Loyalty business model: Difference between revisions

A model by Kaj Storbacka, Tore Strandvik, and Christian Grönroos (1994), the [[service (business)|service]] [[quality (business)|quality]] model, is more detailed than the basic loyalty business model but arrives at the same conclusion.<ref>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.</ref> 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 (business)|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 barriers|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.

1)# the customer moves away from the company's service area,

2)# the customer no longer has a need for the company's products or services,

3)# more suitable alternative providers become available,

4)# the relationship strength has weakened,

5)# the company handles a critical episode poorly,

6)# 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 [[Fred Reichheld|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.<ref>{{cite journal |last1=Carrol |first1=P. |last2=Reichheld |first2=F. |date=1992 |title=The fallacy of customer retention |journal=Journal of Retail Banking |volume=13 |issue=4 }}</ref>

According to Buchanan and Gilles (1990),{{sfn|Buchanan|1990}} the increased profitability associated with customer retention efforts occurs because:

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|patronage concentration ratio]]. This calculation is hindered by the difficulty in allocating costs to individual relationships and the ambiguity regarding relationship cost drivers.

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 willcan create [[customer loyalty]], improved sales levels, and higher [[profit marginsmargin]]s. Some of these profits can be reinvested in [[employee development]] thereby initiating another iteration of a virtuous cycle.

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 has been described by Anderson and Mittal (2000) in a paper published in the Journal of Service Research.<ref>Anderson, Eugene W., and Vikas Mittal. "Strengthening the satisfaction-profit chain." Journal of service research 3, no. 2 (2000): 107-120.</ref> 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 <ref>KamakuraCarr, WagnerNicholas AG., Vikas1999. Mittal,Marketing: FernandoThe Deeconomics Rosa,of andcustomer Jose Afonso Mazzonsatisfaction. "AssessingHarvard theBusiness service-profit chain." Marketing science 21, no. 3Review (2002March-Apr):. 29415-31718. Available at SSRN: http://ssrn.com/abstract=2344873</ref> 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.<ref>Mittal, Vikas and Frennea, Carly and Westbrook, Robert A., Managing Customer Value in Business-to-Business Markets (March 2014). Marketing Review St. Gallen 3/2014. Available at SSRN: http://ssrn.com/abstract=2430196</ref>

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.<ref>Evanschitzky, Heiner and Groening, Christopher and Mittal, Vikas and Wunderlich, Maren, How Employer and Employee Satisfaction Affect Customer Satisfaction: An Application to Franchise Services (December 17, 2011). Journal of Service Research, 14(2), May 2011, 136-148. Available at SSRN: http://ssrn.com/abstract=2339332</ref> 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).<ref>Mittal, Vikas and Frennea, Carly, Customer Satisfaction: A Strategic Review and Guidelines for Managers (2010). MSI Fast Forward Series, Marketing Science Institute, Cambridge, MA, 2010. Available at SSRN: http://ssrn.com/abstract=2345469</ref><ref>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.</ref><ref name="Homburg, Christian 2001">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.</ref><ref name=":0">{{Cite journal|last1=Gonçalves|first1=Fábio M.R.R.|last2=Cândido|first2=Carlos J.F.|last3=Feliciano|first3=Isabel Maria Pereira Luís|date=2020-06-11|title=Inertia, group conformity and customer loyalty in healthcare in the information age|url=https://www.emerald.com/insight/content/doi/10.1108/JSTP-08-2019-0184/full/html|journal=Journal of Service Theory and Practice|language=en|volume=30|issue=3|pages=307–330|doi=10.1108/JSTP-08-2019-0184|issn=2055-6225|hdl=10400.1/14708|s2cid=219924463 |hdl-access=free}}</ref> 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.<ref> name="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.</ref><ref>Vikas Mittal, Jerome Katrichis, & Pankaj Kumar. (2001). "Attribute Performance and Customer Satisfaction Over Time: Evidence from Two Field Studies." The Journal of Services Marketing, 2001, 15(4/5): 343-356.. Available at SSRN: http://ssrn.com/abstract=2344878</ref><ref>Danaher, Peter J. "Customer heterogeneity in service management." Journal of Service Research 1, no. 2 (1998): 129-139.</ref><ref>Vikas Mittal and Wagner Kamakura. (2001) "Satisfaction, Repurchase Intent, and Repurchase Behavior: Investigating the Moderating Effect of Customer Characteristics". Journal of Marketing Research, 38(1): 131-142. Available at SSRN: http://ssrn.com/abstract=2344925</ref>

