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Models and theories of customer satisfaction

This chapter presents an overview and critical analysis of relevant literature on the topic. It covers customer satisfaction concepts, theories and models, service quality concepts and models and customer behavioural intentions referral concepts and models.

2.1 Definition of Service

Services are deeds, performances and processes provided or coproduced by one entity or person for and with another entity or person (Zeithaml et al, 2009). This definition of service includes core service, products and product-service bundles. Vargo and Lusch (2004) provided a more inclusive definition of service with the derived service perspective, suggesting that all products and physical goods are valued for the inherent service (value derived) they provide not the goods itself. Services differ from product due to their intangibility, heterogeneity, simultaneous production and consumption and perishability (Zeithaml et al, 2009). The automotive service industry is mainly involved in delivering pure service, with car servicing, MoT tests, accident repairs, among others.

2.1.1 Classification of Services

Zeithaml et al (2009) classified products into three categories using the works of economists;

Search qualities – attributes that consumers can determine before purchasing the product. Search qualities include colour, style, price, fit, feel, hardness and smell. Example of products are clothing, automobile, furniture and jewellery

Experience qualities – attributes that can be determined only after purchase or during consumption. Examples include taste and wearability and examples include vacation packages and restaurant services.

Credence qualities – attributes that consumer may find very difficult to evaluate (mainly due to insufficient technical knowledge) even after purchase and consumption. Examples include wheel alignment (auto repair), medical operation, etc.

The figure below presents the qualities in a continuum from easy to difficult to evaluate. It is viewed in a continuum because some services may be very difficult to place in a distinction category. An automotive repair is more of credence qualities as most customers do not possess the technical knowledge to evaluate the service. This makes it necessary for garages and dealer to engage customers to reduce perception of poor quality.

Figure 2.1: Service classification continuum (Zeithaml et al., 2009)

2.2.0 Customer Satisfaction (CS)

Customer satisfaction emerged as a distinct area of inquiry in the 1970s (Churchill & Surprenant, 1982), and companies both big and small have realised the strategic benefits of service quality and customer satisfaction as competition become more intense and global. The achievement of customer satisfaction has become a good business practice that businesses strive to achieve (Szymanski & Henard, 200 cited in Yu et al, 2005).

2.2.2 Definition of Customer Satisfaction

Several definitions have been offered for customer satisfaction over the past three decades. Anderson et al. (1994) suggested two definitions of customer satisfaction, in accordance with the two broad classes of customer experiences identified by the literature – transaction specific experiences and cumulative experiences (Mittal et al, 1999 cited in Zeithaml et al, 2009). With a transaction-specific experience, customer satisfaction is defined as the post-choice evaluative judgement of a specific purchase occasion. Whereas a cumulative experience, customer satisfaction is determined as a result of a customer’s evaluation of his or her total purchase and consumption experience over time. Oliver (1997) cited in (Zeithaml et al, 2009) defined satisfaction as

“...the consumer’s fulfilment response. It is a judgement that a product or service feature, or the product or service itself, provides a pleasurable level of consumption related fulfilment”.

It is the ability of the service or product to meet the customer’s needs and expectations. Fornell et al. (1996) in their CSI model defined customer satisfaction as a function of customer expectations, perceived quality, and perceived value.

2.2.3 Why is Customer Satisfaction Important to Businesses?

Customer satisfaction helps companies in many ways, some of which include:

Customer satisfaction information helps companies to evaluate their ability in meeting customers’ needs and expectations effectively (Zeithaml et al, 2009).

It also helps companies to analyse the performance of an offering to customers in order to identify areas for improvements as well as what areas customers consider to be very important to them (Zeithaml et al, 2009).

Companies can predict customer retention and loyalty as well as organisational profitability through satisfaction surveys. Research has suggested that customer satisfaction leads to company profitability (Bei & Chiao, 2001; Heskett et al., 1997). Studies have shown a positive correlation between customer satisfaction and customer retention and loyalty (Zeithaml et al., 1996; Heskett et al., 1997). Reichheld (1990) asserted that customer satisfaction accounted for about 40% of customer retention. In the automotive service industry, customers who are satisfied with a dealer might buy multiple vehicles as their income and status increase (especially high value vehicles) and also keep going back to that dealer for every service throughout their lifetime. The figure below depicts the relationship between satisfaction and customer loyalty.

