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The Importance of Customer Satisfaction

in Relation to Customer Loyalty and


Retention

by

Harkiranpal Singh

May 2006

UCTI Working Paper


WP-06-06
The Importance of Customer Satisfaction in Relation to
Customer Loyalty and Retention

Harkiranpal Singh
Asia Pacific University College of Technology & Innovation
Technology Park Malaysia
Bukit Jalil, 5700 Kuala Lumpur, Malaysia
May 2006

kiran@apiit.edu.my

Abstract
To be successful, organizations must look into the needs and wants of their customers.
That is the reason why many researchers and academicians have continuously
emphasized on the importance of customer satisfaction, loyalty and retention.
Customer satisfaction is important because many researches have shown that
customer satisfaction has a positive effect on an organisation’s profitability. Due to
this, the consequences of customer satisfaction and dissatisfaction must be considered.
There is also a positive connection between customer satisfaction, loyalty and
retention. Therefore, customer satisfaction, loyalty and retention are all very
important for an organization to be successful
Keywords: Customer satisfaction, customer loyalty, customer retention

switching behaviour”. True customer loyalty


Introduction is created when the customer becomes an
The importance of customers has been advocate for the organisation, without
highlighted by many researchers and incentive”. According to Hoyer and MacInnis
academicians. Zairi (2000) said “Customers (2001), customer retention is “the practice of
are the purpose of what we do and rather than working to satisfy customers with the intention
them depending on us, we very much depend of developing long-term relationships with
on them. The customer is not the source of a them”. Zineldin (2000) said that retention can
problem, we shouldn’t perhaps make a wish be defined as “a commitment to continue to do
that customers ‘should go away’ because our business or exchange with a particular
future and our security will be put in company on an ongoing basis”.
jeopardy”. That is the main reason why
organisations today are focusing on customer Customer satisfaction
satisfaction, loyalty and retention. Many researchers have looked into the
importance of customer satisfaction. Kotler
According to Hansemark and Albinsson
(2000) defined satisfaction as: “a person’s
(2004), “satisfaction is an overall customer
feelings of pleasure or disappointment
attitude towards a service provider, or an
resulting from comparing a product’s
emotional reaction to the difference between
perceived performance (or outcome) in relation
what customers anticipate and what they
to his or her expectations”. Hoyer and
receive, regarding the fulfilment of some need,
MacInnis (2001) said that satisfaction can be
goal or desire”. Customer loyalty, on the other
associated with feelings of acceptance,
hand, according to Anderson and Jacobsen
happiness, relief, excitement, and delight.
(2000) “is actually the result of an organisation
creating a benefit for a customer so that they There are many factors that affect customer
will maintain or increase their purchases from satisfaction. According to Hokanson (1995),
the organisation. Oliver (1997) said that these factors include friendly employees,
customer loyalty refers to “a deeply held courteous employees, knowledgeable
commitment to re-buy or re-patronise a employees, helpful employees, accuracy of
preferred product or service consistently in the billing, billing timeliness, competitive pricing,
future despite situational influences and service quality, good value, billing clarity and
marketing efforts having the potential to cause

Harkiranpal Singh Page 1


The Importance of Customer Satisfaction in Relation to WP-06-06

quick service. This is shown in Figure 1 retention. They all convey a similar message
below. in that:

Friendly Employees Courteous


• Satisfied customers are most likely to
Employees share their experiences with other people
to the order of perhaps five or six people.
Helpful Knowledgeable Equally well, dissatisfied customers are
Employees Employees

Overall
more likely to tell another ten people of
Quick Service Customer Accuracy their unfortunate experience.
Satisfaction of Billing
• Furthermore, it is important to realise that
Billing Billing
many customers will not complain and
Clarity Timeliness this will differ from one industry sector to
another.
Service
Good
Quality
Competitive • Lastly, if people believe that dealing with
Value Pricing
customer satisfaction/complaint is costly,
they need to realise that it costs as much
Figure 1 as 25 percent more to recruit new
Factors that Affect Customer Satisfaction customers”.

