Attaining High Levels of Customer Satisfaction and Customer Retention through Relationship Marketing in the Bulgarian Steel Distribution Industry

Transcription

1 Attaining High Levels of Customer Satisfaction and Customer Retention through Relationship Marketing in the Bulgarian Steel Distribution Industry Author: Marinova, Marina Student Registration No: ST Program: Business Administration, Master Level Supervisor: Prof. Dr. Vesselin Blagoev Date: 10th of September, 2010 INTERNATIONAL UNIVERSITY COLLEGE, UWIC MBA PROGRAM

2 SUPERVISOR DECALARTION Student Name: Marina Marinova Supervisor Name: Prof. Dr. Vesselin Blagoev I acknowledge that the above named student has regularly attended the planned meetings and actively engaged in the dissertation supervision process. He has provided regular timely draft chapters of the dissertation and followed given guidance. Signed... (Prof. Dr. Vesselin Blagoev) Date... CANDIDATE DECLARATION This work is being submitted in partial fulfillment of the requirements for the degree of Master of Business Administration and has not previously been accepted in substance for any degree and is not being concurrently submitted in candidature for any degree. Signed... (Marinova, Marina) Date... STATEMENT 1 This dissertation is the result of my own work and investigations, except where otherwise stated. Where correction services have been used, the extent and nature of the correction is clearly marked in a footnote(s). Other sources are acknowledged by footnotes giving explicit references. A bibliography is appended. Signed... (Marinova, Marina) Date... STATEMENT 2 I hereby give consent for my dissertation, if accepted, to be available for photocopying and for inter library loan, for deposit in UWIC s e Repository, and that the title and summary may be available to outside organizations. Signed... (Marinova, Marina) Date... 2

3 ABSTRACT Relationship marketing has been actively discussed by many scholars as an important determinant of attaining high customer satisfaction and customer retention in today s high competitive global environment. Both are often seen as a key driver of company s improved competitiveness, long term results and overall success. This study first reviews the concept of relationship marketing and its importance. Furthermore, all aspects of customer satisfaction and customer retention are discussed in details, as well as various relationship marketing strategies used by the companies to achieve them. Although there are a great number of investigations on the different relationship marketing tactics and their impact on companies performance, they are specific to the context of the different industries. Therefore, the purpose of this research is to empirically investigate the effect of relationship marketing on customer satisfaction and customer retention in the business to business industry and is based on a sample of business relationships in the steel distribution industry in Bulgaria. This study has adapted a deductive approach. A quantitative study of customer s perspective about this subject was conducted to find out their preferences of various relationship marketing tactics and what could be the main incentives for higher level of customer satisfaction, retention and repurchase behavior. A questionnaire has been launched through e mail and online survey websites. Throughout this research the author have concluded that although relationship marketing is not very popular in Bulgarian steel distribution industry, there is evidence that through a successful using of its mechanisms, there could be achieved superior customer satisfaction and customer retention. The findings from the study show that all of the reviewed relationship marketing tactics are positively related both objectives customer satisfaction and customer retention. However, the results indicated that some of the customer services are found to be less correlated to them. In addition there was provided recommendations for improvements in the area, as well suggestions for further research. Keywords: Relationship Marketing, Steel Industry, Customer Satisfaction, Customer Retention, Relationship Marketing Tactics 3

4 ACKNOWLEDGEMENTS First I would like to thank to my supervisor, Prof. Dr. Vesselin Blagoev for his great support and guidance during the process of preparing my dissertation, as well as during the whole study process. Furthermore, I am very grateful to my colleagues and partners that I am working with, for their kind co operation and involvement, especially in the process of primary data collection. Finally, I would like to express my special thanks to my family and my friends for their patience and encouragement throughout the whole MBA course. Marinova, Marina 4

5 TABLE OF CONTENTS 1 INTRODUCTION BACKGROUND PURPOSE PROBLEM DISCUSSION AIMS AND OBJECTIVES RESEARCH QUESTIONS DISSERTATION STRUCTURE LIMITATIONS LITERATURE REVIEW RELATIONSHIP MARKETING AND ITS IMPORTANCE CUSTOMER SATISFACTION CUSTOMER RETENTION SWITCHING BARRIERS LOYALTY PROGRAMS BUILDING RELATIONS THROUGH CUSTOMER SERVICE AND ORIENTATION MARKETING MIX AND RELATIONSHIP MARKETING THE SIX MARKETS MODEL EMPLOYEES AND RELATIONSHIP MARKETING STEEL INDUSTRY AND RELATIONSHIP MARKETING STEEL INDUSTRY AND ITS CHALLENGES METHODOLOGY RESEARCH APPROACH RESEARCH STRATEGY CASE STUDY QUALITATIVE VERSUS QUANTITATIVE METHOD SAMPLING DATA COLLECTION SECONDARY DATA COLLECTION PRIMARY DATA COLLECTION DATA ANALYSIS LIMITATIONS AND POTENTIAL PROBLEMS