Customers who are satisfied with a company’s offering may tell others about it – positive word-of-moth, just as dissatisfied customer also bad mouth the company to other. Goodman (2009) suggested that dissatisfied customers tell on average ten people about the company as against 5 people by satisfied customer. Goodman (2009) also asserted that it cost five times to attract a new customer than to maintain a current customer. Therefore it is imperative for service businesses to satisfied customer on a consisted basis.

2.2.4 Determinants of Customer Satisfaction

Several studies have identified the factors that influence customer satisfaction over the years (Fornell et al., 1996; Yu et al 2005; Zeithaml et al., 2009). These factors are mostly similar in what aspect of customer satisfaction they are measuring; some of them include customer’s expectation, perceived service quality, product quality, perceived value, price, among others. Some of these studies will be looked at in detail, examining their merits and demerits.

Determinants of CS using CS indexes

Fornell et al. (1996) developed the American Customer Satisfaction Index (ACSI) based on the Swedish Customer Barometer. The ACSI is an economic indicator based on modelling of customer evaluations of the quality of goods and services produced and purchased in the United States. Its main purpose according to Te-King Chein et al. (2003) is to gain an insight into the interaction between the customers and businesses, to enable better planning and decision making. The ACSI is a cause-and-effect model showing drivers of satisfaction on the left side (customer expectations, perceived quality, and perceived value), satisfaction in the centre, and outcomes of satisfaction on the right side (customer complaints and customer loyalty, including customer retention and price tolerance) as shown in the figure below.

Figure 2.2: ACSI Model (Fornell et al. 1996)

Each of these factors is explained below in accordance with Fornell et al. (1996).

Customer Expectations are customers’ anticipation of the level of quality they are to receive from a company. They emphasise that the

“...market's expectations represent both the served market's prior consumption experience with the firm's offering – including non-experiential information available through sources such as advertising and word-of-mouth – and a forecast of the supplier's ability to deliver quality in the future”.

They postulated that customer expectations have a direct and positive influence on overall customer satisfaction with an organisation because of the on-going relationship with customer. It also influences both perceived quality and perceived value as shown in the figure.

Perceived Quality is a customers’ measure of the recent service interaction with the company. They stated that quality could be measured in terms of how the product meets customer’s individual needs and error-free service delivery – reliability. This is also said to have a direct and positive impact on overall satisfaction.

Perceived Value is a measure of quality relative to price paid - value for money (Anderson et al., 1994). They asserted that price has more impact on satisfaction in a customer’s first purchase experience but a lesser impact on satisfaction for repeat purchases.

Customer Complaints are customers who have talked to the service provider about a service that they were not happy within a specific time. They stated that satisfaction is negatively correlated to customer complaints – the more satisfied the customers, the less likely they are to complain.

Customer Loyalty is customers’ likelihood to purchase their next service with the same organisation at a given price (price tolerance). Customer loyalty is the critical component of the model because it equals profitability (Heskett et al., 1997; Reichheld and Sasser, 1990).

The European Consumer Satisfaction Index (ECSI) is also an adapted version of the Swedish Customer Satisfaction Barometer and very similar to the ACSI. Unlike the ACSI with six variables, the ECSI has seven variables with “corporate image” being the seventh and optional variable (ECSI Technical Committee, 1998). It refers to the brand name and what kind of associations the customers get from the product/company. Eklöf (2000) suggested that perceived quality can be distinguished into perceived product quality and perceived service quality; where perceived service quality is the assessment of recent consumption experience of associated services like customer service, range of services and products, conditions of product display while perceived products quality relates to the attributes of the core product and product. The figure below presents the detail of the ECSI index.

Figure 2.3: ECSI Model (ECSI Technical Committee, 1998)

The three indexes have set the pace for other countries to follow; they include Russia, Switzerland, Norway, Taiwan, Germany and Turkey (Eklöf, 2000).

