A model by Kaj Storbacka, Tore Strandvik, and Christian Grönroos (1994), the servicequality model, is more detailed than the basic loyalty business model but arrives at the same conclusion.[1] In it, customer satisfaction is first based on a recent experience of the product or service. This assessment depends on prior expectations of overall quality compared to the actual performance received. If the recent experience exceeds prior expectations, customer satisfaction is likely to be high. Customer satisfaction can also be high even with mediocre performance quality if the customer's expectations are low, or if the performance provides value (that is, it is priced low to reflect the mediocre quality). Likewise, a customer can be dissatisfied with the service encounter and still perceive the overall quality to be good. This occurs when a quality service is priced very high and the transaction provides little value.
This loyalty business model then looks at the strength of the business relationship; it proposes that this strength is determined by the level of satisfaction with recent experience, overall perceptions of quality, customer commitment to the relationship, and bonds between the parties. Customers are said to have a "zone of tolerance" corresponding to a range of service quality between "barely adequate" and "exceptional". A single disappointing experience may not significantly reduce the strength of the business relationship if the customer's overall perception of quality remains high, if switching costs are high, if there are few satisfactory alternatives, if they are committed to the relationship, and if there are bonds keeping them in the relationship. The existence of these bonds acts as an exit barrier. There are several types of bonds, including: legal bonds (contracts), technological bonds (shared technology), economic bonds (dependence), knowledge bonds, social bonds, cultural or ethnic bonds, ideological bonds, psychological bonds, geographical bonds, time bonds, and planning bonds.
This model then examines the link between relationship strength and customer loyalty. Customer loyalty is determined by three factors: relationship strength, perceived alternatives and critical episodes. The relationship can terminate if:
the customer moves away from the company's service area,
the customer no longer has a need for the company's products or services,
more suitable alternative providers become available,
the relationship strength has weakened,
the company handles a critical episode poorly,
unexplainable change of price of the service provided.
The final link in the model is the effect of customer loyalty on profitability. The fundamental assumption of all the loyalty models is that keeping existing customers is less expensive than acquiring new ones. It is claimed by Reichheld and Sasser (1990) that a 5% improvement in customer retention can cause an increase in profitability between 25% and 85% (in terms of net present value) depending upon the industry. However, Carrol and Reichheld (1992) dispute these calculations, claiming that they result from faulty cross-sectional analysis.[2]
According to Buchanan and Gilles (1990), the increased profitability associated with customer retention efforts occurs because:
The cost of acquisition occurs only at the beginning of a relationship: the longer the relationship, the lower the amortized cost.
Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
Long term customers tend to be less inclined to switch and also tend to be less price sensitive. This can result in stable unit sales volume and increases in sales volume.
Long term customers may initiate free word of mouth promotions and referrals.
Long term customers are more likely to purchase ancillary products and high-margin supplemental products.
Long term customers tend to be satisfied with their relationship with the company and are less likely to switch to competitors, making market entry or competitors' market share gains difficult.
Regular customers tend to be less expensive to service because they are familiar with the processes involved, require less "education," and are consistent in their order placement.
Increased customer retention and loyalty makes the employees' jobs easier and more satisfying. In turn, happy employees feed back into higher customer satisfaction in a virtuous circle.
For this final link to hold, the relationship must be profitable. Striving to maintain the loyalty of unprofitable customers is not a viable business model. That is why it is important for marketers to assess the profitability of each of its clients (or types of clients), and terminate those relationships that are not profitable. In order to do this, each customer's "relationship costs" are compared to their "relationship revenue". A useful calculation for this is the patronage concentration ratio. This calculation is hindered by the difficulty in allocating costs to individual relationships and the ambiguity regarding relationship cost drivers.
Expanded models
Virtuous Circle
Schlesinger and Heskett (1991) added employee loyalty to the basic customer loyalty model. They developed the concepts of "cycle of success" and "cycle of failure". In the cycle of success, an investment in your employees’ ability to provide superior service to customers can be seen as a "virtuous circle". Effort spent in selecting and training employees and creating a corporate culture in which they are empowered can lead to increased employee satisfaction and employee competence. This will likely result in superior service delivery and customer satisfaction. This in turn can create customer loyalty, improved sales levels, and higher profit margins. Some of these profits can be reinvested in employee development thereby initiating another iteration of a virtuous cycle.
