UNIT IV

Customer Loyalty OutcomesCharacteristic Features of Behavioral Loyalty, Attitudinal Loyalty and Cognitive Loyalty, Role of Customer Loyalty outcomes in business decisions, Significance of Customer Loyalty for Marketers, Relationship Influencers of Customer Loyalty including factors mediating customer loyalty relationship with other relationship influencers, Customer Affinity, Customer Engagement.

Customer Loyalty Outcomes• Customer loyalty is a psychological state that companies try to create in

the mind of their customers.• There are two popular prospectives- attitudinal and behavioral.• In terms of practical accuracy, including both dimensions are important.• Researchers insisted that focusing on only the behaviour (repeat

purchase) would lead to an incomplete understanding of the reasons behind it.

• Similarly observing customer attitude alone cannot help.• The purpose of business organization is to create customers who need

to be satisfied. The emergence of competition has redefined the bargaining power of the customers and make them demanding as well as strategic.

• Loyalty is principally valued for its outcomes since it is the outcome behaviour of loyal customers that exercise a huge impact over the revenues and growth of the firm.

• Jones and Taylor (2007) affirmed that advanced literature has proposed loyalty to be a three dimensional construct – behavioural, attitudinal and cognitive loyalty.

Cognitive: relating to the mental processes of perception, memory, judgment, and reasoning, as contrasted with emotional and volitional processes.

1. Behavioural Loyalty• The behavioural dimension refers to a customer’s behaviour in respect of

repeat purchase, indicating a consistent preference for a brand or service over time.

• The behavioural definition of loyalty focuses on a customer’s demeanour, irrespective of attitudes or preference that lie beneath the conduct.

• A loyal customer is one who purchases from the company and then continues to do so. Here repurchase activity is the only measure of loyalty and any internally held attitudes or preferences are completely ignored.

• In order to achieve customer loyalty a company should initiate the necessary tactics that increase the frequency and scale of repurchase.

• These tactics include improving product quality, customer satisfaction and brand preference.

• Behavioural Variables– Proportion of a given visit. Measures the frequency of purchase as

compared to other brands in the same product category.– Time spent.– Cooperation and word-of-mouth recommendations. • We need to understand the difference between repeat purchase and

intention to do so. Intention may or may not lead to repeat purchase.• A truly loyal customer exhibits actual repeat buying behaviour and

not simply an intention to do so.• Behavioural outcomes of loyalty include:– Repurchasing from the same service provider.– Lower switching intentions.– Making all purchases in a particular category from a single service provider.

2. Attitudinal Loyalty• Attitudinal dimension of customer loyalty refers to favorable

customer intention to repurchase and recommend.• Attitudinal definition of loyalty suggests loyalty to be a state of

mind. Where the customer is considered loyal to a brand or a company if he/she exhibits a positive and preferential attitude towards it.

• In economic terms, it implies that anyone who is ready to pay a premium for Brand A and select it over other brands. NOKIA, Pulsar, VW, Amul etc are some brands which can fetch premium.

• Increasing customer loyalty in terms of attitude is about enhancing customer preference for the brand. It can be increased by improving product quality, corporate image and other customer experience elements of a company’s performance.

• Attitudinal Variables: the attitudinal measures of customer loyalty include trust, emotional connection and switching cost.– Emotional connection: involves liking the partner, experiencing a sense of

belongingness to the company.– Trust: involves elements like honesty, competence, reliability and customer

orientation.– Switching cost: time, effort and experience involved in switching from one

company to another.• Apart from repetitive purchase, true customer loyalty is accompanied by

a favourable attitude towards a product or a service.• A truly loyal customer will not only repeat his/her purchase, but exhibit

strong preference and a relative commitment.• Some authors argued that attitudinal dimension can adequately measure

customer loyalty because a customer who is deeply committed has strong intentions to repurchase and stick to the brand/store/company.

Attitude Vs. Behaviour• There have been discussions about the superiority of behavioural definition

over attitudinal explanation of customer loyalty. • Viewing loyalty solely as an attitude is of no use as a customer’s attitude

can persist without having any connection with the ongoing relationship.• Customer A, who has never consumed a particular product before, and

customer B, who is regularly using it, might have equally favourable attitude towards the product. But both of them cannot be considered as loyal. Customer A is showing ‘preference’ not loyalty.

