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Customer loyalty : concept, context and character
 9789332902718, 9332902712

Table of contents :
Title
Contents
Part One: Customer Loyalty: The Conceptual Framework
1. The Character of Loyalty
1.1. Introduction
1.2. Nature of Loyalty
1.2.1. Loyalty as a Habit
1.2.2. Loyalty as Learning
1.2.3. Loyalty as Character
1.3. Formation of the Character of Loyalty
1.4. Understanding Loyalty
1.5. Myths About the Character of Loyalty
1.6. Development of Loyalty
1.6.1. Essentials of the Loyalty Development Process
1.7. Types of Loyalty
1.8. Loyalty Conflicts
1.9. Final Thoughts
Review Questions
Project Assignments
2. Decoding Customers
2.1. Introduction
2.2. Customers
2.2.1. Differentiating Customers from Consumers
2.2.2. Determinants of a Customer’s Characteristics
2.3. New Age Customers
2.3.1. Customer Life Cycle
2.4. Customer Lifetime Value
2.4.1. Calculating Customer Lifetime Value (CLV)
2.4.2. he Lifetime Value Equation
2.4.3. Issues in Calculating CLV
2.5. Customer Affinity
2.6. Customer Engagement
2.7. Final Thoughts
Review Questions
Project Assignments
References
3. Customer Loyalty: A Prelude
3.1. Introduction
3.2. Customer Satisfaction
3.2.1. Understanding Customer Satisfaction
3.2.2. The Satisfaction – Dissatisfaction Paradigm
3.2.3. Differentiating Customer Satisfaction from Customer Loyalty
3.3. Customer Retention
3.3.1. Understanding Customer Retention
3.3.2. Differentiating Customer Retention from Customer Loyalty
3.4. Brand Loyalty
3.4.1. Understanding Brand Loyalty
3.4.2. Differentiating Brand Loyalty from Customer Loyalty
3.5. Final Thoughts
Review Questions
Project Assignments
References
4. Customer Loyalty: A Comprehension
4.1. Introduction
4.2. Loyal Customers
4.3. Customer Loyalty: Meaning and Concept
4.4. Defining Customer Loyalty
4.4.1 The Rai–Srivastava’s Satisfaction – Emotion Quadrate Model of Customer Loyalty
4.5. Significance of Customer Loyalty
4.6. Final Thoughts
Review Questions
Project Assignments
References
5. Customer Loyalty: A Perspective
5.1. Introduction
5.2. Laws of Loyalty
5.3. Raison D’être of Customer Loyalty
5.4. Factors Affecting Customer Loyalty
5.4.1. Core Product
5.4.2. Satisfaction
5.4.3. Elasticity Level
5.4.4. The Marketplace
5.4.5. Demographics
5.4.6. Share of Wallet
5.5. Classification of Customer Loyalty
5.6. Final Thoughts
Review Questions
Project Assignments
References
6. Customer Loyalty: The Emerging Paradigms
6.1. Introduction
6.2. Customer Loyalty Development: Emerging Models
6.2.1. The Loyalty Business Model
6.2.2. Customer Loyalty Development Model
6.2.3. Righteous Circle Model of Customer Loyalty
6.2.4. Model of Customer Loyalty Categorisation
6.2.5. Apostle Model of Customer Loyalty
6.3. Building Customer Loyalty
6.4. Building Loyalty Through Fun
6.5. Recent Research in Customer Loyalty
6.6. Customer Loyalty: The Role of Social Media
6.6.1. Advocacy and Social Media
6.7. Final Thoughts
Review Questions
Project Assignments
References
Part Two: Customer Loyalty: The Research Framework
7. Determinants of Customer Loyalty Formation
7.1. Introduction
7.2. Drivers of Customer Loyalty
7.2.1. Trust
7.2.2. Concern for the Customer
7.2.3. Regularity of Contact
7.2.4. Ownership Benefits
7.2.5. Convenience to the Customer
7.2.6. Consistency of Performance
7.3. Formation of Customer Loyalty
7.3.1. Service Quality
7.3.2. Customer Satisfaction
7.3.3. Corporate Image
7.3.4. Trust
7.3.5. Commitment
7.3.6. Communication
7.3.7. Service Recovery
7.3.8. Switching Costs
7.3.9. Emotions
7.4. Determinants of Customer Loyalty and Their Impact on Loyalty
7.5. Final Thoughts
Review Questions
Project Assignments
References
8. Customer Loyalty Outcomes
8.1. Introduction
8.2. Outcomes of Customer Loyalty
8.2.1. Behavioural Loyalty
8.2.2. Attitudinal Loyalty
8.2.3. Attitude vs. Behaviour
8.2.4. Cognitive Loyalty
8.3. Customer Loyalty Outcomes – An Explanation
8.3.1. Strength of Preference
8.3.2. Advocacy/ Willingness to Refer
8.3.3. Altruism
8.3.4. Patronage Intentions
8.3.5. Resistance to Change
8.3.6. Share of Wallet/Exclusive Purchasing/Share of Category
8.3.7. Price Indifference/Price Insensitivity
8.3.8. Identification
8.3.9. Exclusive Consideration
8.4. Final Thoughts
Review Questions
Project Assignments
References
9. Customer Loyalty Assessment: Methods and Measurement
9.1. Introduction
9.2. Assessing Customer Loyalty
9.3. Measurement Models in Customer Loyalty Research
9.4. Methods and Mechanism for Assessing Customer Loyalty
9.4.1. Measurement Scales for Customer Loyalty
9.5. Final Thoughts
Review Questions
Project Assignments
References
10. Customer Loyalty: The Relationship Influencers
10.1. Introduction
10.2. Mediating influencer in Customer Loyalty Relationship
10.2.1. Mediation – The Conceptual Framework
10.2.2. Establishing Mediation
10.2.3. Types of Mediation
10.2.4. Estimating and Testing the Mediating Effects
10.2.5. Researching Customer Related Constructs
10.3. Relationship Influencers Moderating the Customer Loyalty Relationship
10.3.1. Moderation–The Conceptual Framework
10.3.2. Identifying Moderating Variables
10.3.3. Testing the Moderating Effects
10.3.4. Moderating Variables in the Service Quality–Customer Loyalty Link
10.4. Final Thoughts
Review Questions
Project Assignments
References
Part Three: Customer Loyalty: The Application Framework
11. Customer Loyalty in the Services Sector
11.1. Introduction
11.2. The Service Sector in India: A Perspective
11.3. Growth of the Service Sector in Modern Economy
11.4. Characteristics of the Services Industry
11.5. Significance of Customer Loyalty in the Services Sector
11.6. Application Model of Customer Loyalty in the Services Sector
11.7. Final Thoughts
Review Questions
Project Assignments
References
12. Customer Loyalty in the Retail Industry 199–
12.1. Introduction
12.2. Customer Loyalty Practices in the Retail Industry
12.2.1. Shoppers Stop
12.2.2. Tanishq
12.2.3. Future Group
12.2.4. Globus
12.2.5. Vishal Mega Mart
12.3. Final Thoughts
Review Questions
Project Assignments
References
13. Customer Loyalty in the Aviation Industry
13.1. Introduction
13.2. Customer Loyalty in the Aviation Industry
13.2.1. Customer Loyalty Practices in the Indian Aviation Industry
13.3. Final Thoughts
Review Questions
Project Assignments
References
14. Customer Loyalty in the Banking Industry
14.1. Introduction
14.2. Evolution of Banking in India
14.2.1. Pre-independence Era (1786–1947)
14.2.2. Post-independence Era (1947–1991)
14.2.3. Post Liberalisation (1991 Onwards)
14.3. Customer Loyalty Practices in the Indian Banking Industry
14.3.1. The Punjab National Bank
14.3.2. The Bank of Baroda
14.4. Final Thoughts
Review Questions
Project Assignments
15. Customer Loyalty in the Life Insurance Industry
15.1. Introduction
15.2. Insurance in India
15.2.1. Structure of the Industry
15.3. Life Insurance in India
15.3.1. Life Insurers in India
15.4. Customer Loyalty in the Life Insurance Industry
15.4.1. Customer Loyalty Practices at Select Life Insurance Companies
15.5 Final Thoughts
Review Questions
Project Assignments
References
Author Index
Company/Brand Index
Customer Loyalty Programmes Index
Model Index
Subject Index

Citation preview

CUSTOMER LOYALTY Concept, Context and Character

About the Authors Alok Kumar Rai (MBA, Ph D) is Professor of Marketing in Faculty of Management Studies, Banaras Hindu University, Varanasi. He has been a trainer and a consultant to various government and corporate organisations including Ministry of Defence, Dept of Telecom, NTPC, UPPCL, ECGC, REC to name a few. As key note speaker, subject expert and resource person, Professor Rai has been well received in conferences, seminars, workshops in different parts of the country on contemporary issues of business and management. He has authored seven and edited four books in the area of Marketing, Customer Relationship Management(CRM), Customer Loyalty and Entrepreneurship published by leading publishers of the country and abroad. Professor Rai published over 50 papers in leading refereed international Journals and also in leading refereed national Journals, including the ones from IIMs, IMT, FORE, Symbiosis, NMIMS, ICFAI, etc., which are widely cited in Marketing literature. He has completed projects funded by AICTE and UGC. He has organised International and National conferences, Seminars, Management Development Programmes (MDPs) and Faculty Development Programmes (FDPs). He also holds several administrative positions in the faculty and university. Medha Srivastava obtained her Ph D from Faculty of Management Studies, Banaras Hindu University and is presently working as Manager at Malviya Centre of Innovation, Incubation and Entrepreneurship, Indian Institute of Technology, Banaras Hindu University, Varanasi. She has two years of experience in management teaching and her core areas include Customer Relationship Management (CRM), Consumer Behaviour and Customer Loyalty, Marketing of Services. Dr. Srivastava has a monograph and several research publications in reputed refereed journals of USA, Europe and Asia to her credit and has presented papers in several international and national conferences.

CUSTOMER LOYALTY Concept, Context and Character

Alok Kumar Rai Faculty of Management Studies Banaras Hindu University

Medha Srivastava Malviya Centre for Innovation, Incubation & Entrepreneurship Indian Institute of Technology Banaras Hindu University

McGraw Hill Education (India) Private Limited NEW DELHI McGraw Hill Education Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto

McGraw Hill Education (India) Private Limited Published by McGraw Hill Education (India) Private Limited P-24, Green Park Extension, New Delhi 110 016 Customer Loyalty: Concept, Context and Character Copyright © 2014 by McGraw Hill Education (India) Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, McGraw Hill Education (India) Private Limited ISBN (13 digit): 978-93-329-0271-8 ISBN (10 digit): 93-329-0271-2 Managing Director: Kaushik Bellani Head—Higher Education Publishing and Marketing: Vibha Mahajan Senior Publishing Manager—B&E/HSSL: Tapas K Maji Manager (Sponsoring): Surabhi Khare Assistant Sponsoring Editor: Anirudh Sharan Production System Manager: Manohar Lal Junior Production Manager: Atul Gupta Assistant General Manager—Higher Education Marketing: Vijay Sarathi Senior Product Specialist: Navneet Kumar Senior Graphic Designer (Cover Design): Meenu Raghav General Manager—Production: Rajender P Ghansela Manager—Production: Reji Kumar

Information contained in this work has been obtained by McGraw Hill Education (India), from sources believed to be reliable. However, neither McGraw Hill Education (India) nor its authors guarantee the accuracy or completeness of any information published herein, and neither McGraw Hill Education (India) nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that McGraw Hill Education (India) and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Script Makers, 19, A1-B, DDA Market, Paschim Vihar, New Delhi 110 063, and printed at Cover Printer:

To The Anchor of my life Maa Sati, And to my dear wife Sangeeta —Alok K Rai

To My precious parents and their interminable love and support —Medha Srivastava

Preface



Character determines Communication, Conduct and Culture. You



are loyal or not is determined by your Character.

Alok Kumar Rai Medha Srivastava

Man inherits and institutes several associations during his lifetime; some remain mere associations and others graduate to become relationships. Not all relationships carry equal meaning for all individuals; variation in status, scope, strength and significance of the relationships create different resonance in different relationships. Vacillating feelings and wavering commitments due to dynamics of modern times have left their brunt on almost every aspect of human lives. The worst hit area of relationship out of this social and professional adventure has been loyalty. Businesses also often find themselves in jeopardy due to the high costs of customer defection and surmounting pressures of competition. This has eventually led them to the ubiquitous quest of loyalty as they realise the incontestable virtues of customer loyalty. The book is a unique effort to decrypt and decipher loyalty as a concept peculiar to human character. Interestingly, in the fast changing market dynamics, inculcating loyalty as a fundamental character among customers have become the focal point and marketing purpose of corporate. Living up to its name, the book gorges into the delicacies of customer loyalty under three broad sections. Section I of the book unfurls the very concept of loyalty and bridges the journey of loyalty from being a crucial choice to be made in a relationship to become a vigorous and well sought shield to be achieved in a business. The section starts with exploring the real meaning, characteristics, types, myths and conflicts associated with the notion of loyalty in Chapter 1 and moves on to understanding various connotations connected with a customer from the belvedere of a business organization in Chapter 2. Chapter 3 elaborates on the concept of customer loyalty and delves into the concepts often confused with customer loyalty and the differences that lie therein. Chapter 4 enunciates customer loyalty by explaining it through Satisfaction Emotion Quadrate Model of Customer Loyalty offering definition and significance of customer loyalty. Chapters 5 and 6 builds on the conceptual understanding developed over the previous chapters by discussing various principles, reasons, factors and models pertaining to customer loyalty and finally, the role played by social media. Section II of the book is dedicated to examining the character of customer loyalty by untangling the mysteries following the formation, manifestation and measurement of customer loyalty in a business scenario and unveils the potential factors that influence the relationships of customer loyalty. The section spawns through four chapters i.e., Chapter 7 through 10 with a strong research orientation. Chapter 7 talks about numerous drivers and determinants of customer loyalty and

viii

Preface

the way they affect its formation and preservation while Chapter 8 enlightens about the mighty outcomes of customer loyalty which make it a business proposition so powerful. Chapter 9 brings in the knowledge about quantifying the parameters of customer loyalty and introduces the major measurement scales that have been used so far for academic research and business feedback. Chapter 10 presents the factors that may either exercise indirect effects or introduce an interactivity effect in the relationships of customer loyalty with other business variables. The chapter elucidates upon the concepts and tests of mediating and moderating effects with special reference to customer loyalty and its determinants. Connotation alters with alteration in circumstances and thus, final Section III of the book speaks of customer loyalty practices and programmes prevailing under various commercial contexts. Chapters 11 to 15 unearth variations that have been witnessed in customer loyalty practices of different industries and primarily engage the major service industries striving to create and command customer loyalty in their respective business spaces. Chapter 11 discusses services sector of India and the significance of customer loyalty in respect of unique characteristics that services exhibit. Chapters 12 and 13 give an account of customer loyalty practices in retail and aviation industry respectively whereas chapters 14 and 15 cover the banking and life insurance services of India and the particular programmes designed for wooing and winning customer loyalty in these industries. Alok Kumar Rai Medha Srivastava

Acknowledgements Alok Kumar Rai Pursuit of happiness starts and ends in attaining what our heart guides us towards. Striving on my interest of decoding customer character as clearly and candidly as possible has been one such pursuit that always motivated me to put forth my best. This book is a by product of my learning and motivation to contribute to the subject thus far. The book is dedicated to the journey I undertook and the dreams I saw with Ms. Medha Srivastava, my co-author and research scholar, who I prefer calling as my ‘most profitable intellectual investment’ and the best academic partner I have had till date. This is a tribute to the toil of years of comprehension, contemplation, discussion and deliberation that took place between us and numerous moments of writing, reading, arguing and then rewriting thousands of print pages. At the end, it is a wonderful feeling and a moment of pride to see the output. I wish to express my gratitude to all those who became the reason to make this work possible including scholars, writers, professionals and people who have contributed to the book in several ways. I am grateful to my Dean Professor R K Pandey for creating academic environment conducive to undertake such an academic exercise. I extend my heartfelt thanks to many senior academicians for continuously guiding and motivating me in book writing process. I am grateful to officials of various companies from across the country who helped me through their intellectually informative and creative inputs. Making my parents Smt. Rajeshwari Rai and Sri Tarkeshwar Narain Rai happy through my good work has always been my biggest dream. Through such creations, I get the opportunity to make them feel happy and contented. I want special mention of my son Anvaya Srivardhan who is too young to appreciate but hope he surely would find it worth feel proud of some day. I am indebted to my elder sisters Asha Singh and Neeta Rai whose love and affection always motivated me and mere their presence imparts enough confidence in me to be able to do anything and everything in the world. Medha Srivastava I extend deepest regard and gratitude to my mentor and co-author, Professor Alok Kumar Rai for the most genuine concern and persistent support that I received from him over the last few years of my struggle to grow as a contributing scholar of marketing. This book would not have seen day’s light without his visionary attitude, focused aptitude and methodical approach and my appreciation for him knows no precincts for it. I owe every accomplishment of mine to my mother, Smt. Saroj Srivastava who never left my side come what may and continues to be my biggest strength and greatest motivation for excelling in life. My father, Shri D.K. Srivastava, has a huge role in shaping the kind of person I’ve matured into and I’d remain eternally grateful for the blessings he bequeathed upon me despite all the disappointments and discontent I may have

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caused to him. Harsh, my younger brother is the vigour that I need for staying sprightly enough to face the struggles life so often brings in. Lastly but most importantly, I’d like to acknowledge each researcher and every scholar whose work I referred to at any point of my journey dedicated to apprehend and internalize the celestial concept of customer loyalty. Last but not the least we express our sincere gratitude to the editorial and production team of McGraw Hill Education (India), the publishers, in particular Ms. Surabhi Khare (who motivated, guided and also directed us to bring forth this work). We are also thankful to Sri Anirudh Sharan (McGraw Hill Education (India)) who undertook the assignment and took it to a meaningful conclusion. Alok Kumar Rai Medha Srivastava

Contents Preface Acknowledgements

Part One:

vii ix

Customer Loyalty: The Conceptual Framework

1. The Character of Loyalty 1.1. Introduction 3 1.2. Nature of Loyalty 4 1.2.1. Loyalty as a Habit 4 1.2.2. Loyalty as Learning 5 1.2.3. Loyalty as Character 6 1.3. Formation of the Character of Loyalty 6 1.4. Understanding Loyalty 12 1.5. Myths About the Character of Loyalty 13 1.6. Development of Loyalty 15 1.6.1. Essentials of the Loyalty Development Process 1.7. Types of Loyalty 17 1.8. Loyalty Conflicts 19 1.9. Final Thoughts 21 Review Questions 22 Project Assignments 22

3–22

16

2. Decoding Customers 2.1. Introduction 23 2.2. Customers 23 2.2.1. Differentiating Customers from Consumers 25 2.2.2. Determinants of a Customer’s Characteristics 25 2.3. New Age Customers 27 2.3.1. Customer Life Cycle 29 2.4. Customer Lifetime Value 31 2.4.1. Calculating Customer Lifetime Value (CLV) 32 2.4.2. he Lifetime Value Equation 33 2.4.3. Issues in Calculating CLV 33 2.5. Customer Affinity 36 2.6. Customer Engagement 37 2.7. Final Thoughts 38 Review Questions 40 Project Assignments 40 References 40

23–40

Contents

xii

3. Customer Loyalty: A Prelude

41–52

3.1. Introduction 41 3.2. Customer Satisfaction 41 3.2.1. Understanding Customer Satisfaction 41 3.2.2. The Satisfaction – Dissatisfaction Paradigm 42 3.2.3. Differentiating Customer Satisfaction from Customer Loyalty 43 3.3. Customer Retention 45 3.3.1. Understanding Customer Retention 45 3.3.2. Differentiating Customer Retention from Customer Loyalty 47 3.4. Brand Loyalty 48 3.4.1. Understanding Brand Loyalty 48 3.4.2. Differentiating Brand Loyalty from Customer Loyalty 49 3.5. Final Thoughts 50 Review Questions 51 Project Assignments 52 References 52

4. Customer Loyalty: A Comprehension

53–70

4.1. 4.2. 4.3. 4.4.