In order to achieve customer satisfaction, Aaker (1995) said that the strategic dimension
organisations must be able to satisfy their for an organisation includes becoming more
customers needs and wants (La Barbera and competitive through customer
Mazursky, 1983). Customers’ needs state the satisfaction/brand loyalty, product/service
felt deprivation of a customer (Kotler, 2000). quality, brand/firm associations, relative cost,
Whereas customers’ wants, according to new product activity, and manager/employee
Kotler (2000) refer to “the form taken by capability and performance (Figure 3).
human needs as they are shaped by culture and
individual personality”.
Customer
Satisfaction/
Effect of Customer Satisfaction on Brand Loyalty
Profitability
Product/Service
Customer satisfaction does have a positive Quality
effect on an organisation’s profitability.
According to Hoyer and MacInnis (2001),
Brand/Firm
satisfied customers form the foundation of any Associations
LONG-
successful business as customer satisfaction CURRENT TERM
PERFORMANCE PROFITS
leads to repeat purchase, brand loyalty, and
positive word of mouth. Relative Cost

Coldwell (2001): “Growth Strategies


New Product Activity
International (GSI) performed a statistical
analysis of Customer Satisfaction data
Manager/Employee
encompassing the findings of over 20,000 Capability &
customer surveys conducted in 40 countries by Performance

InfoQuest. The conclusion of the study was:


Figure 3
• A Totally Satisfied Customer contributes Performance Measures Reflecting Long-Term
2.6 times as much revenue to a company Profitability
as a Somewhat Satisfied Customer.
• A Totally Satisfied Customer contributes Consequences of Customer
17 times as much revenue as a Somewhat Satisfaction and Dissatisfaction
Dissatisfied Customer. The consequences of not satisfying customers
• A Totally Dissatisfied Customer decreases can be severe. According to Hoyer and
revenue at a rate equal to 1.8 times what a MacInnis (2001), dissatisfied consumers can
Totally Satisfied Customer contributes to decide to: -
a business”.
• discontinue purchasing the good or
Zairi (2000): “There are numerous studies that service,
have looked at the impact of customer • complain to the company or to a third
satisfaction on repeat purchase, loyalty and party and perhaps return the item, or

The Importance of Customer Satisfaction in relation to Customer Loyalty and Retention Harkiranpal Singh, kiran@apiit.edu.my
The Importance of Customer Satisfaction in Relation to WP-06-06