Fred Reichheld (1996) expanded the loyalty business model beyond customers and employees. He looked at the benefits of obtaining the loyalty of suppliers, employees, bankers, customers, distributors, shareholders, and the board of directors.
Duff and Einig (2015) expanded the model to debt issuers and credit ratings agencies to investigate what role commitment plays in issuer-CRA relations.
Satisfaction-profit-chain (SPC) model
The satisfaction-profit chain is a model that theoretically develops linkages and then enables researchers to test them statistically for a firm using customer data (both from surveys and other sources). The satisfaction-profit-chain was tested in the context of banking industry showing that product and services improvements indeed were associated with customer perceptions, which led to beneficial customer behaviors such as repurchase, and desirable financial outcomes such as increased sales and profitability [3] The satisfaction-profit-chain, as a methodology for managing customer loyalty and firm profitability, is also applicable in business-to-business markets, irrespective of whether the B2B firm sells goods and/or services.
The satisfaction-profit-chain refers to a chain of effects whereby increased performance on key attributes leads to improvements in overall satisfaction, which in turn affects loyalty intentions and behaviors. The increased customer loyalty is shown to affect short- and long-term financial outcomes including sales, profitability, and stock price. More recently, some studies show that especially in the context of services such as retailing and financial services, employee satisfaction can play a critical role in enhancing customer loyalty. This happens because both customer satisfaction and employee satisfaction can mutually reinforce each other, and promote stronger customer loyalty. More specifically, for a given level of overall satisfaction, customer loyalty is disproportionately stronger when customers perceive that employees are also satisfied.
The SPC model has become the basis of a large body of empirical research showing the strong impact of customer satisfaction on customer loyalty. Research has clearly shown that one of the best ways to increase customer loyalty—measured as repurchase intentions and/or repurchase behavior—is by increasing customer satisfaction (more satisfied customers are more loyal, in general).[4][5][6] Though the relationship is positive, research shows there are many differences:
1) The effect of customer satisfaction on customer loyalty can vary based on customer demographics and segments, such that it is stronger for some demographic groups and segments than others.[5][7]
2) The effect of customer satisfaction and customer loyalty, and subsequent financial outcomes for firms, can vary based on industry. Specifically, factors such as—goods versus services industry, degree of competition or concentration in the industry, the utilitarian or hedonic nature of products, and customers' switching costs can affect the nature (non-linearity) and strength of the link between customer satisfaction and customer loyalty.[8][9][10][6]
3) The measurement of loyalty—especially for customers is multi-faceted. Customer loyalty includes a variety of outcomes—intentions and behaviors associated with repurchase including word-of-mouth,[11][12] complaint behaviors,[13] share-of-wallet or the relative proportion of purchasing from a single firm relative to customer's total purchasing,[14] and likelihood to recommend.[15]
4) Customer loyalty is influenced, not only by customer satisfaction but also employee satisfaction. Customer loyalty is a function of customer satisfaction. In many firms, especially service-oriented industries such as retailing, health-care, financial services, education, and hospitality the level of satisfaction experienced by front-line employees is a critical component. The level of employee satisfaction influences customer satisfaction as shown in a large-scale study of managers, front-line employees, and customers of a DIY retailer in Europe:[16] results showed that managers affected overall job-satisfaction of front-line employees, which in turn affected the satisfaction of customers they interacted with. Most surprisingly, the level of customer loyalty was much higher among those customers who were themselves more satisfied, but also interacted with more satisfied employees. Highly satisfied customers who dealt with relatively less satisfied employees were relatively less loyal.
Commitment-loyalty model
The customer commitment approach to loyalty is based on the idea that customers with higher commitment toward the brand are also more likely to be loyal toward the brand. Earlier models of customer commitment conceptualized it as a unidimensional construct (e.g., Garbarino and Johnson 1999; Moorman et al. 1992).[17][18] More recently, scholars have developed a five dimensional scale to measure customer commitment and relate it to customer loyalty. The five commitment dimensions include:
Typically, loyalty data is being collected by multi-item measurement scales administered in questionnaires by software providers such as Confirmit, Medallia, and Satmetrix.[19] However, other approaches sometimes seem more viable if managers want to know the extent of loyalty for an entire data warehouse. This approach is described in Buckinx, Verstraeten & Van den Poel (2006).