Introduction 53 Loyal Customers 55 Customer Loyalty: Meaning and Concept 56 Defining Customer Loyalty 58 4.4.1 The Rai–Srivastava’s Satisfaction – Emotion Quadrate Model of Customer Loyalty 60 4.5. Significance of Customer Loyalty 66 4.6. Final Thoughts 67 Review Questions 68 Project Assignments 68 References 68

5. Customer Loyalty: A Perspective 5.1. 5.2. 5.3. 5.4.

Introduction 71 Laws of Loyalty 71 Raison D’être of Customer Loyalty 73 Factors Affecting Customer Loyalty 75 5.4.1. Core Product 76 5.4.2. Satisfaction 77 5.4.3. Elasticity Level 78 5.4.4. The Marketplace 78 5.4.5. Demographics 79 5.4.6. Share of Wallet 79 5.5. Classification of Customer Loyalty 80

71–83

Contents

xiii

5.6. Final Thoughts 82 Review Questions 83 Project Assignments 83 References 83

6. Customer Loyalty: The Emerging Paradigms

84–102

6.1. Introduction 84 6.2. Customer Loyalty Development: Emerging Models 85 6.2.1. The Loyalty Business Model 85 6.2.2. Customer Loyalty Development Model 87 6.2.3. Righteous Circle Model of Customer Loyalty 89 6.2.4. Model of Customer Loyalty Categorisation 91 6.2.5. Apostle Model of Customer Loyalty 92 6.3. Building Customer Loyalty 93 6.4. Building Loyalty Through Fun 95 6.5. Recent Research in Customer Loyalty 95 6.6. Customer Loyalty: The Role of Social Media 97 6.6.1. Advocacy and Social Media 99 6.7. Final Thoughts 99 Review Questions 100 Project Assignments 100 References 100

Part Two:

Customer Loyalty: The Research Framework

7. Determinants of Customer Loyalty Formation 7.1. Introduction 105 7.2. Drivers of Customer Loyalty 106 7.2.1. Trust 106 7.2.2. Concern for the Customer 107 7.2.3. Regularity of Contact 107 7.2.4. Ownership Benefits 107 7.2.5. Convenience to the Customer 108 7.2.6. Consistency of Performance 108 7.3. Formation of Customer Loyalty 109 7.3.1. Service Quality 117 7.3.2. Customer Satisfaction 117 7.3.3. Corporate Image 118 7.3.4. Trust 119 7.3.5. Commitment 120 7.3.6. Communication 121 7.3.7. Service Recovery 121

105–131

Contents

xiv

7.3.8. Switching Costs 122 7.3.9. Emotions 123 7.4. Determinants of Customer Loyalty and Their Impact on Loyalty 7.5. Final Thoughts 126 Review Questions 127 Project Assignments 127 References 127

124

8. Customer Loyalty Outcomes 8.1. Introduction 132 8.2. Outcomes of Customer Loyalty 134 8.2.1. Behavioural Loyalty 134 8.2.2. Attitudinal Loyalty 136 8.2.3. Attitude vs. Behaviour 138 8.2.4. Cognitive Loyalty 138 8.3. Customer Loyalty Outcomes – An Explanation 139 8.3.1. Strength of Preference 140 8.3.2. Advocacy/ Willingness to Refer 141 8.3.3. Altruism 141 8.3.4. Patronage Intentions 141 8.3.5. Resistance to Change 141 8.3.6. Share of Wallet/Exclusive Purchasing/Share of Category 8.3.7. Price Indifference/Price Insensitivity 142 8.3.8. Identification 142 8.3.9. Exclusive Consideration 143 8.4. Final Thoughts 143 Review Questions 144 Project Assignments 145 References 145

9. Customer Loyalty Assessment: Methods and Measurement 9.1. 9.2. 9.3. 9.4.

Introduction 147 Assessing Customer Loyalty 148 Measurement Models in Customer Loyalty Research 150 Methods and Mechanism for Assessing Customer Loyalty 150 9.4.1. Measurement Scales for Customer Loyalty 151 9.5. Final Thoughts 158 Review Questions 158 Project Assignments 159 References 159

132–146

142

147–159

Contents

10. Customer Loyalty: The Relationship Influencers

xv

160–182

10.1. Introduction 160 10.2. Mediating influencer in Customer Loyalty Relationship 161 10.2.1. Mediation – The Conceptual Framework 161 10.2.2. Establishing Mediation 163 10.2.3. Types of Mediation 163 10.2.4. Estimating and Testing the Mediating Effects 164 10.2.5. Researching Customer Related Constructs 166 10.3. Relationship Influencers Moderating the Customer Loyalty Relationship 171 10.3.1. Moderation–The Conceptual Framework 171 10.3.2. Identifying Moderating Variables 172 10.3.3. Testing the Moderating Effects 173 10.3.4. Moderating Variables in the Service Quality–Customer Loyalty Link 174 10.4. Final Thoughts 178 Review Questions 179 Project Assignments 179 References 180

Part Three:

Customer Loyalty: The Application Framework

11. Customer Loyalty in the Services Sector 11.1. 11.2. 11.3. 11.4. 11.5. 11.6. 11.7.

185–198

Introduction 185 The Service Sector in India: A Perspective 186 Growth of the Service Sector in Modern Economy 188 Characteristics of the Services Industry 190 Significance of Customer Loyalty in the Services Sector 195 Application Model of Customer Loyalty in the Services Sector 195 Final Thoughts 196 Review Questions 197 Project Assignments 197 References 198

12. Customer Loyalty in the Retail Industry 12.1. Introduction 199 12.2. Customer Loyalty Practices in the Retail Industry 12.2.1. Shoppers Stop 204 12.2.2. Tanishq 207 12.2.3. Future Group 209 12.2.4. Globus 213 12.2.5. Vishal Mega Mart 219 12.3. Final Thoughts 226

199–227 202

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Contents

Review Questions 226 Project Assignments 227 References 227

13. Customer Loyalty in the Aviation Industry

228–240

13.1. Introduction 228 13.2. Customer Loyalty in the Aviation Industry 229 13.2.1. Customer Loyalty Practices in the Indian Aviation Industry 13.3. Final Thoughts 239 Review Questions 239 Project Assignments 239 References 240

14. Customer Loyalty in the Banking Industry 14.1. Introduction 241 14.2. Evolution of Banking in India 242 14.2.1. Pre-independence Era (1786–1947) 242 14.2.2. Post-independence Era (1947–1991) 243 14.2.3. Post Liberalisation (1991 Onwards) 244 14.3. Customer Loyalty Practices in the Indian Banking Industry 14.3.1. The Punjab National Bank 245 14.3.2. The Bank of Baroda 251 14.4. Final Thoughts 258 Review Questions 258 Project Assignments 259

15. Customer Loyalty in the Life Insurance Industry

231

241–259

244

260–289

15.1. Introduction 260 15.2. Insurance in India 261 15.2.1. Structure of the Industry 263 15.3. Life Insurance in India 264 15.3.1. Life Insurers in India 265 15.4. Customer Loyalty in the Life Insurance Industry 266 15.4.1. Customer Loyalty Practices at Select Life Insurance Companies 267 15.5 Final Thoughts 287 Review Questions 288 Project Assignments 288 References 288 Author Index Company/ Brand Index Customer Loyalty Programmes Index Model Index Subject Index

290 295 298 299 300

Part One Customer Loyalty: The Conceptual Framework

1

The Character of Loyalty

Loyalty cannot be blueprinted. It cannot be produced on an assembly line. In fact, it cannot be manufactured at all, for its origin is the human heart the centre of self-respect and human dignity. It is a force which leaps into being only when conditions are exactly right for it and it is a force very sensitive to betrayal. Maurice R. Franks This chapter is aimed at providing an insight into: v v v v v v v v

The Nature of Loyalty Formation of the Character of Loyalty Defining Loyalty Development of the Character of Loyalty Myths of Loyalty Types of Loyalty Loyalty Conflicts The Role of Social Media in Building Customer Loyalty

1.1. INTRODUCTION A person gets up and wants a particular newspaper, a particular quantity of tea or coffee, prefers to worship a particular God before leaving for office, and never misses a particular television show before going to sleep. Some might refer to this behavioural pattern as habit and yet others may term it as a behavioural manifestation of an individual’s loyalty towards a particular set of product consumption. This state is prevalent among people irrespective of their age, gender, occupation, location, region, educational qualification, or other demographic variables. It has been observed that two siblings, who fight amongst themselves, stand united to protect the interests of each other and the pride of the family when threatened from outsiders. An employee might have serious issues with his company’s management on improving the working conditions, but he might not entertain bickering by employees of a rival company. A family chooses a particular restaurant when it comes to dining out or a particular caterer when organizing a party at home. A joint family with several members generally selects a particular educational institution for all their children. This might not just be restricted to primary level admission but goes till higher level education as well. Students are heard proudly saying, “This is the college where my parents

Customer Loyalty

4

Box 1.1: TV soaps and their loyal viewers Weekly serials and daily soaps have been quite a phenomenon in India. Before the advent of satellite television, serials like Hum Log, Ramayana, and Mahabharata used to have a tremendous loyal audience base. Post the satellite channel revolution, daily soaps such as Kyonki Saas bhi Kabhi Bahu Thi, Kahani Ghar-Ghar ki, and Chandrakanta, amongst others, have enjoyed loyal audience but the viewers shifted to some other programme after some time. At the same time, programmes like Kaun Banega Crorepati, Taarak Mehta ka Ulta Chashma, CID, and Big Boss have retained their hold on their audience base, which enabled these programs to continue for several years. Therefore, it is imperative to decipher the phenomenon of loyalty with habit or interest and also its decay over a period of time.

also studied.” Similarly, families continue to opt for the same professionals such as Doctors, Lawyers, Chartered Accountants, and Priests to perform religious rituals. The manifestation of these forms of human behaviour in different walks of life and in different relationships exhibits a common pattern – they fulfil the expectation of the relationship. Such consistent conformance to the expectation is considered as loyalty. 1.2.

NATURE OF LOYALTY

Loyalty can be understood as faithfulness, dedication, commitment, or devotion to a person, profession, nation, institution, belief, or cause. The consistency of commitment, referred to as loyalty, has been viewed as a personality trait by many theorists. While writing about loyalty, philosopher Josiah Royce considered it to be of utmost moral value and opined that loyalty is the level of devotion an object is able to command for itself, transcending its own virtues. The trait of loyalty is infused and inculcated among individuals in a variety of ways and is developed depending upon the personal parameters of personality. Since childhood, kids are asked to exhibit a prescribed set of behaviour and follow certain practices while dealing with different stakeholders of their life including parents, other family members, relatives, religion, race, and rituals. Any deviation from the set pattern is pointed out and might be disapproved. Over a period of time, these practices form an essential part of an individual’s personality and play an important role in the formation of their character. In order to understand the nature of loyalty, it is imperative to comprehend the concept of loyalty in the context of its relationship to individual personality traits. It must also be explored if “Loyalty is a character of the individual personality or is it just a habit or learning?” 1.2.1.

Loyalty as a Habit

Repeated practice of a particular set of behaviour might take place due to habits and therefore, falling in one’s repeated action category might be understood as loyalty towards such practice. If loyalty is simply a habit or addiction, it can be altered with little effort. For example, having

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a cup of tea immediately after waking up in the morning or the tendency to watch a television programme or reading before going to sleep are all simple habits, part of routine. Being loyal to tea or a television program or book is not an urgent issue to discuss, deliberate, and research as habits can be easily changed. So, loyalty is more than mere habit. Habit is a behavioural manifestation while loyalty is a psychological state. Sustainability and strength of inclination are the two keys of differentiating habit from loyalty. Box 1.2: Habit versus Loyalty During its initial days of operations, HONDA Motorcycles and Scooters India Limited (HMSI) introduced geared scooters in India with the brand name ETERNO. In ETERNO, the foot platform was changed from the step structure as in other scooters to an evenly surfaced flat foot platform. While doing so, HMSI was of the firm view that this change in the foot platform would not have any adverse impact on customer’s acceptability of the product and thus, sales, because the use of the step structure is just a habit that can easily be changed. Instead, this changed structure of the foot platform would provide customers an even space to keep their belongings with greater ease and comfort.

1.2.2.

Loyalty as Learning

Learning is “a relatively permanent change in behaviour arising out of personal experience and exposure.” People’s experience or acquired learning forms an important part of the mental makeup of an individual towards any person, organization, or idea, and hence is capable of making a significant impact on one’s behaviour. Illustration: There are different ways of greeting people in “Learning is restricted to different cultures. While in some families, people greet elders behavioural manifestation, by touching their feet, in others, visitors might be greeted by which may or may not be an folded hands. Modern urban society has other ways of greeting expression of a psychological visitors as well. The way of greeting also changes with varying state which is a violation of geographies. This simple human behavioural requirement the fundamental premise of takes numerous forms from Japan to the US. Different forms loyalty.” of greeting visitors and elders reflect one’s behaviour acquired through learning. On migration to the US, the Japanese might find it difficult to practise their traditional form of greeting people and find it appropriate to follow the American practice. A practice or reflected behaviour may not always match the psychological state but for certain reasons, might form part of human behaviour. There are several relations in a person’s life towards which loyalty is exhibited. For example, a person might have several friends, but there might be just one for whom the person is willing to make sacrifices. Several teachers teach at school, but there might be only a select few or probably just one whom a person remembers later on in life. This selective approach of an individual is dependent on the previous experience of the relationship. The friend or the teacher towards whom an individual expresses an enhanced set of behavioural affinity and commitment might have left an indelible mark on their mind. Loyalty can be called as learning. If loyalty is learning, then its formation requires time and effort as would its alteration.

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Customer Loyalty

Hence, it can be concluded that learning is restricted to behavioural manifestation, which may or may not be an expression of a psychological state that is a violation of the fundamental premise of loyalty. If the issues discussed earlier do not fully validate loyalty as a habit or learning, then what is the nature of loyalty? 1.2.3. Loyalty as Character Human beings display certain inherent characteristics. Is loyalty one of them? The history of mankind is affluent with instances where people sacrificed everything for loyalty. People left kingdoms, comforts, families, interests and much more for the sake of loyalty. Loyal individuals are likely to exhibit loyalty in all aspects of their relationships, be it with their family, profession, emotion, or consumption and essentially stay strong in their commitments. At the same time, history is full of several tales of people who have been guided solely by their self-interest. Such set of people never remained loyal in any of their relationships; they formed associations, graduated them to relations, reaped the benefits and then deserted the relationship. If loyalty is character, it is part of the personality of a human being. If it is part of the personality, it would be extremely difficult to both develop and alter it. So, if a person is loyal in his conception, conviction and conduct, it becomes part of the character and the person often remains loyal in most relationships. If the person is not loyal, the person remains disrespectful, distrustful and disgruntled, exhibiting betrayal in relationships, be it personal, social, or professional. Box 1.3: Treating the Character of Disloyalty Babar was born as the fifth generation of the notorious Taimur on February 14, 1483. His father was Umar Sheikh, the ruler of Farghana. In June 1494, at the age of 11, Babar became heir to the throne. In those days, his income was limited and so he could afford looking after only a few hundred soldiers. While ruling Afghanistan, Babar came to know a lot of things about India. In 1517 and 1519, in his quest for wealth and power, Babar twice came down from the plateau of Afghanistan up to the plains of India. In 1523, on the invitation of the ruler of Punjab, Daulat Khan Lodhi, Babar entered Punjab. Daulat Khan offered his allegiance in exchange for assistance against the emperor, Ibrahim Lodhi, the then ruler of Delhi. But Ibrahim Lodhi won the battle and Babar had to flee from India. In 1524, Babar again attacked India and was helped by Daulat Khan Lodhi, the Governor of Punjab (falling under Delhi). On April 21, 1526, Babar defeated Ibrahim Lodhi in the battle of Panipat and became the ruler of Delhi. After becoming the ruler, Babar ordered the imprisonment of Daulat Khan Lodhi, saying that when he was not loyal to his own master, how could he be loyal to me? Daulat Khan Lodhi died on the way to Bhera, where he was to be imprisoned.

1.3.

FORMATION OF THE CHARACTER OF LOYALTY

The formation of loyalty is an extremely important but difficult philosophy and psychology to decode. The formation of loyalty in human relations, whether it is with a physical object such as a product or a brand or with spiritual subjects such as sect, religion, or God, or with a person, starts with an introduction. With mutual liking and consent, this introduction moves to association. Association is largely interest based when both parties of a relationship are in a position to serve each other’s

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interests. Graduation of this association results into a relationship, characterised with empathy. Empathy remains even if the parties in the relationship do not stay together. Further graduation of this relationship when both parties consistently exhibit their commitment toward the relationship to the extent of bearing its cost, if any, is loyalty. This makes the relationship loyal (Fig. 1.1). Person A

Person B

Introduction Mutual liking and consent

Exit

Association Empathy

Exit

Relationship Satisfaction

Consistent and willful stay with an emotional attachment

Prolonged Relationship

Loyalty in a Relationship

Figure 1.1

The Landmarks of Loyal Relationship

Loyalty is a psychological character arising out of a psychological makeup that guides people to contemplate, communicate, and conduct in a particular manner in different relationships, be it personal, professional, spiritual, or social. Therefore, it is important to ponder upon the factors or issues responsible for the formation of the character of an individual. It needs to be explored whether alteration of these factors would alter the character of people or are people simply born with this trait. It must also be explored whether this reflection of character is towards the micro components (person, profession, or institution) or towards the concept of relationship at large. The same person may exhibit different degrees of loyalty in different relationships. One may be extremely loyal in personal relationships but may be extremely disloyal in professional relationship or vice-versa. A professional who constantly updates and upgrades his skills might leave a company for another in pursuit of career growth. Such career moves might make the person appear disloyal in his professional affiliation but at the same time, the person can be seen as faithful towards himself. Therefore, it is important to comprehend the complications and components of customer loyalty formation. The factors responsible for the formation of loyalty are as follows: ∑ Trust and Faith: Trust is the most fundamental premise for the formation of loyalty. “Trust is the confidence which arises out of the ability of a person.” Faith is another form of trust where the ability has not been seen but is being anticipated. The reciprocal interest of the people is strengthened with trust. The confidence imparted by a spiritual leader inspires confidence among the followers. When they come to know that numerous people have benefited by the leader’s blessings, they start trusting in the abilities, and over a period of time, develop loyalty towards the spiritual guru. Similar is the case with political or corporate

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Customer Loyalty

leadership. Through manifestation of behaviour, a leader develops following amongst supporters and employees and inculcates a sense of loyalty among them, which in turn orients their behaviour as desired by the leader. "When people lost sight of the way to live Came codes of love and honesty, Learning came, charity came, Hypocrisy took charge; When differences weakened family ties Came benevolent fathers and dutiful sons; And when lands were disrupted and misgoverned Came ministers commended as loyal” Lao Tzu's

Faith, a term identical to trust, significantly affects formation of loyalty. It can be understood as a strong form of belief where one has both hope and self-assurance and a sense of certainty about positive outcomes in the future. So, faith is belief without having experienced or being observant of actual manifestation of superior abilities. Belief in God is a result of faith where people might not have experienced the miracle but believe in the ability of God performing miracles. This instils confidence among them and subsequently creates loyalty. Box 1.4: Trust Based Following in the Indian Freedom Struggle The struggle against the British rule and the subsequent win through truth and nonviolence gave common Indians a high degree of trust in the principles of Mahatma Gandhi.