Zeithaml et al.’s Customer Satisfaction Model

Zeithaml et al. (2009) suggested a customer satisfaction model. This model has five factors that drive customer satisfaction; they are service quality (SERVQUAL), product quality, price, situational and personal factors (such as emotions and moods) as shown in the figure below.

Figure 2.4: Customer Satiafaction Model (Zeithaml et al., 2009)

The concept of product quality is similar to other models presented above. Personal factors such as customer emotions affect satisfaction either in a positive or negative way (example, Price et al., 1995; Gremler et al., 2006; Liljander and Strandvik, 1997). Shaw and Ivens (2002) advised businesses to view customer emotions as a major differentiation factor contributing to customer satisfaction, especially where customers are actively involved in the service delivery (for example Disney Land). This may not the same for automotive service; therefore, much will not be said about customer emotions.

Price as a Determinant of Customer Satisfaction

The factor “perceived value” in the other models presented above is also similar to price but relates more to an aspect of pricing described as demand-based pricing (Zeithaml et al., 2009). The influence of price on satisfaction has been given a lot of attention by researchers over the years (for example Anderson et al., 1994; Salvador et al., 2006).

Salvador et al. (2006) stressed that the concept of price should be expanded to include the actual cost of the service and other associated costs. They suggested that price has two dimensions: the objective price paid (monetary) and the cost of obtaining the service (how adequate the fees for the labour performed by the customer and in comparison with the cost of other services). Zeithaml (1988) provided a precise classification of price component into objective price, monetary price and sacrifice. Salvador et al. (2006) suggested that price should include value, benefit and cost, and that customer received value when the benefit from a product or service is more than the cost of buying it.

Horovitz (2000) suggested that services be limited to the strategy of ‘outpacing’ – a service that can reduce its costs, reinvesting all or part of the savings from lowering the price to customers, and at the same time maintaining or even increasing the benefits to increase value for the customer.

Some studies (for example Bei & Chiao, 2001; Anderson et al., 1994) have found that the price paid for a product or service plays an important in influencing customers’ satisfaction and loyalty to a company. Anderson et al. (1994, p. 54) “...customer satisfaction is dependent on value, where value can be viewed as the ratio of perceived quality relative to price or benefits received relative to costs incurred”. Jiang & Rosenbloom (2005) postulated that customers’ perception of price has a positive impact on satisfaction and behavioural intentions. According to Yieh et al. (2007) asserted that customer may use price as an extrinsic signal of service quality by a company, for example, where quality is difficult to assess. This is especially true for automotive service where most customers lack technical knowledge to judge the service.

Service Quality as a Determinant of Customer Satisfaction

The service quality models (both the gaps model and SERVQUAL) assume that customers come into a service encounter with a prior expectation, this expectation is then matched with the actual service experience to determine the service quality of that organisation (Zeithaml et al 1985; Grönroos 1990). The customer is satisfied if actual service experience meets expected service, he/she is dissatisfied if actual service falls below expected service and delighted if actual service exceeds expected service. Studies (for example Rust and Oliver, 1994; Zeithaml et al., 1988; Boulding et al., 1993; Anderson and Sullivan, 1993; Fornell et al., 1996) have agreed that service quality is an antecedent to customer satisfaction, therefore adequate discussion of this topic is done here.

The Gaps model of service quality

Zeithaml et al (1985) identified five service quality gaps that lead to poor quality of services delivered by an organisation. The model suggests that service quality is the difference between customers’ expectations and customer perceptions of the actual service delivery, referring to this difference as gaps – an obstacle to achieving quality. The gaps are discussed below as shown in figure below.

Gap 1 – The Listening Gap: difference between customer expectations and company perception of customers' expectations

Gap 2 – The Service Design and Standards Gap: difference between the company perception of customers' expectations and the customer-driven service designs and standards

Gap 3 – The Performance Gap: difference between customer-driven service designs and standards and the service delivery

Gap4 – The Communication Gap: difference between the service delivery and the external communication to customers

Gap 5 – The Customer Gap: the difference between customer’s expectations and perceptions of services provided by an organization.