6 3.5.1 RELIABILITY AND VALIDITY ETHICAL PROBLEMS RESEARCH FINDINGS SECONDARY DATA ATTAINING SATISFACTIONʹS UP DESPITE DOWNTURN IN US AND CANADA CUSTOMER SERVICE AND INDIAN STEEL INDUSTRY CUSTOMER RETENTION THROUGH SERVICE QUALITY IN UK STEEL INDUSTRY CUSTOMER ORIENTATION AND EMPLOYEE INVOLVEMENT IN B2B INDUSTRY PRIMARY DATA SAMPLE PROFILE PURCHASE DECISION FACTORS CONSUMER TRUST, LOYALTY AND SWITCHING BEHAVIOUR IMPORTANCE OF VARIOUS FACTORS OF CUSTOMER SERVICES PERSONAL RELATIONSHIPS AND OVERALL SATISFACTION CUSTOMER SATISFACTION, CUSTOMER RETENTION AND RELATIONSHIP MARKETING DISCUSSION OF THE FINDINGS ANALYSIS OF THE FINDINGS RELATIONSHIP MARKETING AND REPEAT PURCHASE CUSTOMER TRUST CUSTOMER SERVICE CUSTOMER SATISFACTION CUSTOMER RETENTION RELATIONSHIP MARKETING LEADING TO CUSTOMER SATISFACTION AND RETENTION CONCLUSION AND RECOMMENDATIONS CONCLUSION RECOMMENDATIONS IMPLICATIONS FOR THE MANAGERS / MARKETERS FUTURE RESEARCH REFERENCES APPENDIX 1: QUESTIONNAIRE

7 TABLE OF FIGURES Figure 2.1 The Six Markets Model Figure 3.1 Research Methodology Figure 4.1 Satisfaction Rates of US and Canada Steel Customers Figure 4.2 Importance and Need of Improvement of Steel Mills Performance Attributes Figure 4.3 Outstanding Satisfaction Performance Measurement Figure 4.4 Model of Customer Expectations Figure 4.5 Industry of Activity Figure 4.6 Size of the Companies of the Respondents Figure 4.7 Frequency of Purchase Figure 4.8 Number of Suppliers Figure 4.9 Scatter Plotter representing the most important factors in purchase decision process Figure 4.10 Most Important Purchase Decision Factors Figure 4.11 Most Inconsiderable Purchase Decision Factors Figure 4.12 Importance of trust Figure 4.13 Company Size vs Switching Suppliers Figure 4.14 Industry vs Co operation Continuance Figure 4.15 Way of Searching for New Supplier Figure 4.16 Customer Services Importance Figure 4.17 Importance of Personal Relationship Figure 4.18 Overall Steel Customer Satisfaction Figure 4.19 Statements Rates Figure 4.20 Pearson s Correlation Coefficient LIST OF TABLES Table 4.1 Pearson Correlations between Quality, Satisfaction and Loyalty Table 4.2 Purchase Decision Factors Table 4.3 Customer Services and Conditions Table 4.4 Customer Satisfaction, Customer Retention and Relationship Marketing Statements

8 CHAPTER ONE: 1 Introduction This chapter consists of a short background of the research area and introduction to the research problem through problem discussion based on the theory. The purpose of the project will be also clearly described. Furthermore, there will be listed the aims and objectives of this study as well as the research questions to be investigated. In addition the dissertation structure will be outlined and study limitations will be briefly covered. 1.1 Background Nowadays, most industries are suffering from the outcomes of the financial and economic crisis, therefore the companies are challenged to implement effective marketing strategies in order to survive and maintain competitiveness in the situation of an economic downturn (Kotler and Armstrong, 2010). According to Palmatier (2006) Relationship Marketing is now one of the most essential parts of a business strategy. The performance of any business is positively influenced by relationship marketing. Relationships are at the heart of human behaviour and relationships are very important for businesses. Customer supplier relationships are very crucial for marketing professionals. Traditionally marketers used to reach out to their customers through mass promotion and distribution however this phenomenon doest not match the reality of society based on relationship. 8

