It is the job of a marketer to realise, understand and effectively make use of how a customer can best provide the business with the profit that it strives for. As marketing in the 21st century has moved away form traditional offensive strategies and moving towards defensive strategies where pull factors become vital when attracting and maintaining customers. A customer will purchase a product or service for a number of reasons, all however, are to satisfy the customer’s need or want at that moment in time. If we can understand what motivates the customer to purchase we can start to understand how and why the customer becomes one of the businesses’ biggest asset – as it is the customer who affects the bottom line measures of success, namely profits.
In order to analyse the title statement and ascertain outcomes and conclusions this paper will examine both classical and modern day literature making reference to how the areas of service quality, satisfaction and customer retention have been focused upon in academia. This paper shall endeavor to highlight any relevance links between these areas of business whilst answering the question of the statements validity in modern-day business. Breaking down the title quote will allow us to compare and contrast past literature on the subject and how they relate to each other.
2. Service Quality
Berry et al (1988) defines service quality:
“Service quality can often make the difference between a business’s success and failure” and “Quality is conformance to customer specifications; it is the customer’s definition of quality, not management’s that counts.”
These quotes put in context the importance of service quality and how important it is to focus on the customer when aiming to create this quality in service. Berry et al (1988) describe service quality as being a major differentiator for businesses as well as being a powerful competitive weapon.
There has been overwhelming literature on the subject of service quality on the past two decades. Gronroos (1984) explains a customer’s perception of service quality:
“…it is reasonable to state that the perceived quality of a given service will be the outcome of an evaluation process, where the consumer compares his expectations with the service he perceives he has received, i.e. he puts the perceive service against the expected service. The result if this process will be perceived quality of the service.”
If a customer enters the market place with low expectations of the service he or she is about to experience it is likely that if the service is better than expected the perceived level of quality of service will be high. Similarly, if expectations are high it is going to be harder for the supplier to meet the customer’s expectations. The service quality cannot simply be determined by the organization, it must come from the customer. If the supplier can realize what the customer wants, and more importantly, what the customer expects, it can use this information when attempting to serve the customer.
Gronroos (1984) goes on to describe Technical and Functional quality, see The Service Quality Model figure 1 below:
The technical quality is the outcome of the transactional. This is what the customer attempts to find when entering the market place and seeks to satisfy the original want or need. The functional quality is how well the service does its job and is what contributes to the ‘quality’ of the service. Once the technical and functional qualities are added to the image of the service the customer can start to evaluate its service quality. The image of the organization and the image of service itself can dramatically affect the way in which the customer perceives the overall service quality. Gronroos (1984) also explains that:
“…image may be a quality dimension. If a consumer believes that he goes to a good restaurant and the meal, for instance is not perfect, or the behaviour of the waiter is irritating, he may still find the perceived service satisfactory.”
Zeithaml and Bitner (p.92, 2003) explain how consumers judge service quality:
“Over the years service researchers have suggested that consumers judge the quality of services based on their perceptions of the technical outcome provided, the process by which that outcome was delivered, and the quality of the physical surroundings where the service is delivered”.
The Interactions Qualities are the qualities that the organization attempts to serve the customer with, such response times and the ability to communicate clearly with the customer. Any combination of the five factors above contribute to how the customer perceives the service quality he or she receives during the interaction between them and the organization. The Physical Surroundings that the customer is aware of is another quality that contributes to service quality. This can be as simple as a comfortable chair for the customer to sit on whilst he or she is dealing with the organization – the perception of a customer’s surroundings can influence a customer’s overall perception of service quality.
An example of this would be Nike Town where the whole where the customer is encouraged to fully engage in the shopping experience as it becomes a ‘day out’ – offering customers to perceive excellent quality service. The Outcome Qualities are what gets the customer’s attention and what the customer wants to get out of the interaction with the organization. For example, if a customer wanted a jacket to be dry-cleaned the clean jacket would be the outcome quality. Again, the five factors listed above make up an overall perception for the customer on the outcome quality.
Parasuraman, et al (1985) describe how understanding customer expectations through market research and open communication with employees contributes to the five service quality dimensions. If an organization can gain information about the market it can more effectively create superior service dimensions for the customer by identifying what the customer wants and how these wants fit into the market as a whole. Open communication with employees also allows the organization to gain first hand data on customer responses as employees often received on-the-spot feedback from customers. Parasuraman, et al (1985) also describes how management commitment to service and employee performance impact on how the service dimensions are perceived.
Zeithaml & Bitner (1996) describe the ‘zone of tolerance’ and the two levels of service expectation, see figure 3.
The zone of tolerance lies between a perceived adequate level of service and the desired level of service. Due to the nature of services variation can often arise from serving one customer to another. One customer may even experience different levels of service, or a lack or consistency, from one transaction to another. The zone of tolerance allows for an amount of variation where the customer still finds the service to be acceptable – if the perceived level of service drops below the acceptable level the customer will become frustrated and dissatisfied.
“The zone of tolerance can increase or decrease for individual customers depending on factors including competition, price or importance of specific service attributes” (Lovelock et al, p.127, 1999)
For example, if a customer was given a complimentary holiday from a travel company they are likely to have a larger zone of tolerance than if they had paid full price. The level of service they receive may drop to below what they would usually accept but because the holiday was free they may not be dissatisfied.
Just three years later Burrell and Gale (1987) show us the PIMS Principle (figure 4) and the relationship between Relative Quality and Relative Market share. This is a useful model to understand as it brings in the Return on Investment (ROI) which most models do not include.
The equations are: High Market Share + High Quality = High ROI
Low Market Share + Low Quality = Low ROI
We must remember that service quality is rarely described as a cheap or short-term implemented part of business. Berry et al makes it clear that service quality is long term if it is to work.