All historical trends for different segmentations and their standard of living may also be very helpful in developing customer retention strategy. Lifestyle is also a very powerful tool, can be used for better customer retention and to know his/her needs in better way.
↑ Storbacka, K. Strandvik, T. and Gronroos, C. (1994) "Managing customer relationships for profit", International Journal of Service Industry Management, vol 5, no 5, 1994, pp 21-28.
↑ Carrol, P.; Reichheld, F. (1992). "The fallacy of customer retention". Journal of Retail Banking. 13 (4).
↑ Carr, Nicholas G. 1999. Marketing: The economics of customer satisfaction. Harvard Business Review (March-Apr). 15-18.
↑ Lee, Jonathan, Janghyuk Lee, and Lawrence Feick. "The impact of switching costs on the customer satisfaction-loyalty link: mobile phone service in France." Journal of services marketing 15, no. 1 (2001): 35-48.
1 2 Homburg, Christian, and Annette Giering. "Personal characteristics as moderators of the relationship between customer satisfaction and loyalty—an empirical analysis." Psychology & Marketing 18, no. 1 (2001): 43-66.
↑ Danaher, Peter J. "Customer heterogeneity in service management." Journal of Service Research 1, no. 2 (1998): 129-139.
↑ Anderson, Eugene W., Claes Fornell, and Roland T. Rust. "Customer satisfaction, productivity, and profitability: Differences between goods and services." Marketing science 16, no. 2 (1997): 129-145.
↑ Gupta, Sunil, and Valarie Zeithaml. "Customer metrics and their impact on financial performance." Marketing Science 25, no. 6 (2006): 718-739.
↑ Keiningham, Timothy L., Bruce Cooil, Tor Wallin Andreassen, and Lerzan Aksoy. "A longitudinal examination of net promoter and firm revenue growth." Journal of Marketing 71, no. 3 (2007): 39-51.
↑ Kowalski, Robin M. (1996), "Complaints and Complaining: Functions, Antecedents, and Consequences," Psychological Bulletin, 119 (2), 179–196.
↑ Anderson, Eugene W. "Customer satisfaction and word of mouth." Journal of service research 1, no. 1 (1998): 5-17.
↑ Fornell, Claes, and Birger Wernerfelt. "Defensive marketing strategy by customer complaint management: a theoretical analysis." Journal of Marketing research (1987): 337-346.
↑ Cooil, Bruce, et al. "A longitudinal analysis of customer satisfaction and share of wallet: Investigating the moderating effect of customer characteristics." Journal of Marketing 71.1 (2007): 67-83.
↑ Ryu, Gangseog, and Lawrence Feick. "A penny for your thoughts: Referral reward programs and referral likelihood." Journal of Marketing 71, no. 1 (2007): 84-94.
↑ Brickley, James A., Frederick Dark, and Michael S. Weisbach (1991),‘‘An Agency Perspective on Franchising,’’Financial Manage-ment, 20 (1), 27-35.
↑ Moorman, Christine, Gerald Zaltman, and Rohit Deshpandé (1992), "Relationships Between Providers and Users of Market Research: The Dynamics of Trust Within and Between Organizations," Journal of Marketing Research, 29 (August), 314-328.
↑ Garbarino, Ellen, and Mark S. Johnson (1999), "The Different Roles of Satisfaction, Trust, and Commitment in Customer Relationships," Journal of Marketing, 63 (April), 70-87.
Customer relationship management (CRM) is a process in which a business or other organization administers its interactions with customers, typically using data analysis to study large amounts of information.
In marketing, customer lifetime value, lifetime customer value (LCV), or life-time value (LTV) is a prognostication of the net profit contributed to the whole future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques.