The first four are known as the provider’s gaps which give rise to the customer gap (5). To close the customer gap, providers must first close the first four gaps in the order presented above. The understanding of this will enable service businesses to deliver a consistent level of service that meets or exceeds customer expectation leading to customer repeat business and profitability.

Figure 2.5: Gaps Model of service quality (Zeithaml et al., 1985)

Researchers (Dabholkar et al., 2000; Gronroose, 1990; Teas, 1993) have raised concerns about the definition and measurement of expectation in the gaps model. They stated that while customer perceptions can be defined and measured in a straightforward fashion – as customers experience the service, expectations on the other hand is subject to different definitions and interpretations by different authors. The meaning of perceived service is similar to the ones offered above. Zeithaml et al. (2009, p32) described customer perceptions as “...subjective assessment of actual service experience”. Customer expectation will be discussed further as the models above did not offer enough explanations.

Customer Expectations and the Zone of Tolerance (ZoT)

Boulding et al. (1993) defined customer expectations as “...pre-trial beliefs about a product or service”. Churchill & Surprenant (1982) stated that a customer’s expectations are: (1) confirmed when a product performs as expected, (2) negatively disconfirmed when the product performs more poorly than expected, and (3) positively disconfirmed when the product performs better than expected based on the disconfirmation theory (Oliver, 1980).

Tse & Wilton (1988) proposed three definitions of customer expectations. The first is equitable performance – a normative standard for performance based on implicit relationships between an individual’s cost/investment and anticipated rewards. In this instance, expectations are likely to be influenced by the price paid, the effort invested, and previous product experiences. The second is ideal product performance – ideal product performance scenario from a customer’s perspective, such that expectations may be based on previous product experiences, messages gleaned from advertisements, or word-of-mouth communications. The third is expected product performance – product’s most likely performance.

Customer’s expected service can either be adequate (“minimum tolerable expectation”) or desired (“should be” and “can be”) service and the amount of variation that customers are willing to accept is known as Zone of Tolerance (Zeithaml et al 1993). The more important a customer deems a service encounter or dimension (for example, reliability) to be, the higher the desired service and narrower the ZoT and vice versa. When service experience exceeds the desired level, customers become delighted and are dissatisfied when service experience falls below the adequate level.

Johnston (1995) identified three main applications of zone of tolerance: (1) as a description of an outcome state, (2) of a range of pre-performance expectations and (3) as the satisfactory range of in-process service performances

The outcome state: the service quality models assume this application with their three outcomes: satisfaction (adequate service quality), dissatisfaction (poor quality service) and delight (high service quality).

Pre-performance expectations: this may range from “minimum tolerable” to “ideal” (Miller, 1977) cited in Johnston (1995) with “desirable” and “adequate” (Zeithaml et al 1993) somewhere in between.

The in-process service performances: Berry and Parasuraman (1991) suggested that the zone of tolerance is an in-process service performance and define it as

“...a range of service performance that a customer considers satisfactory. A performance below the tolerance zone will engender customer frustration and decrease customer loyalty. A performance level above the tolerance zone will pleasantly surprise customers and strengthen their loyalty”.

The definition offered by Berry and Parasuraman (1991) encapsulates the other two, emphasising the variation of service performance that customers are willing to accept and that customers become dissatisfied when performance fall below the adequate level. The ZoT is dynamic and changes according to what the customer deems to be important as well the particular service encounter.

The figure below identifies the factors affecting desired and adequate service with the arrows. Desired service is influenced by personal service philosophy and lasting service intensifiers. Predicted service is a somewhat adequate judgement of what a customer is likely to receive in a particular service interaction and therefore influences adequate service. It is influenced by service promises (implicit and explicit), word-of-mouth communication by other customer and past service experience. Other factors that influence adequate service are temporary service intensifiers, perceived service alternatives, self-perceived service role and situational. Even though not all these factors are within the control of service firms, they can be influenced through customer education, making realistic promises, conducting market research, among others (Zeithaml et al., 2009).

