unclear definitions of loyalty
seem to create a bias within the model. Particularly, retention and loyalty are used
interchangeably, implying that they should be taken as one.
What we can observe in practice though, is the fact that not every repurchase is a clear sign of
customer commitment. The term repurchase intention, suggested by Zeithaml et al. (2001), might
actually be more suitable in terms of a better link with satisfaction.
Secondly, the link between loyalty and satisfaction highly depends on the structure of the
industry, where the firm operates. It has been reported by
Hence the traditional view that loyalty arises from satisfaction is rather ambiguous and needs
further research. Loyalty leads to increased profitability.
As previously stated, this is the most common belief among both academics and executives. In
fact, without accepting that loyalty creates profits, it would probably make little sense to consider
loyalty at all. The question here is the risk of taking this statement blindly, ignoring various
limitations of it. Specifically, there are two popular frameworks in support of the “loyalty-
profitability” link. The “80-20 rule” states, that 80 percent of firm’s profitability comes from the
20 percent of the customers. The rule particularly assumes that these 20 percent are the few loyal
customers. It can be concluded then, that slightly increasing loyalty will lead to a greater margin
of profitability. A similar approach, which is customer profitability pyramid, is suggested by
Zeithaml et al. (2001), who segments customers according to four tiers of profitability, assuming
again that the most loyal customers are the most profitable ones. In practice, however, this is not
always the case. The “best” 20 percent or the platinum tier is likely to be the competitor’s most
profitable customers as well (Dowling et al. 1997). In addition, the link between loyalty and
profitability weakens because of the mediating role of costs. Despite, widely held beliefs about
cost efficiency of loyal customers, the research conducted by Reinartz et al.
(2002) revealed, that loyal customers are actually more expensive to serve and expect to pay
lower prices than the rest. Finally, it should be acknowledged that the popular effect of
diminishing returns in economics, works here too. This means that marginal retention comes at
increasing cost, and increasing retention might eventually be counter-effective (Kumar et al.
2006). Loyalty can be equally stimulated in all consumers.
Traditionally, transaction-based approach has considered marketing a one-way process, where
customers are individually unimportant, and their role is passive. It seems to be consistent then to
assume, that consumers respond to loyalty initiatives, or otherwise loyalty programmes, in a
similar way. However, extensive empirical studies report existence of various moderating factors
in the effectiveness of loyalty programmes, individual characteristics being one of them (Liu
2007). Here is where relational marketing steps in, to insure that customer relationship is
managed and the retention of idiosyncratic consumers is enhanced. Indeed, the practice shows
that consumers act differently, depending, among others, on a wide range of individual
characteristics. In some extreme approaches it is even assumed that certain customers never stay
loyal to one company (Reichheld 1993). In other situations, so called “polygamous loyalty”, i.e.
loyalty for multiple products/services has a place to be. One widely used framework to address
the nature of different consumers, introduced by Payne (2000), is the loyalty ladder. The ladder
includes seven different natures of customers (ranging from suspects to partners) and their
subsequent levels of loyalty. The framework implies that there is a need for managers to
investigate in the characteristics of their consumers to be able to distinguish the most suitable
ones among them. Generally, studies report moderating factors to repurchase intentions such as
age, customer involvement and income levels. It was discovered for example, that low-
involvement customers perceive higher satisfaction and register significantly higher repurchase
intensions (Seiders et al. 2005). This apparently corresponds to the Relationship Life Cycle
Model, where as the relationship with the customer matures over time, there is inevitable decline
in cooperation, hence repurchase intentions. These results might challenge existing perceptions
that the longer the customer stays with the company, the more revenue can be generated. It
should also be noted, that customers are not homogenous in their value expectations as well.
Some customers may cost far more to retain than they are actually worth (West et al. 2006).
Additionally, factors such as convenience, initial usage levels and product types have been
reported to play a strong moderating role for loyalty (Dowling et al. 1997, Liu 2007, Seiders et
al. 2005). Surprisingly, loyalty programmes are found to be more effective with low initial usage
levels by customers. Low-involvement products, accordingly, do not seem to stimulate loyalty,
since the customers are not very interested in developing a relationship there. And obviously, the
more convenient the experience, the higher loyalty was detected.
What these results indicate is that differences in customer characteristics, as well as situational
and relational factors make considerable corrections to the context of loyalty discussions.