• Customer loyalty should display a clear and direct impact on a company’s financial results.

• The standpoint of loyalty being a pure attitudinal concept denies the possibility of any immediate monetary benefit.

• Unexpressed internally held attitudes are no good for the revenue. In order to achieve a positive impact on the financial results, attitudes need to be manifested in some form of behaviour.

3. Cognitive Loyalty• It is the third dimension of customer loyalty that explains loyalty as the

conscious evaluation of the various aspects of a brand or the rewards and benefits of re-patronage intentions.

• This dimension of customer loyalty can rake following forms:– Top of mind– First choice– Price tolerance– Exclusive consideration– Identification with the service provider• Such loyalty leads to increased repurchase tendency among customers and also

keeps them with the company, which in turn leads to increased financial performance.

Customer Loyalty Repurchase Customer Retention

Financial Performance

Affective Drivers

Cognitive Drivers

Customer Loyalty Outcomes• Companies make several attempts to build loyalty among their customers

through a variety of initiatives that are extremely engaging and costly.• It is therefore beneficial for companies to understand the variety and quality

of outcomes that customer loyalty may result in.• Attitudinal

– Strength of Preference– Advocacy/Willingness to refer– Altruism

• Behavioural– Re-patronage– Resistance to change– Share of wallet/exclusive purchasing/ share of category

• Cognitive– Price indifference/ Price Insensitivity– Exclusivity/ Top of mind– Identification

Attitudinal Outcome• Strength of Preference– Customer’s degree of predilection for a service based upon its affective evaluation.– Strength of preference reflects the vigour of a customer’s inclination towards a particular product or

service.– Customer loyalty requires exhibition of a strong preference towards a product. This strength of

preference is affected by relative attitude, preference loyalty and affection towards a brand.• Advocacy/ Willingness to Refer– Customer’s willingness to commend and advocate a service into his social group at the risk of his own

reputation.– Willingness to recommend the product is an extremely important measure of customer loyalty. – Customers who act as ambassadors of the product and advocate it among other are also known as

‘customer evangelists’.– These customers are not only loyal but also ready to back the company/product with positive word of

mouth.• Altruism– Customer’s readiness to support the service provider by providing feedback or helping co-customers in

order to ensure successful service delivery.– Altruism is another outcome of a strong and positive attitude of customers that encourages them to

assist the company in providing better products and services by giving inputs through genuine feedback or helping co-customers in having a delightful consumption experience.

Behavioural Outcome• Patronage Intentions– Customer’s willingness to sustain a relationship with his service provider and

repurchase from the same provider in a particular category.– It refers to a customer’s willingness to emotionally connect with the company and

there us greater likelihood to purchase from the same company in future as well.• Resistance to Change– Customer’s imperviousness against substitutes available in the market.– It can be described as a customer’s readiness to continue with an organization

regardless of pleasant or unpleasant service encounters and consumption experience. Eg. Bank branch near to your locality.

• Share of Wallet/Exclusive Purchasing/Share of Category– Customer’s relative willingness to allocate all his purchases in a category to a particular

service provider.– it is deciphered by referring to the portion of a customer’s total expenditure in a

particular category that he/she commits to the company he is supposed to be loyal to.

Cognitive Outcome• Price Indifference/Price Insensitivity– Customer’s apathy towards the disparity between the price charged by his service

provider and that of others charging in the same category.– Indian customers are extremely price sensitive. The level of indifference a customer

shows towards price changes also reflect his/her level of loyalty. – It implies that customer values the relationship more than the changes in

serviceability.• Exclusivity/ Top of Mind– Customer’s set of consideration comprising a single service provider exclusively while

procuring a particular service.• Identification– Customer’s feeling of ownership over the service, his/her belongingness with the

service provider or the analogy of his values with that of the service provider.– It is a primary psychological state for deep, committed and meaningful relationships

that marketers increasingly seek to build with their customers.– Customers who identify with a company, experience a feeling of connectedness,

consequently making them define themselves somewhat in sync with the company.