Figure 2.6: Factors that influence Desired and Predicted service (Zeithaml et al., 2009)

SERVQUAL Scale of Measuring Service Quality

The SERVQUAL model was developed by Zeithaml et al (1988) to measures the quality of service on five identified quality dimension. This scale is designed to measure the difference between customers’ expectations and perception (gap 5) on a 22-item scale, representing five service quality dimensions, explained below.

Reliability: how well can the company deliver on its promises dependably and accurately?

Assurance: knowledgeable and courtesy of employees and their ability to inspire trust and confidence

Responsiveness: willingness to help customers and provides prompt service

Empathy: caring, individualised attention the firm provides its customers

Tangibles: appearance of physical facility, equipment and staff

Brady and Cronin (2001) classified service dimensions into: interaction (attitude, behaviour and expertise), physical environment (ambient, design and social factors) and outcome quality (waiting time, tangible and valence).

The model is can be referred to as a diagnostic tool for identifying broad areas of a company’s service quality strengths and weaknesses (Tan and Pawitra, 2001).

Some of benefits of the SERVQUAL methodology are summarised below.

It gives customers the opportunity to offer their views regarding service encounters.

It enables management to look at the perceptions from both business and customers’ perspective.

By closing the gaps, businesses can use the information generated to formulate strategies to ensure customer expectations are fulfilled on a consisted basis (Tan and Pawitra, 2001).

According to Tan and Pawitra (2001), SERVQUAL is limited as it addresses only continuous improvement in a fast moving world where continuous improvement alone may not ensure business success unless blended with service and product innovation. Shen et al. (2000) emphasise the need for innovation as the key to becoming competitive in the global economy. Brito et al., (2007, p. 466) also suggested that the use of dimensions unlike the attribute themselves are limited in giving “...specific guidance on where to act in the design or improvement of service operation”.

SERVPERF Scale

The SERVPERF scale, also known as “performance only” model, was developed by Cronin and Taylor (1992) to address the issue with the measurability and definition challenges of the SERVQUAL scale (as explained above) by eliminating the expectation construct of the SERVQUAL scale and using only performance. It assumes that respondents providing their ratings have already unconsciously compared performance perceptions with expectations and measuring expectation again is redundancy. Evidence was gathered across four industries (fast food, banks, pest control, and dry cleaning) to support the model. Although the SERVQUAL has enjoyed wide application across different industries and countries than this model, studies (Brady et al., 2002; Babakus and Boller, 1992) have suggested that the SERVPERF scale showed superior results when applied in conjunction with the SERVQUAL scale through the use of its single-item scale. On the other hand, research conducted by Quester and Romaniuk (1997) suggested that the SERVQUAL is a better predictor of service quality than SERVPERF. Carrillat et al. (2007) in their bid to end the years long debate between the two models, suggested that both model are adequate and equally valid predictors of overall service quality with the use of meta-analysis. This can be viewed as the final stopper (hopefully) to more than a decade long debate.

It must however be emphasised that the two models are more complementary than competing and that the key is adopting a particular model to the business needs. This study would adopt the SERVQUAL methodology because of it wide usage. This would enable the researcher to compare the results of this study to other researchers.

Service Quality and Customer Satisfaction in the Automotive Service Industry

Dealerships are vitally important in influencing customers’ overall satisfaction because they are the most important point of contact for both potential and actual customers during the buying and usage stages (Huber and Herrmann, 2001). There is little research in the areas of automotive service industry (Brito et al., 2007). Those that were identified by the researcher are discussed below.

Bouman and Wiele (1992) were one of the first to used the SERVQUAL methodology in the automotive service industry in the Netherlands. Using a sample of 226 customers from 9 difference car service firms; a 48 item scale was developed to measure service quality. Their analysis identified the following dimensions:

Customer kindness (friendliness and willingness of front line staff to assist customer with problems)

Tangibles (physical evidence in the form of concrete characteristic of the service)

Faith (information about service process to inspire assurance)

They asserted that only customer kindness (which is in turn influenced by tangibles and faith) has a direct influence on service quality with tangible and faith having indirect influence. They however associated the difference of these dimension to the SERVQUAL to the inadequate analysis (p. 13).