Customers may be shopping at the nearest supermarket because it is closer, or because the price
is suitable or just because they arenot curious enough to try other shops. Equally it can be the
case, that the supermarket has built a certain relationship with the customers, who end up having
feelings for it. Apparently, the loyalty that is a level beyond simple behavioural characteristics is
the one that might potentially be the most lasting and profitable. Hence, marketers should
consider these findings when designing and implementing their loyalty initiatives.
Relationship Marketing Tactics
There have been various ways for marketers to implement relationship marketing tactics, which
are expected to have impact on customer retention and loyalty. Bansal, Taylor and James (2005)
suggested that relationship marketing tactics can be executed through service quality, price
perception, value offered, alternative attractiveness, and so on. Tseng (2007) discussed that
tactics as direct mail, tangible rewards, interpersonal communication, preferential treatment and
membership could enhance long-term relationship and increase relationship satisfaction, trust
and commitment. Peng and Wang (2006) also examed the application of relationship tactics in
service quality, reputation (brand), price perception, value offers. Based on the early theories,
certain relationship marketing tactics which are considered of importance in service industry,
such as service quality, price perception, value offers and brand image, will be focused in the
following parts.
Service Quality
Service is different from physical products. Compared with physical products, Service is thought
to be intangible, heterogeneous, produced and consumed simultaneously, unable to be kept in
stock, etc. A widely accepted definition of service is proposed by Grönroos in 1990 as: “A
service is a process consisting of a series of more or less intangible activities that normally, but
not necessarily always, take place in interactions between the customer and service employees
and/or physical resources or goods and/or systems of the service provider, which are provided as
solutions to customer problems” (see Grönroos, 2000, p.46). This definition implied that service
is a process where interactions between customer and service provider most often exist. Hence,
in a service context, there are almost a relationship between customer and service provider; such
relationship can be used as a basis for marketing (Grönroos, 2000). In order to retain loyal
customer who will bring long-term profit to the firm, the key issue for service provider is to
make use of this relationship in the way it manages customers by offering what the customer’s
needs and wants.
The quality of a service is subjectively perceived by customers during the interactions with a
firm (Grönroos, 2000). Parasuraman et al.(1988) defined service quality as the consumers’
judgment about a firm’s overall excellence or superiority. What happens and perceived by
customers in the interaction process will obviously have critical impacts on customers’
evaluation of service quality (Grönroos, 2000).
Due to the peculiar attributes of service, the evaluation of service quality is more complex than
evaluation of product quality. There have been various ways for measurements of service quality
proposed by previous researches and literatures. The famous measurement model of service
quality is SERVQUAL developed by Parasuraman et al.(1988), who measured the differences
between customer expectations and perceptions cross five determinants as follows:
Tangibles: Appearance of physical facilities, equipment, employees and communication
materials from a service company.
Reliability: A service company’s ability to perform the promised service dependably and
accurately.
Assurance: employees’ knowledge and behavior about courtesy and ability to convey trust and
confidence.
Responsiveness: A service company is willing to help customers and provide punctual
services.
Empathy: A service company provides care and individualized attention to its customers, as
well as having convenient operating hours.
High service quality is regarded as a key to succeed in competitive service markets. Many
researchers have showed that service quality perceived by customers are will directly influence
customers’ satisfaction, as well as their trust in the service firm (Parasuraman et al., 1988; Aydin
and Özer, 2005; Ismail et al., 2006; etc.). Customers might be satisfied when a firm provides
better services than their pre-purchase expectations. Customer trusts also emerge when
customers perceive positive service quality from a firm, and believe the service firm would bring
preferable outcomes for them. In mobile telecommunication industry which belongs to service
industry, service quality is an important indicator to assess a service provider’s performance.
Offering a high quality service is considered to be a visible way to create customers trust and
satisfaction, as well as obtaining competitive advantages and building a long-term relationship
with customers.
Price Perception
Price is the monetary cost for a customer to buy products or services. It is the critical determinant
that influences customer buying decision. Customers usually select their service providers
strongly relying on perceived price. How much consumers are willing to pay differs due to their
different needs and wants. Thus, the price perceptions to the same service products may differ
among individuals. Higher pricing perceived by consumers might negatively influence their
purchase probabilities (Peng and Wang, 2006). Price perception is also thought to be related to
price searching (Lichtenstein et al., 1993). Consumers are likely to be attracted by perceived
high-quality services at perceived competitive prices during the searching process.