During his freedom struggle in India, thousands of people stopped going to government schools, left government jobs, and put their foreign made clothes on fire, readily faced police atrocities without any reaction, only at an instruction of Mahatma Gandhi. Interestingly, most of these people might not have met or talked to him but they had complete faith in him and his principles. This has been an exemplary case of leader–follower relationship loyalty in the political history of the world.

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Illustration: ABC Ltd was a manufacturing sector company founded by Mr XYZ, a man of principles. Considering the need for amicable industrial relations among the employees in such units and the routine nature of the assignment, his company followed properly laid down principles and practices for its employees. The company had clearcut guidelines and procedures directing its HR practices from recruitment to retirement. Since its inception, the company applied standard rules for performance appraisal and punishment. Good work was rewarded and mistakes were never overlooked. Such practice imparted trust among the company employees for fair treatment by the company for their work and made the employees extremely satisfied and happy. Seeing the growth in the services sector, Mr XYZ forayed into the service sector and made an open offer to the employees of ABC Ltd to join him in the next venture. Employees who had complete faith in him took up his offer. ∑ Satisfaction: Satisfaction is a state of meeting of expectations. A person has some expectations from each relationship. If those expectations are met, people feel satisfied. Satisfaction is an essential condition for loyalty. But it is important to note that mere satisfaction with the relationship would not be a sufficient condition for loyalty. There are so many relationships in personal, social, and professional life where one remains satisfied but might not be loyal. Satisfaction with the telecom service provider, the airline company, the government, the college or even with a television serial is common but loyalty towards all these service providers is highly uncommon. Box 1.5: Satisfaction–Loyalty Relationship in Government Service Government employees generally get the best of service conditions, reasonable work pressure, status and repute in the society and a decent salary. This should ideally make them satisfied employees. This fact can also be verified by the number of applications a government position receives against a vacancy. But can all government employees be called as loyal employees? Do they behave loyally towards their employer?

∑ Empathy: Empathy is another driver in strengthening a relationship that subsequently contributes to loyalty formation. Empathy develops belongingness, which in turn increases the relationship and feeling for the relationship. Matured empathy creates compassion, which leads to care, then concern and finally, loyalty. Care Compassion

Concern

Loyalty

Empathy

Figure 1.2

The Empathy Ensemble

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Customer Loyalty

Empathy leads to compassion, and people start feeling for the sorrows or sufferings of others. Compassion leads to care. Care graduates and takes the form of concern. Consistent concern for the relationship over a period of time might lead to the formation of loyalty. It is interesting to note that people attempt to use sympathy to create empathy, which ultimately is aimed at creating a loyal behaviour in the relationship. ∑ Emotion: Emotions are the primary motivators of behaviour. The manner in which a person responds in a relationship is impacted to a great extent by the emotional connect that the stakeholders have. Emotional attachment with the parents or elder siblings makes a person pay heed to their scolding. The emotional bonding in friendship motivates people to make sacrifices that the relationship demands. Box 1.6: Catching Eyeballs through Emotions Clutter at the market place is one of the biggest issues faced by advertising agencies. Marketers find it difficult to make a product visible amongst its competitors, especially in a non-differentiated product category. The use of emotion is a handy tool for marketers to connect with their customers. Daag Achhe hain

-

Surf Excel

For a growing child

-

Complan

Care for your family’s health

-

Saffola

Ghar me mummy ne jalebi banayi hai - Dhara These are some commercials that managed to garner the attention of their target audience by creating an emotional bond between the product and the customer.

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Developing emotion in a relationship is a complex process but is the most important aspect of a relationship. The strength of the relationship is largely determined by the emotional attachment the relationship carries. Sacrifice and benefit are the two important drivers of the formation of emotional attachment. In the initial stage of a person’s life, a person has strong attachment to his parents. Later on in life, the same person might get romantically attached to another person and display disloyalty to the parents by marrying against their consent and wishes. ∑ Benefit/Contribution: Humans are rational beings. While determining the strength of a relationship, benefit or servicing of interest or the contribution made by the relationship forms an important factor. The strength of the relationship is responsible for infusing loyalty in the relationship. Illustration: If a person suffers from health issues but medical treatment is unable to cure him, and yoga makes him feel better, then the person might develop strong loyalty towards yoga. Similarly, if a person feels calm after a state of mental unrest on the advice of a spiritual leader, the person develops loyalty towards the spiritual guru. The benefit received need not be monetary but must address issues that a person is facing. The issues could be economic, social, spiritual, or emotional. For sustenance of loyalty in a relationship, it needs to create a win-win state for all the parties involved. Therefore, benefit from a relationship also has a decisive role in the formation of loyalty. It is important to note that a relationship formed merely for serving an interest would not lead to loyalty. Also, a relationship without any benefits or contribution for the parties involved cannot be sustained. ∑ Image: The image or the equity of the brand with which a person is entering into a relationship has the power to affect the relationship’s strength and thus, form loyalty. So, image also has an important factor in determining loyalty. The status and reputation of the individual or the institution infuses respect, which leads to confidence, which in turn helps in inculcating a will to stay in the relationship. ∑ Culture: The character of culture is an important factor contributing to the character of loyalty. Culture is a set of beliefs. This belief is developed over a period of time. The family is the most important institution forming a part of the culture. Family is the first school of all persons, where we learn most of our beliefs and conduct. If a person observes loyal conduct towards relationships in his family, this forms part of his culture, which subsequently becomes a part of his active and dominant character and is reflected in his behaviour. ∑ Environment: The society we live in, the company we keep, and the education we receive have a strong impact on the formation of our personality traits. Loyalty as a personality trait is no exception to this and is significantly affected by the environment a person lives in. There are some people who keep changing their tastes and preferences but there are some who are more consistent in their choices. In earlier generations, people were more consistent with their choices. Most of their relationships whether it be with their family, job or consumption patterns stayed strong. Lesser number of divorces or separations were reported. The dynamics of the modern life have affected this tendency and the character of today’s generation has become more dynamic. The actions of others also play an important role in the loyalty makeup. If a person sees several people around him quickly or easily shifting their loyalties, the person might also start following suit. In the early age of Indian political history, people used to join a par-

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Customer Loyalty

ticular political party because of their ideological inclination and remain loyal to the party, whether it won or lost. In modern politics, people might change their political inclinations overnight, largely guided by who is likely to win the polls. Especially on the eve of elections, switching from one party to another is a common thing.

∑ Education and Learning: As mentioned earlier, learning creates a relatively permanent change in a person’s behaviour and it often arises out of the experiences one had. Experiences play an important role in forming the beliefs which in turn, affect an individual’s loyal character. Education offers understanding, compassion and balance required to make sense of lessons that accompany experiences and thus, hold great value in respect of loyalty formation. An important aspect that needs to be looked into is the very reason why people enter into a relationship. If one enters into a relationship with negative intentions, there is a low chance of loyalty in the relationship and vice versa. All factors mentioned earlier are important for loyalty in different relationships as the factors exercise varying degrees of strength in loyalty formation. 1.4.

UNDERSTANDING LOYALTY

The idea and concept of loyalty has been an issue of interest to psychiatrists, psychologists, sociologists, religionists, scholars of business and marketing, and most importantly, to political theorists. Encyclopaedia Britannica (eleventh edition) defines loyalty as “allegiance to the sovereign or established government of one’s country” and also “personal devotion and reverence to the sovereign and royal family.” It further states that “loyalty” was firstly used in the 15th century for denoting fidelity in service, in love relationships, or to a vow. There has been a shift in the meaning of loyalty from the one that referred to its allegiance to the monarch. Josiah Royce (1908), in his book, ‘The Philosophy of Loyalty,’ regarded loyalty as a key virtue which is “the heart of all the virtues, the central duty amongst all the duties.” Royce also found loyalty to be social as loyalty towards a cause connects several fellow-servants of that cause fastening them together in their service. Richard P. Mullin, professor of Philosophy at Jesuit University, brought forth the following three important elements of loyalty:

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1. Loyalty is willing involvement: Loyalty stands for a voluntary involvement in the relationship. It does not subscribe to coercion or an idea that one is born into it. 2. Loyalty is rehearsed: Loyalty is a practice that needs to be rehearsed through an active engagement. Feelings that do not get expressed are not sufficient enough to be considered as a state of loyalty. 3. Loyalty is absolute: Loyalty requires unreserved commitment instead of mere ingress and stay in the relationship due to some reason. This is why loyalty is known as faithfulness or devotion of a person to a person, country, group, or cause. 1.5.

MYTHS ABOUT THE CHARACTER OF LOYALTY

Loyalty is a special state of relationship which can be understood as “consistently being in a relationship.” The premise of loyalty formation starts with communication; the more the communication the greater is the exposure, the greater is the exposure, the higher is the attachment, the higher the attachment, the greater is the emotion, the greater is the emotional connect, the stronger is the loyalty. Certain myths about the character of loyalty are presented as follows: ∑ Loyalty is formed out of greed: Loyalty is a result of incentives, that is, can loyalty be created by incentivizing people? The answer is NO. Loyalty cannot be created only by offering benefits, serving interests, or designing loyalty schemes. If that was the case, there would be no betrayals in our personal, social, or professional life. Relationships formed on the basis of incentives would cease to exist once the purpose is served or when another party offers greater incentive or benefit to a party. Such relationships cannot be termed loyal and are interest-based relationships, where the resultant behaviour would be sycophancy. Interest driven relationships are driven by greed and the stay in such relationships and expression of dedication or commitment is sycophancy. Box 1.7: Loyalty and Sycophancy The Australian workplace relations minister agrees with PM Julia Gillard, even when he doesn’t know what she has said. Bill Shorten, the Australian workplace relations minister, was asked by Sky News Australia whether he felt the parliamentary speaker, Peter Slipper, should be allowed to go back to his job after being accused of sexual harassment and misuse of funds. Aware Gillard was abroad, but unaware of what she’d said on the matter, Shorten replied: “I haven’t seen what she’s said, but let me say I support what it is she said.” Pressed by an astonished presenter to confirm he backed his boss even though he didn’t know what she’d said, he nodded: “I support what she said. My view is what the prime minister’s view is.” A new record in on-message obedience? Source: The Guardian, 27th April 2012, UK Edition

This questions the relevance and validity of customer loyalty programs and schemes by corporates aimed towards building customer loyalty. Interest driven commitment is sycophancy and is a result of greed arising out of the relationship.

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Customer Loyalty

∑ Relationship retention is loyalty reflection: Not deserting the partner equals to being loyal to the relationship. Mere retention in the relationship is not a true state of loyalty. Retention in the relationship can stem out of a variety of factors other than those motivating people to willingly stay in the relationship. The reasons could be extremely high switching costs or unavailability of options in that relationship segment. Such stay results in retention but not in loyalty. This relationship would become redundant as soon as people get a better option than the existing one. For instance, people continue to travel using Indian Railways, buy electricity from state electricity boards, or buy services of local municipal corporations not out of loyalty but because no other options are available.

∑ Loyalty cannot be created: Another myth that hovers around loyalty is that it can’t be created. If loyalty is an important and essential reflection of human genetic makeup, how can its character be altered? So, loyalty is the character one is born with. Points mentioned in the section of formation of loyalty specify that no single factor can be held responsible for loyalty formation; it is a result of a variety of factors. It depends on the personality and individual characteristics of the individual and the relationship towards which loyalty is to be developed. The intensity and strength of loyalty also alters with these factors. ∑ Accomplishment of duty is loyalty: Mere fulfilment of duties can make for loyalty. The definition clearly states that loyalty essentially requires “doing over and above laid down requirements of the duty,” that is, loyal behaviour is guided by the principle of preference, patronage, and premium.

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∑ Loyalty can be fashioned out of fear: Fear forcing people to be loyal in a relationship is another myth of loyalty formation. Fear forces people to behave in a particular manner at a particular time but sustenance of such conduct and behaviour would cease to exist the moment fear disappears. Fear may act as a negative motivation for performance but this would never bring in willing contribution to the relationship. Bosses who try to build loyalty among their subordinates out of fear often end up getting minimal effort from their employees. ∑ Loyalty forms without any interest: For conduct and behaviour to be loyal, it needs to be formed without interest. Box 1.8: Interest as the basis of Loyalty There are several instances of people who have shown exemplary commitment and sacrifices in their profession. Despite urgent personal commitments, soldiers posted on the borders continue to hold guard, police personnel are on their duty on all festivals away from their families, a train driver is busy on his job on all nights when all passengers are asleep. These committed employees do not find excuses to run away from their jobs. It is also important to note the fundamental premise of their loyalty towards their job. Their job also provides them things that they value such as identity in the society, adequate compensation, financial security, and funds for meeting the needs of their families. But how would these professionals perform in the absence of salary, social security, and family support? So, serving of people’s interest cannot be altogether denied as a reason for the formation of a relationship, but for the growth of the relationship to loyalty, selfinterest would certainly not be the sole driver.

Without any interest, only attraction can be formed, not loyalty. For sustenance of a relationship, a win-win situation for both the stakeholders of the relationship has to be present. So, serving of some interest, whether physical, financial, emotional, or spiritual, in some form is a must. But this interest service cannot be the sole driver of the relationship else it would fall into the category of greed instead of augmenting the relationship’s strength. 1.6.

DEVELOPMENT OF LOYALTY

Plato said “only a man who is just can be loyal.” Loyal employee, loyal supporter, loyal customer, loyal partner, and loyal friend are some commonly used terms. But how does a person become loyal in a relationship is an interesting issue to decipher. Being loyal in different kinds of relationships, such as personal, professional, social, or spiritual has different sets of issues involving different intricacies. The loyalty development process broadly moves in the following forms using these steps (Fig. 1.3): Loyalty in a relationship calls for willing and consistent stay with an emotional attachment. Such lasting relationship does not necessarily follow the principle of “love at first sight.” The psychological development of loyalty moves in an organised manner that starts with introduction. If introduction enthuses both the stakeholders, it leads to increased communication. The more one communicates, the more another party comes to know about him. Consistent communication leads to greater exposure of the parties. If communication is fruitful for both parties, their introduction

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moves to association. Till this stage, serving of some interest is an important component. Increased association leads to the formation and development of a relationship with its own set expectation – perception equation and empathy between the parties. This movement of association moves to the formation of a relationship. If satisfactory on a sustainable basis, the relationship might grow to an emotional bonding. If the relationship develops emotional connect among the stakeholders, it graduates and attains the status of loyalty. So, loyalty in a relationship is developed with sustained satisfaction and matures with emotional bonding.

Communication

Exposure

Satisfaction

Attachment

Emotion

Loyalty

Figure 1.3:

1.6.1.

The Loyalty Links

Essentials of the Loyalty Development Process

A loyal relationship is characterized by commitment, dedication, trustworthiness, contribution, sacrifice and respect. Loyalty with respect to a relationship, be it personal, social, or professional, calls for a certain set of grounding which involves mental, emotional and psychological preparation. The following steps are essential to build loyalty in a relationship: 1. Defining loyalty: To decide on loyalty, one first needs to define loyalty. What is the meaning of loyalty? Is it mere fulfilment of one’s duties towards a partner, continuous stay in the relationship, or something else?

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2. Assessing loyalty worthiness: As loyalty cannot be uni-dimensional, assessing the loyalty worthiness of the person for whom loyalty is to be exhibited is an important aspect. 3. Understanding the essentials of loyalty: Loyalty in a relationship is not mere fulfilment of duties in a relationship. It demands continuous contributions from both the parties, which might involve sacrifice as well. So, the essentials of loyalty need to be understood clearly. For being loyal in friendship, the following are the requirements stated in Indian literature:

4. 5.

6.

7.

8.

9.

1.7.

It means, “One who keeps away from bad things and engages in good activities, keeps the secrets and expresses the virtues in public, does not leave us at bad times, are the traits of a true friend, said by great people.” Mental preparedness: After realizing the requirements of the relationship, it is important to be mentally prepared for adherence to the requirements. Realizing and recognizing the cost of loyalty: Entering into a relationship is easy but staying in the relationship might prove to be challenging because it demands costs, which might be extremely high. For instance, the loyalty cost for a soldier might be his life whereas the loyalty cost for a student is his comfort. So, a person needs to realize and recognize the loyalty cost of the relationship and be prepared to work towards it. Identifying the merits of a loyal relationship: After assessing the cost of the relationship, the benefits of the relationship must also be assessed. These benefits may not always be monetary but assessing benefits is extremely essential for the sustenance of a relationship. Evaluating the relative impact on other relationships: Human beings are part of a web of relationships. There are so many stakeholders in different relationships and inclination towards one might affect another. This impact needs to be assessed and evaluated. Weighing the reward against the loyalty: Then comes the stage of assessment of the reward of being loyal in the relationship. As discussed earlier, serving of interest is a necessary requirement for loyalty in a relationship. Balancing loyalty with other interests: After deciding the design and strength of loyalty in a relationship in view of the mentioned factors, it needs to be balanced with the costs accruing to other relationships. TYPES OF LOYALTY

Most theories agree that “remaining in a relationship is loyalty.” But there are two broad reasons for people to remain in a relationship: 1. Constraint based loyalty: Constraint based relationship is characterised by “where one cannot leave the relationship or one has to stay in the relationship.” Such consistent stay in the relationship conforms to the requirement of loyalty that demands a consistent stay in a relationship as the state of loyalty. Here, people stay in the relationship just because

Customer Loyalty

18

they do not have an option to switch such as using the railways, government electricity provider, neighbours, or relatives. Another reason why people stay in the relationship is the switching cost of exiting the relationship. Uncordial marriages are one such relationship, where moving away from the relationship would cost the person dearly. A legal separation involves high monetary, social, and personal cost so partners might remain in the relationship despite a state of unhappiness. This is an important reason why some people in developed societies are opting for alternate forms of relationships in which they can avoid such costs and freely stay in the relationship. They have the freedom to move out anytime without any other liability in the relationship. Such constraint based loyalty may be termed as proxy loyalty. Box 1.9: Constraint based loyalty in Indian marriages Indian society is a traditional society and marriages in India are considered a social institution. Arranged marriages are a common feature of the Indian society. In traditional roles, a husband is supposed to earn and the wife is supposed to take care of the family. Ancient Indian scriptures have defined the following types of relationships between husband and wife. The following verse explains six criteria of an ideal wife based on the different types of roles the wife is supposed to perform.



, ,

; ;

,



This shloka elaborates the duties of a wife as following: ∑ ∑ ∑ ∑ ∑

Works like a servant, Advises like a minister, Feeds like a mother, Makes love like a nymph, Is as beautiful as Lakshmi, And forgives like the earth.

Marriage in Indian society is considered to be more a relationship between two families than just two persons. So, there is high social cost of separation in marriage. Besides, as per law of the land, there is huge financial cost also involved in separation of the married relationship in India. These two combined together make the switching cost high. Thus, divorce rate in Indian Hindu families have been found to be less as compared to other societies in other parts of the globe.

