Background and justification of affecting customers loyalty

In today’s competitive markets services and service companies within the same industry are becoming increasingly similar. Differentiation through the delivery channel (i.e. delivery of services against payment) is difficult. A growing number of service companies have embarked on a journey of positioning through the communication channel (i.e. advertising and personal selling) (Andreassen, T.  1995), with the objective of building strong corporate images in order to create relative attractiveness. This development is in line with Lovelock (1984) who claims that «(images).. . are likely to play only a secondary role in customer choice decisions unless competing services are perceived as virtually identical on performance, price, and availability».

Recent years have shown a growing interest in customer loyalty. The globalisation of competition, saturation of markets, and development of information technology have changed customer behavior and perception and created a situation where success is no longer achieved through product price and qualities. Instead, companies build their success on a long-term customer relationship.

According to former studies, it can cost as much as 6 times more to win a new customer than it does to keep an existing one. (Rosenberg L. et al. 1984: 45) Depending on the particular industry, it is possible to increase profit by up to 60% after reducing potential migration by 5%. (Reichheld F. 1993) It follows then, that the increase and holding of loyal customers has become a key factor for long-term success of the companies.

The main emphasis in marketing has changed from winning new customers to the keeping of existing ones. Traditionally there are two approaches to treat customer loyalty. Some researchers have investigated the nature of different levels of loyalty, others have explored the influence of individual factors on loyalty. In this article both treatments are combined. The starting point of the paper is to test whether the list of most important factors affecting customer loyalty is dependant on the levels of loyalty of costumers. The potential for establishing loyalty depends on the object (i.e. product or vendor), on the subject (customer) or on the environment (market, other suppliers etc.).

This work might be rather helpful for both students, interested in developing this field of research and people, who are working in the sphere of marketing, because it may provide with interesting information worth dwelling upon. This topic interests me personally, because to my mind, customers are the turning point of the market. They decide whether to buy a product or to use a service or not, changing the whole picture of market. That is why, I suppose it is rather necessary for industries to pay much attention to the topic of customers loyalty and satisfaction in order to be a success.

Chapter 2.

Statement of Objectives and Hypothesis to be Examined.

This paper aims to test if the importance of each factor affecting loyalty varies in different loyalty segments described in Figure 1, presenting segmentation of customers loyalty. One possibility to investigate it is to compare the customers of different loyalty levels and examine what kind of factors influence the probability of the customers to remain on that level or to move to another loyalty level.

Customer loyalty expresses an intended behavior related to the service or the company. This includes the likelihood of future renewal of service contracts, how likely it is that the customer changes his preferences, how likely the customer is to provide positive word-of-mouth opinion. If real alternatives exist or switching barriers are low management discovers the organization’s inability to satisfy its customers through two feedback mechanisms: exit and voice (Hirschman A. 1970). Exit implies that the customers stop buying the company’s services while voice is customer complaints expressing the consumers dissatisfaction directly to the company. Customers’ exit or change of patronage will have an impact on the long-term revenue of the company. Customers may be loyal due to high switching barriers or lack of real alternatives. Customers may also be loyal because they are satisfied and thus want to continue the relationship. History has proven that most barriers to exit are limited with regard to durability; companies tend to consider customer satisfaction the only viable strategy in order to keep existing customers. Several authors have found a positive correlation between customer satisfaction and loyalty (Bearden and Teel  1980;Bolton and Drew 1991; Fornell 1992; Anderson and Sullivan 1993).

Based on the future discussion, the following two hypotheses are proposed:

Hypothesis 1: Factors such as satisfaction, trustworthiness, importance of relationship and image have a positive influence on loyalty.

Objective 1: To indicate any relationship between loyalty and such pshycological factors as satisfaction, importance of relationship and others.

Hypothesis 2: The relevance of factors affecting loyalty depends on the levels of loyalty of customers.

Objective 2: Define and dwell upon the levels of loyalty of customers, examin them.

The limitations of my hypothesis questions were shortage of time, because I had to provide results in a relatively short period of time, and money, because true and reliable information was hard and costly to get.