• engage in negative word-of-mouth for recommending and repurchasing from the


communication. store. Once customers recommend a
department store it fosters both repatronage
Customer satisfaction is important because, and loyalty towards that store. Thus the key to
according to La Barbera and Mazursky (1983), generating loyalty is to get customers to
“satisfaction influences repurchase intentions recommend a store to others. Also, customers
whereas dissatisfaction has been seen as a are likely to recommend a department store
primary reason for customer defection or when they are satisfied with that store and
discontinuation of purchase”. when they have a favourable relative attitude
towards that store”. Evans and Berman
Effect of Customer Satisfaction on
(1997): “Companies with satisfied customers
Customer Loyalty and Retention have a good opportunity to convert them into
However, Bowen and Chen (2001) said that loyal customers – who purchases from those
having satisfied customers is not enough, there firms over an extended period”.
has to be extremely satisfied customers. This is
because customer satisfaction must lead to Clarke (2001) said, “a business that focuses
customer loyalty. Bansal and Gupta (2001): exclusively on customer satisfaction runs the
“Building customer loyalty is not a choice any risk of becoming an undifferentiated brand
longer with businesses: it’s the only way of whose customers believe only that it meets the
building sustainable competitive advantage. minimum performance criteria for the
Building loyalty with key customers has category. Long-term customer retention in
become a core marketing objective shared by competitive markets requires the supplier to go
key players in all industries catering to business beyond mere basic satisfaction and to look for
customers. The strategic imperatives for ways of establishing ties of loyalty that will
building a loyal customer base are as: help ward off competitor attack”. Sivadas and
Baker-Prewitt (2000) also said that it is not
• Focus on key customers merely enough to satisfy a customer.
• Proactively generate high level of According to Reichheld (1996), 65 to 85
customer satisfaction with every percent of customers who defect to
interaction competitors’ brands say they were either
• Anticipate customer needs and respond to satisfied or very satisfied with the product or
them before the competition does service they left. Therefore, in order to ensure
• Build closer ties with customers that customers do not defect, Bowen and Chen
• Create a value perception”. are correct to say that customers must to be
extremely satisfied. As far as organisations are
Sivadas and Baker-Prewitt (2000) said “there concerned, they want their customers to be
is an increasing recognition that the ultimate loyal to them and customer satisfaction does
objective of customer satisfaction not guarantee this. According to Storbacka
measurement should be customer loyalty”. and Lentinen (2001), customer satisfaction is
Fornell (1992) said “high customer satisfaction not necessarily a guarantee of loyalty. They
will result in increased loyalty for the firm and said that in certain industries up to 75% of
that customers will be less prone to overtures customers who switch providers say that they
from competition”. This view was also shared were ‘satisfied’ or even ‘very satisfied’ with
by Anton (1996) who said that “satisfaction is the previous provider. Customers may change
positively associated with repurchase providers because of price, or because the
intentions, likelihood of recommending a competitor is offering new opportunities, or
product or service, loyalty and profitability”. simply because they want some variation
Loyal customers would purchase from the firm (Storbacka and Lentinen, 2001). Clarke
over an extended time (Evans and Berman, (2001) said that customer satisfaction is really
1997). Guiltinan, Paul and Madden (1997) no more than the price of entry to a category.
said that satisfied customers are more likely to For satisfaction to be effective, it must be able
be repeat (and even become loyal) customers. to create loyalty amongst customers. Sivadas
Sivadas and Baker-Prewitt (2000): and Baker-Prewitt (2000): “There is increasing
“Satisfaction also influences the likelihood of recognition that the ultimate objective of
recommending a departmental store as well as customer satisfaction measurement should be
repurchase but has no direct impact on loyalty. customer loyalty”.
Thus satisfaction in itself will not translate into
loyalty. However, satisfaction will foster McIlroy and Barnett (2000): “An important
loyalty to the extent that it is a prerequisite for concept to consider when developing a
maintaining a favourable relative attitude and customer loyalty programme is customer
satisfaction. Satisfaction is a measure of how

The Importance of Customer Satisfaction in relation to Customer Loyalty and Retention Harkiranpal Singh, kiran@apiit.edu.my
The Importance of Customer Satisfaction in Relation to WP-06-06

well a customer’s expectations are met while Bansal and Gupta (2001): “Building customer
customer loyalty is a measure of how likely a loyalty is not a choice any longer with
customer is to repurchase and engage in businesses: it’s the only way of building
relationship activities. Loyalty is vulnerable sustainable competitive advantage. Building
because even if customers are satisfied with loyalty with key customers has become a core
the service they will continue to defect if they marketing objective shared by key players in
believe they can get better value, convenience all industries catering to business customers.
or quality elsewhere. Therefore, customer The strategic imperatives for building a loyal
satisfaction is not an accurate indicator of customer base are as:
loyalty. Satisfaction is a necessary but not a
sufficient condition of loyalty. In other words, • Focus on key customers
we can have satisfaction without loyalty, but it • Proactively generate high level of
is hard to have loyalty without satisfaction”. customer satisfaction with every
interaction
McIlroy and Barnett (2000), “in a business • Anticipate customer needs and respond to
context loyalty has come to describe a them before the competition does
customer’s commitment to do business with a • Build closer ties with customers
particular organisation, purchasing their goods • Create a value perception”.
and services repeatedly, and recommending
the services and products to friends and McIlroy and Barnett (2000) said that loyalty
associates”. Anderson and Jacobsen (2000) cannot be taken for granted. They said that it
said customer loyalty is actually the result of will continue only as long as the customers
an organisation creating a benefit for a feels they are receiving better value than they
customer so that they will maintain or increase would obtain from another supplier.
their purchases from the organisation. They
said that true customer loyalty is created when Anton (1996): “When you can increase
the customer becomes an advocate for the customer loyalty, a beneficial ‘flywheel’ kicks
organisation, without incentive. in, powered by: -

