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The importance of creating and maintaining customer loyalty is not new. The topic of customer loyalty has geared its importance as the recognition of the benefits that can be derived from loyal customers emerges. In view of its importance building loyal customer base should be viewed rather as one of the most important strategy to achieve sustainable competitive advantage. In this chapter a conceptual approach has been adopted to present debates and different authors view on the topic. This first part of the literature review, emphasis on the complexity of loyal customers and the benefits loyal customers bring to the organisation. It also discusses some drivers of loyalty in complex services.
1.2 Marketing and Insurance services
The Chartered Institute of Marketing (CIM) defines marketing as
“â€¦the management process that identifies, anticipates and satisfies customer requirements profitably”
According to Kotler et al. (2008) marketing generates the strategy that underlies sales techniques, business communication, and business development. It is an integrated process through which companies build strong customer relationships and create value for their customers and for themselves.
However this practice poses a problem in financial services. According to Ennew (1998) the relative slow development of marketing in the financial services sector is often attributed to the idea that financial services are in some sense ‘different’. It is generally recognized that insurance services tend to be more generic and non differentiated. Insurance also have a particular characteristic, the fiduciary responsibility for which trust is a prerequisite element. Marketers often fail to market this aspect. Customers need to trust with the company in their ability to satisfy their needs. However according to Dwayne (2006) most of the insurance companies lack natural communication with their customers. Indeed marketers view insurance as the most difficult service to market. Industries providing similar products and distribution channels at similar prices, they are likely to remain uncompetitive. For insurers a pure pricing strategy to differentiate is dangerous or worse.
1.3 The untapped opportunity in the Insurance Sector
Most insurance companies spend lots of money in selling to new customers through different marketing methods including door to door selling advertisement, publicities, or even by changing their marketing mix completely. Infact insurance are rather sold than bought. However, Marion (2006) argue that focus on conquest marketing can be at the detriment of real business growth. Kindurys (2009) posit that it important acquire new customers but most important is to make loyal insured. Once cultivated, truly loyal customers bring lifetime value to the organization. Reicheld (1996) suggest that building a highly loyal customer base cannot be done as an add-on. It must be an integral part of a company’s basic business strategy.
1.4 Customer Loyalty: A source of sustainable competitive advantage?
“Few companies think of customers as annuities” – The loyalty effect, Frederik Reicheld
And yet that is precisely what a loyal customer can mean to a firm- a consistent source of revenue over a period of many years. On the other hand, marketers assert that with saturate market and low switching cost competition has intensified (Sivadas and Baker-Prewitt, 2000) Due to the proliferation of choices those having a weak customer base will eventually collapsed. Singh and Sirdeshmukh (2000) commented that customer loyalty is rapidly becoming, “the marketplace currency of the twenty-first century”. Gaining and maintain loyalty has become a source of sustainable competitive advantage. In addition the financial services sector has become more flexible competitors to grow like mushrooms.
1.4.1 Why focus on customer loyalty
Previous research on loyalty has advocated that if customer loyalty is gained, profits will follow (Chen and Chang, 2006; Reichheld, 2002). Reinartz and Kumar (2002) state the past mantra, “Win loyalty, therefore, and profits will follow as night follows day”.
Bove and Johnson (2009) states that the pursuit of true customer loyalty is worthwhile as it provides firms with greater stability in their client base regardless of competitive efforts. Others reveal that customer loyalty is the most important driver of financial performance in the service sector (Ganesh, Arnold and Reynold, 2006). In a much-cited study, Reichheld and Sasser (1990) found that a 5% increase in customer retention resulted in a 125% increase in profit in nine service industry groups. According to Heskett (1994) customer loyalty is also the most important determinant of profit than market share and position.
Brown and Gremler (1998) in their work “The ripple effect” concluded that the benefits of loyal customer are far beyond increase revenue and profitability. They argue that while it seem obvious that loyal customers will generate revenue by recommending the firm to other customers, however it seem that other benefits arises which create value for the organization.
1.5 Defining customer loyalty
Majumdar (2005) states that “Customer loyalty is a complex, multidimensional concept”.