Chapter 3.

Details of Information/ Data Collection Methods.

Research on customer loyalty has a long history and has been studied using a large variety of methods. Although the study of relationship between satisfaction and loyalty of customers is a newer field of research, various methods have been applied to study this  phenomenon as well. Some studies have also been purely conceptual (Stewart 1998; Hocutt 1998).

Although qualitative methods seem to dominate in studies of relationship, quantitative methods have also been used.

The data used for the analysis is a secondary source. A secondary source usually contains commentary on or discussion about a primary source. The most important feature of secondary sources is that they offer an interpretation of information gathered from primary sources.  I did not use the primary source as it is an original material. It is from the time period involved, was not filtered through interpretation and need much time and knowledge to process it. Demographically, the study had some limitations. Firstly, only urban customers were targeted in the study. This group was chosen due to the fact that urban customers have more available alternativetives and are therefore potentially more active in their telecommunication choices.

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Methodologically a certain limitation of the study was that some of the interviews were conducted on the telephone. Despite the fact that the interviews were considered to provide a deep and accurate enough picture of the relationships and the factors affecting customer loyalty, it is obvious that interviews face-to-face have the potential to reach greater depth.

The data used in our analysis originates from PacoNet Customer Satisfaction Survey carried out in November 2003 by professional market research company. PacoNet is the one of the leading telecommunication provider in Ukraine and was providing telephone and internet services for private customers at that time. There were three kinds of competitors for PacoNet: firms providing telephone services on PacoNet network; cable-TV companies providing internet services on their own networks, and mobile telephone companies.

The satisfaction survey contained information about 1000 private customers. Data was collected by phone interviews. During the survey the customers were asked how important various factors were for them.

The importance was measured on a 5-point scale, where “1” is “not important at all” and “5” is “very important”. Every factor listed above was divided into 3 to 7 subcategories (e.g. accounting had subcategories like the accuracy and understandability of bills, dept management, availability of different payment methods). Satisfaction with the factors reveals from the satisfaction with those subcategories. Additionally customers answered about their general satisfaction with the firm PacoNet. The satisfaction was also measured on a 5-point scale, where “1” is “not satisfied at all” and “5” is “very satisfied”.

Customer loyalty was measured by following questions: What operators are the customers using right now? What operators will the customers use in 2 years? Does the customer recommend or is the customer ready to recommend PacoNet to others?

Chapter 4.

Details of Data Analysis Methods

In the current analysis only the raw data of mentioned survey was used. Software packages MS Excel 2000 and Stata 9.2 have been used by PacoNet for data processing, because Microsoft Excel is a deep program rich in features and functionality. One of the most powerful features of Excel is the ability to write programs that run “behind” the worksheets to turn Excel into a calculation-oriented development tool for creating special purpose spreadsheets which can function as applications in their own right.

Chapter 5.

Literature Review

There are multiple approaches to customer loyalty. Theories of behavioral loyalty were dominating until 1970 considering loyalty as the function of the share of total purchases (Cunningham R. 1956; Farley J. 1964), function of buying frequency or buying pattern (Tucker 1964; Sheth 1968) or function of buying probability (Harary F. et al. 1962; McConnell D. 1968; Wernerfelt B. 1991). These approaches looked at brand loyalty in terms of outcomes  rather than reasons, until Day G. (1969) introduced the two-dimensional concept of brand loyalty, which stated that loyalty should be evaluated with both behavioral and attitudinal criteria.

Contemporary researches consider and accent the psychological (mostly attitudinal and emotional) factor of loyalty (Jacoby J. et al. 1973; Oliver R. 1999; Chaudury A. 1995). These different approaches allow distinguishing customers as whether behaviorally or emotionally loyal.