9 Therefore, the focus has shifted to one to one marketing where a business builds a relationship with individual customers (Gummesson 2008). This study is being conducted to evaluate the effect of relationship marketing practices on the customer satisfaction and customer retention in the steel distribution industry. This chapter will give a brief overview of the concept of relationship marketing and the factors influencing customer supplier relationship. Various aspects of customer satisfaction and customer retention have also been discussed. Finally, the study is being conducted in the Bulgarian steel distribution sector. 1.2 Purpose More and more businesses are turning away from mass marketing and adapting the concept of relationship marketing. With increasing competition it has become essential to develop and maintain relationship with individual customers. This relationship is not only important in the business to consumer market but in the business to business market too. Therefore the purpose of this study will be to highlight the various aspects of relationship marketing and to investigate the way how businesses can keep their customers satisfied and retained through relationship marketing. The study focuses on business to business sector and Bulgarian steel industry has been chosen for the research. My interest of writing about relationship marketing in the steel distribution industry is based on the observations during my work in the sphere. 9

10 The practical aim of my dissertation is to investigate whether the companies working in business to business industries should place special emphasis upon relationship marketing as a key to keeping their customers satisfied and retained and therefore through stimulating repurchase behaviour, creating switching barriers and so on, to acquire strong competitiveness and overall success. This study would examine the relationship between some of the more principal relationship marketing constructs (customer service, customer orientation, switching barriers, loyalty programs, etc.) and customer satisfaction and retention. 1.3 Problem Discussion According to Egan (2008) traditional marketing mix techniques provide limited options and it is too restrictive for the services marketing and the business to business market. In the consumer goods market, marketing mix is becoming an outdated approach because of increased emphasis on customer orientation and customer service which is becoming a differentiation factor between the products. Thus the concept of relationship marketing is gaining more importance as it has become a basis for achieving competitive advantage for the businesses. Gronroos (2004) claims that consumer markets and business markets both benefit from relationship marketing. By adapting this concept they can foster closer ties with the customers, build trust and show commitment to their customers. Payne et al. (2003) has linked relationship marketing with customer value. They claimed that through relationship marketing customer value as well as customer satisfaction can be enhanced. While Reicheld and Sasser (1990) claim that 10

11 customer retention leads to increased profits. Payne and Frow (2005) argue that during the last few years there has been a growing interest in the customer relationship management however more research is required in this field. Murphy et al. (2007) argue that relationship marketing leads to strong social, technical and economic ties between all the stakeholders and it reduces the cost of transaction and enhances the exchange efficiencies. The relationship is not only between the seller and the buyer but also all the parties involved including all the business partners, strategic alliance and all the networks of cooperative marketing. According Murphy et al. (2007) the relationship marketing not only emphasises on the economic ties but also emotional ties which eventually results into long term relationship. Thus relationship marketing is a crucial part of marketing process. Bush et al. (2007) discussed relationship marketing and have identified three different schools of thoughts regarding relationship marketing. First one is inter organisational approach that refers to the relationship between different organisations. Second one is customer relationship which refers to the relationship between the customers and the suppliers or businesses and third one is customer valuation which refers to increasing the customer value through relationship marketing. Lambe et al. (2000) has listed various aspects of relationship marketing including: Trust, which is the believe that the partners would act in the benefit of each other, Commitment, which means that the partners are committed to each other, Cooperation, it s a joint efforts with both the parties resulting into benefits for both, Communication, the sharing of information between the parties involved, Relational Norms, 11

12 shared expectations between customers and the suppliers, Mutual Goals, partners working together to achieve these common goals, Social Bonds, various relational exchanges between partners, Interdependence, the belief that the relationship would create a greater benefit than working alone, Adaptations, altering or modifying products or services as per customer requirements, Structural Bonds, to make sure the continuous process of relationship and Performance Satisfaction, that is meeting the expectations of the customers. According to Gummesson (2002) new mindset is required for the successful implementation of all aspects of relationship marketing. The author further asserts that relationship marketing drives from the various theories of marketing and management. Three different marketing theories have been identified in this regard. Traditional Marketing Management: Marketing management and the 4 Ps are treated differently in the relationship marketing. Marketing management also emphasises to focus on the customers. Services marketing: It emphasises the interactions among the customers and the businesses and providing good customer service. It also emphasises strong relationships with the customers. Network Theory of Business to Business Marketing: It sees the process of sales, marketing, product development and engineering as part similar management context. Morgan and Hunt (1994) argue that there are several factors that work towards making a relationship successful or a failure. Two of the most important factors are commitment and trust. These attributes ensure that marketers maintain relationship with exchange partners and invest in it. 12