Infact, the complexity of customer loyalty is reflected in the wide range of definitions within academic fields. It is often described as a feeling or attachment including primary behavior such as repeat patronage, share of purchase and active and passive secondary behaviors such as expansion of service usage, price insensitivity, customer referral and spreading of word of mouth. (Ganesh, Arnold, Reynolds 2000, Jones and Sasser 1995)
1.5.1 The complexity of customer loyalty
Focusing on consumer attitudes, Oliver (1997) defines loyalty as “A deeply held commitment to rebuy or repatronize a preferred product or service consistently in the future, despite situational influences and marketing efforts having the potential to cause switching behaviour”.
Indeed the truly loyal insured is one when the latter constantly extend their insurance policies, share a positive opinion about the company and will recommend others to the company. They are not motivated to shift to competitors even on favorable terms (Buttle, 2004). However a customers whose main reason for repeated purchases due lack of choices is known as false loyalty.
Hence Buttle (2004) posit that customer loyalty has 2 major approaches in its definition. One is base on behavior and the other attitude. Several authors argue that the behavioral perspective give a better view of loyalty as the attitudinal perspective only positions loyalty as a desire to continue a relationship with the company which is an imperfect representation of behavior (Mittal and Kamakura, 2001) since they do not always lead to actions.
The ladder of loyalty
Figure 1: Ladder of customer’s loyalty (Zeithaml, 2003)
According to Zeithaml (2003) loyal customers are earned with time. The potential customer goes through certain stages; firstly, he becomes a customer, then he becomes a recurrent customer, customer-member, attorney, and finally he becomes a partner who not only purchases company constantly, but also disseminates a favorable opinion about that company. Such evolution of customer-company relations is called the ladder of loyalty
1.6 Path to loyal customers
1.6.1 Customer satisfaction
The disconfirmation-of-expectation paradigm (Oliver 1980) assert that customer
loyalty is a function of customer satisfaction. According to Woodruff (1997) service firms focus on achieving customer satisfaction and loyalty by delivering superior value, an underlying source of competitive advantage. Indeed, customer satisfaction or dissatisfaction requires experience with the service, and is influenced by the perceived quality and the value of the service (Anderson, Fornell et al. 1994).
22.214.171.124 Service quality
Service quality is often conceptualised as the comparison of service expectations with actual performance perceptions (Zeithaml et al., 1990). According to Juran (1988) quality consists of two primary elements: (1) to what degree a product or service meets the needs of the consumers, and (2) to what degree a product or service is free from deficiencies. Research in service quality has been dominated by the SERVQUAL instrument, based on the so-called gap model which measures perceptions of service quality across five dimensions: tangibles; reliability; responsiveness; assurance and empathy. Indeed customer evaluations is based on both the outcome of the service i.e the technical quality, and the process of service delivery or functional quality (Gronroos, 1984). Newman (2001), in his work reinforces the idea that ‘delivering the promise’ is critical to service quality and hence customer satisfaction.
126.96.36.199 Perceived value
Perceived value takes into account the price of the service in addition to the quality.
According to Zeithaml et al. (1988), “perceived value is the customer’s overall assessment of the utility of a product based on perceptions of what is received and what is given”.
Bolton and Drew (1991) commented that consumers´ perception of value is influenced by differences in monetary costs, nonmonetary costs, customer tastes, and customer characteristics
According to him in making the decision to return to the service provider, customers are likely to consider whether or not they received “value for money”.
1.6.2 Satisfaction and loyalty link
Kotler (1991) describe satisfaction as a consumer’s post-purchase evaluation of a product or service given pre-purchase expectations (Kotler, 1991). Supporting the notion that loyalty is a both a long-term attitude and a long-term behavioural pattern which is reinforced by multiple experiences over time, Terblanche and Boshoff (2006) argue that overall, customer satisfaction becomes important because these multiple experiences need to be satisfactory to lead to the positive predisposition of long-term loyalty.
According to Bolton (1998) and Anderson (1994) the satisfaction-loyalty link is stronger when involvement and experience are high. Webster and Sundaram, (1998) found that relationship between satisfaction and loyalty is also moderated by the type of failure recovery effort in service settings. High overall satisfaction lead to protection from reduction in loyalty even after poor performance.
However Lovelock (2001) assert that the relationship between satisfaction and loyalty is not as simple as it seem. Indeed improvements in satisfaction levels initially result in a large increase in loyalty before reaching the zone of indifference or the zone of tolerance where an increase in satisfaction does not lead to an increase in loyalty (Heskett et al., 1997). Mittal and Lassar (1998), further add that customer’s satisfaction with a product may motivate them to seek out other retailers of that product. In addition to variety seeking (Homburg and Giering, 2001), other circumstances such as differentiation (Mittal and Lassar, 1998), changing needs, and level of risk also mitigate the satisfaction-loyalty relationship. Others claimed that loyalty also depends on the type of customer. It was found that, the banking sector in Australia had 23-32 percent of their customers dissatisfied (Choice, 2002) but 70 percent of the customers are attitudinally loyal. Hence satisfaction is not the only driver of loyalty.