Dedication based Loyalty: Another type of loyalty relationship is dedication based loyalty. This calls for willing participation in the relationship. Friendship is an example of dedication based relationship where people are free to enter into and leave the relationship. However, the strength of this relationship can be considered as the strongest. In such relationships, dedication is to the person,

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institution or system and adherence to the rules or conventions is the highest. Employees of family based enterprises hold their commitment towards the family and easily accept the successor without questioning his ability, qualification, or the competence and exhibit loyalty to the new generation as well. Misplaced Loyalty: Misplaced loyalty is the loyalty placed in a person or an organisation where it is not recognized, respected, or reciprocated. Such a state of loyalty is also known as mistaken loyalty. Being loyal to a mistaken or malevolent cause is also mistaken loyalty. One-sided love, where one party is in love with the other but the other does not pay any attention is misplaced loyalty. Such loyalty does not last long and people generally shift their loyalty to some other party. Box 1.10: Loyalty Crisis in Indian Politics The strength of a political party lies in the number of its supporters and voters just as the stature of a leader depends on the number of followers. This set of support or following is based on the loyalty of people. In modern society, political party supporters and followers are seen to quickly change their allegiance. Modern political leaders also understand this trend and hence promote their family members in the hierarchy of the party as part of the succession plan.

1.8.

LOYALTY CONFLICTS

Loyalty might conflict with other interests in a person’s life. For instance, loyalty towards family might force people to betray the call of their duty. ∑ Loyalty Conflicts with Love: Love is the most divine gift of God. There is no universally acceptable definition of Love. “Love is a psychological and emotional feeling that makes people contribute their best and the most to the person they are in love with.” There come several situations in life which conflict with love. A mother, who gives birth to the child and does everything for her child is a perfect example of love. But when it comes to choosing between loyalty towards her husband or love for her child, loyalty might be preferred over love. For instance, a police inspector who has to arrest his son for a crime, faces a conflict between love for his son and loyalty towards his profession. ∑ Loyalty Conflicting Ethics: Loyalty is a strong value and a character trait. It is accorded high value in the society. But should one blindly pursue loyalty or does it need to be analysed, especially in case where it conflicts with ethics? Loyalty towards the state, race, and regime led Germans to kill millions of Jews and others. So, loyalty might present conflicting situations when it clashes with ethics.

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Customer Loyalty

Box 1.11: Love–Loyalty Conflict; Loyalty wins Panna Dhai, nursemaid of Udai Singh, the fourth son of Maharana SANGRAM SINGH I (SANGA), was a Rajput woman of the Kheechee tribe (16th century). Panna Dhai was responsible for young Udai since his birth in 1522. Panna breastfed Udai and took complete care of him along with her own son Chandan, who was Udai’s coeval playmate. After the death of Rana Sanga and Maharana RATAN SINGH II, VIKRAMADITYA II succeeded to the throne at the young age of 14. He continued his battle with the Mughals. In 1536, he ill-treated a respected old chieftain in his court. This angered Mewar aristocrats and they put Vikramaditya under palace arrest, which automatically promoted Udai Singh to the position of heir-elect. The court appointed Banbir, Udai’s distant cousin, as his regent. Banbir took this opportunity to grab the throne as he considered himself the rightful heir. Banbir murdered the imprisoned Vikramaditya and rushed to Rawala to eliminate the thorn in his path, Maharana-elect Udai Singh, who was only 14 years old then. On that fateful day, Panna Dhai had put both the boys, her beloved son and her royal charge, to bed when a servant brought the news of Vikramaditya’s assassination. The loyal nursemaid immediately understood Banbir’s intentions and also realised that young Udai must be protected for the future of Mewar. She immediately instructed her trusted servants to smuggle the sleeping prince out of the fort by hiding him in a large basket and promised to join them later. As soon as the servants left with the prince, she placed her son, Chandan, on the prince’s bed and covered him with a blanket. Few moments later, Banbir entered the room with a sword in his hand and asked where young Udai was. Panna Dhai indicated towards the only occupied bed. Later, she faced all odds and somehow managed to reach Kumbhalgarh with young Udai. The Kumbhal kingdom then coronated Udai and helped him to win back Chittorgarh. The name and deeds of Panna Dhai are considered as a symbol of exemplary loyalty.

∑ Loyalty Conflicting Duties: There are situations where an individual’s religious beliefs or personal obligations stand in the way of discharging his duty towards his profession and nation. Operation Blue Star, which became the catalyst in the assassination of the then Indian Prime Minister Mrs. Indira Gandhi, is a case in point. The operation by the Indian military inside a gurudwara was deemed sacrilegious by the Sikhs. Box 1.12: Synchronising Ethics and Loyalty with courage Mahatma Gandhi was known across the globe for his belief in the principles of truth and nonviolence. He was also famous for his loyalty towards the principles he believed in. At the peak of the civil disobedience movement in 1919, in Chaurichaura, (Gorakhpur district), Uttar Pradesh, a few protesters burnt to death policemen in a police station. Mahatma Gandhi was so hurt that he withdrew the whole movement. This invited sharp criticism from political and civil class at that time but he did not budge from his stand. During an interaction with kids, Mahatma Gandhi was once asked, “what would you do if you are sitting in a jungle, and you see a deer running and hiding behind a bush. A hunter comes chasing and asks if you saw a deer? If you tell him expressing your loyalty to truth, it will go against the interest of nonviolence and if you are loyal to your principle of nonviolence, your loyalty towards truth is violated. Mahatma Gandhi replied “I would tell him, I have seen the deer but will not tell you.” He further added that it would require courage to face the situation arising out of such a conflict.

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Realising that terrorists had taken refuge in the Golden Temple, Amritsar, Mrs. Gandhi took the decision of ordering the Indian military to enter the temple and capture the terrorists. Her decision was followed by resentment amongst the Sikh community, which perceived this step as sacrilegious. Moreover, Operation Blue Star coincided with the martyrdom day of the founder of the Golden Temple, Guru Arjun Dev. On this day, Sikhs from all over the world visit the temple. The high number of civilians killed due to the timing of the operation led it to be seen as an attempt to wreak maximum number of casualties on Sikhs and demoralise them. 1.9.

FINAL THOUGHTS

Loyalty is widely considered to be one of the most respected and powerful qualities. It is a phenomenon which goes beyond the limits of habitual actions and learned behaviour and takes time to evolve and strengthen. Undoubtedly, it exists as part of the character of an individual that can be developed and strengthened if provided with the right kind of environment, ethics, and education. Loyalty “Loyalty is a stable and is often confused with interest generated sycophancy, fear enduring association which driven endurance or retention based relationship, all of comes after a relationship which suggest fake allegiance. Loyalty is a more stable and manages to travel through enduring association that comes after a relationship manages the stages of communication, to travel through the stages of communication, exposure, and exposure and satisfaction satisfaction leading to emotional attachment, which ultimately leading to emotional attachtranspires a feeling or an attitude of devoted regard caused by ment which ultimately tranaffection. Such attachment makes a person feel responsible to spires a feeling or an attitude persevere with the relationship even in adverse times. Loyalty of devoted regard caused by signifies a defining characteristic of an individual, which can affection.” sometimes turn into an obligatory sense, so much so that a person is ready to pay any price just to uphold his commitment towards another person, religion, nation, profession, belief, community or even a profit making company and the commodities it sells. Box 1.13: Conflicting Loyalties U.S. Presidential elections of 1960 had two strong contestants: Nixon and Kennedy. Doubts were expressed about the loyalty of Kennedy to the role of the President as he was a Catholic. Catholics, who follow Pope, are firm regarding their religious affiliation. Concerns arose about a potential situation where U.S. interests might clash with the papal ideology. It was a clear case of conflicting loyalties with each having the ability to surmount the other. Questions were raised about what will be Kennedy’s call? Will he stand by his country and the responsibilities of his office or will he uphold his Catholic faith by abiding by the Pope. However, Kennedy demonstrated clarity in his priorities and responded that should his loyalties towards the Pope and the Presidential office conflict, he would step down the Presidential office and continue life with his Catholic beliefs. (Time, September 26, 1960.) Americans clearly found his answer satisfactory and voted in his favour. He was elected as the Head of the U.S. State for the next four years.

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Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

What is loyalty? Explain the meaning of loyalty? Does loyalty vary from relationship to relationship? If yes, why? What are the factors responsible for the formation of loyalty amongst individuals? Only dogs are loyal, human beings cannot be loyal. Comment. What are the myths of loyalty? “Satisfaction is a necessary but insufficient condition for loyalty formation.” Explain. Explain the loyalty ladder. Does this loyalty ladder change with relationships? What is loyalty conflict? How can this be overcome? Emotional connect is a requirement for any loyal relationship. Comment. What are the remedial measures to win back a person’s loyalty?

Project Assignments 1. Conduct a study to find out what factors are responsible in building a loyal friendship. Also assess the relative importance of these factors in the formation of loyalty. 2. Conduct a study to investigate “why some political parties who once had strong and loyal base of supporters found themselves at bottom position in recent polls?” Identify the reasons and suggest remedial measures to the party to bring them back to their fold. The remedial measures should be based on the study conducted.

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Decoding Customers

Revolve your world around the customer and more customers will revolve around you. Heather Williams This chapter is aimed at providing an insight into: Customers New Age Customers Customer Value Customer Lifetime Value Customer Affinity Customer Engagement 2.1. INTRODUCTION Renowned marketing author, consultant, and Professor Philip Kotler placed customers at a place of supreme prominence by stating that “Marketing is the art of creating genuine customer value. It is the art of helping your customer become better off. The marketer’s watchwords are quality, service and value.” It seems that the whole existence of business and marketing is to serve customers by providing them quality products, superior service, and value for money. Often considered as the most critical component of business success, customers undeniably hold great power by being able to steer any company’s profitability and growth in the market. Customers are vital for the health of a company and establishing a strong rapport with them becomes even more crucial in a fiercely competitive landscape. Therefore, it is important to understand the core of customers in order to deliver the product that can delight them by providing maximum value as well as create and continue an association with them that goes beyond the realms of commercial benefits and forge a resilient emotional bond called customer loyalty. 2.2.

CUSTOMERS

There are various meanings and interpretations of the word ‘customer’ in marketing. But the concept of customer starts from the word, custom. Custom means “making something the way you want it to be like,” such as a custom-made house, custom-made dress, custom made car, or custommade food. The process of custom made is referred to as customisation, that is, to get something

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CUSTOMER

made exactly as per your needs and desires. A customer is ready to make sacrifices in order to obtain something that fulfils his needs or wants. The term, customer, has been defined in a variety of ways. Primary customer Wikipedia defines customer as “A customer (sometimes known as a client, buyer, or purchaser) is the recipient of a good, service, product, or idea, obtained from a seller, vendor, Secondary customer or supplier for a monetary or other valuable consideration.” Customers are generally classified into the following two categories: Primary Customers: Primary customers are those who purchase products from the company, that is, primary customers are a set of individuals, institutions, and organisations in whose favour a company directly issues invoices. In the category of goods, the earlier concept restricted primary customers to the wholesalers, distributors, or dealers who directly purchase goods from the company. They subsequently use this purchase for re-sale. But the advent of technology enabled direct access of retail customers to the company, and this brought even retail customers within the purview of primary customers. On the contrary, the service sector is characterised with simultaneous production and delivery of service and in most cases, had the same primary as well as secondary customers. Secondary Customers: Largely understood as retail customers, secondary customers are those who purchase from the intermediary whom the company has billed the goods to. They are a set of people who generate off-take from the channel intermediary. Their importance lies in the fact that they create the space in the system for the company to further sell to the primary customers and sustain the system. From the perspective of marketing, it is important to understand who this customer is. A customer can be defined as the one who creates demand. It is, therefore, imperative to decipher the concept of demand. For demand to arise, three conditions must be present: (i) The desire to buy (ii) The ability to pay (iii) The willingness to pay The fulfilment of these three conditions qualifies a person to possess demand and therefore, be termed a customer. The concept, context, and character of customers has changed significantly over the last few years in respect of almost all aspects of exchange and consumption, thereby creating an urgent need to understand customers on a consistent basis. Appreciating this change is reflected in the constant redesign of marketing practices. For example, till about a few years ago, packaged water was available only in 1 litre bottles. Today, companies have made available packaging in 200 ml, 500 ml, 1 litre, 2 litre, 5 litre and 10 litre water bottles. Packaged drinking water is also available as mineral water and flavoured, sparkling water. Such variations have been introduced as an appreciation of different customer

Decoding Customers

25

segments and their different needs and wants. Marketers now realize, respect, and respond to this inevitable phenomenon of customer dynamics. It is important to note that “All customers are important but some are more important than others,” said Philip Kotler. Customers across diverse geographical locations have different ethnicities, habits and customs and so are their requirements. Mobile phones by iPhone and Google Nexus do not offer the flexibility of setting a ringtone of your choice besides the default set of ringtones provided in the phone till additional software is downloaded. This might go well with the customers in the US but Indian customers who like to use Bollywood songs, religious chants or classical music as their ringtone might feel dissatisfied with the unavailability of such facility in the phone. 2.2.1.

Differentiating Customers from Consumers

There has always been a discussion about distinction between customers and consumers. The discussion gained significance especially for the following reasons: (i) (ii) (iii) (iv)

Who is it for whom the product needs to be designed? Who is it that has to pay for the purchase? Who has what role to play in the consumption decision? Who carries greater sig

The most widely accepted difference between customers and consumers in the marketing literature suggests that “Customer is the one who actually buys the product and consumer is the one who consumes the product.” So, if a pencil is to be bought for a child by his father, the father is the customer while the child is the consumer. Similarly, it is the father and the mother who decide which school the kid will take admission into, which coaching class he will join, who would be his doctor, which bank should he open his account with, and so on. In all these cases, the child is the consumer and the parents are the customers. From the perspective of marketing, it might seem that the parents hold greater significance than the child for the marketer as they are the decision makers. But this interpretation of the entire episode is an ill-informed disposition. The child might insist that the parents open an account in a particular bank or force his parents for admission in a particular school where most of his friends have taken admission. So, the exact compartmentalisation of customer and consumer and their relative roles does not hold true in this case. Similarly, in case of high involvement purchases such as a car or a television for the family, every member participates and in most cases, the opinion of younger generation greatly influences the final purchase decision and the older generation takes a backseat by just paying the bills. In such cases also, it is difficult to distinguish the role of the people involved. Therefore, it is important for the marketer to have an extremely explicit image of the customers, consumers and the area that is common in terms of their role and contribution. 2.2.2.

Determinants of a Customer’s Characteristics

Decoding the nature of human beings is an extremely difficult job. A customer is just another specific aspect of the human personality. What constitutes the personality of a customer has also been an area of interest for marketers and social psychologists. Extensive research has been

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Customer Loyalty

conducted to decode the customer’s character. To decipher the customer’s character, understanding the following aspects were found to be of great significance (see Fig. 2.1): Demographic

Age. race, religion, gender, family size, occupation, income level, education level, marital status and others

Geographic

Size, location, density, climate, transportation network, media, competition, growth pattern, legislation, cost of living

Psychographics

Social class, family life cycle, usage rate and experience brand loyalty, personality and motives, perceived risk, innovativeness, opinion and lifestyle

Behaviours

Occasion, benefit sought, user status, user rate, loyalty rate, readiness stage, and consumers attitude

Linguistics

Keywords, key phrases, misspellings, regional differences in spelling and pronunciation

Figure 2.1

Determinants of a Customer’s Characteristics

Demographics Demographics are one of the most obvious base of market segmentation as they help in forming easily identifiable groups of customers with similar characteristics, desires, tastes and preferences. Each customer, whether individual or organizational, carries certain basic traits which are to a large extent beyond their control but have an even larger influence on who they are and what choices they make. These factors may include age, race, religion, gender, family size, occupation, income level, education level, and marital status.

Geographics As the name suggests, this pertains to the place where a customer resides. The geographical location of a customer holds significance for determination of customer characteristics in terms of its implications for cultural notions, reach, connectivity with other parts of the world, and the consumption pattern of a customer. Geographics stand for the rudimentary discernible characteristics of towns, cities, states, regions, and countries. Population size, location, density, climate, media, competition, growth pattern, legislation, transportation network, and cost of living are some of the major factors that are covered under geographics.

Psychographics Personality, values, attitudes, interests, or lifestyles of persons determine a great deal of their choices and actions. Psychographics include customer characteristics such as social class, family life cycle, usage rate and experience, brand loyalty, personality and motives, perceived risk, innovativeness, opinion and lifestyle. A marketer needs to carefully scan these variables before deciding upon the communications being targeted at the customers as they influence a person’s self-concept and his perception of others which leads him to form his expectations as well as his tolerance zone.

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Behaviouristics Factors such as occasion, benefit sought, user status, user rate, loyalty rate, readiness stage, and consumer attitude determine the behaviour of a customer, which is one of the greatest concerns of a marketer. Behavioristics comprise loyalty, share of wallet, frequency of purchase, purchase volume, time of year, level of involvement, and the preferred place to purchase the product.

Linguistics Linguistics refers to the variation in language within varied customer communities. It particularly takes into account the interaction between social factors and linguistic structures which might include sounds, grammatical forms, intonation features and words. Keywords, key phrases, misspellings, regional differences in spelling and pronunciation also cause considerable change in core cultural connotations and thus, determine characteristics of a customer to a prodigious degree. 2.3.