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.<ref>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.</ref><ref>Gupta, Sunil, and Valarie Zeithaml. "Customer metrics and their impact on financial performance." Marketing Science 25, no. 6 (2006): 718-739.</ref><ref>Blut, Markus and Frennea, Carly and Mittal, Vikas and Mothersbaugh, David L., How Procedural, Financial and Relational Switching Costs Affect Customer Satisfaction, Repurchase Intentions, and Repurchase Behavior: A Meta-Analysis (January 20, 2015). International Journal of Research in Marketing, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2553402</ref><ref>Pallas, Florian and Mittal, Vikas and Groening, Christopher, Allocation of Resources to Customer Satisfaction and Delight Based on Utilitarian and Hedonic Benefits (2014). Journal of Research in Marketing, Vol. 2 (1), 106-112 . Available at SSRN: http://ssrn.com/abstract=2404450</ref><ref>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.</ref><ref name=":0" />

3) The measurement of loyalty—especially for customers is multi-faceted. Customer loyalty includes a variety of outcomes—intentions and behaviors associated with repurchase,<ref>Blut, Markusincluding and Frennea, Carly and Mittal, Vikas and Mothersbaugh, David L., How Procedural, Financial and Relational Switching Costs Affect Customer Satisfaction, Repurchase Intentions, and Repurchase Behavior: A Metaword-Analysis (January 20, 2015). International Journal of Research in Marketing-mouth, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2553402</ref><ref>Vikas Mittal andKowalski, WagnerRobin KamakuraM. (20011996), "Satisfaction, Repurchase Intent,Complaints and Repurchase BehaviorComplaining: Investigating the Moderating Effect of Customer Characteristics". Journal of Marketing ResearchFunctions, 38(1): 131-142. Available at SSRN: http://ssrn.com/abstract=2344925</ref> word-of-mouthAntecedents,<ref>Zhang, Yinlong and FeickConsequences," Lawrence andPsychological MittalBulletin, Vikas, How Males and Females Differ in Their Likelihood of Transmitting Negative Word of Mouth119 (20142). Journal of Consumer Research, Vol179–196. 40, April 2014. Available at SSRN: http://ssrn.com/abstract=2425685</ref><ref>Anderson, Eugene W. "Customer satisfaction and word of mouth." Journal of service research 1, no. 1 (1998): 5-17.</ref> complaint behaviors,<ref>Mittal, Vikas and Huppertz, John W. and Khare, Adwait, Customer Complaining: The Role of Tie Strength and Information Control (October 10, 2008). Journal of Retailing, 84(2), 195-204, June 2008. Available at SSRN: http://ssrn.com/abstract=2338719</ref><ref>Fornell, Claes, and Birger Wernerfelt. "Defensive marketing strategy by customer complaint management: a theoretical analysis." Journal of Marketing research (1987): 337-346.</ref> share-of-wallet or the relative proportion of purchasing from a single firm relative to customer's total purchasing,<ref>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.</ref> and likelihood to recommend.<ref>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.</ref><ref>Mittal, Vikas and Kumar, Pankaj and Tsiros, Michael, Attribute-Level Performance, Satisfaction, and Behavioral Intentions Over Time: A Consumption-System Approach (April 1, 1999). Journal of Marketing, 63, April 1999, 88-101. Available at SSRN: http://ssrn.com/abstract=2345366</ref>

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:<ref>EvanschitzkyBrickley, HeinerJames and GroeningA., ChristopherFrederick and MittalDark, Vikas and Wunderlich,Michael Maren,S. How Employer and Employee Satisfaction Affect Customer Satisfaction: An Application to Franchise ServicesWeisbach (December 171991),‘‘An 2011).Agency JournalPerspective ofon ServiceFranchising,’’Financial ResearchManage-ment, 1420 (21), May 2011, 13627-148. Available at SSRN: http://ssrn35.com/abstract=2339332</ref> 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.

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 [[brand loyalty|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).<ref>Moorman, Christine, Gerald Zaltman, and Rohit Deshpandé (1992), “Relationships"Relationships Between Providers and Users of Market Research: The Dynamics of Trust Within and Between Organizations,”" Journal of Marketing Research, 29 (August), 314-328.</ref><ref>Garbarino, Ellen, and Mark S. Johnson (1999), “The"The Different Roles of Satisfaction, Trust, and Commitment in Customer Relationships,”" Journal of Marketing, 63 (April), 70-87.</ref> More recently, scholars have developed a five dimensional scale to measure customer commitment and relate it to customer loyalty. The five commitment dimensions include:

* [[Affective]] commitment

* Habitual[[Habit]]ual commitment

All historical trends for different segmentations and their standard of living may also be very helpful in developing customer retention strategy. [[Lifestyle (sociology)|Lifestyle]] is also a very powerful tool, can be used for better customer retention and to know his/her needs in better way.

*[[{{annotated link|Loyalty marketing]]}}

*[[{{annotated link|Business model]]}}

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{{More footnotes needed|date=December 2007}}

* {{cite journal|author1=Buchanan, R. and |author2=Gilles, C. (|year=1990) "|title=Value managed relationship: The key to customer retention and profitability", ''|journal=European Management Journal'', vol |volume=8, no |issue=4, |ref={{sfnref|Buchanan|1990.}}}}