Oliver (1997) suggested that consumers often judge price relating to service quality, and
accordingly generate satisfaction or dissatisfaction, depending on the equity principle. If a
consumer perceives price as fairness, he or she is willing to conduct this transaction with the
service provider. Based on previous studies, Cheng et al.(2008) proposed that price perception
can be measured by two dimensions: one is reasonableness of prices, which reflects the way that
price is perceived by customers comparing to that of competitors.; another is value for money,
which implies the relative status of the service provider in terms of price. In general, high-quality
services are considered to cost more than low-quality equivalents (Chitty et al., 2007)
Many researchers have pointed out that price perception influences customer satisfaction and
trust (Oliver, 1997; Peng and Wang, 2006; Cheng et al., 2008; Kim et al., 2008). Customer often
switches mainly due to some pricing issues, e.g. high price perceived, unfair or deceptive pricing
practices (Peng and Wang, 2006). Therefore, in order to increase customer satisfaction, it is
essential for service firms to actively manage their customers’ price perceptions, e.g. carrying out
attractive pricing, offering reasonable prices mix, lower prices without decreasing quality, etc.
Brand Image
Brand concept has been frequently discussed in marketing literatures. Brand building is not only
an important driving force for marketing physical products, it is also a vital issue for service
firms. Brand image was defined by Keller (1993) as the “perceptions about a brand as reflected
by the brand associations held in consumers’ memory.” It is thought as the perception or mental
picture of a brand formed and held in customers’ mind, through customers’ response, whether
rational or emotional (Dobni and Zinkhan, 1990). According to Grönroos (2000, p.287), “A
brand is not first built and then perceived by the customers.
Instead, every step in the branding process, every brand massages, is separately perceived by
customers and together add up to a brand image, which is formed in customers’ minds”.
Therefore, brand image is consequence of how a customer perceives the relationship with a
brand over time (Ibid). The concept of relationship marketing within services displays the
importance of one-to-one relationships between businesses and customers as well as
relationships between consumers and the brands (O’Loughlin, Szmigin, and Turnbull, 2004).
The development of a brand relationship with customers is based on a series of brand contacts
experienced by customers (Grönroos, 2000). What customer perceives the brand image during
such experience is critical issue for a service firm to realize. Furthermore, customers are likely to
form brand image in mind from inexperience ways, such as word of mouth from other
consumers, a company’s reputation in public, marketing communication, and so on. A positive
brand image make it easier for a firm to convey its brand value to consumers, also generates
favorable word of mouth among people; contrarily, a negative image affect people in opposite
direction; a neutral or unfamiliar image may not cause any damage, but it does not increase the
effectiveness of communication and word of mouth either (Ibid). The more customers consider a
brand valuable, the more sales can be expected to be achieved (Ibid).
Relationship Quality
Relationship Quality (RQ) emerged from the field of Relationship Marketing (RM). Due to the
importance of relationship marketing in today’s businesses, relationship quality is essential for
assessment of relationship strength and the satisfied degree of customer needs and expectations
(Crosby & Evans & Cowles, 1990; Smith, 1998). Successful exchange events can finally lead to
an enduring buyer-seller relationship if they are properly treated from both a buyer and a seller’s
perspectives (Crosby et al., 1990). In some service contexts, since service is invisible and
heterogeneous, customers would feel high uncertainty and risk in the transaction (Li and Ho,
2008). Whereas, good relationship quality could reduce service uncertainty and risk for the
purpose of increasing customers’ reliability to develop long-term relationships (Crosby et al.,
1990; Li and Ho, 2008). In other words, higher quality of relationship creates association
between service providers and customers, and fosters long-term stable exchanges where both
parties can gain mutual benefits (Singh, 2008).
Relationship quality does not have a widely accepted definition and measures (Singh, 2008).
Various dimensions have been used to measure relationship quality within marketing researches.
One attempt to conceptualize relationship quality has been proposed by Grosby et al.(1990), who
viewed relationship quality as a high-order construct and should contain at least two dimensions:
trust and satisfaction. Morgan and Hunt (1994) drew the commitment-trust theory by proposing
that trust and commitment are two basic constructs for measuring relationship quality. By
integrating different research viewpoint, Chakrabarty, Whitten and Green (2007) discussed that
relationship quality is measured in terms of trust, commitment, culture, interdependence, and
communication. Otherwise, Lages et al. (2005), from a perspective of business organization
rather than consumers, suggested that relationship quality reflected the intensity of information
sharing, communication quality, long-term orientation and satisfaction with the relationship
between the exporter and importer.
Although there are no consensuses regarding the components that form up relationship quality, it
is generally accepted that trust and satisfaction are two significant factors for measuring
relationship quality. Especially in the context of service markets, high relationship quality
perceived by customers is achieved through customer trusts and customer satisfaction, which are
two key points for service providers to consolidate stable long-term relationship with their
customers, and in turn achieve customer retention and loyalty behavior. Therefore, we study
relationship quality by focusing on trust and satisfaction from customers’ perspectives.