Significance of Customer Loyalty for Marketers• Customers are the lifeblood of any business. Meeting their needs and ensuring their

satisfaction is imperative. Unless an organization cares about its customers, customers won’t reciprocate in a similar manner.

• Fierce market competition necessitates that organizations constantly improve their relationship with customers. This can translate into efficient customer lifecycle management by evoking a positive experience across the customer journey.

• While acquiring new customers is essential, organizations must lay emphasis on retaining existing ones and creating loyal customers who will ensure stable business operations. The better the relationship customers share with an organization, the greater their potential to generate revenue for the business.

• Some of the key reasons why customer loyalty is so important are listed below.1. Encouraging Referrals: – The customer lifecycle has become more complex because the customer’s buying journey begins even

before he/she directly engages with a particular brand. Therefore, customer relationship management should begin at the very first contact.

– Unless an organization sets up a system to reach out to prospects with the right information, it is easy to lose potential customers. The best way to ensure that ‘potential’ converts into ‘actual’ sales is to ensure that prospects engage with the existing customers who will endorse the value of a particular brand. After all, current customers act as net promoters and form strong voices in the market.

2. Reduced Costs: – By cultivating customer loyalty, businesses are creating an army of strong promoters that can outshine

their best marketing efforts. These net promoters can help save huge advertising and marketing costs for enterprises as word-of-mouth is a powerful and cost-effective marketing tool.

– Moreover, customer retention efforts are cheaper than acquiring new customers. Building loyalty forms a solid customer base helping the business to grow exponentially.

3. Repeat Business: – Since organizations have already won the trust of loyal customers, it is easier to cross-sell and up-sell

to these customers as compared to new ones. – Organizations have an open line of communication with loyal customers. These customers generally

provide honest feedback to help improve the brand. Since they openly voice their complaints, organizations can make a concerted effort to address issues raised promptly, increasing customer satisfaction.

– Thus, loyal customers are likely to ensure repeated business, which is critical for organizations to survive in the long run.

4. Insulate your Business from Competitors: – Loyal customers will stick to a brand because they trust the brand. Organizations with a loyal customer

base are immune to both competition and economic changes. This helps to protect bottom lines.

• Customer are the biggest assets of a business.

• Source: http://www.firstsource.com/blog/building-customer-loyalty-matters-business/

5 Reasons Why Customer Loyalty Is So Important in Our Digitized Marketplace

• For businesses, the current trend to attracting customers now in the consumer market is participating in group buying sites by selling their products and services at deeply discounted prices. On the surface, this customer acquisition method of increasing sales seemed to work. However, group buying does more harm than good to your business and its brand. You make plenty of sales, but hardly any of these dollars translate to profits. Businesses are starting to be wary of group buying.

• Consider another channel of increasing sales- through customer retention and loyalty activities. Not only does instilling customer loyalty increase sales, it also creates profits and builds your brand. According to The Gartner Group, 20% of your existing customers generate 80% of your profits. The key for any businesses to survive and grow is beyond just acquiring new customers, but to build sustainable sales stream of existing customers.

• It’s about time businesses pay more attention to building and instilling customer loyalty which has a long-term impact on their brands and not getting completely sucked into the group buying craze. It is more than just increasing sales.

• Here are 5 reasons why customer loyalty matters.1. It’s easier to up-sell and cross-sell to loyal customers• Loyal customers are familiar with their favourite brands and more willing to try out and explore recommendations

and new products. Marketing Metrics found out that the probability of selling something to new prospects is only about 5-20%, whilst the probability of selling something to an existing customer is 60-70%. For the same amount of effort to sell something, expected sales as such is higher from selling to your loyal customers.

2. Loyal customers are your free marketing agent, brand ‘ambassador’ to help build your brand• Loyal customers are more inclined to share their positive experience and making recommendation of a business to

their friends. They love your brand, they speak about your brand and humans are generally more influenced by people they are familiar with. Word-of-mouth marketing is one of the most powerful channel of marketing, if not the most. They reinforce your brand in the mind of consumers that are unfamiliar and new to your brand.

