2.1.3 Customer loyalty and customer retention

According to Hoyer and MacInnis (2001), customer retention is “the practice of working to satisfy customers with the intention of developing long-term relationships with them”. However, Bowen and Chen (2001) said that having satisfied customers is not enough, there has to be extremely satisfied customers. Zineldin (2000) said that retention can be defined as “a commitment to continue to do business or exchange with a particular company on an ongoing basis”. This is because customer satisfaction must lead to customer loyalty. According to Anderson and Jacobsen (2000) “loyalty is actually the result of an organization creating a benefit for a customer so that they will maintain or increase their purchases from the organization’. Oliver (1997) said that customer loyalty refers to “a deeply held commitment to re-buy or re-patronize a preferred product or service consistently in the future despite situational influences and marketing efforts having the potential to cause switching behavior”. True customer loyalty is created when the customer becomes an advocate for the organization, without incentive”. Bansal and Gupta (2001): “Building customer loyalty is not a choice any longer with businesses: it’s the only way of building sustainable competitive advantage.

Building loyalty with key customers has become a core marketing objective shared by key players in all industries catering to business customers. The strategic imperatives for building a loyal customer base are as:

• Focus on key customers
• Proactively generate high level of customer satisfaction with every interaction
• Anticipate customer needs and respond to them before the competition does
• Build closer ties with customers
• Create a value perception.

Sivadas and Baker-Prewitt (2000) said “there is an increasing recognition that the ultimate objective of customer satisfaction measurement should be customer loyalty”. Fornell (1992) said “high customer satisfaction will result in increased loyalty for the firm and that customers will be less prone to overtures from competition”. This view was also shared by Anton (1996) who said that “satisfaction is positively associated with repurchase intentions, likelihood of recommending a product or service, loyalty and profitability”. Loyal customers would purchase from the firm over an extended time (Evans and Berman, 1997). Guiltinan, Paul and Madden (1997) said that satisfied customers are more likely to be repeat (and even become loyal) customers. Sivadas and Baker-Prewitt (2000): “Satisfaction also influences the likelihood of recommending a departmental store as well as repurchase but has no direct impact on loyalty.

Thus satisfaction in itself will not translate into loyalty. However, satisfaction will foster loyalty to the extent that it is a prerequisite for maintaining a favorable relative attitude and for recommending and repurchasing from the store. Once customers recommend an organization it fosters both repatronage and loyalty towards that organization. Thus the key to generating loyalty is to get customers to recommend an organization to others. Also, customers are likely to recommend an organization when they are satisfied with that organization and when they have a favorable relative attitude towards that organization. Evans and Berman (1997): “Companies with satisfied customers have a good opportunity to convert them into loyal customers – who purchases from those firms over an extended period”.

Clarke (2001) said, “a business that focuses exclusively on customer satisfaction runs the risk of becoming an undifferentiated brand whose customers believe only that it meets the minimum performance criteria for the category. Long-term customer retention in competitive markets requires the supplier to go beyond mere basic satisfaction and to look for ways of establishing ties of loyalty that will help ward off competitor attack”. Sivadas and Baker-Prewitt (2000) also said that it is not merely enough to satisfy a customer. According to Reichheld (1996), 65 to 85 percent of customers who defect to competitors’ brands say they were either satisfied or very satisfied with the product or service they left. Therefore, in order to ensure that customers do not defect, Bowen and Chen are correct to say that customers must to be extremely satisfied. As far as organizations are concerned, they want their customers to be loyal to them and customer satisfaction does not guarantee this.

According to Storbacka and Lentinen (2001), customer satisfaction is not necessarily a guarantee of loyalty. They said that in certain industries up to 75% of customers who switch providers say that they were ‘satisfied’ or even ‘very satisfied’ with the previous provider. Customers may change providers because of price, or because the competitor is offering new opportunities, or simply because they want some variation (Storbacka and Lentinen, 2001). Clarke (2001) said that customer satisfaction is really no more than the price of entry to a category. For satisfaction to be effective, it must be able to create loyalty amongst customers. Sivadas and Baker-Prewitt (2000): “There is increasing recognition that the ultimate objective of customer satisfaction measurement should be customer loyalty”.

McIlroy and Barnett (2000): “An important concept to consider when developing a customer loyalty program is customer satisfaction. Satisfaction is a measure of how well a customer’s expectations are met while customer loyalty is a measure of how likely a customer is to repurchase and engage in relationship activities. Loyalty is vulnerable because even if customers are satisfied with the service they will continue to defect if they believe they can get better value, convenience or quality elsewhere. Therefore, customer satisfaction is not an accurate indicator of loyalty. Satisfaction is a necessary but not a sufficient condition of loyalty. In other words, we can have satisfaction without loyalty, but it is hard to have loyalty without satisfaction”.

McIlroy and Barnett (2000), “in a business context loyalty has come to describe a customer’s commitment to do business with a particular organization, purchasing their goods and services repeatedly, and recommending the services and products to friends and associates”. Anderson and Jacobsen (2000) said customer loyalty is actually the result of an organization creating a benefit for a customer so that they will maintain or increase their purchases from the organization. They said that true customer loyalty is created when the customer becomes an advocate for the organization, without incentive.

Clarke (2001): “The notion of customer loyalty may appear at first sight to be outmoded in the era of the Internet, when customers are able to explore and evaluate competing alternatives as well as checking reports from others – at the touch of a button. Yet the evidence shows that the old rules of successful and profitable management still hold good: customer retention is still a key to long-term profits, while on the other side of the coin there is a high cost-penalty to low loyalty. Indeed, the very fact that customers can so readily assess the competing services and products on offer and then so easily make the new purchase does in itself give added weight to the importance of building strong ties of loyalty with customers”.

Bowen and Chen (2001): “It is commonly known that there is a positive relationship between customer loyalty and profitability. Today, marketers are seeking information on how to build customer loyalty. The increased profit comes from reduced marketing costs, increased sales and reduced operational costs. Finally, loyal customers cost less to serve, in part because they know the product and require less information. They even serve as part-time employees. Therefore loyal customers not only require less information themselves, they also serve as an information source for other customers”.

McIlroy and Barnett (2000) said that loyalty cannot be taken for granted. They said that it will continue only as long as the customer feels they are receiving better value than they would obtain from another supplier. Anton (1996): “When you can increase customer loyalty, a beneficial ‘flywheel’ kicks in, powered by:

• Increased purchases of the existing product,
• Cross-purchase of your other products,
• Price premium due to appreciation of your added-value services,
• Reduced operating cost because of familiarity with your service system,
• Positive word-of-mouth in terms of referring other customers to your company”.

In order to ensure that there is customer loyalty, organizations must be able to anticipate the needs of their customers (Kandampully and Duffy, 1999). According to Kandampully and Duffy (1999), a customer’s interest in maintaining a loyal relationship is depended on the firm’s ability to anticipate customer’s future needs and offering them before anyone else. According to the study done by Bowen and Chen (2001), it supported the contention that there is a positive correlation between loyal customers and profitability. Bowen and Chen (2001): “The result of our study supported the contention that there is a positive correlation between loyal customers and profitability. Loyal customers indeed provide more repeat business and were less likely to shop around for the best deals than non-loyal customers”.

Day (1994) said that the identification and satisfaction of customer needs leads to improved customer retention. Clark (1997): “Customer retention is potentially one of the most powerful weapons that companies can employ in their fight to gain a strategic advantage and survive in today’s ever increasing competitive environment. It is vitally important to understand the factors that impact on customer retention and the role that it can play in formulating strategies and plans”.