Relationship marketing is a form of marketing developed from direct response marketing campaigns that emphasizes customer retention and satisfaction rather than sales transactions. It differentiates from other forms of marketing in that it recognises the long-term value of customer relationships and extends communication beyond intrusive advertising and sales promotional messages. With the growth of the Internet and mobile platforms, relationship marketing has continued to evolve as technology opens more collaborative and social communication channels such as tools for managing relationships with customers that go beyond demographics and customer service data collection. Relationship marketing extends to include inbound marketing, a combination of search optimization and strategic content, public relations, social media and application development.
In marketing, brand loyalty describes a consumer's positive feelings towards a brand, and their dedication to purchasing the brand's products and/or services repeatedly, regardless of deficiencies, a competitor's actions, or changes in the environment. It can also be demonstrated with other behaviors such as positive word-of-mouth advocacy. Corporate brand loyalty is where an individual buys products from the same manufacturer repeatedly and without wavering, rather than from other suppliers. Loyalty implies dedication and should not be confused with habit, its less-than-emotional engagement and commitment. Businesses whose financial and ethical values rest in large part on their brand loyalty are said to use the loyalty business model.
Customer satisfaction is a term frequently used in marketing. It is a measure of how products and services supplied by a company meet or surpass customer expectation. Customer satisfaction is defined as "the number of customers, or percentage of total customers, whose reported experience with a firm, its products, or its services (ratings) exceeds specified satisfaction goals." Customers play an important role and are essential in keeping a product or service relevant; it is, therefore, in the best interest of the business to ensure customer satisfaction and build customer loyalty.
Enterprise feedback management (EFM) is a system of processes and software that enables organizations to centrally manage deployment of surveys while dispersing authoring and analysis throughout an organization. EFM systems typically provide different roles and permission levels for different types of users, such as novice survey authors, professional survey authors, survey reporters and translators. EFM can help an organization establish a dialogue with employees, partners, and customers regarding key issues and concerns and potentially make customer-specific real time interventions. EFM consists of data collection, analysis and reporting.
Net promoter score (NPS) is a widely used market research metric that is based on a single survey question asking respondents to rate the likelihood that they would recommend a company, product, or a service to a friend or colleague. The NPS is a proprietary instrument developed by Fred Reichheld, who owns the registered NPS trademark in conjunction with Bain & Company and Satmetrix. Its popularity and broad use have been attributed to its simplicity and transparent methodology.
Frederick F. Reichheld is an American New York Times best-selling author, speaker and business strategist. He is best known for his research and writing on the loyalty business model and loyalty marketing. He is the creator of the Net Promoter System of management (NPS).
Customer attrition, also known as customer churn, customer turnover, or customer defection, is the loss of clients or customers.
Loyalty marketing is an approach to marketing, based on strategic management, in which a company focuses on growing and retaining existing customers through incentives. Branding, product marketing, and loyalty marketing all form part of the customer proposition – the subjective assessment by the customer of whether to purchase a brand or not based on the integrated combination of the value they receive from each of these marketing disciplines.
Customer engagement is an interaction between an external consumer/customer and an organization through various online or offline channels. According to Hollebeek, Srivastava and Chen's S-D logic-Definition of customer engagement is "a customer’s motivationally driven, volitional investment of operant resources, and operand resources into brand interactions," which applies to online and offline engagement.
Customer retention refers to the ability of a company or product to retain its customers over some specified period. High customer retention means customers of the product or business tend to return to, continue to buy or in some other way not defect to another product or business, or to non-use entirely. Selling organizations generally attempt to reduce customer defections. Customer retention starts with the first contact an organization has with a customer and continues throughout the entire lifetime of a relationship and successful retention efforts take this entire lifecycle into account. A company's ability to attract and retain new customers is related not only to its product or services, but also to the way it services its existing customers, the value the customers actually perceive as a result of utilizing the solutions, and the reputation it creates within and across the marketplace.
The service recovery paradox (SRP) is a situation in which a customer thinks more highly of a company after the company has corrected a problem with their service, compared to how they would regard the company if non-faulty service had been provided. The main reason behind this thinking is that successful recovery of a faulty service increases the assurance and confidence from the customer.