Trust
Trust is one of the most widely subjects across multi disciplines, including management,
economics, philosophy and psychology. Various definitions of trusts have been given in previous
literatures. One general concept of trust was provided by Mayer, Davis and Schoorman (1995),
who systematically studied organizational trust and defined trust as the willingness of a party to
be vulnerable to the actions of another party based on the expectation that the other will perform
a particular action important to the trust or, irrespective of the ability to monitor or control the
other party. Geyskens and Steenkamp (1995) also summarized trust as the extent to which a firm
believes that its exchange partner is benevolent and honest. Doney and Cannon (1997)
emphasized that trust is the perceived credibility and benevolence. Based on above definitions, it
is clear that trust is a human characteristic that is based on assessment of one another’s
personality traits (Chu, 2009), motives and behaviors (Tian et al., 2008). In the development of
trust, trustors’ expectations and perception about trustees are involved. This is suggested that the
level of trust is different significantly among individuals based on their personal decision-making
habits and characteristics (Chu, 2009).
Trust or distrust often takes place with a relationship built up. As a supplier actively makes
relationship efforts, it provides evidence to customers that the supplier can be trusted, concerns
about the customers’ interests and is willing to make sacrifices for satisfying customers’ needs in
the relationship (Liang and Wang, 2008)).
In practical business activities, therefore, the development of trust is considered to be a critical
result of establishing a long-term successful relationship between all the parties involved. In face
of complicated service markets, customers tend to behave and make purchasing decision
depending on their previous consuming experiences (Doney and Cannon, 1997), their
expectations (Anderson and Narus, 1990; Mayer et al., 1995) and perception (Liu et al., 2008;
Gwinner et al., 1998; Doney and Cannon, 1997) to service providers. Investing in long-term
relationship with customers thus helps to develop customer trusts and improve the effective
quality of a relationship in order to obtain mutual interests (Anderson & Weitz, 1989).
Customers with trusts in service providers’ capability would probably be willing to commit to a
service relationship for meeting their expectations (Morgan and Hunt, 1994). Even when the
environment is changing, the customers would believe that the service provider will take
customers’ interests into account instead of doing anything harmful to the development of
relationship (Liu et al., 2008).
Mayer et al. (1995) conceptualized organizational trust by proposing three core elements as:
trustee’s ability, trustee’s benevolence and trustee’s integrity. These three dimensions have been
further supported and adopted by several researchers to operate trust in their later studies. (Lin
and Ding, 2005; Aydin and Özer, 2005; Tian et al.,2008). Besides, cumulative process in a
relationship was considered to construct trust on the basis of a party’s capability of implementing
its obligations continuously (Doney and Cannon, 1997; Aydin and Özer, 2005).
Trust is considered so important to long-term relationships and enhancing customer loyalty.
Many researchers have suggested that customers’ trust is a significant role in building long-term
relationship and achieving customer loyalty (Berry, 1995;Bowen and Shoemaker, 2003; Chu,
2009). With trust as a precursor, a customer becomes loyal to a firm and forms a commitment to
that firm (Bowen and Shoemaker, 2003).
Satisfaction
Customer satisfaction has been paid much attention among theoretical literatures and practical
researches. It is also an expected outcome of implementing marketing activities, as providing
satisfying products or services to customers relates to success achieved in today’s tensely
competitive would of business.
Fornell (1992) defined satisfaction as an overall evaluation dependent on the total purchase and
consumption experience of the target product or service performance compared with repurchase
expectations over time. Oliver (1997, 1999) reviewed satisfaction as pleasurable fulfillment
which is sensed by customers in the consumption. It means that “the consumer senses that
consumption fulfills some need, desire, goal, or so forth and that this fulfillment is pleasurable”
(Oliver, 1999, p.34).
In relationship marketing literatures, customer satisfaction has also been thought to be an key
performance indicator for evaluating the quality of a relationship between service provider and
customers. Customers’ expectations regarding costs and benefits of the relationship mainly
depend on past experience, and satisfying experiences increase the motivation and the likelihood
that an individual stays in the relationship (Mouri, 2005). Customer perception to products or
services has been widely used to measure customer satisfaction. According to Li (2008), five
emotions perceived by customers as below are satisfactory:
(1) Satisfaction: the products can be accepted or tolerated;
(2) Content: the products bring people with a positive and happy experience;
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