NEW AGE CUSTOMERS

A customer is an entity who takes part in a trade to obtain goods, services, or ideas in exchange of monetary compensation or some other mode of repayment. Evolution of business practices gradually underlined the importance of customers for the survival and growth of businesses. The prevailing relationship orientation of businesses is merely an acknowledgement of the significant role customers play in a business environment. Adages like “The customer is always right” and “Customer is king” reflect the supreme place of importance conferred upon the customers in the modern corporate world. History is affluent with the exemplary successes of businesses that regarded customer needs, expectations and opinions with utmost sincerity and strived earnestly to deliver superior value to them. These businesses are characterised with customer orientation and customer service being treated as an underlying business philosophy instead of a functional department. Not only corporate but the academic world has also acknowledged the growing power of customers and paid heed to the need of comprehending and analysing the needs, expectations, motives, attitudinal dispositions and behavioural tendencies of customers. However, there still remains a nagging doubt about the aptness of adopting and applying what is referred to as ‘an all pervasive customer orientation’ as there still remains a point that customers are not always, in fact more often, right. Anybody who has ever dealt with customers or has awareness about his own behaviour as a customer, will agree that customers often expect extra, listen less and demand difficult. What makes businessmen bow before customers is actually not their righteousness but the fact that it is the customer who is in a giving position, not the business. There are several reasons that can be attributed to the place of value that customers enjoy. These are: ∑ Availability of Alternatives: In the age of customer empowerment characterised with customised products and personalised services, customers have an upper hand in deciding upon the desired attributes of a product. In a single category, several options are available to the customer. This not

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only enhances his bargaining capacity but also ensures availability of better quality and upgraded features and helps him in making an informed choice. ∑ Influence over Others: Word of Mouth (WOM) is a widely acknowledged and effective publicity tool that renders an edge to the customer beyond the reach of any advertising or promotional campaign. WOM is a powerful tool for both existing as well as potential customer perceptions. Customers, who experience satisfaction high enough to mention it among their peer group and other circles, actually provide the most reliable rating to the business as people tend to believe actual feedback to be way more credible than the sales pitch designed to lure them in. ∑ Impact on Profit Prospects: Pointing out unreasonable demands and irrational behaviour of customers can be perceived as tactless and uncooperative on the company’s part, which is sure to leave a negative mark on the deal in question and consequently, the profits of the company. Researchers suggest that an offended customer can do more damage to the company than a satisfied customer due to factors mentioned in the earlier sections. Thus, customer truly is a king who rules and regulates the profitability and growth of a company. It is important to avoid conflicts with customers and make them feel valued by listening to them and communicating with them. Every business has its own limitations that must be respected for the well-being and sustainability of the business. Customer expectations falling beyond these limitations need to be addressed through polite yet, firm interactions instead of rejecting them straight away by labelling them as irrational. Customers today are not seen in the context of an isolated business transaction. Instead, they are considered as a bundle of cognitive evaluations and emotional reactions with potential long lasting association resulting in repeat transactions, opportunities for cross selling and a live advertisement of positive product features to the rest of the world. Box 2.1: Ritz-Carlton Gold Standards Ritz-Carlton is a name which enjoys a reputation of being the best in the eyes of customers. The strong positioning of the brand is a result of its exceptional customer service philosophy that is a remarkable benchmark of customer service. The Ritz-Carlton’s approach towards customer relations and employee retention is summarised in the following points:

∑ Ritz-Carlton makes its customers feel valued and persuades its employees to keep customer service as top priority. Managers and trainers ensure that employees are familiar with Ritz-Carlton Gold Standards. Ritz-Carlton’s Gold Standards form a philosophy that determines the way of life instead of only guiding the procedure. ∑ In their initial years, managers and employees at Ritz Carlton receive 250 to 300 hours of training. The importance of training is well acknowledged at Ritz Carlton as the senior management understands that rigorous and comprehensive training will lead to good on job performance, which in turn makes employees feel good. As a result, a win-win situation is created where lower staff turnover and positive work environment collectively keep the profit soaring. (Contd )

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Box 2.1: (Contd )

∑ The Ritz-Carlton philosophy provides ownership to its employees over the complaints they receive. Front-line employees such as bellboys, desk clerks, and housekeepers are allowed to use up to $2,000 to manage any grievances from the guests whereas managers are empowered to spend up to $5,000 for grievance handling for which they do not need any additional authorisation. ∑ A handbook for quality improvement and problem-solving procedures is provided, which enlists around 1,000 potential problems that might arise during a client’s stay. These problems are accompanied with suitable handling procedures that lead to successful recovery and an exceptionally pleased client. The Ritz-Carlton is a great illustration of the amazing results an organisation can achieve by focusing on customer service and building a customer service outlook that helps in creating a win-win situation at each level of the organisation. Such long lasting associations may prove to be vital for the competitive health of the business and thus, need to be sustained and nurtured on a priority basis. Like any other human relationship, a customer’s relationship with a business is characterized with constant flow of expectations, different phases, and varying levels of maturity. Such a relationship has its own life cycle depicting the various stages and their respective activities, which is elaborated upon in the following section:

O

N

N O T I C T T I S C V U A N R F L O T S L C T I Y I N T T W E A L D M T S A O T H Y O I G E O G M I C L M L N O E E C D I R E P X E I

2.3.1. Customer Life Cycle The customer life cycle is segregated into six broad stages which mark the journey of a customer as an interesting business prospect to being an inactive business contact (Fig. 2.2). These stages are as follows:

i. Prospect The potential customers of the business who are yet to experience the products and services of the company fall into this category. This is the initial stage of life cycle where a relationship is yet to take off. Marketers are required to attract these customers by first making them aware of the company and its brand and arouse strong interest to try its offerings. Once willingness to experience the product or service has been formed, the next job is to help and assist the customers into removing barriers, if any, by giving them confidence, clarification and compensation of being a paying user. This is a challenging phase as it requires high marketing budgets along with a deep understanding of customer dynamics.

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ii. Paying Customers Converting prospects into customers can be considered a job half accomplished because now the chances of repeat buying and referrals tend to be high provided that the company has promptly played its role. However, getting a customer to do one or two transactions doesn’t necessarily translate into a long-term association since it still lacks an element of commitment. This stage of life cycle can be compared to a romantic rendezvous where one has sold himself good enough to attract a partner for a few dates, but he still has a long way to go before his partner can actually perceive him as a choice for life and commit loyalty towards him. This stage requires delivering on the brand promises while ensuring the customers that their time, privacy and most of all, business, is valued and respected.

iii. Regular Customers Prospects converted into regular customers will stay with the business only if they are given reasons to return to the company. Delivering good quality goods or services along with regular communication to the customers matter a lot at this stage. A company should follow up regularly, either directly from the customers or from customer contact employees, and strive to make an impact on the lives of customers.

iv. Loyal Customers The next stage of life cycle involves earning the loyalty of regular customers by managing to ensure their revisits and repurchases and turning them into repeated episodes of satisfaction and emotional bonding. A company which achieves the loyalty of its customers can be sure of not only increased profits as a result of repurchase, cross selling and low switching intentions but can also expect a steady growth rate due to strong relative attitude and recommendations. It is important to keep communicating with the customers and reminding them that they are valued.

v. Lapsed Customers Sometimes, a company loses contact with its loyal customers when no interaction or business has taken place in a long time. Such customers are considered to be lapsed, who can again be classified into segments such as short term or temporarily lapsed, long term or permanently lapsed, and seasonable or personally lapsed due to change of needs, lifestyle or fashion. Such segmentation largely depends upon the nature of the industry the business operates in. A general definition of lost customers might include those who have not purchased from the company during a period considered adequate for repeat purchasing to take place. The measures that need to be taken should focus on reviving contact with the customers and finding out the reasons of disruption in the relationship.

vi. Lost Customers The company may eventually lose some of the lapsed customers due to reasons largely uncontrollable such as a bad consumption experience, crisis in personal life or a permanent change in life situation where the company’s offerings can no longer serve the interests of the customer. It is better to leave such anguished customers alone instead of badgering them for further business or referrals and

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concentrate on the other set of customers who have merely forgotten the company due to relocation, discontinued communication or competitive enticement. Such customers need to be brought back to the business by active communication Lost and marketing campaigns directed at rejuvenating Customers Prospects the relationship like the ones used to attract them initially. The relationship between a customer and a business is not on equal terms, and there is a Lapsed Paying Customers clear dominance of the customer as the survival Customers of a company depends considerably upon the continuity of business and referrals from customers. Companies often engage into understanding, Loyal Regular decoding and fulfilling customer expectations as Customers Customers they have the power of determining the fate of a business. Figure 2.2 Customer’s life cycle 2.4.

CUSTOMER LIFETIME VALUE

The company–customer relationship has several perspectives and consequently, distinct values. The relationship between two parties starts with their introduction. In the first phase of the relationship, the customer needs to be evaluated by the company from two perspectives: (i) Based on the immediate value he contributes to the company. For example, a retail customer visits a retail store and buys products of a certain value, a subscriber of a telecom service operator buying a recharge card of a certain value, a DTH operator recharging his account for a certain amount, an air traveller buying an air ticket for a particular destination, and parents admitting their ward to a particular school by paying a specific fee. This is the transactional marketing model, where the company gets the profit, the customer gets the benefit, and both parties try to optimise their benefits. (ii) Based on the total value it might contribute to the company through various transactions that will take place if this introduction gets translated into a lasting relationship. Then, the same retail customer might repeatedly visit the same store and even increase the volume and variety of purchases. For instance, post-marriage, the customer of the telecom service provider is likely to recharge his wife’s cell phone besides his own. He may also consider his telecom service provider for newer offerings such as DTH, internet connection, basic landline service as well, given that he continues to feel the same sense of affiliation with the service provider over all the years and circumstances. Parents who send their ward to a particular school might not just keep him in the same school throughout his school years but also motivate others in their personal, professional and social circle to send their children to the same school. Similarly, an airline customer does not just remain with the same airline company but also leads to a growing customer value hierarchy with his own growth as a customer. These instances bring the concept of Customer Lifetime Value (CLV) to fore in marketing in general and relationship marketing in particular. Customer Lifetime Value is the value potential of the customer that may accrue to the company over the total relationship period of the customer with the company.

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Keeping customers with the company requires deviation from the traditional transactional marketing model and calls for a dynamic relationship marketing model. Later, this relationship marketing model graduated to the full-fledged concept of Customer Relationship Management (CRM). Rai (2012) defined Customer Relationship Management as “a continuously updated process of identifying relative value of customers and designing customised company interaction to delight them so that they do not just remain with the company profitably but also be the company’s ambassador. Full involvement and empowerment of employees and appropriate technology are two essentials for successful CRM.” Here, the identification of the potential customer value was emphasised upon as an imperative for the success of CRM. Figure 2.3 shows the model of Customer Relationship Management implementation process as proposed by Rai (2013) where he established “customer segmentation based on customer lifetime value” as the first step. Given the value potential of the customer, a company might also decide on the investment requirement in a particular customer relationship. So, the greater the customer lifetime value, the greater can be the investment in the customer relationship building.

Customer segmentation based on customer lifetime value Customer profiling Offer customization Marketing service cost and revenue Employee participation in CRM design Motivating employees for effective implementation Making CRM an enterprise wide activity Adequate technology support for CRM implementation Consistency of CRM programs CRM practice evaluation from: (a) Customer experience perspective (b) Employee participation perspective

Figure 2.3 Model of Customer Relationship Management implementation process

2.4.1. Calculating Customer Lifetime Value (CLV) Calculating Customer Lifetime Value of the customer is extremely difficult as several factors play a significant role in determining the customer stay and upgrade as discussed earlier. Assuming the stay with the customer by applying superior and effective customer loyalty building measures, the lifetime value of the customer can be assessed. Calculating the lifetime value of the customer depends on several other micro factors along with the macro-economic indicators discussed. The micro economic factors include the age of the customer, product category and the company’s strength. Box 2.2: Kellogg’s Marketing Strategy on Presumption of High Customer Lifetime Value Indians have always preferred paranthas, pooris, rotis, idli, dosa, poha, upma, bread, and eggs for breakfast. When Kellogg’s came to India, it had the uphill task of changing the breakfast habit in India. The company was sure that once the taste for cornflakes is developed, Kellogg’s would be able to reap the benefit as customer lifetime value is very high. So, for several years, the company sold its products at a loss only under the premise that once the taste for its product is developed, it would be able to reap the benefit of the investment made on building customer loyalty.

Decoding Customers

2.4.2.

33

The Lifetime Value Equation

Calculation of a customer’s lifetime value in a service industry is a baffling job that tends to get more typical if one wants to take more than five years into account while projecting customer value. The calculation generally finds its base in statistical data such as a customer’s age, tenure of the relationship with the company, past usage as well as his proclivity towards trying other products of the company minus the possible risk of defection. With the help of these facts and profitability figures pertaining to each product, a customer’s projected portfolio can be assessed. As marketing grew into a more sophisticated and meticulous discipline, customer lifetime value replaced the product lifetime value. The concept simply reflects the growing customer orientation that has covered every aspect of business. Customer lifetime value dictates to focus upon a customer’s total life span with the company instead of fretting after a particular product’s life span. In their study on customer retention and corporate profitability, Reichheld and Sasser (1990) suggested that customers have a significant role to play in relation to corporate performance as enduring relationships with the customers lead to increased profits. In the context of financial services, it becomes all the more important to define the expected life cycle of a customer, mechanism for performance measurement and adequate service mix for achieving business success. Along with designing a system for measuring and monitoring the progress, assimilating systems, processes, technology and infrastructure amplify the customer value model. As argued by Panda (2003), such integrative approach brings all costs related to acquisition and retention of customers and corresponding revenues generated from every customer category under analysis, thereby assisting in the accurate calculation of customer lifetime value. Rai (2013) suggested the following processes that are a part of the creation of customer lifetime value: (i) A process of ad hoc segmentation and data analysis for database marketing (ii) A process of automation of decisions against customer requests, targeted to retention activities and decisions to ensure that the retention effort is aligned to CLV (iii) Identification of customer categories for cross-selling and up-selling of financial services (iv) Development of service and product portfolios aligned to CLV (v) Alignment of customers to appropriate channels by CLV 2.4.3.

Issues in Calculating CLV

The concept of customer lifetime value holds a marketing attraction as it stands for the exact monetary worth of a customer and indicates the resources that should be invested in acquiring and retaining such customer. However, due to the complex nature of customer relationships and the uncertainty that prevails in a business environment, it is hard to calculate and predict the actual customer lifetime value. The exact calculation is subject to the characteristics and structure of a customer relationship program. The process involves a series of steps, each of which has its own set of challenges spawning occasions of doubts and debate. Some of these issues are as follows: Insufficient data: Incomplete or inaccurate data about the customers hinders the calculation of customer lifetime value often as the data might not have been collected regularly or the research remained insufficient and thus, could not generate relevant information. Lost customers: A customer can be considered as lost if he has not transacted or communicated with the company within a considerable time period, usually one year. However, companies often

34

Customer Loyalty

choose to ignore such possibilities as Bryan Eisenberg in his book ‘How Are You Measuring Customers?’ opined that “Some marketers are unwilling to admit a customer is truly lost.” Even if the company acknowledges that some of its customers fall into the category of lost, it is definitely difficult to identify such customers, and this affects the calculations for customer lifetime value. For example, cellular service operators release the data of how many new customers they have added on a monthly basis. However, they do not state how many customers they have lost in the same duration as they hardly have any mechanism in place to identify and analyse customers who are still with them. Several customers buy a SIM card of a particular cellular service provider and after using it for a specified period of time, they discontinue its use. Later, they might buy another SIM from another service provider. Similar is the case with banks. After getting transferred to a new place, a person opens a new account. After completing the term at the first place and getting transferred to yet another place, the person withdraws most of his money but does not close his account. His account becomes inactive for all practical purpose but remains alive in all banking statistics. Small and new companies:

Method of calculation:

Nonetheless, such limitations do not deplete the significance of calculating the customer lifetime value for a business. The practice of benchmarking might help in solving some of the earlier discussed issues by specifying the average order size and frequency of the orders. Rogers and Peppers, who wrote the bestseller ‘One to One Future,’ suggested forming a proxy for lifetime value. It could be anything like total orders per annum plus the value of each recommendation made by each client. The real worth of customer lifetime value lies in the ease of understanding and communicating the value of customer retention or the cost of customer defection in monetary terms. Box 2.3: Calculating Customer Lifetime Value through Technology Service companies leverage technology to assess Customer Lifetime Value. Know your customer, popularly known as KYC, is a powerful data collection tool. Banks, hotels, retail, and insurance are the popular service sector industries that use technology to assess the value of their customers. For example, when a customer checks into a hotel, he is required to fill a form disclosing certain mandatory information. Along with the mandatory information, hotels also try to get the information required to gauge the lifetime value of the customer such as his age, occupation, employer, income, days of stay, frequency of visit to the city, family members, purpose of visit, food habits, and any other preferences. Hotels have designed software that uses this information to project the lifetime value of the visitor to the hotel.

Illustration Assume that the customer of a leading cellular service, who is sure to stay with the company, is a management student who takes admission in a reputed management school. He pays a monthly

Decoding Customers

35

cell phone bill of Rs. 300. After taking admission into the institute, he buys an Internet connection of the same company and buys a moderate package of Rs. 200 per month. He pays Rs. 12,000 during his two-year stay in the management institute for availing the company’s internet offering. After successful completion of the program, he gets placed in a good company, and his monthly cell phone expense increases from Rs. 300 to Rs. 600. At the same time, he upgrades his internet package from Rs. 200 to Rs. 400, making his monthly contribution to Rs 1,000 per month and this continues for two years, so, he pays Rs. 24,000 to the company. After two years, he gets married and buys the same company’s connection for his wife with an average monthly bill of Rs 400. He also gets a DTH connection of the same operator with a monthly package of Rs 300, making his annual outgo to the company to be Rs 20,400 per month. Total business the telecom company has received from the = (300 + 200) × 24 customer in two years (during student life) = Rs. 12,000 Total business the telecom company has received from the = (600 + 400) × 24 customer in two years (post placement) = Rs. 24,000 Total business the telecom company has received from the = (1,000 + 400 + 300) × 12 customer in one year (post marriage) = Rs. 20,400 Assuming that he remains at this stage of consumption for 15 more years, during his total consumption period, he pays: Total business the telecom company has received from the = 12,000 + 24,000 + 3,06,000 customer during 17 years of the relationship = Rs. 3,42,000

Under the given set of assumptions, the customer lifetime value of the student is Rs. 3,42,000. Bangalore-based corporate executive Namitha Krishnamurthy routinely logs on to an e-commerce site to redeem points accumulated on her debit card for gifts or discounts. Recently, she was intrigued to learn that her points could be used to gift a needy child a mid-day meal or fund a destitute senior citizen’s cataract operation. “A charity option in the shopping basket is great as most of us have the inclination to give, but don’t have the time to get personally involved in social causes,” says Krishnamurthy, 38, who redeemed her points to feed a hungry child. Krishnamurthy isn’t the only Indian consumer who found the shopping-cum-giving experience a gratifying one. According to a Global Survey on Corporate Social Responsibility, a recent poll conducted by AC Nielsen across 58 countries, 75% Indians were willing to spend more on sociallyresponsible companies in 2013 as compared to 53% in 2010. The study mapped the spending behaviour of 29,000 online consumers between February and March 2013. While the sample size may be small, it is indicative of an evolving mindset. Until recently, socially conscious consumers were a niche group, comprising mainly those who sought out ‘fair trade’ labels on the clothes rack or opted for organic vegetables and fruits at the neighbourhood supermarket. But today, loyalty programmes that were originally introduced as marketing initiatives to build allegiance to a brand bear testimony to philanthropic churnings among routine shoppers. Most loyalty programmes are designed on similar lines. Consumers accumulate loyalty points every time they punch their credit card at their favourite store or swipe their debit card at a café, which in turn can be redeemed against further discounts on particular products. Multi-brand loyalty programmes such as PAYBACK, Loyalty Rewardz, Accentiv, Rewards 360 and AIMIA have tied up with charity organisations so that customers could redeem their points not only against snazzy lifestyle products but direct them towards a social cause as well. (Contd )

36

Customer Loyalty

(Contd ) “Such platforms for consumer-charity collaborations give consumers an opportunity to create social impact without much effort as well as allow brands to engage directly with social causes,” says Vikas Puthran, vice-president of charitable platform, Give India, which initiated the tie-ups. The impact isn’t small. Vijay Bobba, CEO of PAYBACK India, one of the first to tap consumers’ charity, estimates that the points redeemed on their loyalty card every month provide for a year’s worth of mid-day meals for over 100 poor children through the voluntary organization, AkshayaPatra Foundation. The success of these tie-ups signals the willingness of Indian consumers to reach out beyond their needs. Krishnamurthy, for instance, was heartened to receive a follow-up newsletter tracking how her money was spent. Convinced that it was being used effectively, she has since been routinely redeeming her loyalty points for an array of social causes. Source: The Times of India, October 27, 2013

It is clear from this illustration that a customer’s net worth is not what he transacts today. Rather, the total value of transactions over the period of his stay with the company along with the value of referrals that he provides to the business determines his lifetime value for the company. Hence, it is advisable for a company to strive in the direction of retaining its profitable customers and increasing its share of wallet through well-designed customer loyalty practices. 2.5.

CUSTOMER AFFINITY

Customer affinity 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. However, this, in no way, suggests that the emotional association is fake or weak. Some of the strongest brands like Apple and Harley Davidson hugely bank upon the affinity that their customers feel towards them due to specific attributes such as providing 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 a desirable social image.

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A few years ago, Alaska Airlines Services achieved top spot in a survey conducted by a travel magazine to find out which airline delivered excellent customer service consistently. Many of the respondents who participated in the survey had never experienced Alaska’s services. Yet, they had full faith in its superiority due to the strong word of mouth publicity from its customers. Most frequent flyer programs aim to create customer loyalty among flyers by encouraging repurchases and revisits. However, these programs fail to bond with the customers by not giving them personalised attention and experience.

2.6.