Clarke (2001): “The notion of customer loyalty • Increased purchases of the existing
may appear at first sight to be outmoded in the product,
era of the Internet, when customers are able to • Cross-purchase of your other products,
explore and evaluate competing alternatives as • Price premium due to appreciation of your
well as checking reports from others – at the added-value services,
touch of a button. Yet the evidence shows that • Reduced operating cost because of
the old rules of successful and profitable familiarity with your service system,
management still hold good: customer • Positive word-of-mouth in terms of
retention is still a key to long-term profits, referring other customers to your
while on the other side of the coin there is a company”.
high cost-penalty to low loyalty. Indeed, the
very fact that customers can so readily assess In order to ensure that there is customer
the competing services and products on offer loyalty, organisations must be able to
and then so easily make the new purchase does anticipate the needs of their customers
in itself give added weight to the importance of (Kandampully and Duffy, 1999). According
building strong ties of loyalty with customers”. to Kandampully and Duffy (1999), a
customer’s interest in maintaining a loyal
Bowen and Chen (2001): “It is commonly relationship is depended on the firm’s ability to
known that there is a positive relationship anticipate customer’s future needs and offering
between customer loyalty and profitability. them before anyone else.
Today, marketers are seeking information on
how to build customer loyalty. The increased According to the study done by Bowen and
profit comes from reduced marketing costs, Chen (2001), it supported the contention that
increased sales and reduced operational costs. there is a positive correlation between loyal
Finally, loyal customers cost less to serve, in customers and profitability. Bowen and Chen
part because they know the product and require (2001): “The result of our study supported the
less information. They even serve as part-time contention that there is a positive correlation
employees. Therefore loyal customers not between loyal customers and profitability.
only require less information themselves, they Loyal customers indeed provide more repeat
also serve as an information source for other business and were less likely to shop around
customers”. for the best deals than non-loyal customers”.

The Importance of Customer Satisfaction in relation to Customer Loyalty and Retention Harkiranpal Singh, kiran@apiit.edu.my
The Importance of Customer Satisfaction in Relation to WP-06-06

Day (1994) said that the identification and Qualitative Market Research: An
satisfaction of customer needs leads to International Journal, 4 (3), pp. 160-168.
improved customer retention. Clark (1997):
“Customer retention is potentially one of the Clark, M., 1997, Modelling the Impact of
most powerful weapons that companies can Customer-Employee Relationships on
employ in their fight to gain a strategic Customer Retention Rates in a Major UK
advantage and survive in today’s ever- Retail Bank, Management Decisions, 35
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impact on customer retention and the role that Coldwell, J., 2001, Characteristics of a Good
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Sheth, A. Parvatiyar & G. Shainesh, eds.,
Conclusion Customer Relationship Management, New
Based on the views and research done by Delhi, Tata McGraw-Hill , 2001, pp. 193-
numerous researchers and academicians, it can 199. .
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organisations should always strive to ensure Satisfaction Barometer: the Swedish
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56, pp. 1-18.
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Harkiranpal Singh
Sivadass, E. & Baker-Prewitt, J. L., 2000, An
Examination of the Relationship Between Harkiranpal Singh holds Master of Business
Service Quality, Customer Satisfaction, Administration (MBA) from University of
and Store Loyalty, International Journal Leicester, UK and Bachelor of Laws
of Retail & Distribution Management, 28 (Honours) (LL.B (Hons.)) from University of
(2), pp. 73-82. London, UK. His interest areas are marketing,
strategic management, organizational
Storbacka, K., Strandvik, T. & Grönroos, C., behaviour and law.
Sept 1994, Managing Customer
Relationships for Profit: The Dynamics of Harkiranpal Singh is now a senior lecturer at
Relationship Quality, International Journal APIIT/UCTI where he lectures subject relating
to business, management and law.

The Importance of Customer Satisfaction in relation to Customer Loyalty and Retention Harkiranpal Singh, kiran@apiit.edu.my