Syed & Amiya (1994) identified five factors (using a 27 item measuring scale) in their examination of services delivered by auto service companies using the SERVPERF methodology. They identified: (1) perceived fairness of the facility and its personnel; (2) empathy; (3) responsiveness; (4) reliability; and (5) convenience. They however emphasised that when a task was particularly complex and customers could not understand it, perceived fairness was found to be significantly more important than the other factors.

Brito et al., (2007) conducted a survey on customer’s choice of car maintenance service provider after the warranty with the dealer expires – to determine whether customers 1will stay with the dealer or change to an independent garage. Using the SERVPERF methodology, a sample of 400 car (economic) owners was drawn from Uberlandia, Brazil. Their analysis identified convenience and value perception as new dimensions peculiar car maintenance providers in addition to the service quality dimensions. They also found that customers’ choice is influence by value for money, price honesty (adherence to forecast prices) and mechanical reliability in favour of independent garages, while the only factor that influences their choice for dealers is better equipments.

Berndt (2009) conducted a study within the South African automotive service industry to determine service quality dimensions. Using a convenience sample of 761 respondents with car owners of various brands, the following dimension where identified:

Customer-focused quality (organisation’s contact and interaction with the customer)

Tangibles (customer perception of physical evidence)

Delivery quality (the way in which the core service is presented)

Communication quality (communication to customer about the work)

Customer care quality (showing care to customer about service arrangements)

The table below summarises the dimensions identified in the automotive service industry for over the last two decades.

Table 2.1: Summary of Service Quality Dimensions in the Automotive Service Industry literature

These dimensions are very similar to the SERVQUAL dimensions for example better equipment relates to tangibles (and in some way assurance), customer care, communication quality, customer kindness, customer-focus quality, perceived fairness of the facility and its personnel relate to both responsiveness and empathy dimensions, and delivery quality, mechanical reliability, and better equipment relate to reliability and assurance. However, faith in service provider, price honesty, and convenience are peculiar to the automotive servicing industry. This indicates that the SERVQUAL dimensions (or similar) mostly come out of many service quality researches, further increasing the popularity of the scale.

Effects of Customer Satisfaction on Behavioural Intentions

Several studies (Zeithaml et al., 1988; Anderson et al., 1994; Cronin et al., 2000; Saha and Theingi, 2009) have linked customer satisfaction to customer behavioural intentions. Fishbein and Ajzen (1975) defined behavioural intentions as a customer’s subjective likelihood of performing certain behavioural act relative a business. These behavioural intentions when managed well can increase a firm profitability and long term competitiveness.

Customer behavioural intentions include:

word-of-mouth (both positive and negative)

repurchase intention (repeat business)

feedback to the service provider (usually in a form of complaints or compliments)

Saha and Theingi (2009, pp. 354) have described word-of-mouth as

“...a flow of information about products, services, or companies from one customer to another. As such, word-of-mouth represents a trusted external source of information by which customers can evaluate a product or service”.

The information is trusted because of the difficulty in trying out a service prior to purchase or returning a service after experiencing it unlike products. Therefore customers usually depend on the experience of others before buying a service (most of the time). The information shared could either be encouraging (positive) or discouraging (negative) other customers from using a service or product of the firm that being talked about. Goodman (2009) indicated that while satisfied customers tell on average 5 other people, dissatisfied customer tell about 10 other people. Other researchers (Brown et al., 2005; Babin et al., 2005; Saha and Theingi, 2009) have found a positive correlation between customer satisfaction and word-of-mouth communication.

Plethora of studies (for example Jones and Suh, 2000; Bitner et al., 1990; Cronin and Taylor, 1992) has linked customer satisfaction with repurchase intention of customer. For the purposes of this study, only the first two customer behaviours will be investigated. The net promoter scale, and life time value of a customer literature will be reviewed to enable a comprehensive understanding of these areas.