1.6.3 The relationship between corporate image, satisfaction and loyalty
Andreassen and Lindestad (1997) suggest that for complex and infrequently purchased services corporate image rather than customer satisfaction is the main predictor of customer loyalty. Because of their credence component, customers often view corporate image is often use as a benchmark for evaluating financial services (Weiwei, (2007). According to Grönroos “(corporate) image is a filter which influences the perception of the operation of the company”. However, Lovelock (1984) claimed that image are likely to play only a secondary role in customer choice decisions unless competing services are perceived as virtually identical on performance, price, and availability. Indeed a company image is influenced by both by internal and external factors (Lines, 2003)
Empirical researches have indicated that good corporate reputation could reinforce customers’ trust in corporate and product and finally promote customer repurchase (Nha Nguyen and Gaston Leblanc, 2001). Corporate image impact on customer loyalty directly whereas customer satisfaction (Andreassen and Lindestad, 1997)
On the other hand, Drake et al (1998) states that customer’s experience of a service is coloured both by the quality of service and the customer’s state of mind including the company image when they experience the service. According Brooker and Serenko (2007) to the corporate image, satisfaction and loyalty are interconnected differently. They assert that while corporate reputation can be improved by focusing on customer satisfaction, enhanced corporate reputation may increases loyalty. Indeed, for complex services corporate image and customer satisfaction may not be 2 separate routes to customer loyalty.
The loyalty concept is complex including a combination of attitudes and behaviors. Customer loyalty is becoming the most important concern for many businesses mainly because of the high cost related to looking for new customers. Also because of the benefits loyal customers bring to the organization. It is also argued that in insurance sector customer satisfaction may not be the only route to loyalty. Knowing the main drivers of customer loyalty is vital with regard to resource allocation in order to improve customer loyalty. Research related to the importance of image and satisfaction in attracting new customers to the company and how this may change in this service industry is in dire need. In the emerging paradigm of relationship marketing, we need to understand the importance of image and satisfaction in retaining customers. The next chapter will lay more emphasis on the strategies with which loyalty among customers in the insurance sector can be cultivated.
.Literature Review 2: Cultivating loyalty in the insurance sector
Insurers see themselves as a boring industry with low involvement and low customer interest. Some marketers state that customers value relationship through personal interaction, others stick to transaction base relationship. Infact cultivating customer loyalty has become a puzzle that involves lots of pieces fitting together. Insurance customers have so many choices these days, and it is the company with a careful mix of loyalty programs, dynamic employees and a sense of service that will succeed in creating rich, personalized customer experiences and luring customers away from competitors — and keeping them year after year. CRM systems all play a role in retaining satisfied customers and creating a superior reputation. Indeed, this chapter will focus on some strategies to cultivate loyalty in the insurance sector.
2.2 Transactional versus Relationship marketing
Numerous marketing specialist advanced that transactional marketing focuses on the traditional marketing mix, 4ps only and fail to value customer. Tod (2009) states that transactional marketing infact focuses on maximize the benefit of the transaction to each party without any interest with any future exchanges, client satisfaction, or client loyalty. In this view Hartung (2009) suggest that transactional marketing is short sighted. According to him as customers become more demanding and less easily persuaded they will be more influence by the company they believe care for them. Relationship marketing is thus viewed as an alternative to transactional marketing is a method that requires persuading prospects to make a purchase, as well as strengthening the relationship (Berry 1983). Infact traditional methods such as transactional marketing has been challenged to such an extent that relationship marketing is viewed as “paradigm shift”. However even advocates of relationship marketing realize that ”Not all relationships are important to all companies all the time. Some marketing is best handled as transaction marketing” (Gummesson, 1995). Supporting this statement, Roderik et al (1997) assert that in spite of the current trend towards relationship marketing, a combination of transactional and relational marketing approaches may be relevant to most firms.