Behaviorally loyal customers act loyal but have no emotional bond with the brand or the supplier when emotionally loyal customers do. Jones T. and Sasser W. call these two kind of loyalty accordingly false or true long-term loyalty (Jones T. et al. 1995). Hofmeyr J. and Rice B. (2000) divide customers to loyal (behavioral) or committed (emotional). Emotional loyalty is much stronger and longer lasting than behavioral loyalty. It’s a lasting desire to maintain a valued relationship. The relationship is so important for the customer that he or she makes maximum efforts to keep it (Reichheld F. 2003; Moorman C. et al. 1992). Highly bonded customers will buy repeatedly from a provider to which they are bonded, recommend that provider to others, and strongly defend these choices to others – insisting that they have chosen the “best” product or service. (Butz H. et al. 1996) Behaviorally loyal customers could be divided to sub-segments by the reason of acting: forced to be loyal, loyal due to passivity or functionally loyal.

Customers are forced to be loyal when they have to be clients even if they do not want to. Customers may be forced to consume certain products or products/services offered by certain vendor e.g. when the company acts as a monopoly or the poor financial status of the customer is limiting his selection of goods. Gronholdt L. has found that companies with low price strategy had a much higher loyalty than expected from their customer satisfaction. On the other hand, companies that had used a lot of energy on branding indeed had a high customer satisfaction but they did not have a correspondingly high loyalty (Gronholdt L. et al. 2000).

Forced loyalty could be established through creating exit barriers as well. Loyal behaviour may also result from passivity – customer does not move to another vendor due to comfort or relatively low importance of operation – if the choice has low importance, there is no point to spend time and effort on searching for alternatives.

Thus, based on his faith in the suitability of the current product, the customer continues to use it without checking alternatives. Hofmeyr J. and Rice B. (2000) say that one of the reasons that customers don’t switch brands when they are dissatisfied is that they feel that the alternatives are just as bad as the brand they are using or even worse. Passivity may be caused also by lack of information about attractive characteristics of the brands (Wernerfelt B. 1991). Functionally loyal customers are loyal because they have an objective reason to be.

Wernerfelt B. (1991) points out “cost-based brand loyalty” where brand utilities have a positive influence on brand choice. Functional loyalty can be created by functional values using price, quality, distribution, usage convenience of a product or through different loyalty programs (points, coupons, games, draws etc.) giving a concrete reason to prefer certain supplier. Unfortunately competitors can most easily copy functional values. Thus, creating functional value offers a fleeting competitive advantage: functional loyalty can’t be very long lasting (Barnes J. 2003). Jones T. and Sasser W. (1995) propose three measures of loyalty that could be used in segmentation by loyalty:

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Customer’s primary behavior – regency, frequency and amount of purchase;

Customer’s secondary behavior – customer referrals, approval and spreading the word;

Customer’s intent to repurchase – is the customer ready to repurchase in the future.

Based on the theoretical literature presented above, the customers of a certain telecommunication provider could be segmented by their loyalty as follows:

Committed or emotionally loyal customers – active customers who use only the certain provider’s services and declare that they will use only this provider in the future and recommend this provider to others;

Behaviorally loyal customers – active customers who use only the certain provider’s services and declare that they will use only this provider in the future but do not agree to recommend this provider to others (inert or functionally loyal);

Contradictory or dubious customers – active customers who use only the certain provider’s services but don’t know which provider they will use in the future;

Disloyal reducers- customers who have reduced or will reduce the percentage of the provider’s services in their usage;

Leavers – customers who declare, that they will certainly leave this provider.

The impact of satisfaction on loyalty has been the most popular subject of studies. Several studies have revealed that there exists a direct connection between satisfaction and loyalty: satisfied customers become loyal and dissatisfied customers move to another vendor (Heskett J. et al. 1993).

The primary objective of creating ACSI (American Customer Satisfaction Index) in 1984 was to explain the development of customer loyalty. In ACSI model customer satisfaction has three antecedents: perceived quality, perceived value and customer expectations (Anderson E. et al. 2000). In the ECSI (European Customer Satisfaction Index) model perceived quality is divided into two elements: “hard ware”, which consists of the quality of the product or service attributes, and “human ware”, which represents the associated customer interactive elements in service, i.e. the personal behaviour and atmosphere of the service environment (Gronholdt L. et al. 2000). In both model increased satisfaction should increase customer loyalty. When the satisfaction is low customers have the option to exit (e.g. going to a competitor) or express their complaints. Researches have shown that 60-80% of customers who turned to a competitor said they were satisfied or very satisfied on the survey just prior to their defection (Reichheld F. et al. 2000). So it’s clear that there must be also other factors beside satisfaction that have a certain impact on customer loyalty.