“There are no ways to change the attitudes, habits, knowledge, and skills of human beings quickly.”
Service quality can add a valued differentiator to the products offered where goods in today’s environment are largely undifferentiated. However, this will inevitably have an instant effect on bottom line success in that it will costing will increase.
3. Customer Satisfaction
We can define customer satisfaction:
“Satisfaction is the consumer’s fulfillment response. It is a judgment that a product or service feature, or the product or service itself, provides a pleasurable level of consumption-related fulfillment. Zeithaml and Bitner (2003) quote R. L. Oliver.
Satisfaction happens when the customer perceives the product or service to at least meet their expectations. The customer may experience fulfillment, contentment, pleasure, delight or relief. If the customer’s needs or wants are not met he or she will become dissatisfied.
Zeithaml and Bitner (2003) go on to compare customer satisfaction:
“Although they have certain things in common, satisfaction is generally viewed as a broader concept, whereas service quality assessment focuses specifically on dimensions of service. Based on this view, perceived service quality is a component of customer satisfaction.”
We can see how the ‘Customer Perceptions of Quality Customer Satisfaction’ model (Zeithaml and Bitner, 2003) is completed in figure 5.
We can see that price is introduced as a contributing factor to customer satisfaction, whereas as price does not contribute to service quality. Most importantly, we can see that situational and personal factors influence customer satisfaction. These factors are beyond the control of the organization and are part of individual customers and what they bring with them to the market place.
“Customer’s emotions can also affect their perceptions of satisfaction…”,
“Positive emotions such as happiness, pleasure, elation and a sense of warm-heartednesss enhanced customers’ satisfaction…” (Zeithaml & Bitner, 2003)
Zeithaml are offering the notion of emotional transactions with the service delivery and if organizations factor this into the delivery it is likely to enduce a positive outcome of customer satisfaction, hence customer satisfaction is in itself an emotional state. This is important to marketers, as a customer with already positive emotions is likely to respond to the service quality with an already positive outlook when dealing with the supplier. Negative emotions will, however, have the opposite affect.
“…negative emotions such as sadness, sorrow, regret and anger led to diminished customer satisfaction.” (Zeithaml & Bitner, 2003)
Cronin & Taylor (1992) describes the results from their study on Service Quality that they link to satisfaction and the relationship – the results are as follows:
(1) a performance-based measure of service quality may be an improved means of measuring the service quality construct,
(2) service quality is an antecedent of consumer satisfaction,
(3) consumer satisfaction has a significant effect on purchase intentions,
(4) service quality has less effect on purchase intentions than does consumer satisfaction.
4. Defections Management
Realising and effectively managing how and why customers decide to leave, or defect, from your company can have a positive impact on bottom line success.
“Companies can boost profits by almost 100% by retaining just 5% more of their customers.” (Reichheld & Sasser, p.105, 1990)
Reichheld & Sasser (1990) explain the cost of losing a customer in relation to the initial spend made by companies to gain the customer in the first place. An example of a credit card is used to demonstrate how attracting one customer can cost as much as $50 – but this outlay is not recouped until year two. They explain that operating costs decrease the longer the customer stays with the company, and revenues increase year on year as the customer becomes more confident in using the service. Costs are likely to decrease as a more confident customer is expected to spend less time asking questions and more time making use of the service i.e. spending. Defections Management can also result in increased profits from referrals and price premiums.
5. Repeat Purchasing and Retention
Customer repurchase intention is influenced by seven important factors – service quality, equity and value, customer satisfaction, past loyalty, expected switching cost and brand preference. (Hellier et al, 2003) Past loyalty to the product is likely to influence the customer making another purchase simply due to the loyalty the customer feels towards the business. If a customer has been loyal in the past it may feel perfectly natural to carry on with a system that has worked in the past. Large organizations, for example, will often order supplies such as stationary from the same supplier because they have systems in place to make those orders due to past loyalties with the supplier. The expected switching cost can be a major contributing factor to repurchases in industries where joining fees or ‘get-out’ clauses exist.
Jones & Sasser (1995) compare satisfaction with retention at Rank Xerox in the early 1990s (Figure 6).
High levels of retention are not met until the customer is very satisfied. Just not dissatisfying the customer or even satisfying the customer is not enough to gain 50% or higher levels of retention.
Rust et al (1995), however, say that scores of 5 will result in 97%, a score of 3’s and 4’s will result in 95% retention. We can see from this that satisfaction to retention varies from one organization to another, as well as from industry to industry. Figure 7 (Jones & Sasser, 1995) displays how this relationship changes dependant on industry.
A service such a telephone service provider (or most utility providers) often serve their customers because there is none or very little alternatives available. Contracts and notice to leave also result in customers staying with their service provider because it is more convenient, even if they are not especially satisfied. A motorcar supplier is shown to have the opposite affect as there is much choice in the market and customers are free to purchase how and when they like. Technological advances may also influence if and when a customer defects from one company to another, as they may desire new technology from a competitor. Robert Weisman, Boston Globe (2004) supports this notion:
“Some customers may feel trapped – they’ll continue doing business with their vendors because they have to, not because they want to.”
We can also explore the notion that loyal customers have a direct postive affect on bottom line business success. Much literature on loyal agrees that loyal customers will be more familiar with a company’s transactional processes and therefore should find it cheaper to serve them (Reinartz et al, 2002)
Reinartz et al (2002 ) do not agree fully that loyal customers have a direct positive affect on profits:
“Specifically, we discover little or no evidence to suggest that customers who purchase steadily from a company over time are necessarily cheaper to serve, less price sensitive, or particularly effective in bringing in new business.”