CUSTOMER ENGAGEMENT

Advertising Research Foundation announced the first definition of customer engagement in March 2006, which suggests that “Engagement is turning on a prospect to a brand idea enhanced by the surrounding context.” Customer engagement can be depicted through the stages a customer undergoes during his interaction with a brand. The 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 the customer going through the customer engagement cycle, marketers resort to search engine marketing, optimisation and advertisements and popularise media, keywords and phrases which lead on the customers. The concept of customer engagement endorses the practice of treating customers as a component of a company’s collaborative value chain while giving them liberty to decide the ways they want the company to interact with them by using product, services and other consumption related SOCIAL experiences. Companies understand the importance of closeness MEDIA with the customers. In its CEO study conducted in 2010, IBM’s Institute for Business Value revealed that around 88% of the CEOs regard achieving closeness to customers as an important business goal and plan to continue this for the next five years. The basic features of customer engagement are: 1. Customer engagement engrosses the concept of social customers by ensuring that social media channels are inherently incorporated into all customer communications. So, instead of responding to people upon taking notice of certain posts on any social platform such as Facebook or Twitter, which are completely beyond control, a company chooses to be proactive and includes social media strategy as a part of its multichannel strategy combining both traditional and social means of customer interaction. 2. Customer engagement involves identifying the need for collaboration and exploring ways to achieve better productivity. It endorses inculcating a corporate culture focussed on social business by empowering the employees and making them capable of dealing with customers in a more efficient way. 3. It uses surveys, business models and frameworks, strategic parameters, metrics, practical examples, success and failure stories, case studies, programs, best practices, systems and above all, a cultural orientation towards customer service to engage the customers effectively.

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Customer Loyalty

With declining effectiveness of traditional advertising media and growing power of customers in terms of referrals and word of mouth, customer engagement has emerged as the need of the hour. Researches revealed that an average customer in the age group of 18–26 spends more time online than watching television, which automatically reduces the reach and thus, usefulness of television advertising. Moreover, the ability to peep inside a customer’s mind is no longer a differentiator as customers have now become more vocal about their needs, expectations and experiences. Delivering few static messages to the target segment that has already experienced, discussed and positioned the brand is not going to serve the purpose. Instead, getting involved with the customers through the means they prefer and the platforms they choose can produce the desired results for the company. Elevated levels of competition due to lower entry barriers, greater access to product and price related information, increased number of channels and lesser costs of switching have collectively made achieving customer loyalty a tough game. Also, new and innovative media channels have empowered the customers to control what kind of marketing communications they receive and respond to. Enhanced role of peers turned customers have decreased the levels of trust in company sponsored advertising. Enticing customers to engage with a brand has become necessary to create and sustain loyalty among them. Customer engagement is a strategic orientation of marketing which can align a company’s efforts with social and technological developments in the market. It is an endeavour to establish an engaging dialogue with the customers leading them to get engaged with the brand itself. 2.7.

FINAL THOUGHTS

The ever growing flow of data and information accompanied with advancements in communication and technology has enhanced the already mighty power of customers. Recent shifts in economic environment and business dynamics clearly indicate towards the need to understand customers’ perceptions more closely and respond to their expectations more effectively. The new age marketing involves practices such as customer affinity and customer engagement which are solely aimed at building a proactive response system which attends and addresses the whims and wishes of customers with greater accuracy and promptness. A keen understanding of customers’ needs and behaviours can assist in devising growth driven profit strategies and infuse the confidence while taking products and investment related decisions. The exercise of incorporating customer centricity as an organization wide culture is never going to be a piece of cake as the organization will have to redefine the core business values by emphasizing upon the need of tending to the relationships on priority basis. There will also be challenges related to development of required skills and capabilities critical to customer centricity and realignment of objectives, reward systems, performance appraisals and other business practices. However, the

Decoding Customers

39

rewards tend to be particularly pleasing as visible in case of leading organizations such as FedEx, Amazon, etc. Pizza Hut: Employee Engagement with Customer Orientation Pizza Hut is in the organised food retail business where role and conduct of employees, especially those functioning as contact points for customers is extremely crucial for maintaining high satisfaction levels. Employees not only get educated about the products and processes but also receive training to handle different customer grievances. Every employee has to go through the proper training program before serving at the shop floor. The employees’ engagement in the organisational activities is marinated with a deep orientation towards customer service through the following ways: 1. The behaviour of the employees is modelled to be friendly and kind, while helping customers in the best way possible. 2. There is a proper employee evaluation program in place which is conducted twice a month to monitor the behaviour and attitude of the employees. For the purpose of evaluation, a balance score card is used to rate the employees and compare and control their performance. This also helps in following the CRM practices of the brand. 3. The employees are trained to address their customers with their names as it generates a feeling of recognition in the customer which may result in a better sense of affiliation with the brand. The customers feel happy to be recognised and remembered. 4.

Customer Focus: Employees listen and respond to the voice of the customers.

5.

Belief in People: Pizza Hut believes in people, trusts in positive intentions, encourages ideas from everyone and actively develops a workforce that is diverse in style and background.

6. Coaching and Support: Employees coach and support each other. 7.

Accountability: Employees do what they say, they are accountable, and they act like owners.

8.

Excellence: Employees take pride in their work and have a passion for excellence.

9.

Positive Energy: Employees execute operations with positive energy and intensity.

10.

Teamwork: Employees practise team together, team apart.

Many organizations just don’t pay adequate attention to altering customer dynamics that profoundly affect the competitive landscape in every industry. Business success in today’s volatile industrial scenario invariably depends on retaining and reinvigorating relationships with customers, upgrading the business models to adapt the technological advances and incorporating innovation as a strategic key to all sorts of decision making that takes place in various functional compartments of business. Achieving customer centricity is more than just a grand vision of a successful organization with customer at the centre of its functions. It is about building a cadence of credence in the minds of customers with every small business decision solely guided by the needs and preferences of customers.

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Social and technological changes that have brought social media to the centre stage of customer dynamics call for crossing the boundaries of retention and satisfaction and create an affinity based bond with the customers while engaging them by serving and interacting in the way they prefer. Cold calling, a prominent marketing tool of the last decade has now been replaced by reverse cold calling, where it is customers who decide the content, medium and duration of marketing communications companies can deliver. Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9.

Define a customer. Discuss the different types of customers an organisation might cater to. “The customer is king – always.” Comment. Suggest ways to make customers stay with the business. Elaborate on the concept and stages of the Customer Life Cycle. What is Customer Lifetime Value? Elaborate with an example. Elucidate on the factors which determine the characteristics of a customer. What are the problems an organisation might face while calculating customer lifetime value? What is Customer Affinity? Elaborate. Suggest ways to build customer affinity in the context of service organisations. “Customer Engagement is reverse cold calling where a customer decides and the company follows.” Comment. 10. Explain the role of social media in the growing importance of customer engagement practices in business.

Project Assignments 1. Design a Customer Engagement program for a fitness centre by actively using social media platforms. 2. As a marketing strategist of a multiplex chain, what steps would you take to build affinity with your customers?

References 1. East, R., Gendall, P., Hammond, K., and Lomax, W. (2005). Consumer loyalty: singular, additive or interactive? Australasian Marketing Journal, 13 (2), 10–26. 2. Jacoby, J. and Chestnut, R.W. (1978). Brand Loyalty: Measurement and Management (John Wiley & Sons, New York). 3. Oliver, R. (1997). Satisfaction: A Behavioural Perspective on the Consumer. New York, NY: McGraw-Hill. 4. Olson, Jerry C., and Jacoby, J. (1971). ‘Construct validation study of brand loyalty’. Proceedings in 79th Annual Convention of the American Psychological Association, 6, 657–58. 5. Rai Alok K. (2013), Customer Relationship Management: Concepts and Cases, PHI Learning 2nd Edition 6. Reichheld F. Sasser EW. Jr. (1990). Zero defections: Quality comes to services. Harvard Business Review, 68 (5), 105–111. 7. Reichheld, F. F. (1996). Learning from Customer Defections. Harvard Business Review, 74 (March– April), 56–69. 8. Rowe G.W., J.G. Barnes (1998). Relationship Marketing and Sustained Competitive Advantage. Journal of Market Focused Management, 2 (3), 281–97. 9. Stewart, M. (1996). Keep the Right Customers. London: McGraw-Hill. NY. 10. Zeithaml, Valarie A., Leonard L. Berry, and A. Parasuraman (1996). The Behavioural Consequences of Service Quality. Journal of Marketing, 60 (2), 31–46.

3

Customer Loyalty: A Prelude

Merely satisfying customers will not be enough to earn their loyalty. Instead, they must experience exceptional service worthy of their repeat business and referral. Understand the factors that drive this customer revolution. Rick Tate This chapter is aimed at providing an insight into: v v v v v v v

3.1.

Customer Satisfaction The Satisfaction – Dissatisfaction Paradigm The Difference between Customer Satisfaction and Customer Loyalty Customer Retention The Difference between Customer Retention and Customer Loyalty Brand Loyalty The Difference between Brand Loyalty and Customer Loyalty INTRODUCTION

Customer Loyalty is often assumed to be customer retention, customer satisfaction, or in some cases, brand loyalty. Hence, it is necessary to be clear about the difference between customer loyalty and other related constructs and also to understand the common cord that they share. This chapter elucidates the meaning of these constructs and explains their dissimilarity with customer loyalty. 3.2.

CUSTOMER SATISFACTION

Customer satisfaction stands out as an ambiguous and abstract concept whose tangible expression differs from person to person and product to product. A number of psychological and physical factors affect the state of satisfaction, which prompts favourable behaviours such as revisit and recommendation. In addition, alternatives available to customers also manipulate a customer’s level of satisfaction since they provide points of comparison. 3.2.1. Understanding Customer Satisfaction Satisfaction stands for gratification, pleasure or fulfilment of desire. It is a feeling that emanates from fulfilment of needs and wants and gets evaluated on the basis of what is received against what

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was expected. At its most general level, satisfaction can be understood as “things not going wrong.” The manner in which satisfaction is expressed varies among individuals in the context of different products. It can be conceptualised as either an emotional or cognitive response. Satisfaction is often viewed as a judgment that depends on cognitive frames of references which are culturally unique. Understanding the satisfaction of a buyer in reference to a business transaction is Customer Satisfaction. Rai (2012) stated that “Customer Satisfaction or Consumer Satisfaction is a buyer’s emotional or cognitive response post subjective assessment and comparison of pre-purchase expectations and actual performance subsequent to the consumption of the product or service; meanwhile evaluating the costs incurred and benefits reaped in a specific purchase event or overtime in course of transacting with an organisation. These benefits can be categorised as emotional and functional benefits.” 3.2.2.

The Satisfaction – Dissatisfaction Paradigm

Every company strives to attract and retain customers through a number of marketing practices largely wrapped around the key issues a business faces, namely, product (what to produce), price (how much to charge), place (how to deliver) and promotion (how to communicate). As marketing developed into a more sophisticated, yet fundamental aspect of business, people, process and physical evidence were added to these four ‘Ps’ of marketing in order to render a more holistic appeal to the overall marketing approach of a company. The marketing strategies pertaining to these 7Ps primarily aim at wooing and retaining the customer and play a significant role in forming a customer’s expectations of a product. Feedback I n p u t

7 Ps of marketing Product

C O M Marketing P A Practices N Y

Price

Background Customer Expectation

Education Cognition

Place Promotion

Psychology

Experiences

People Process

Emotions

Expertise

CUSTOMER EVALUATION Customer Perception

Physical exidence I n p u t

Company-Customer Interaction Feedback

Figure 3.1

Customer Satisfaction CECP

Customer Loyalty: A Prelude

43

However, customer expectations are not solely determined by being exposed to a company’s marketing practices. Several personality related factors such as social background, educational qualification, cognitive mind processes, psychological setup, previous consumption experiences, emotional quotient and knowledge and expertise also significantly affect the interaction between the company and its customers. This interaction shapes their consumption experiences, thereby, leading to customers’ evaluation of the product, which results into the specific state of customer satisfaction or dissatisfaction. Customer’s evaluation can broadly be understood as an interplay of a customer’s expectation from the product and perception about its actual performance. If perceived performance is more than customer expectation, it results into customer satisfaction, which has several associated advantages such as repeat purchase, customer retention, cross-sell, and up-sell. If perceived performance is less than customer expectation, it leads to customer dissatisfaction and results into a behaviour that is detrimental to the company’s interest as negative publicity and loss of sale. Figure 3.1 depicts the process of customer satisfaction formation: Based upon the earlier discussion, it can be concluded that: Customer satisfaction/dissatisfaction is the cognitive judgement of a customer resulting out of an interaction between the customer’s personality and a company’s marketing practices in the perspective of the expectation the customer had with the product and perception of the benefits received. Customer satisfaction has achieved an important position for organisations that strive to sustain customer loyalty in a market full of competitive forces by improving the quality of their products and services. Nonetheless, it has often been used interchangeably with customer loyalty as though both denote a similar concept. However, there are significant differences between customer satisfaction and customer loyalty that are dealt with in the following section: 3.2.3. Differentiating Customer Satisfaction from Customer Loyalty The value of customer satisfaction and customer loyalty for long term profitability of a business has often been discussed. However, the difference between these two concepts has largely been ignored as they are often used interchangeably. Researchers who analysed the concepts of satisfaction and loyalty rejected the notion of these being identical. There is considerable difference between customer satisfaction and customer loyalty with the latter holding greater importance for businesses. Box 3.1: Satisfaction not a sufficient condition: Diebold Experience A satisfied customer is not necessarily a loyal one. This realisation inspired Diebold, a provider of ATMs and security systems, to focus as much on its customers’ voices as it does on their fingers! Until 2003, the customer surveys Diebold used gleaned insights on satisfaction with products and product features. Today, the company has incorporated a systematic approach to measuring and managing customer loyalty into its top-level strategy, says Cassie Metzger, Diebold’s director of strategic development and global marketing. Executives, including CEO Wally O’Dell, receive reports on customer interactions stemming from the customer surveys the company conducts, prioritise their projects according to survey results and sometimes participate in improvement plans designed to convert “reluctant” customers into “truly loyal” ones.

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Customer Loyalty

The element that distinguishes customer loyalty from customer satisfaction is the emotional association of loyal customers with the company. This emotional association results in a bonding between the company and its customers which does not easily get affected by external factors. Moreover, true customer loyalty possesses an unwavering and unnerving nature which remains rigid even in course of changing situations. On the contrary, customer satisfaction is prone to change with a change in situations. A mobile phone customer might be highly satisfied with his existing telecom service provider but any changes in the tariff plans or value added services might act as a cause of switching to another network. Merely satisfaction does not stop the customer from switching over to a rival brand. The following points distinguish satisfaction from loyalty: ∑ Customer satisfaction is a measure of how adequately a customer’s expectations are met. ∑ On the other hand, customer loyalty is all about customers’ revisit intentions and their readiness to undertake participative activities with the organisation. ∑ Customer satisfaction is certainly a requirement for customer loyalty formation but it does not guarantee repeat customers. The minute difference between Customer Satisfaction and Customer Loyalty While customer satisfaction is good, customer loyalty is even better. Interestingly, loyalty is not the automatic fallout of satisfaction. Satisfaction ratings often lull companies into a false sense of security. There is more here Satisfaction Commitment worth noticing. For example, the following continuum, starting Loyalty with satisfaction and ending Retention with loyalty: Customer stickiness increases as one moves further to the right along the continuum. As a company moves up the continuum, it connects with its customers on a deeper and emotional level—creating a much stronger bond than it does through satisfaction alone. Both customer satisfaction and customer loyalty originate from customer experience. Despite being inter-reliant, these concepts differ from each other and require individual attention. The former is a requisite for operating the business smoothly and acts as a measure of the extent to which customers’ expectations are exceeded whereas the latter is crucial for sustained profitability and growth. The difference between customer satisfaction and customer loyalty is primarily seen in the following eight areas (Fig. 3.2): Pricing

Payment

Turnover

Perception

Figure 3.2

Referrals

Competitive data

Contract

Difficult times

Points of difference between customer satisfaction and customer loyalty.

Customer Loyalty: A Prelude

45

Customer satisfaction is limited within the boundaries of product and service provisions, but customer loyalty is a wide canvas painted with customer experiences and emotional bonding. A company might have satisfied customers, but they are not necessarily connected or committed to the company. So, stopping at satisfaction can prove to be detrimental for a business in the long run. A company should make continuous attempts to move its customers up the continuum to loyalty. Then they will advocate its products, and on average, mention its name to five to seven people—compared to the three referrals from satisfied customers. Clearly, understanding what drives customer loyalty towards a company and its products is essential for achieving success. 3.3.

CUSTOMER RETENTION

Apart from bringing in the revenue required for an organisation’s survival in a volatile economic environment, customer retention also acts as a vital path that leads to profitable business growth. Nevertheless, the performance gaps most of the organisations today suffer from are bound to make retention a difficult strategy to learn and implement in a challenging economic environment. 3.3.1. Understanding Customer Retention Businesses characterized with high performance standards have the capability to ensure distinguished customer experience while fulfilling the brand promise. Such capability plays a crucial role in formation of customer loyalty, which contributes to the business in terms of better financial results and greater value for shareholders. However, most businesses suffer from a peculiar sort of myopia where they fail to align their marketing efforts with customers’ preferences, ultimately, mislaying the potential base of customers willing to return. Reichheld (1996) discussed the relationship between customer retention and company revenue. According to him, a rise in the rate of customer retention has direct and indirect effects on company revenue. The direct fallout is the effect of the customer retention rate on the number of customers of the company. The indirect fallout is the effect of the customer retention rate on average customer tenure and the average customer tenure’s effect on yearly spending of an average customer. Reichheld argued that the three relationships paraphrased here work together in a manner that a small improvement in the customer retention rate can have a surprisingly large effect on company revenue: ∑ The customer retention rate has a strong effect on average customer tenure. (The other determinant is the customer acquisition rate.) ∑ In many product categories, there is a relationship between customer tenure and purchase behaviour, with a customer who has more tenure spending more per year on an average. ∑ A small change in the customer retention rate might, if maintained, have a substantial effect on the number of customers of the company. Customer retention and loyalty confer remarkable economic perks to an organisation. Accenture conducted a study including 16 retail banks of North America and found that moving customers to a higher level of loyalty can result in as much as 20% rise in profitability per customer. In case of some banks included in the study, converting loyal customers into very loyal customers led to $6.0 billion in incremental profit. The research indicated that a number of organisations were unable to meet customer expectations with apposite customer experiences. Being “customer centric” involves three main challenges:

46

Customer Loyalty

1. Acquaintance with the Customer: Customers in mature markets are not only diverse in their needs but they also have specialised knowledge about the products meant for them. They expect service providers to decipher their changing needs and interests and serve them accordingly. New markets with better growth opportunities also consist of customers who constitute segments like chalk and cheese characterised with distinct sets of preferences and values waiting to be decoded through careful observation and analysis. 2. Finding the Customer: Companies are finding it hard to deliver the right message to the right customer at the right Different factors determine customer perception time due to channel fragmentation and and level of satisfaction. proliferation. With increased interference of digital media and social networking platforms, customers are now more empowered to control the content and timing of communication that is being sent to them. Companies need to appreciate the growing importance of social media in the lives of customers, especially younger ones, and alter their marketing mix in the light of this factor. While targeting alien market segments, innovative routes of entry and customised marketing mix should be used to contact and connect with the customers. 3. Delivering Differentiated Customer Experiences: The intricacies involved in finding customers and familiarising with them also affect the customer experience a company creates. Customers are likely to hold varied preferences about different factors which form their perception and determine their level of satisfaction with the experience, functional aspects of the product, price, service conditions, range and availability of channels. Comprehending and taking care of all these preferences is bound to be exigent when the company is targeting to serve a big, demographically mixed customer base. Importance of Customer Retention Customer retention has proven its economic worth across industries and its benefits are listed by Rowe and Barnes (1998) as: 1. The cost of gaining a new customer is about six times the cost required to retain an existing one. 2. A dissatisfied guest will tell 10 others about the complaint. 3. 91% of customers whose complaints do not get addressed will not return. 4. 65% to 85% of switchers are dissatisfied guests. 5. Only 4% of dissatisfied customers will complain. 6. More than 65% of customers who will not return do so because of the way they were treated, not because of the product.