Contd..3. Lower costs to acquire new customers• It is 6 to 7 times more expensive to acquire new customers than servicing your regulars. Businesses have

to advertise to attract their attention, incentivize them with discounts, educate them about their brand and product, provide personalized services which all amounts to costs. By focusing on customer loyalty and building your brand, your loyal customers will be a strong influencer to get new prospects to try out your brand, substantially reducing the associated costs in acquiring new customers. Cultivate loyalty, and get an army of free, sales people to spread the love of your brand.

4. Customer loyalty insulates your business from price competition.• Competition is heating up! Let’s slash prices! But through loyalty, it reduces the effect of price sensitivity

on your customers and in the words of Warren Buffett, it gives you an ‘economic moat’ from losing customers to competitors. It takes more than reducing prices to lure your loyal customers away. Loyalty also helps in the opposite direction when prices have to go up. In times of rising costs and inflation, the stickiness and commitment towards your brand makes it easier to pass on additional costs to customers without them defecting in mass, eventually helping to protect your bottom line.

5. Loyal customers provide honest, quality feedback• Feedback is crucial to know where and how to improve. Loyal customers, they love your brand. They

wouldn’t hesitate or be shy to provide their honest feedback, especially negative ones as they want to see your brand thrive and serve them better. In many instances, new customers visit your brand, try it out, have some dislikes or unpleasant experience and they tend not to voice it out and telling themselves that they will not return again. You hardly get feedback loop from new customers and this is detrimental to your product and service quality.

Source: http://www.nextupasia.com/5-reasons-why-customer-loyalty-is-so-important-in-our-digitized-marketplace/

Customer Loyalty: The Relationship Influencers

• With ever increasing focus on customer relationships and the profound impact that customer’s evaluative judgment exercise on customer loyalty, it has become more important to uncover the factors that direct customer loyalty formation.

• There is a need to identify factors that affect customer loyalty in its relationship with other factors that constitute its formation.

• According to Morgan and Hunt (1994), customer relationship gained significance first in B2B relationships and it is only in later stage they received importance in B2C context as well.

• Rai (2013) defined Customer Relationship Management as “a continuously updated process of identifying relative value of customers and designing customized company interaction to delight them so that they do not just remain with company profitably but also be the companies ambassador.”

• Emphasis is on long term, sustainable and mutually beneficial business relations.

Mediating Influencer in Customer Loyalty Relationship

Mediation- the conceptual framework• A variable may be considered as a mediator in a relationship if it is able to

explicate the relationship between predictor (Independent Variable) and criterion (Dependent Variable).

• Mediator is the variable that serves as an explicatory link in the relationship between two other variables, one dependent and other independent

• A variable function acts as a mediator when:– Variations in independent variable significantly account for variation in presumed

mediator (a)– Variations in mediator significantly account for variations in the dependent variable (b)– When path a and b are controlled, previously significant relation b/w independent and

dependent variable becomes insignificant and sometimes zero (for strong mediation)

predictor

Mediator

criterionc

ba

Predictor (X)

Mediator (M)

Criterion (Y)c’

ba

Predictor (X) Criterion (Y)c

a X b = indirect effect of X on Yc = direct effect of X on Yc = c’ + ab

ab = c – c’

The very nature of meditational model is causal.

Typically mediator mechanisms are proposed only after a predictor-criterion effect have been fairly established.

• Establishing Mediation– Following conditions are requisite for establishing mediation:• The independent variable must affect the mediator in the first equation.• The independent variable must be shown to affect the dependent variable on the second equation.• The mediator must affect the dependent variable in the third equation.

• Types of Mediation• Full mediation (presence of indirect effect but no direct effect)• Partial mediation (presence of both indirect and direct effects)• No mediation (absence of indirect effect).

– Zhao et al. (2010) found this classification as misleading and coarse since mediation cannot be conceptualize as single dimension concept.

– Mediation• Complementary: Existence of both mediating effect (axb) and direct effect (c), same direction.• Competitive: Existence of both mediating effect (axb) and direct effect (c), opposite direction• Indirect-only: Existence of both mediating effect (axb) and no direct effect.