13 Alternative especially short term benefits would be avoided because of this and the exchange partners do not consider each others opportunistic. Businesses employ various measures to build this relationship such as giving excellent customer service, devising customer loyalty programs and erecting switching barriers. According to Christopher, Payne and Ballantyne (2002) customer service adds to the value already created by a product while Verhoef (2003) claims that customer loyalty programs facilitate a strong relationship between a customer and the business and leads to customer retention. Positive switching barriers are also employed to create customer loyalty and retention (Julander and Soderand, 2003). One of the aims of the relationship marketing is to create customer satisfaction. Naumann et al. (2010) argue that the concept of customer satisfaction has gained importance in the last decade. It is argued that customer satisfaction leads to customer loyalty and loyalty in turn leads to more profitability, increased market share and growth for the businesses. Luo and Homburg (2007) claim that customer satisfaction plays a central role in marketing strategies. Customer satisfaction increases sales of the company, moreover, satisfied customers are less price sensitive and they are willing to pay higher price as compared to the competitors. In addition, a company s future human capital performance is also affected by customer satisfaction. Cooli et al. (2007) argue that customer satisfaction has a non linear and asymmetric effect on consumer behaviour. It is argued that customer satisfaction is directly linked to the share of wallet, in other words when a customer is satisfied by a firm it spends disproportionately more on buying from that company. Lam et al. (2004) conducted a study in the 13

14 business to business market and they found that increased customer satisfaction resulted into increased customer loyalty. According to Gustafsson et al. (2005) customer satisfaction is one of the drivers of customer retention. Customer satisfaction is the overall evaluation of the company s performance by a customer and this customer satisfaction has a strong relationship with customer loyalty. It has become important for the businesses to retain their customers. According to Gerpott et al. (2001) customer retention represents the relationship between the consumer and the business. Besides customer satisfaction Gustafsson et al. (2005) have listed 2 more drivers of retention: calculative commitment and affective commitment. Calculative commitment and affective commitment explain that customer remains retained due to many other factors even if the satisfaction level is low. Lewis (2004) carried out a study on the effect of customer loyalty programs on customer retention. The research suggested that customer loyalty programs positively influence customer retention. It was observed that the customers involved in the customer loyalty programs showed repeat purchasing behaviour. Gounaris (2003) also conducted a study in the business to business market on the antecedents of the trust and commitment as part of relationship marketing including the quality perceived by the customers and the relationship bonding techniques used by the businesses. According to Eriksson and Vaghult (2000) customer retention plays an important part in building relationships. It was also argued that a customer who buys more is also a satisfied customer. It was also claimed that different types of relationships have different effects on customer retention and the higher a 14

15 customer perceives his the value of his relationship with the firm the higher will be the level of retention and repeat purchase behaviour. More and more business to business companies are turning towards relationship marketing. This study would focus on the relationship marketing in case of steel distribution industry, as it main purpose is to find out especially how Bulgarian steel distribution companies can achieve the goals of customer satisfaction and customer retention through relationship marketing practices. 1.4 Aims and Objectives As stated above, the aim of this research is to investigate the impact of relationship marketing on customer satisfaction and customer retention in the business to business industry. The objectives of this study include: 1. To investigate the impact of relationship marketing on customer satisfaction. 2. To investigate the impact of relationship marketing on customer retention. 3. To investigate various antecedents in building customer relationship. 4. To investigate the importance of relationship marketing in the business to business industry. Another objective is to fulfil the gap in the existing literature on the effect that relationship marketing approach could have in a specific industry steel distribution industry and to contribute to the managerial practice by giving recommendations for application and improvement of 15

16 relationship marketing tactics in the business to business industry in general and steel distribution industry in particular. 1.5 Research Questions Following research questions that should be answered have been prepared according to the aims and objectives of this study: How relationship marketing creates customer satisfaction? How relationship marketing creates customer retention? How businesses can use relationship marketing to enhance their performances? 1.6 Dissertation Structure This dissertation comprises of six chapters. First chapter would cover an overview of the topic, aims and objectives of the research, also research questions and the limitations. The second chapter would include the review of the existing literature on the relationship marketing and its various process and outcomes including customer satisfaction and customer retention. 16

17 The third chapter would highlight the research methodology used while conducting this research. Fourth chapter would involve first presentation of the secondary data, as well as the analysis and interpretation of the data which would be collected by a survey, following by the fifth chapter that would present a discussion of the main findings based on the survey and comparison of the results to the literature review. Finally, the sixth chapter will present concluding discussions of the study, as well as recommendations for improvement, management implications and further research will be provided. 1.7 Limitations Limited resources available to the student are one of the limitations. The study is being conducted in the Bulgarian steel industry which might not cover all the issues faced by the business to business industry when implementing the principles of relationship marketing. In addition the study covers only the customers point of view, as the companies perspectives about this topic are not researched. Some participants left some of the questions blank or unanswered. Another limitation is that the study will focus only in two of the tools used for measuring of the outcomes of relationship marketing, as well as only some of the various relationship marketing tactics are reviewed. Other measurements and practices are beyond this study. 17