Image of brand or supplier is one of the most complex factors. It affects loyalty at least in two ways. Firstly, customer may use his preferences to present his own image. That may occur both in conscious and subconscious level. According to the Belk’s theory of extended self, people define themselves by the possessions they have, manage or create (Belk R. 1988). Aaker J. has shown how consumers prefer brands with personality traits that are corresponding with the personality traits that constitute their selfschemas (Aaker J. 1999).

Kim C., Han D. and Park S. have researched the link between brand personality and loyalty. They did get positive support to hypothesis that the attractiveness of the brand personality indirectly affects brand loyalty (Kim C. et al. 2001). Tidwell P. and Horgan D. (1993) have showed that people use products to enhance self-image.

Secondly, according to social identity theory, people tend to classify themselves into different social categories. That leads to evaluation of objectives and values in various groups and organisations in comparison with the customer’s own values and objectives. They prefer partners who share similar objectives and values (Ashforth B. et al. 2001).

Fournier S. (1998) states that consumer-brand relationships are more a matter of perceived goal compatibility. Brands cohere into systems that consumers create not only to aid living but also to give meanings to their lives. Oliver R. (1999) argues that for fully bonded loyalty the consumable must be part of the consumer’s self-identity and his or her social-identity.

Trustworthiness of the partner is a factor that has certain impact on the establishment of loyalty – nobody expects a long-term relation with a partner that cannot be trusted. Trustworthiness is one criterion for measuring the value of the partner (Doney P. et al. 1997). Spekman R. (1988) calls trust a cornerstone of the strategic partnership. Morgan R. and Hunt S. (1994) posit that trust is a major determinant of relationship commitment: brand trust leads to brand loyalty because trust creates exchange relationships that are highly valued. Chauduri A. and Holbrook M. (2001) have showed that brand trust is directly related to both purchase and attitudinal loyalty.

Many authors have accented that trust is important in conditions of uncertainty (Moorman C. et al. 1992; Doney P. et al. 1997; Morgan R. et al. 1994). Uncertainty may be caused by dependence or large choice: people tend then to prefer popular or familiar brands or partners. Many definitions describe loyalty as a desire to retain a valuable or important relationship (Morgan R. et al 1994; Moorman C. et al. 1992). That way the establishment of loyalty is predetermined by the importance of relevant relationship or selection. Weiss A. (2001) points out three aspects that may increase the importance of the relationship: strategic importance of a product; high risks involved in the transaction or costs incurred by cancellation of contracts.

Hofmeyr J. and Rice B. point out that the more important the relationship is to a person, the more willing that person is to tolerate dissatisfaction in favour of trying to fix it. By contrast, when a relationship doesn’t matter, then even the perfectly satisfied consumer can switch on to another product (Hofmeyr J. et al. 2000). A relationship can also be made important by personal approach. Various authors have compared loyalty with marriage (Lewitt T. . 1983; Dwyer F. et al. 1987; Gummeson E. 1998; Hofmeyr J. et al. 2000). Marriage is one of the most personal and important relationships. That means that intimacy is one determinant for importance of relationship. Lewitt T. (1983) has considered a role of salesman in making relationship more personal.

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Summarising the discussion above following figure  is presenting the major groups of factors affecting customer loyalty.

The present study focused purely on customer perception of the relationship and the factors that have affected it and their loyalty or disloyalty. A useful extension of the study would be to couple such a study of how the service provider perceives the relationship and factors affecting customer loyalty or disloyalty. This would add factors such as customer profitability to the study, making it possible to focus on factors affecting customers that are most attractive to the company. In such a study, the customer’s and provider’s views on the relationship would be combined. As a result, one would identify potential gaps in the company’s knowledge of the customer and also be able to eliminate potential misconceptions.