– Non-Mediation• Direct Only: Existence of direct effect only (c) with zero or insignificant indirect effect.• No-Effect: Existence of neither direct nor indirect effect.

Service Quality – Customer Satisfaction

• Customer’s level of satisfaction with an organization or a service provider is determined by the evaluation of service quality along with other factors (Hurley and Estelami, 1998).

• Researchers also held arguments to determine whether satisfaction is antecedent or an outcome of service quality.

• Studies established that service quality to be the most influential precursor of customer satisfaction.

• There were conflicting views on the satisfaction – service quality relationship. Despite conflicting opinions, literature available heavily advocates that service quality is precursor to satisfaction.

Customer Satisfaction- Customer Loyalty

• Customer satisfaction- repeat sales, positive WOM and customer loyalty.

• High customer satisfaction leads to increase customer loyalty?• Customer satisfaction also determines customer loyalty to a

great extent.• Ping (1993, 1999) stated that decrease in relationship

satisfaction leads to a drop in loyal behaviour with increased likelihood of relationship termination.

• Studies demonstrated a positive association between satisfied customers and repurchase intentions. This is the indirect influence on customer loyalty.

Service Quality – Customer Loyalty • Service quality is positively related to loyalty that is identified as

a buyer’s readiness to recommend the company.• Wang and Sohal (2003) attempted to assess the impact of

service quality at two levels of retail relationships, interpersonal (person to person) and store level (person to firm).

• They suggested that there is a positive association b/w service quality and customer loyalty and this association is stronger at company level than at interpersonal level.

• Ishak et al. (2006) discovered that the construct of client satisfaction mediates the relationship b/w service quality and customer loyalty.

Service Quality

Customer Satisfaction

Customer Loyaltyc’

ba

Relationship Influencers Moderating The Customer Loyalty Relationship

• Moderator variable is the one that influences the relationship between predictor variable and criterion variable by systematically altering its form and strength.

• The analysis of moderating effects helps in understanding “when” and “for whom” a particular variable acts as a strong predictor of an outcome variable.

• The moderating effect merely represents an interaction whereby the effect of a variable is dependent upon another variable.

• The concept of moderating variables was bought by Saunders (1956) in psychology research.

• The concept of moderating variables helps in understanding and forecasting buyer behaviour:– The possibility of existence of independent variables that essentially share no

relationship and start working at distinct point of time.– The possibility of existence if independent variables that relate to each other at

specific points in time but not always.

Moderating Variables in the Service Quality – Customer Loyalty Link

Customer Affinity• It stands for an emotional connection that a customer feels for

a brand.• It is largely based upon feelings and therefore, contains little

element of rationality.• Emotional association can be very stong. For eg. Apple, Harley

Davidson hugely bank upon the affinity of their customers towards them due to specific attributes of the product.

• Innovative product design, sense of identification, and expression of oneself as most of the customers see these brands as an extension of their identity.

• These brands have successfully positioned themselves as an enriching consumption experience that enhances one’s personality by adding value and desirable social image.

Customer Engagement• Engagement is turning on a prospect to a brand idea enhanced by the surrounding context.• Customer engagement cycle generally involves five different stages: awareness, deliberation,

inquisition, purchase and retention.• Marked with different needs and interests, each of these stages requires distinct focus while

interacting with the customers.• To facilitate customer going through customer engagement cycle, marketers resort to search

engine marketing, optimization and advt. with keywords and phrases.• The concept endorses to give the customers liberty to decide the ways they want company to

interact with them by using product, services and other consumption related experiences.• With declining effectiveness of traditional advertising media and growing power of customers

in terms of referrals and WOM, customer engagement has emerged as the need of the hour.• Researches revealed that an average customer in the age group 18-26 spends more time online

than watching TV.• Elevated levels of competition, greater access to product and price, increased no of channels

and lesser cost of switching have collectively made achieving customer loyalty a tough game for marketers.

• Customer engagement is a strategic orientation of marketing which can align a company’s effort with social and technological developments in the market.