18 CHAPTER TWO: 2 Literature Review In this chapter will be discussed the theoretical framework on which this study builds. In this connection there will be done an extensive critical review of the existing theories and concepts about relationship marketing and its outcomes, focusing on customer satisfaction and retention. Furthermore, there will be explored various relationship marketing practices, as the views and findings of different authors will be critically analyzed. Finally this chapter provides a brief review of steel industry and conclusion of the theoretical framework with reference to the research problem. Introduction In the current competitive environment it has become essential for every business to establish a strong relationship with its customers (Egan 2008). Companies are trying to foster closer ties with their customers and show that they are committed to every need and want of their customers. Companies are using various marketing tools to enhance their relationship with the customers; one of those tools is Relationship Marketing. According to Ford and Gadde (2009), relationship marketing involves having good 18

19 relations with everyone within its micro environment including the supplier, intermediaries, public and most importantly the customers. Over the years with the increasing competition also in the steel market and the squeezed demand during last two years of recession, the war between the companies in the steel manufacturing and service industries is getting more severe, as one of the strategic advantages in retaining and acquiring customers definitely could be creating of long lasting collaborative relationships with them (Sinha and Ghoshal, 1999). Most of the steel producers and traders started to entwine their products with different services aiming to satisfy better their customers needs as moreover the customers see these services as an integral part of the product. Sinha and Ghoshal (1999) observe that achieving of superior value to the customer by providing qualitative customer service at lower delivery cost could be the best path to gain competitive advantage in such an environment. Especially in Bulgaria, based on the experience of my company, that still presents many opportunities for development the concept of employing service quality in a non service industry could be a key to customer satisfaction, customer loyalty and market share. This chapter will explore the study of various authors on relationship marketing and the importance of relationship marketing in the B2B sector especially in the steel distribution industry. It will also evaluate how businesses keep their customers satisfied and retain them through relationship marketing. The views and the findings of various authors will be critically analysed. 19

20 2.1 Relationship Marketing and Its Importance Relationship marketing has gained a lot of importance over the last few years, as the companies have realized the power of learning about their customers to increase their competitiveness, profitability and success (Egan 2008). Since 1990s it is causing an increased interest among researchers and in business practice on the companies relationships to their markets. This has resulted in evolution of a new form of marketing, called Relationship Marketing (Gummesson, 2008). According to Baines et al. (2008) the 4Ps concept, which is the basic marketing approach, has been challenged through years and more and more regarded them as outdated and not appropriate interpretation of how marketing works. He grounds that the 4Ps approach considers mainly the products and their prices, as only the single transaction and short term relations between the sellers and buyers are concerned. On the contrary the relationship marketing is focusing on the interactions between the individuals of the two parties in a long term aspect. Payne et al. (2002) also advocates that relationship marketing is not a new idea or short life management phenomenon, but its concept actually is based on the traditional marketing but with greater focus on the customer value creation. According to him it is very important for the organizations to understand their customers value chain, so they could ensure positive effects on their businesses, as well as their personal satisfaction. They see the fundamental principle of relationship marketing in the greater customer 20

21 satisfaction from the relationship than just from the product or service, which is an important preposition for customer retention and motivation for placing of more business with the company. Furthermore, customer loyalty and retention, as well as increased profitability of the organization, is strongly related to the quality of the customer services provided, as through retaining of just 5 % from their customers, companies could boost their profits by almost 100 % (Reicheld & Sasser, 1990). Kotler et al. (2005) have almost the same new view of marketing as a tool for attracting, retaining and developing profitable customers, instead of just focusing on the single transactions with them. They describe the relationship management as the whole process of building and maintaining of long term and fruitful customer relationships through creating high value for the customers and achieving their satisfaction. But they reviewed also the issue with the right positioning of the company on the market. In order to gain a competitive advantage it should offer greater value to the consumers, either through lower prices than the competition or through quality service and added value to its products. The effective positioning is differentiating, when the company through finding and examining its customers needs, could provide them more value than the competition (Kotler et al., 2005; Baines et al., 2008). Although there are different interpretations of this new approach to marketing, there is a common agreement that the main idea is the delivering of superior value through building long lasting successful relationships with the customers. Therefore we should first have an in depth understanding of 21