2.3 Customer relationship management (CRM) in the Insurance Sector
CRM is often viewed as a marketing tool used particularly in services marketing. CRM approaches marketing in providing consistent positive customer experience through relationships, networks and interaction. According to Cohen and Moore (2000), CRM is concentrated on the use of information technology so as to aid the organization to stay abreast of its customers’ needs and concerns.. Customer relationship management helps organization to respond in time and appropriately to their customers’ calls. It is also a useful tool for identifying the right customer group through customer database management Newell (2000)
According to CRM On the other hand, Jarre (2000) stated that CRM is a business strategy other than the application of technology. The approach on CRM covers all business processes that an organization employs so as to determine, select, obtain, enhance and retain its customers.
At present, CRM in the insurance sector is regarded as the integration of business processes, technological solutions and advanced analysis, which enables companies to understand clients from a multifacet perspective. Through this understanding, companies are able to establish deeper and more profitable customer relations (Zabin, 2004)
However Jacada (2008) states that traditional insurers grew because of the core competency of underwriting risk, not mastering customer relationships. Infact according to a survey conducted in the insurance sector it was found that isurers have little experience in cultivating loyalty.
2.3.1 Interacting with customers
By its very nature, the insurance industry has only a few opportunities to generate experience-based trust. Besides insurance products are highly intangible and based on statistical probabilities that most people do not understand – it takes the “moment of truth” for customers to see whether they bought the right product, dealt with the right carrier or purchased enough protection. X posit that a good and trustworthy relationship with an insurance agent, an insurance company which offers convenience and simplicity with its services and products, and agents or brokers who assume caretaker functions for customers. On the other hand it is argued that only good customer relation will not be sufficient to keep customers if the core loyalty cultivation element is ignored.
Marketing scientist formulate six function for insured loyalty cultivation should perform six functions
social motivation function based on respect and acknowledgement of the customer
Function of client satisfaction, attachment and compliance with his interests;
Function of the received benefit comprehension;
Customer problem solving function;
Function of application of services to the needs and requirement of clients;
Function of additional services provision
(Kurtz, Clow, 1999)
Firms in the financial services should think about enhancing the customer experience, showing reliability at these rare touch points and creating new ones by a combination of functional and personal interaction (Roderik, 1997). Besides increasing attractiveness, insurers should aim at exceeding customer expectation.
2.3.2 ‘Delighting customers’ through relationship marketing
Relationship marketing make use has several tools. However while some organization are more likely to attract customer by building relationship with them other by nature by prefer to stick to transaction base relationship only. Sharp (2009) posit that insurance has a special relationship with customers which requires both of these interactions.
188.8.131.52 Service personalisation
Exceeding customer expectation by providing exceptional services delights customers. In return Delighted customers increases their level of attachment to the company
According to Dwayne et al.(2006) personalization of service largely requires three things:
a service provider willing and able to adjust his or her offerings to the individual customer;
a customer who desires something different from other customers; and
communication between the customer and the service provider to establish the parameters of personalization – what the customer uniquely needs, and what the service provider can do, uniquely, for that customer.
Dwayne et al (2006) also add that service personalization works through improving service satisfaction and trust. Personalization and improved communication act together in such a way that they account for the variance in loyalty that would be otherwise explained by corporate image.
However it is suggested that the adoption of service personalization should be geared towards the benefits all customers not only a group. Marketers agree that other customers may turn away from the company if they feel deprived from such benefits (www.crm2day.com).
184.108.40.206 Loyalty schemes
Bolton et al. (2000) claim that loyalty schemes decrease price sensitivity relative to competitors, induce greater consumer resistance to counter offers dampen the desire to consider alternative brands. However most of the loyalty schemes use by insurance companies offer financial incentives to their regular client (Kindurys, 2009). It is argued that some are in the form of loyalty rebates on insurance policies directly. Some insurance companies in Singapore for instance give discount based on the performance of the client.
However Heskett (2004) commented that though it might cause a differentiation in view of the new customers but once the incentive is taken the prime for purchase disappears. Some loyalty schemes are such that they do not reward customer for the experience but customers become loyal to the schemes rather. It is further argued that these programs are expensive to set up and maintain and that there is little or no evidence that any changes in behavior justify the expenditure (Dowling and Uncles, 1997; Bolton et al. (2000). According to the marketing scientists, effectiveness of loyalty programmes depends on two factors, namely: 1) right choosing of target group and 2) right choosing of promotional means.