Customer Loyalty: A Prelude

47

Box 3.2: Customer Retention at Archies Gallery Archies Gallery practices retention in their gift stores by providing membership in Archies club for all buyers. On every purchase, points are credited in a buyer’s account (this account gets active at the time of providing membership), and once 1000 points are accrued, the club member gets a coupon worth Rs. 100. This strategy helps in retaining customers. Members are updated about various schemes through SMS and email. Discounts are offered on special occasions like Valentine’s Day, Father’s Day, and Daughter’s Day. The details of this membership are as follows: There is no membership fee to register for the Archies club.

of 1000 points. accumulated cannot be carried forward to the next year.

the member.

3.3.2.

Differentiating Customer Retention from Customer Loyalty

Reichheld and Sasser (1990); Zeithaml et al. (1996) noted that most of the researchers use customer retention and customer loyalty to explain the same phenomenon. However, Stewart (1996) claimed that “Customer loyalty and customer retention are not synonymous.” Retention generally connotes existence of those customers who repurchase within a defined duration. Although, this duration varies from company to company, the most agreeable definition of retention involves existing customers who place a minimum of one order every year. Customer loyalty is a scale ahead as it consists of an ongoing association with the customers, their trust and regular buying behaviour based upon preference. Loyal customers are likely to be more tolerant and profitable. The difference between retention and loyalty can be understood with an example of a customer who buys annually from a particular company but transacts on a more frequent basis with its competitors. Such a customer is undoubtedly a retained one but cannot be considered as a loyal customer. Retention alone is not of much use for the business unless it is about retaining loyal customers. Loyalty, in its simplest form, can be defined as being faithful to one’s nation, family, belief, or cause. Retention, on the other hand, is explained in the dictionary as keeping possession of something. The literal meanings of these terms underline the difference in these concepts. The meaning of loyalty signifies the dominant role of customers who choose to revisit and repurchase from the company due to one or more reasons whereas retention seems to be a company matter where, in order to retain customers, companies resort to special offers and preferential treatment. Thus, customer loyalty calls for building relationships which could motivate the customers to revisit the company by influencing their affective or cognitive mind processes. Customer retention conversely, requires merely keeping the customer by providing them incentives for not switching to other available alternatives. It does not enter into the periphery of

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mind processes that actually affect a customer’s decision making. The causal link between retention and loyalty is important to understand as an understanding of loyalty mechanism is imperative for successful loyalty researches and programmes. Opposing the notion that retention leads to loyalty, it is customer loyalty that makes the customers stay with the business. Customer retention does not lead to customer loyalty. Undoubtedly, customer retention is important as not every customer will be loyal. However, achieving customer loyalty should be the ultimate goal of any organisation as it garners larger benefits, financial as well as others, than those that accrue with retention practices. Some of the perks associated with loyalty are winning a long-term partner, ensuring regular income, a better understanding of customer expectations, and easier channels to grow the business. 3.4.

BRAND LOYALTY

The concept of brand loyalty involves buying products from a single manufacturer repeatedly instead of going to other suppliers. Brand loyalty is considered to be a state of commitment where a customer prefers continued usage of the brand or repurchases the same brand. Such state is exhibited in the shape of repeat buying Archies Club was created as part of a customer behaviour, advocacy, and other favourable retention strategy. activities. Brand loyalty was initially linked to repeat purchase measures. Hence, brand loyalty was understood in a behavioural sense but there was no uniform agreement on customer retention or repeat purchase being synonymous with brand loyalty. 3.4.1.

Understanding Brand Loyalty

Jacoby and Chestnut (1978) gave the most comprehensive definition of Brand Loyalty which had four dimensions: (i) (ii) (iii) (iv)

Purchasing sequence Purchasing proportion Purchasing probabilities Behavioural variable

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Another definition by Olson and Jacoby (1971) presented a definition that had six dimensions: (i) (ii) (iii) (iv) (v) (vi)

Biasness Retention Category spending Product attitude Expression over time and Decision Making process

Reichheld (1996) defined brand loyalty to be characterised with customer retention and brand advocacy. Classification of Brand Loyalty: Attempts were made to explain the different types and forms of brand loyalty. East el al. (2005) found the following forms of brand loyalty: (i) (ii) (iii) (iv)

Behavioural brand loyalty Attitudinal brand loyalty Multibrand loyalty General brand loyalty

Oliver (1997) divided brand loyalty into the following different forms: (i) (ii) (iii) (iv)

Cognitive Affective Conative Action

3.4.2.

Differentiating Brand Loyalty from Customer Loyalty

Brand loyalty stands for a withstanding purchase decision based upon strong motivation to repurchase. It can also be seen as a customer’s preference for a particular brand that results in continued usage of that brand by purchasing it each time. To become loyal to a particular brand, customers need to be able to perceive that brand as a right option which offers good quality at reasonable prices. Factors which affect brand loyalty include attitudinal disposition, peer pressure, and familiarity with the salesperson. All these demand attention of the marketer. The level of brand loyalty is also seen as brand’s market share or the brand franchise. Brand loyalty tends to be stronger for established products in comparison to newly launched products. It either comes from a customer actually having experienced the product or service or being so familiar with it through television or magazine ads, that the brand name, the product, the service

Customer loyalty is about share of wallet; brand loyalty relates to share of the mind.

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collectively project the brand as a leader. Brand loyalty incentives accompanying other brand loyalty initiatives are intended to not only ensure that customers revisit the store and purchase the same product but also to boost cross selling possibilities for the company. The key difference between customer loyalty and brand loyalty is that customer loyalty is about share of wallet whereas brand loyalty equals the share of mind. Customers who are loyal to a brand are considered to be truly loyal to the company. In contrast, customers who go for customer loyalty programs are supposedly loyal to themselves and what works for them. Another difference between the two is that customer loyalty mainly relates to a customer’s spending power while brand loyalty has very little to do with prices or money. It has more to do with the way the brand is perceived in the consumer’s mind. It could be through promotional activities, reputation of the brand or with previous experiences. Typically, companies try to achieve customer loyalty by offering free coupons, special offers, low interest rates, extended warranties, rebates, high value trade-ins and other loyalty programs as perks and incentives to the customers. These customer loyalty programs are intended to please the customers so that they keep purchasing from the company and recommend its products and services among their social group. These loyalty programs are designed to garner higher sales volume through reducing the profit margins. Box 3.3: Top 20 Most Loyal Brands Although companies spend billions each year to try to make their brands resonate with customers, few end up with truly loyal customers. Loyal customers consistently come back to buy more, are more willing to stay despite increase in price and become strong advocates for the brand in their own social circles. Brand Keys, a research firm devoted to consumer behaviour metrics, presented the following big brands in 79 categories -- from smartphones to allergy medicines. 1 3 7 9 11 13 17 19

Amazon Facebook Apple (computer) Hyundai Patron Crest Whitestrips Walmart Grey Goose Ketel One LG (cell phone)

2 4

10 12 14

20

Apple (smartphone) Samsung (cell phone) Zappos Kindle Mary Kay Dunkin’ Donuts (coffee) Maybelline Google L’Oreal (hair color) Twitter

Source: http://www.businessinsider.com/brand-loyalty-customers-2011-9

3.5.

FINAL THOUGHTS

A visible increase in competition and rapidly changing tastes and preferences have inspired most businesses to explore and implement business concepts such as customer retention, customer affinity, customer engagement and customer loyalty. Market dynamics have changed completely

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over the past few years and customer satisfaction is no longer the key to business survival and profitability. More and more players are entering into the market thereby, intensifying the competition and presenting better choices to customers. Though customer satisfaction does not guarantee repeat business that finally affects the strength of bottom line, it definitely contributes to the customer retention efforts of the business. Retention renders long-term viability and improved profits through repeat purchasing behaviour and positive word of mouth publicity. However, retention may or may not convert into loyalty. In a business, loyalty development takes place in three phases. In the first stage, businesses are solely concerned with attracting new customers and increasing sales. Sales turnover is used as a tool to measure the level of preference among customers. Retention is the next stage which involves measurement of customer satisfaction through customer surveys and satisfaction indices. Successful Source: http://www.businessinsider.com/ brand-loyalty-customers-2011-9 retention results in building and maintaining loyalty which has become a strategic consideration for businesses today. Staying with a particular business can come from a variety of reasons such as convenience, habit, or mere hesitation to try out a new brand. Therefore, Customer retention does not necessarily the next step in the hierarchy is customer loyalty. translate into customer loyalty. Every business wants to acquire loyal customers who come to them repeatedly despite the availability of better alternatives. Gaining customer loyalty has become one of the strategic objectives of businesses and to achieve it, businesses offer enticements such as lower prices or discounts, special offers, promotional deals and loyalty programmes. These tactics surely result in repeat buying but they are not powerful enough to generate loyalty. Review Questions 1. Define customer satisfaction? Elaborate on the satisfaction-dissatisfaction paradigm and its implications for the businesses. 2. What are the major challenges an organization has to face while implementing customer centric measures? 3. What is Customer Satisfaction? How does it differ from Customer Loyalty? 4. What are the advantages of Customer Retention that make it indispensable for profits and growth? 5. Explain the difference between retention and loyalty. 6. Distinguish Brand Loyalty from Customer Loyalty by explaining these concepts and their implications for the marketers. 7. Suggest some effective customer retention strategies for a low cost airline which has limited budget for marketing programmes. 8. Discuss the importance of customer retention in service industries.

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9. Satisfaction is an essential but not sufficient condition for loyalty.” Comment. 10. Does the image of a brand influence the level of loyalty in its customers? Discuss with the help of appropriate examples.

Project Assignments 1. Conduct a satisfaction survey on the municipal corporation of your city providing civil amenities and identify the areas leading to dissatisfaction. Also assess the degree of dissatisfaction with the services. 2. How important role do you think satisfaction of employees play in determination of final satisfaction of customers? Comment based on the findings generated from the study on services of Indian Railways.

References 1. East, R., Gendall, P., Hammond, K., and Lomax, W. (2005). Consumer loyalty: singular, additive or interactive? Australasian Marketing Journal, 13 (2), 10–26. 2. Jacoby, J. and Chestnut, R.W. (1978). English (India) Brand Loyalty: Measurement and Management (John Wiley & Sons, New York). 3. Oliver, R. (1997). English (India) Satisfaction: A Behavioral Perspective on the Consumer. New York, NY: McGraw-Hill. 4. Olson, Jerry C., and Jacoby, J. (1971). Construct validation study of brand loyalty. Proceedings in 79th Annual Convention of the American Psychological Association, 6, 657–58. 5. Reichheld F, Sasser EW Jr (1990). Zero defections: Quality comes to services. English (India) Harvard Business Review, 68 (5), 105–111. 6. Reichheld, F. F. (1996). Learning from Customer Defections. English (India) Harvard Business Review, 74 (March–April), 56–69. 7. Rowe G.W., J.G. Barnes (1998). Relationship Marketing and Sustained Competitive Advantage. English (India) Journal of Market Focused Management, 2 (3), 281–97. 8. Stewart, M. (1996). English (India) Keep the Right Customers. London: McGraw-Hill. 9. Zeithaml, Valarie A., Leonard L. Berry, and A. Parasuraman (1996). The Behavioral Consequences of Service Quality. English (India) Journal of Marketing, 60 (2), 31–46.

4

Customer Loyalty: A Comprehension

“Customer satisfaction is worthless. Customer loyalty is priceless.” Jeffrey Gitomer This chapter is aimed at providing an insight into: Loyal Customers Customer Loyalty: Meaning and Concept Defining Customer Loyalty The Rai–Srivastava’s Satisfaction Emotions Quadrate Model of Customer Loyalty Significance of Customer Loyalty 4.1.

INTRODUCTION

In the current times of fierce rivalry and commoditised brands, retaining and enhancing customer relationships has become increasingly crucial. The only way to secure sustained and profitable relationships is to ensure that a customer receives bespoke experience that not only caters to his changing needs and values but also delivers the brand promise. Besides increasing competition and mounting customer expectations, economic uncertainty poses obstacles in the way of developing and retaining the ties of customer loyalty. Achieving customers’ trust is vital to acquiring customer loyalty. If the confidence of a customer shakes, so does the chance of continued customer loyalty. The economic uncertainty faced by the world during the last few years has led to a loss of customer trust and unpredictable purchase behaviours. In the wake of corporate failures, spending cuts and job losses, consumer confidence has fallen to its lowest ebb. Some customers deferred purchases, particularly those of discretionary items, putting severe pressure on companies to contain costs and optimise spending. Inevitably, these pressures affected customer relationships by eroding trust at a time when the bonds of customer loyalty had already been seriously weakened. Due to the volatile economic environment, developing and managing customer relationships are crucial to staying relevant, competitive and profitable. Intense competition in both the national and international business arena has led to an increased number of choices for customers, thereby rendering them greater consumption might. Heightened customer expectations are a result of their access to a wider and better assortment of products and services. The other consequences of renewed customer knowledge and expertise are lower tolerance for mistakes and higher switching intentions.

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These factors collectively make profitable relationships harder to develop and retain as service providers frequently note that new customers switch much faster before these relationships generate enough value to offset the cost of acquiring them. Consumer studies suggest that customers are most at risk when they believe their specific expectations are not met — as underscored by a recent Accenture Customer Satisfaction survey. The survey was conducted on 4,189 consumers residing in Australia, Brazil, Canada, China, France, Germany, India, the United Kingdom, and the United States. The number of consumers in various industries who admitted switching to another service provider after receiving poor service increased to 67% from 59% the previous year. Respondents who believed their expectations were not frequently met were the most likely to leave. Box 4.1: McDonald’s: A Relationship Philosophy McDonald's brand mission is to be their customers’ favourite place and way to eat. Their worldwide operations are aligned around a global strategy called The Plan to Win, which centres on an exceptional customer experience – People, Products, Place, Price, and Promotion. Their commitment is to continuously improve their operations and enhance the customer experience. The relationship philosophy governing its business is present below: 1.

Customer experience at the core of every activity. McDonald’s fully appreciates the value its customers hold and demonstrates it by serving them with high quality food and superior service in a clean and hospitable environment delivering great value. The underlying goal is ensuring quality, service, cleanliness and value (QSC&V) for all customers at all times.

2.

Commitment towards people. McDonald’s provides opportunities, nurtures talent, and develops leaders as it believes that a team of well-trained individuals with diverse backgrounds and experiences, working together in an environment that fosters respect and drives high levels of engagement, is essential to continued success.

3.

McDonald’s System. McDonald’s business model, depicted by the “three-legged stool” of owner/operators, suppliers, and company employees acts as its foundation. Balancing the interests of all three groups is key to the balanced growth of its business.

4.

Ethical operations. Sound ethics is good business. At McDonald’s, business is conducted with high standards of fairness, honesty, and integrity. Employees are held individually accountable and collectively responsible.

5.

Growing profitably. McDonald’s needs to secure sustained growth for its shareholders as it is a publicly traded company. This requires a continuous focus on customers and the health of the company system.

6.

Striving to improve. McDonald’s considers itself as a learning organisation that is focussed on anticipating and responding to the changing needs of customers, employees, and its system through constant evolution and innovation.

7.

CSR Activities. McDonald’s undertakes activities related to Corporate Social Responsibility such as planting of trees and cleaning of streets in order to stay connected with the society and retain its image as a socially responsible company.

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As customers grow more price-sensitive in response to turbulent economic conditions and aggressive rivals gear up to lure them away, companies must ensure that they tailor the entire customer experience from the point of brand awareness and acquisition to purchase, use and renewal. To create a lasting positive perception among their customers and target market, it is essential that not only price (or price cuts) differentiates their products from competitors, but an attractive value proposition is also offered to consistently keep the customers with the company. 4.2.

LOYAL CUSTOMERS

Loyal customers, they don’t just come back, they don’t simply recommend you, they insist that their friends do business with you. Chip Bell Companies make all possible efforts to make their customers loyal. Customers who remain unaffected by price inducement from competitors and make more purchases than others are considered to be loyal customers. Once a customer is deeply committed or has strong intentions to repurchase, recommend, and spend more, the customer is likely to remain loyal to a company. Another primary contribution of loyal customers is their intentional as well as unintentional promotion of the company and its offerings. Based on different research findings, different definitions have been provided for loyal customers. A few of these definitions are: “Loyal customers are a “fantastic marketing force” who offer recommendations as well as generating positive word-of-mouth which provides a great combination of advertising and publicity to a company.” Raman (1999) “Behaviourally loyal customers are expected to serve as information channels, informally linking networks of friends, relatives and other potential customers to the organisation.” Shoemaker and Lewis (1999) “A loyal customer is one who repurchases from the same service provider whenever possible, who continues to recommend and who maintains a positive attitude towards the service provider.” Gremler and Brown (1999) “A loyal customer as one who holds a favourable attitude toward the service provider, recommends the service provider to other consumers and exhibits repurchase behaviour.” Dimitriades (2006)

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4.3.