22 what are the principles of customer satisfaction and the value of customer retention. Patterson and Smith (2003) have described relationship marketing as developing and nurturing strong relationship with a customer keeping insight the long term success of the company. They further maintained that in the increasingly competitive market where customers are becoming less loyal to a single company, relationship marketing helps in retaining customers and building a competitive advantage. Gronroos (2004) explained that relationship marketing involves establishing, maintaining and enhancing relations with the customers where both the parties involved achieve their objectives. In Europe relationship marketing has become an essential part of industrial marketing and the companies are focusing more on building closer relations with the customers than achieving economies of scale by identifying the individual requirements of each customer. Crosby and Stephens (1997) argue that building personal relationships shows greater commitment to customers. The authors have identified two views regarding relationship marketing, one view is that customer relationship is a quality surrogate to the positive feeling that customers have towards a business while another view is that through relationship marketing a business adds value to its services provided. Christopher et al. (1991) view relationship marketing as a tool to fill the gap between what the customers expect and what they get. However they maintain that effective relation must be backed by quality products and the right marketing mix. Often customers complain when they are asked about their corporate partners. Most of the customers complain about the behaviour of the people 22

23 who deal with them. Fournier et al. (1998) argue that the answer to these complaints is to focus on customer orientation. A company s dealing with its customers should be transparent, objective, fit to customer s requirement moreover it should delight the customers. Buttle (1996) puts relationship marketing as an ongoing process. A customer is no longer seen as an outsider rather he is considered a partner who can help a business in increasing its sales and profits. Tax et al. (1998) claim that proper handling of complaints is an important part of relationship marketing. Effective handling of complaints leads to increased customer retention; it decreases the chance of spread of negative word of mouth and improves a companies bottom line. Two important approaches of relationship marketing are customer satisfaction and customer retention. Baines et al. (2008) claim that relationship marketing is an old phenomenon however there has been a surge in research related to it in the recent years. The interest is growing among academics as well marketers in customer viewpoints, customer bonding, winning customers trust and benefits that arise from them (Edgan, 2008; Gummesson, 2008; Kotler and Armstrong, 2010). Shet and Parvatiyar (1995) claim that most of the research carried out on the relationship marketing has been in the service oriented industry and less research has been done in the product oriented industry. Sheth and Pavattiyar (1995) also identified affinity marketing, database marketing and local marketing to build ongoing relationship with customers thus they are essential part of relationship marketing. 23

24 Lin et al. (2006) conducted a study on the importance of relationship marketing in the steel industry and textile industry. They found that the steel companies recognised the importance of maintaining relationship with customers. When they asked the employees and the management about customer relationship management they discovered that when the customers of the steel companies were engaged through increased sharing of information it resulted into repeat purchase behaviour, increased market share for the company. The level of customer satisfaction was also found to be high and the companies were experiencing increased levels of customer retention. Ryals and Knox (2001) have described customer relationship management as having its roots in the relationship marketing. They argue that companies who leave the data or information collected about their customers to their marketing department are missing the point. Customer oriented strategies should be communicated through the entire organisations. It is also important for a firm to invest in the IT and IT systems and the information should be conveyed right through the organisation to the front line employees. According to Farrington et al. (2009) companies institute customer loyalty programs to build close relationship with customers. Businesses have come to know that customer service is the backbone of growth. Customer service includes broad range of activities that a company and its employees follow to create customer satisfaction. Customer loyalty occurs due to good customer service moreover customer loyalty is an outcome of customer satisfaction. Farrington et al. (2009) argue that once customer loyalty is 24

25 achieved a company must take measures to maintain it. Chandershekaran et al. (2007) claim that many customers say that they are satisfied yet they defect to other companies. Their study observed the data from ABC which a large business to business service based organisation serving customers in North America including the United States and Canada. It has dozens of sales representatives who directly deal with the customers and because of this a strong tie is visible between the sales representative and the customers. Each month ABC conducts a survey with 4000 customers using quota sample method on customer satisfaction and then an interview is also with the sales representatives serving those customers. The study concluded that there is a relationship between customer satisfaction and customer loyalty however it was also noted that if the customer satisfaction is weak it will not result in customer loyalty or in other words customer loyalty will occur only when the customer satisfaction is strong. 2.2 Customer Satisfaction Customer satisfaction is an important tool to measure if the business has met or surpassed expectations of the customers. More and more organisations including my company and a substantial number of our business partners are taking measures to achieve high levels of customer satisfaction. It is claimed that high levels of customer satisfaction results into higher economic returns. Organisations are adopting various approaches such as total quality management. However, there is strong link between firm s performance, quality of the product and customer satisfaction (Homburg et al 2005; Anderson et al. 1994). Some managers have a tendency of measuring 25