Both Gronroos (1986) and Lehtinen (1985), argued that consumers are prone to make quality generalization base on the strength of those relationships, perhaps to the detriment of price competition. However, Lawrence and Stephen (1987) suggest that though relationship marketing add value to the service package, it is not a substitute for having a strong up to date core service. Companies using relationship marketing aim at increasing share of wallet and they do so by offering variety of products and services to existing customers.
2.4 The role of employees in cultivating loyalty
Ferrel and Hartline (2005) observe that employees are central to an effective CRM and as such firms must manage its relationships with their employees if they have any hope of fully serving customer needs and that this is especially important in firms where employees are the eyes of customers. According to Reichheld and Schefter (2000) to gain the loyalty of customers, one must first gain the trust of their clients. Customers are loyal to companies that make an emotional connection with them, align with their values, listen to their needs, and respond with meaningful products and service.
Schlesinger and Heskett (1991) emphasized the importance of 4 factors for front-line workers and their managers inorder to enhance their relationship with customer:
training and support in communication
coaching and empowerment
Both Reichheld and Kenny (1990) and Schlesinger and Heskett (1991) found that companies that exhibited these policies and attitudes experienced not only higher customer retention and profits, but also an increase in employee loyalty. Zeithaml, et. al. (1990) added that empowering employees to provide a quick response to customer frustrations “can turn a potentially frustrated or angry customer into a satisfied one” (Bowen and Lawler, 1990).
However Jacada (2008) found that insurance providers experience a very high employee churn rate in their call centers, relative to other industries. Consequently this results in significant expense to the company in terms of training and recruitment and can negatively impact customer experience. One of the main reasons employees leaving their jobs is because of the difficult systems and technology they need to learn.
2.5 Preventing customers from leavingâ€¦
According to Anderson and Narus (2004) customer retention is a more effective business strategy than continuously trying to acquire new customers in order to replace the defecting customers. This view supports the well versed marketing maxim notes, “It costs five times more to acquire a new customer than to retain an existing one. The leaky bucket theory suggests when firm cannot find more customers coming in than those going out churn can be reduced by plugging the bucket.
2.5.1 Complaint management and service recovery
Keaveney (1995) finds that service failure and failed recoveries are the leading cause of switching behavior in service organization. Supporting this view, Smith et al., (1999) suggest that it is critical that an organization’s recovery efforts be equally strong and effective. Effective service recovery enhance the probability that aggrieved customers are returned to a state of satisfaction and are likely to maintain the business relationship with the service firm that is obviously beneficial. According to Hart et al., (1990) successful service recovery can reverse this dissatisfaction and can sometimes lead to the customer feeling more satisfied than before the problem, a phenomenon called the ‘service recovery paradox’. Gerson (1995) on the other side states that “happy customers, for whom you have found a solution to their complains, will talk to 3 to 5 people about their positive experience.” Yadav (2000) added that in case of complaints customers tend to evaluate the company’s complaint-handling performance as meeting or exceeding his or her expectations.
Indeed managing complaints should be viewed as an opportunity by management to improve relationships by setting a course for change which should taken and not to document shortcomings. Gustafsson and Johnson (2003) suggest that the service organization should “create a seamless system of linked activities that solves customer problems or provides unique experiences”
2.5.2 Switching barriers
According to Chen and Wang (2009) switching barriers do have a moderating effect and play a crucial role in winning customer loyalty. They can represent any factor that makes it more difficult or costly for consumers to change providers, such as the development of strong interpersonal relationships or an imposition of switching costs. Colgate and Lang (2001) identified four elements of switching barriers within financial service industries: Relationship investment, switching cost, attractiveness of other alternatives and service recovery.
Increasing switching barriers to inhibit customers from defecting to new service providers represents another important strategy (Anderson,1994) However deliberate imposing financial penalties on switchers so as to maintain a long-term relationship may not necessarily cultivate true loyalty. Infact many life insurance companies imposes such barriers as a strategy to keep its existing customers lifelong despite willing to switch customers.
This chapter focuses on loyalty cultivation in the insurance sector focusing both on traditional and relationship marketing practices. It confers the rising importance of relationship building and corporate image in loyalty cultivation in the insurance sector. Some measures to prevent churn as well as the effectiveness of traditional customer acquisition and retention strategies are also broadly discussed. The review of literatures shows that the insurance sector is different from other financial services. Due to its uniqueness, it requires different approaches to maintain its customer base. The following chapter will cover the profile of the company, Phoenix Insurance Limited, that will be used for this case study.
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