Chapter 6.

Chapter Outline.

Presented work is built up of 8 chapters, dwelling upon the customer’s loyalty. Each chapter gives clear information on subtopics, which are logically combined to provide the reader with sufficient facts to understand the flow of the research.

The first chapter is dealing with the background and justification for selection of the topic. Since customer loyalty is something more of what an enterprise must get from the customer, it is a very productive research product for the companies. As opposed to what the name suggests, is not just something that the customer has to build towards the enterprise. It is not just the customer who is being loyal to the company in the progress but also the company that has to maintain its loyalty to the customer

The second chapter presents the hypothesis questions, which are being examined through the whole work. I come out with two hypothesis, which are as follows: Hypothesis 1: Factors such as satisfaction, trustworthiness, importance of relationship and image have a positive influence on loyalty; and Hypothesis 2: The relevance of factors affecting loyalty depends on the levels of loyalty of customers.

The third and forth chapters puts light on the research methodology I have used to process the data and come to conclusions. I took into consideration secondary data, which originates from PacoNet Customer Satisfaction Survey carried out in November 2003 by professional market research company. Two software packages MS Excel 2000 and Stata 9.2 have been used for data processing and presenting the results of the research. In this chapter I also dwell upon the limitations of the research, which consists of time limitation, budget limitation, as well as demographical and methodological.

The fifth chapter gives perception of the theory used for the thesis. It informs us, that theories of behavioral loyalty were dominating until 1970 considering loyalty as the function of the share of total purchases (Cunningham R. 1956; Farley J. 1964), function of buying frequency or buying pattern (Tucker W. 1964) or function of buying probability (Harary F. et al. 1962;). Contemporary researches consider and accent the psychological (mostly attitudinal and emotional) factor of loyalty (Jacoby J. et al. 1973; Oliver R. 1999; Chaudury A. 1995). These and other researches were used as a base for my own research proposal.

And the last, sixth chapter provides with a brief outline of the research proposal stages.

Having developed the hypothesis questions, and done a literature review we come to the conclusion that the findings of the present study reveal that it is not accurate to treat all customers equally in terms of methods of increasing their loyalty. The research supports the research proposition that the list of most important factors affecting loyalty is dependant on the level of loyalty of consumers. The overall satisfaction and importance of products build the foundation of any kind of loyalty. It shows also that reliability of products or trustworthiness of the supplier is most critical for behavioral loyalists and the image creation is the main tool for getting loyal customers.

Therefore many factors were derived indirectly and with certain limitations, and they may lack some qualities considered in the theoretical part. There are multiple ways for further development of the model, but first there is need to elaborate reliable questionnaires for collecting the source data.

There are several factors for building a customer’s loyalty which I could recommend. It is very important to communicate. Whether it is an email newsletter, monthly flier, a reminder card for a tune up, or a holiday greeting card, it is nice to reach out to a steady customers.  Another pleasant way is to provide customer service, to go the extra distance and meet customer needs, because customers remember being treated well.

It is also very important to provide with employee loyalty. Loyalty works from the top down. If a boss is loyal to his employees, they will feel positively about their jobs and pass that loyalty along to the customers. Employee training should also be used, training them in the manner that to interact with customers. It is also of great advice to give customers a reason to return to the industry’s business. For example, because children outgrow shoes quickly, the owner of a children’s shoe store might offer a card that makes the tenth pair of shoes half price. Likewise, a dentist may give a free cleaning to anyone who has seen him regularly for five years.

It is also important to have product’s awareness, knowing what a steady customer purchase and keep these items in stock. It is possible to add other products and/or services that accompany or compliment the products that regular customers buy regularly.

The reliability of the vendor is highly appreciated. If they say a purchase will arrive on Wednesday, they should deliver it on Wednesday. If something goes wrong, they should let customers know immediately and compensate them for their inconvenience. Vendors should be flexible, trying to solve customers’ problems or complaints to the best of their ability.

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