26 quality through customer satisfaction. Anderson and Sullivan (1998) analysed a survey of customers in Sweden conducted between 1989 and 1998 on various products and services. They concluded that customer satisfaction occurs when the quality of the product matches the perceived quality of the customer. They further elaborated that when the actual quality is less than the perceived quality it results in dissatisfaction which affects a customer s decision to repurchase. In addition, customer satisfaction is more important in case of high value products for the customers, in order for them to repurchase from the same company. According to Gilbert et al. (1982) customer satisfaction has become a central concept in marketing. Customer satisfaction is one of the important outcomes of marketing and it affects a customer s post purchase behaviour such as repeat purchase, brand loyalty and attitude change. It is also believed that satisfied customers yield higher profits for the businesses. Fornell et al. (1996) noted that the economy has changed from mass production and mass consumption to highly differentiated products and services which require increase customer involvement. According to American Customer Satisfaction Index United States is observing decrease levels of customer satisfaction. They also noted that the consequence of customer satisfaction is decrease in complaints and increase customer loyalty. Zeelenberga and Pieters (2004) conducted a study involving 900 customers. They explained that dissatisfied customers express their dissatisfaction behaviourally which in turn affects a company s profits. Customers behaviour due to dissatisfaction included complaining, customers switching 26

27 loyalty from one company to another company, negative word of mouth where customers shared there bad experience with their family, friends and other acquaintances; and customer inertia. Kondo (2001) observes that one of the top targets of Total Quality Management is customer satisfaction. The quality of a product can be defined differently by a business as compared to what a customer thinks of a quality of a particular product. Therefore, it is important for the businesses to find out the opinion of the customer otherwise this lack of communication would lead to dissatisfaction of the customer. Moreover, it is said that effectively managing customer dissatisfaction is important for the growth of a business. It is important to find out the cause behind there dissatisfaction and address it. It is said that customers do not exit or switch loyalty immediately rather they voice there dissatisfaction but if this dissatisfaction is not properly managed than it leads to defection of the customers. Some researchers like Henning Thurau and Klee (1998) have noted a weak link between customer satisfaction and customer retention however customer satisfaction remains an essential part of a company s drive towards success and its competitive advantage in the long run. With regards to relationship marketing, customer satisfaction is believed to be main determinant in customer retention. Hallowell (1996) has established a linear relationship between customer satisfaction, customer loyalty and profitability. He argued that customer satisfaction occurs when a customer believes that the value of the product or service he has received is higher or equal to the value that he was expecting. This customer satisfaction leads to customer loyalty and many researchers including Sasser (1990) have written 27

28 that a loyal customer is more profitable for a firm due to enhanced revenues, low sensitivity to the price by a loyal customer and low cost of serving a existing customer who is already well familiar with the delivery system of the form. In addition, a loyal customer may bring in new customers with him thus reducing the cost of acquiring new customers for the firm. Conversely Verhoef (2003) claims that there a nonlinear relationship between customer satisfaction and customer loyalty. According to Verhoef (2003) there are many factors affecting this relationship such as age, variety seeking, product use and benefits, switching barriers and importantly customers knowledge. Consumers update their knowledge through the information available which might affect the level of their satisfaction. Lee Kelly et al. (2002) wrote that traditional manufacturers such as the steel industry are force to look beyond their traditional marketing tactics. They must do more to add value to what they are offering to their customers and one the factors that needs to be focussed is quality of service. They carried out a study involving 232 manufacturing companies specially the companies in the steel industry. They found that there was a strong link in the customer service and customer service furthermore a strong link was also established between customer satisfaction and customer loyalty. They also mentioned that trade off between service quality and product quality if of particular importance to transformation industries where the quality of the inputs contributes significantly to the quality and cost of the outputs. However they concluded that in the steel industry it is essential for the managers to understand the importance of the customer satisfaction and they should ensure it through maintaining high quality of the products as well the 28

29 quality of customer service. Customer satisfaction is a complex phenomenon. Luo and Bhatacharya (2006) viewed it from a different angle. They observed the effects of corporate social responsibility on customer satisfaction. They study included large secondary data set. They observed through their secondary sources that customers are generally satisfied with products and services of those firms which are considered socially responsible, CSR boots a firm s image and customers identify themselves with the company of their choice hence resulting in increased customer satisfaction and socially responsible forms also better understand their customer which leads to customer satisfaction. However, the study also observed CSR reducing customer satisfaction in the companies with low capabilities of innovativeness. 2.3 Customer Retention Customer retention is a concept whereby a company reduces the defection of its customers and retains them possibly for lifetime. Verhoef (2003) has noted various precursors to customer retention such as customer relationship and customer satisfaction. It is claimed that the strategies used to attract new customers do not work to retain customers rather a company s aim should be to enhance customer relationship perception. Firms are offering various incentives to retain customers which include discounts and coupons but more importantly customer loyalty programs. Bolton and Bramlett (2000) argue that loyalty programs have a long term effect on consumer behaviour. The participants of loyalty programs overlook some of the weaknesses of the company because they believe that 29