The Net Promoter Scores (NPS)

The net promoter score was developed by Reichheld (2003) to measure the link between customer referral behaviour and company growth (and profitability). The basis for this metrics is that satisfaction is not a good predictor of company growth and that word-of-mouth by customers is the ultimate determinant. He asserted that customers only recommend you if they are intensely loyal and put their reputation on the line when they do so. It is calculated by first, asking the one question, “how likely it is that you would recommend our company to a friend or colleague?” Customer are asked to rate their response on a scale of 0 – 10 (where, 0 = very unlikely and 10 = very likely). Customers with response 9 and 10 are called “promoters”, those with 7 and 8 are “passively satisfied” while those with 0 – 6 are called “detractors”. The net promoter is the difference between the percentage promoters and percentage detractors (i.e. NPS = %P - %D) and called it “the one number you need to grow” (p.54). Evidence from a study conducted by Satmetrix over two year (2001 and 2002) on over 50 companies from different industries was used to support this conclusion. This assertion has sparked a debate in both academia and the business world. However, it has been widely accepted by the business world because it is simple to conduct and easy to measure and interpret (Reichheld, 2006c).

Some studies (Marketing Week, 2006; Reichheld, 2006c) on the validity of the net promote score have confirmed the claim. However, a longitudinal study conducted by Keiningham et al. (2007) using telephone interview with about 16,000 in 21 firms indicated that the NPS did not show superior results when compared with ACSI. This metric will be used in this study to determine customer referral; however, its effect on company growth will not be investigated.

Life Value of Customers

This is described as the future cash inflows expected from the continuous relationship with customers (Reichheld, 2003). Several studies (Goodman, 2009; Reichheld and Sasser, 1990; Heskett et al., 1997) have link customer satisfaction to how willing customer are to stay with a service company. Reichheld and Sasser (1990) in their Harvard Review article suggested that the only way service companies can make profit over the long term is to satisfy customer such that they are willing to stay with the company over a long period of time.

Unlike scrap for manufacturing companies which is described as product defects (from standard output), Reichheld and Sasser (1990) described service scrap as customer defection from a company. They asserted that customer defection may affect profitability, market share, unit costs of services and other factors related to competiveness. And that keeping customers makes companies more profitable over time, saying “...as a customer’s relationship with a company lengthens, profits rise” (p. 105).

Through their study of over 100 companies across industries (for example, auto services, credit card, laundry services, etc.), they suggested that the longer a customer stays with a company the more profit that it generated from such customer (depending on the industry), as shown in the figure below.

Figure 2.7: Customers’ Profitability over time (Reichheld and Sasser, 1990)

The figure above summarises the overall benefits that companies gain through customer loyalty. Loyal customer will buy more of a company’s services as they stay, the company incurs less marketing expenditure related to these customer as well word-of-mouth communication by them and they are also more willing to pay higher for the service. For an automotive services, satisfied customers may return to the same provider for their future services, buy more products (in terms of new or used cars) as their income and status increases, tell friends and family about the company and are less price sensitive because customer trust the service provider and are willing to pay more. This is especially true for automotive services (with credence qualities) where is very difficult for customers to evaluate the service delivered and are more likely to stay with a company with higher perceived trust.

Effects Customer satisfaction on Customer Loyalty

According to a study done by Xerox (cited in Heskett et al., 1997), customers who are very satisfied with the services of firm are 100% more loyal than extremely dissatisfied customers. The term “apostle” was used to describe very loyal customers because the positive word-of-mouth they spread on behalf of the company. On the other hand, extremely dissatisfied customer were called “terrorist” due to their likelihood to spread negative word-of-mouth about the company with a devastating consequence as this spreads faster than positive recommendations. This assertion is illustrated by the figure below.

Figure 2.8: Customer satisfaction and loyalty (Heskett et al., 1997)

The zone of defection indicated by the red shaded triangle includes dissatisfied customer (1-3) and their likelihood to change a service provider. The zone of indifference (4 and 5) shows both satisfied customers’ intentions to either stay with the company or change another provider. The zone of affection shows the loyalty and referral intentions of very satisfied customers – they are more satisfied and willing to recommend it to friends or family. The figure shows that satisfaction has a direct effect on customers’ behavioural intentions – both repeat business and referral. And therefore, service companies should concentrate efforts in moving customers from terrorists to apostles for high profitability.

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