Service recovery is an organization's resolution of problems from dissatisfied customers, converting those customers into loyal customers. It is the action a service provider takes in response to service failure. By including customer satisfaction in the definition, service recovery is a thought-out, planned process of returning aggrieved/dissatisfied customers to a state of satisfaction with an organization/service. Service recovery differs from complaint management in its focus on immediate reaction to service failures. Complaint management is based on customer complaints, which, in turn, may be triggered by service failures. But since most dissatisfied customers are reluctant to complain, service recovery attempts to solve problems at the service encounter before customers complain or before they leave the service encounter dissatisfied. Both complaint management and service recovery are customer retention strategies. Researchers recently proved that strategies such as value co-creation and follow-up can improve the effectiveness of service recovery efforts.
Business relations are connections between stakeholders in the process of businesses, such as employer–employee relationships, managers as well as outsourced business partners. The association of businesses began relationships that have been constructed through communication channels such as the likes of telephones, personal contacts, and e-mails. These types of contacts are maintained and deepened through similar channels in internal businesses and organizations.
Service quality (SQ), in its contemporary conceptualisation, is a comparison of perceived expectations (E) of a service with perceived performance (P), giving rise to the equation SQ=P-E. This conceptualistion of service quality has its origins in the expectancy-disconfirmation paradigm.
Customer delight is surprising a customer by exceeding their expectations and thus creating a positive emotional reaction. This emotional reaction leads to word of mouth. Customer delight directly affects sales and profitability of a company as it helps to distinguish the company and its products and services from the competition. In the past customer satisfaction has been seen as a key performance indicator. Customer satisfaction measures the extent to which the expectations of a customer are met. However, it has been discovered that mere customer satisfaction does not create brand loyalty nor does it encourage positive word of mouth.
Defensive strategy is defined as a marketing tool that helps companies to retain valuable customers that can be taken away by competitors. Competitors can be defined as other firms that are located in the same market category or sell similar products to the same segment of people. When this rivalry exist, each company must protect its brand, growth expectations, and profitability to maintain a competitive advantage and adequate reputation among other brands. To reduce the risk of financial loss, firms strive to take their competition away from the industry.
Customer Profitability Analysis is a management accounting and a credit underwriting method, allowing businesses and lenders to determine the profitability of each customer or segments of customers, by attributing profits and costs to each customer separately. CPA can be applied at the individual customer level or at the level of customer aggregates / groups.
Dwayne D. Gremler is a social scientist, academic, and author. He is a Professor of Marketing, Distinguished Teaching Professor, and Distinguished Research Professor in the Schmidthorst College of Business at Bowling Green State University. He is a co-author of the textbook Services Marketing: Integrating Customer Focus Across the Firm, now in its 8th edition.
Buchanan, R. and Gilles, C. (1990) "Value managed relationship: The key to customer retention and profitability", European Management Journal, vol 8, no 4, 1990.
Carrol, P. and Reichheld, F. (1992) "The fallacy of customer retention", Journal of Retail Banking, vol 13, no 4, 1992.
Dawkins, P. and Reichheld, F. (1990) "Customer retention as a competitive weapon", Directors and Boards, vol 14, no 4, 1990.
Duff and Einig (2015) "Debt Issuer - Credit Rating Agency Relations and the Trinity of Solicitude: An Empirical Study of the Role of Commitment", Journal of Business Ethics, vol 129, no 3, pp.553–569.
Fornell, C. and Wernerfet, B. (1987) "Defensive marketing strategy by customer complaint management: a theoretical analysis", Journal of Marketing
Meili, Alexander. (2022) "Loyalty Program Assessment: KPI-Based Evaluation of Customer Loyalty Programs", https://doi.org/10.5281/zenodo.6521984HWZ Working Paper Series, Zurich, 2022.
Moloney, Chris X. (2006) "Winning Your Customer’s Loyalty: The Best Tools, Techniques and Practices" AMA Workshop Event(s). Misc. materials distributed related to event(s). San Diego, 2006.
Reichheld, F. (1996) The Loyalty Effect, Harvard Business School Press, Boston, 1996.
This page is based on this Wikipedia article Text is available under the CC BY-SA 4.0 license; additional terms may apply. Images, videos and audio are available under their respective licenses.