30 they are getting better services and a good value for their money. Customer retention plays an important role in a company s growth and economic success. A study conducted by Gerpott (2001) in German telecommunication sector involving 684 customers revealed that once customers are acquired it is important for the company that they stay with it for long because it was noted that as the customers stay longer with the company their spending also increase thus resulting in higher profits. Buchanan and Gillies (1990) argue that both customer satisfaction and customer retention are important for a company. They suggested a technique called Value Management Relationship to ensure customer retention. This technique involved cooperation of the all the partners of a business from suppliers to distributors. It helps in reducing the systems costs. Coyles and Gokey (2005) argue that it is important for businesses to retain customers. They studied the behaviour and attitude of the customers who had been loyal to a company for long and the deduced that these customers were spending more than other customers who were not regular buyers like them. In addition these customers tend to overlook discounts and short term promotions offered by other businesses and stay loyal to their present suppliers of a product or service. Rosenberg et al. (1993) argue that in a market situation where the companies are facing low growth and increase competition from old and new competitors it is vital for them to retain their current customers. They suggest in reorganising the marketing organisation, developing specific marketing mix and creating and optimal customer portfolio. It is emphasised that for sustainable future growth in sales and profits it is 30

31 necessary to keep a balance in retaining old customers and acquiring new customers. Gupta et al. (2004) regard customer retention as an off balance sheet intangible asset of a company. They argue that customers are the most critical aspect of a company and create value for the companies. According to the study a 1 percent increase in the retention increase a firm s value by almost 5 percent moreover a 1 percent increase in retention also results in higher impact on a firm s value than a change in cost of capital or discount rate. However Gronroos (2004) argues that mere retention of customers is not enough to generate value for a firm. Some customer might be satisfied and loyal but they do not contribute towards a company s profit hence he suggests a customer relationship profitability analysis as a prerequisite to customer retention. Reichheld et al. (2000) argue that success for businesses is no longer guaranteed by market share and cost reduction. According to Reichheld et al. (2000) some researchers believe that only those organisations which are empowered learning organisation will succeed. The business environment has changes where organisations are turning from mass production to service oriented practices. They found out that retention of customers is directly link to profitability of a company. It was observed that a slight change in customer retention percentage produced higher change in profits percentage. For example the study observed that a 5 % change in customer retention resulted in 25 % to 100 % shift in profits. 2.4 Switching Barriers Companies are increasing erecting switching barriers to prevent their customer from defecting to other suppliers. A switching cost is referred as 31

32 the cost that a customer must incur when switching a supplier. This cost can be in financial and economical or social or psychological form. Julander and Soderland (2003), claim that positive switching barriers can be used to influence customer satisfaction and attitudinal loyalty thus helping to retain a customer. Jones et al. (2000) found in their empirical study that one of the important factors of switching barriers is interpersonal relationships which includes the building a strong bond between the employees of the supplier and the customer. Klemperer (1988) divided switching barriers into 3 types. One of them is transaction cost where a customer has to bear substantial financial risks when switching suppliers. Second is called a learning cost whereby a customer who already knows his supplier very well and the rules and regulations and also the supplier understands customer s needs and wants hence a change of supplier will involve re establishing this relationship with the new supplier. More importantly the third switching barrier is referred as artificial cost where a supplier offer customer loyalty program, future discount coupons. It is argued that this artificial cost is entirely under firm under firm s discretion and they can use it to build relations with customers and refraining them from going to other suppliers. Patterson and Smith (2003) have included preferential treatment, special benefits and special benefits that a customer receives from a supplier as part of switching barrier. They further argue that once a supplier has successfully built a relationship with a customer it becomes hard for customers to switch a supplier due to the psychological discomfort associated with switching a supplier. 32

33 Yanamandram and White (2006) carried out a research on switching barriers in the business to business market. They discussed what determines behavioural brand loyalty in case of dissatisfied customers in the B2B service sector. The study was conducted through interviews of 28 customers who represented 24 different organisations. The study was conducted in Australia. The main findings of the study included that various dissatisfied customers stay with the company due to following reasons; availability of alternative suppliers, inertia, close relationship with the supplier, service recovery, others and switching costs. The study is important for those companies who have many competitors and there is potential of customers to switch the supplier yet their customers stay with them. They can understand why their customers are also staying. 2.5 Loyalty Programs Several businesses offer loyalty programs which help a firm in fostering closer ties with customers as well understanding the buying behaviour of the customers. It is argued that loyalty programs positively influence customer retention and motivates them to buy from the same supplier repeatedly (Verhoef 2003). Bolton et al. (2000) conducted a research using cross sectional, time series data in the financial industry in regards to loyalty programs. The aim of these programs was increased customer satisfaction and customer retention. Bolton et al. (2000) deduced from their research that the participants of the loyalty programs were content with their service providers, they were engaged in repurchase from the same company, they were also creating a positive word of mouth in favour of their service 33