Customer Loyalty

CUSTOMER LOYALTY: MEANING AND CONCEPT

Loyalty is a psychological process that is largely realised and recognised through behavioural manifestation. It is important to understand the conceptual framework of loyalty to use it in a business perspective for establishing its significance to the stakeholders. Loyalty implies a feeling or an attitude of devoted attachment caused by affection. Such attachment makes a person feel responsible to persevere with the relationship even in adverse times. However, loyalty in commercial relationships involving a company and its customers denotes a subtly different meaning. Javalgi and Moberg (1997) found that customer loyalty has transpired from a simple measure of repeat patronage to a broadly interpreted and multidimensional construct. Kandampully and Suhartanto (2000) asserted that customer loyalty comprises both a behavioural dimension and an attitudinal dimension. They further elaborated that while the behavioural dimension considers consistent repeat patronage or repeat purchase frequency, the attitudinal dimension considers psychological (decision-making or evaluative) commitment towards the store or brand. The behavioural dimension of loyalty has often been regarded as the most reliable and easily understood gesture of a customer’s allegiance to a particular company. A quick observation of customer loyalty is repeat purchase and more specifically, retention. In practical terms, firms want repeat purchases mainly because such behaviour in consumers can: ∑ Show the customer preference for a brand or product ∑ Reflect a customer’s purchase intention and ∑ Secure profitability A bank customer is considered loyal if the customer starts doing most of his banking transactions such as maintaining a savings account, fixed deposits, home loan, and demand draft preparation from the same bank. However, going by the behavioural perspective of loyalty a person who is extremely satisfied with the bank service and wants to forge a strong and loyal relation with the bank but has limited resources and thus, cannot transact on frequent basis or bring in greater business volume for the bank would not be considered as a loyal customer. Gradually, the attitudinal and affective dimension of loyalty started gaining recognition and was included in studies while conceptualising loyalty. Customer loyalty is a favourable attitude towards a company’s products or a brand. Customer loyalty is also perceived as the mindset of customers who hold a favourable attitude towards a company, commit to repurchase the company’s products, and recommend the products to others. A customer’s loyal attitude shows a conscious effort to evaluate competing brands and the customer’s preference and willingness to purchase goods or services. Loyalty demonstrates a customer’s disposition to a brand of goods or service, a supermarket, a category of goods, or a set of activities. A customer’s attitudinal preference towards a company can be expressed as: (i) Repurchase intention or purchasing additional products or services from the same company (ii) Willingness to recommend the company to others (iii) Willingness to suggest the company to others and expressing a level of commitment towards the company by resisting lucrative offers from competitors (iv) Willingness to pay a price premium If a customer is loyal to an airline company, the customer would: (i) Repeatedly opt for the airline for personal travel (ii) Recommend the airline to his family and friends

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(iii) Refuse to be lured by the schemes and offers of other airline companies (iv) Be ready to pay a price premium Dick and Basu (1994) stated that the strength of relationship between relative attitude and repeat patronage of a customer determine his loyalty. They identified four dimensions: True loyalty, latent loyalty, spurious loyalty, and no loyalty. REPEAT PATRONAGE High

Low

High

True loyalty

Latent loyalty

Low

Spurious loyalty

No loyalty

RELATIVE ATTITUDE

Dick and Basu (1994)

Dick and Basu’s two dimensional loyalty model spurred interest in loyalty research all over the world and a number of researchers studied, interpreted, tested, complemented as well as contradicted it. True loyalty comprises strong attitudinal attachment and high repatronage intentions whereas lack of loyalty can be anticipated when both attitudinal attachment and repatronage are low. Lewis (1999) stated that latent loyalty denotes the event of infrequent purchase despite a strong emotional connect with the product. Situational factors also play a role in repeat purchase. Javalgi and Moberg (1997) said that spurious loyalty takes place when there are no other options in a particular category or past experiences and habits dominate the decision of choosing a particular product. Uncles et al. (2003) put forward three popular conceptualisations of loyalty (Fig. 4.1):

Model 1 Attitudinal Loyalty to the brand (Mainly seen as single brand loyalty— Monogamy) Strong attitudes and positive beliefs toward the brand The influence of significant others, community membership and identity

Model 2 Behavioural Loyalty (Mainly seen as divided loyalty to a few brands— Polygamy) Habitual revealed behaviour Satisfactory experience and weak commitment to brands

Model 3 Codeterminants of buying brands (Mainly seen as weak loyalty or no loyalty— Promiscuity) Purchase situations, usage occasions and seeking variety Individual characteristics and circumstances

Uncles et al. (2003) Figure 4.1

Three popular conceptualisations of loyalty

58

Customer Loyalty

Uncles et al. (2003) distinguished loyalty as behavioural, attitudinal and situational. The role played by intentions in a person’s decision to remain loyal to a particular company has been acknowledged by several researchers. Selnes (1993) stated that loyalty is an attitude, expressed in the form of readiness to advocate the service provider before other customers. On the other hand, Ostrowski et al. (1993) asserted that loyalty is also cognitive, which could be operationalised as a product or service that comes first to mind when making a purchase decision, or the product or service that is the first choice among alternatives, or price tolerance as put by Anderson (1996). Gembl (2002) assumed cognition-based or cognitive loyalty as rational because a customer makes decisions recognising the processes in the enterprise, thinking, handling information, and estimating the technology. Caruana (2002) noted that researchers in services suggest that loyalty should incorporate behavioural, attitudinal (affective), and cognitive elements. Box 4.2: Loyalty Leaders among electronics products and brands Consumers’ expectations for social, emotional, and electronic connections turned brands like Apple, Amazon, Samsung, YouTube, and Twitter into big leaders on the 2012 Brand Keys Loyalty Leaders List. Twenty-one new brands forayed on the 2012 list. Most new arrivals came from brands and sectors that facilitate social outreach: tablets, smart phones, and social networks. The top-10 loyalty leaders ranking for the year 2012 is as follows: 1. Apple: tablets 2. Amazon: tablets 3. Apple: smartphones 4. Amazon: online retail 5. Apple: computers 6. Samsung: tablets 7. Call of Duty: major league gaming 8. Samsung: cell phones 9. Halo: major league gaming 10. Twitter: social networks (Source: http://www.forbes.com/sites/marketshare/2012/10/25/)

4.4.

DEFINING CUSTOMER LOYALTY

Several marketing experts have tried to define customer loyalty. The issues highlighted earlier facilitated the academicians in comprehending the concept of customer loyalty and defining it in a manner that establishes its significance and relevance for industry as well as academia. A few popular definitions of customer loyalty are: “Customer loyalty is the proportion of purchases of a household devoted to the brand it purchased most often.” Cunningham (1956) “Loyalty is the subjective (i.e. non-random), behavioural response (i.e. purchase) of some decision making unit, expressed over time with respect to one or more alternative brands out of a set of such brands, and is a function of psychological (i.e. decision making, evaluation) processes.” Jacoby and Kyner (1973)

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“Customer Loyalty is a characteristic of those who repurchased a brand, considering only that brand, without seeking any information related to it.” Newman and Werbel (1973) “When the same customers not only display repeat purchasing behaviour but also recommend the product to other customers without any outright benefits, loyalty exists.” Heskett, J. L., Sasser, W. E. and Schlesinger, L. A. (1997) “Loyal customers repeatedly purchase products or services. They recommend a company to others. And they stick with a business over time.” Prus & Brandt (1995) “Loyalty is an observed behaviour or actual behaviour that drives the performance of an industry. Repeat purchasing and purchasing sequence are measures of actual behaviour. However, the attitudinal aspect also made its presence felt.” Liljander and Strandvik (1995) “Loyalty is a deeply held commitment to re-buy or re-patronize a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing, despite situational influences and marketing efforts have the potential to cause switching behaviour.” Oliver (1999) “Loyalty is the expression of a lasting affective engagement towards the brand, which is reflected in a certain constancy of psychological reactions and individual behaviour.” N’Goala (2003) “Loyalty can be considered as an ongoing propensity to buy the brand, usually as one of several.” Uncles et al. (2003) “Loyalty is the state or quality of being loyal, where loyalty is defined as a customer’s allegiance or adherence towards an object.” Rundle – Thiele (2005) “Loyalty is defined as the strength of the relationship between an individual’s relative attitude and repeat patronage with a supplier.” Fraenkel (2009) “Customer loyalty, at its most general level, reflects various customer propensities towards the service provider.” Jones and Taylor (2012) These definitions conclude that customer loyalty: (i) Is not just behavioural but cognitive as well as affective (ii) Is characterised by a customer’s deeper commitment towards a relationship (iii) Leads to a win-win situation for both parties (iv) Keeps the time perspective into account

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4.4.1

The Rai–Srivastava’s Satisfaction – Emotion Quadrate Model of Customer Loyalty

Various studies have comprehended customer loyalty differently. Researchers found several factors that contributed to the formation of customer loyalty and presented distinct ways of identifying the resultant behaviour of loyal customers. However, there has been no unanimity on the concept of customer loyalty. The Satisfaction – Emotion Quadrate Model of Customer Loyalty is based on a mix of two factors: satisfaction and emotion. CL = f (Satisfaction, Emotions)

Satisfaction Satisfaction stands for pleasure or gratification. It is largely seen as a cognitive process involving evaluation of perceived performance against preconceived expectations. Howard and Sheth (1969) defined Customer Satisfaction as “the buyer’s cognitive state of being adequately or inadequately rewarded for the sacrifice he has undergone.” However, some researchers suggest it to be a twofold concept that is made up of rational as well as emotional responses of customers. They considered emotion to be an essential element of satisfaction which, as Cronin et al. (2000) contended, should be regarded as a separate component of customer satisfaction. According to Oliver (1980), “Customer Satisfaction is a summary psychological state when the emotions surrounding disconfirmed expectations are coupled with the consumer’s prior feelings about consumption experience.” Satisfaction has often been regarded as the most obvious portent of customer loyalty. It is mainly seen as an outcome of a customer’s favourable evaluative judgements about the extent to which a product’s performance could meet their expectations. Satisfaction is considered essential for business profitability as it increases the possibility of a customer’s revisit and repurchase intentions. To provide customer satisfaction, most companies make efforts related to product quality, customer service, and employee training largely focused upon customer expectations. Customer satisfaction as a vital tool of survival and revenue might drive companies into a state of myopia where they fail to develop a visionary approach involving long-term relationship orientation in interactions with customers and instead deliver short-term customer satisfaction focussing on a particular transaction. Companies emphasise upon ensuring satisfaction in various transactions with customers expecting that these continued episodes of satisfaction will result into the formation of customer loyalty. Such a situation has been termed as a “satisfaction trap” by Reichheld (1996) who suggested that 65% to 85% satisfied customers are prone to switching as satisfaction does not universally convert into loyalty despite being generally related to it (Oliver, 1999). It is important to understand that all loyal customers may be termed as satisfied customers, but all satisfied customers do not qualify to become loyal customers of the company as loyalty demands an enduring long-term association between a company and its customers.

Emotions The role and effect of emotions in determining the shape and intensity of customer responses is too important to be completely ignored. Bagozzi et al. (1999) defined emotions as psychological states of willingness arising from cognitive evaluations of events or one’s views. These emotions

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can be understood as discrete groups of emotional “All loyal customers may be experiences and expressions, such as delight, resentment, termed as satisfied customers, or trepidation. These emotions can also be seen as a but all satisfied customers do not limited number of dimensions which are fundamental to qualify to become loyal customers the emotional groups like pleasantness/unpleasantness, of the company as loyalty relaxation/action, or calmness/excitement (Izard, 1977; demands an enduring long-term Plutchik, 1980). Positive emotions are not only helpful association between company in lessening a customer’s agitation in an event of service and its customers.” failure but also induce positive behavioural intentions among customers whereas negative emotions are bound to affect service quality evaluations and the resultant level of satisfaction unfavourably.

Satisfaction – Emotion Quadrate Together, customer satisfaction and emotions can create a bond with customers by enforcing positive behavioural intentions and attitudinal dispositions among customers while negating the negative responses. The Satisfaction–Emotion relationship leads to four psychological states arising out of various combinations of two extreme states of satisfaction and emotions. A categorisation of customers anchored on the concepts of satisfaction and emotions and aimed at delineating distinct forms of customer loyalty is depicted and discussed as follows (see Fig. 4.2). High

Emotions

Pleased

Loyalist

High

Low

Indifferent

Partisan

Low Satisfaction

Figure 4.2

Distinct forms of customer loyalty.

1. Indifferent: Low Satisfaction–Low Emotions These customers can be considered potentially disloyal as they are most prone to succumb to competitive pressures. Their stay with the company can merely be a result of their own limitations such as inertia, unavailability of desired alternatives, high level of perceived switching costs, or some other obligatory forces. Such customers lie in the high risk zone of the company as the resources invested in serving them can prove to have been wasted. Moreover, these customers do not give other benefits to the company such as recommendations, exclusive consideration, and support that restricts the reward-cost ratio. Arranged marriages in Indian society offer numerous examples of such relationships where nuptial unions are sustained lifelong even in the absence of pre-existing emotional attachment and

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Customer Loyalty

relational contentment due to social obligations, habitual dependence, and apprehensions about children’s future. Life insurance is a consumption decision which is passive in nature. People buy a life insurance product with an eye on the future. The sheer nature of the product restricts people to change their service provider easily. Hence, they continue to stay in the relationship with an indifference towards the quality of services. 2. Pleased: High Satisfaction–Low Emotions Relationships which fall into this category are primarily based upon the degree of satisfaction that the partners experience in the relationship. Continuing the relationship is a rational choice made out of cognitive evaluations and subsequent decision making. In the context of business to customer relationships, such associations depict cognitive loyalty of customers that is formed out of conscious evaluation of nursing repatronage intentions, or in other words, weighing the cost and benefits involved in the decision to stay with the company. Though such customers demonstrate signs of loyalty towards the company, their loyalty is subject to change with their expectations, which vary with different life stages, crisis, novelty seeking behaviour, or an attractive offer promising greater benefits. Therefore, customer loyalty of this nature can be termed as unreliable despite contributing significantly towards a company’s profits. Consider a situation where a young employee who joined his present organisation only a few years back, declines an offer from one of the leading organisations in the same sector due to a low salary package. The reason may well be that he is not satisfied with the compensation offered since at this stage of his career, financial stability is more important to him than being associated with a top notch company. However, this doesn’t imply that the same reason will continue to control his intentions to switchover in the future also. This relationship has a highly favourable reward to cost ratio but low emotional connect restricts its patronage and willingness to pay a premium. Teaching in a government school, college, or university might be a highly rewarding job but sending one’s kids to the same institution might not appeal to some teachers. Similarly, investment in real estate is another case where the reward–cost ratio is highly favourable but does not create a deep emotional bond other than with the house you own. On the contrary, investing in child education plans may not provide a lucrative return for self, but it connects at a high point on the emotional spectrum 3. Partisan: Low Satisfaction–High Emotions Marked by deep attachment to the company or the brand, customers’ allegiance towards the company in this category is highly driven by the affective processes of the brain. Partisans are those customers who are ready to endure dissatisfaction without inflicting any permanent damage to their relationship with the company. This is possible only when the intensity of emotions is strong enough to alter the evaluative criteria and infuse a relational focus in decision making. However, to attain a position where emotional attachment governs the role of satisfaction in loyalty formation, the level of customer delight should be sustained for a considerable period of the relationship so that high degrees of trust and commitment can be developed among customers. Such customers are generally found to be highly enthusiastic about the brand and ready to risk their own social identity by strongly supporting and recommending the company among their social circles. Movies and cricket are two passions that have been impacting Indians to a great extent since a long time. Especially in south India, movie lovers get so deeply attached with their actors that they

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go to the extent of constructing temples in the name of their favourite movie star and idolize the actor. As a result, movies featuring a particular movie star might sell instantly. The actor’s name itself is considered a guarantee of box office success, irrespective of the reviews the film generates. The remarkably high number of followers who devote themselves to the ideology of a specific spiritual guru reflects enormous emotional quotient that is involved in such associations. While a majority of these devotees may not understand the tangible benefits they obtain out of their devotion, they not only stay loyal to their spiritual association but also advocate their belief among their family and peer group. 4. Loyalist: High Satisfaction – High Emotions A balanced and comprehensive picture of customer loyalty involves a judicious mix of satisfaction and emotions that is more likely to sustain in the long run than any of the previously discussed quadrants. Customers who choose to stick to a company not only because they are highly satisfied but also because of a feeling of affiliation towards it are most bankable as there is diminutive risk of defection in such cases with low switching intentions. These customers have negligible motives for switching to another company that entails high switching costs with no significant advantages. According to data released by Bureau of Labor Statistics, Physicists were the highest compensated professionals in the US in the year 2011. A professional “Loyalty, which is principally automatically falls into the category of loyalist if he enjoys valued for its outcomes, blooms what he does. Being in a profession which inspires one to to its full strength when loyalists engage one’s abilities to the fullest while being compensated demonstrate manifestations for the hard work, coupled with recognition and respect of customer loyalty by offering is most likely to attract a person’s loyalty to a point where preference, patronage and instead of working to achieve for self, the person strives to premium to the company.” contribute something significant to the profession even if attractive opportunities exist in other sectors. There are many examples in the corporate world where founders of renowned business houses established high corporate standards intended to deliver value to the society at large. Organisations such as Infosys aim to garner profits by repaying to the society in terms of excellent employment opportunities, world class work environment, and regular and effective initiatives related to corporate social responsibility. Loyalists are what a company should strive to inculcate as these customers are capable of providing an effective competitive edge to the company while ensuring sustained growth and profitability. Loyalty, which is principally valued for its outcome, blooms to its full strength when loyalists demonstrate manifestations of customer loyalty by offering preference, patronage and premium to the company. (i) Preference The loyalty of a relationship can be adjudged only when it is tested on the scale of preference. Loyalists with a strong preference towards a particular brand actually demonstrate behavioural loyalty outcomes such as repurchase intentions, resistance towards switching and exclusive purchasing. All these favourable actions express a customers’ proclivity for a brand. This form of loyalty is more action based instead of being driven from an attitudinal predisposition of the mind, which might not yield any tangible results for the service provider. A person buying regular household items from the nearest general store over a sustained period of time might be termed as a loyal customer but his loyalty would be tested if, in the

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vicinity, an organised retail store comes up that offers products at discounted prices and a better shopping experience. If the customer continues to purchase from the regular general store, the customer can be termed loyal as the customer is demonstrating a clear preference towards the general store by choosing it over another superior alternative. (ii) Patronage Patronage largely represents the affect component of customer loyalty that motivates a loyalist to patronise a service by extending full cooperation and support to a particular service provider. Customers with high patronage intentions not only recommend the service provider in their social circles but also lend their support for betterment of services delivered through constructive feedback and co-creation of services, enabling the provider to ensure a congenial service environment. These customers believe their service provider is better than others in business. A regular customer of Pizza Hut will be considered loyal when the customer is willing to actively recommend Pizza Hut by talking favourably about various aspects of dining here such as customer service, competent employees, and the overall dining experience among his social circle. Such a loyal customer patronises his favoured brand by advocacy and altruism whereby he not only offers referrals to the business but also assists it in improving the product, service, ambience and the overall experience by providing constructive feedback. (iii) Premium The cognitive outcomes of customer loyalty reflect rational decision making by customers which guides them to assign their loyalty to a service provider on the basis of a conscious appraisal of different features of the service, or in other words, the advantages of nurturing repatronage intentions. One of the most prominent traits of cognitively loyal customers is their insensitivity towards price hikes. These customers estimate the brand value and other advantages of being associated with a particular service provider beforehand and remain assured of the cost being offset by various other features of the service. Such loyalists sometimes pay a premium to purchase a service which enjoys top of mind recall and provides them a sense of identification with the brand. A customer who visits a specific beauty salon frequently will be termed loyal if increased charges of various services fail to alter the customer’s perception of the cost-benefit ratio and the customer still finds the services worth their price. In this situation, the underlying mechanism is the perceived superiority of rewards that one receives over the cost that has to be incurred. Based on the theory discussed earlier, we suggest that: “Customer Loyalty is a psychological character formed by sustained satisfaction of the customer coupled with emotional attachment formed with the service provider that leads to a state of willingly and consistently being in the relationship with preference, patronage and premium.” This definition brings forth the following features of loyalty: (i) It is a set of qualities of a customer that are psychological in nature. (ii) Customer satisfaction in a commercial relationship is prerequisite for customer loyalty. However, mere satisfaction would not suffice. Loyalty has to be consistent. It requires customer’s emotional involvement in a consumption driven relationship.

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(iii) Loyalty leads to a deliberate and willing participation of the customer in the relationship and motivates the customer to continuously remain in the relationship. (iv) The relationship should reflect the following characteristics: (a) Preference in consumption (b) Ownership of the consumption relationship by the customer, and (c) Readiness to bear premium cost for the sake of the relationship

Preference

Satisfaction State of willingly and consistently being in the relationship

CUSTOMER LOYALTY

Patronage

Emotions

Premium

Figure 4.3 A schematic defining customer loyalty

Customer loyalty can be considered as the sum total of a customer’s level of satisfaction and the degree of the customer’s emotional attachment with a company that constructs a state of willingly and consistently being in the relationship and ultimately translates into customer loyalty. Companies need to adopt a balanced approach while dealing with their customers. While delivering satisfactory services is vital to customer retention, creating an emotional bond with them is equally important for lowering the risks of defection, negative word of mouth publicity, unyielding customer service, and loss-making customer relationships. A high degree of “High degree of satisfaction satisfaction coupled with deep emotional attachment forges coupled with deep emotional an enduring, yet endearing association between the company and its customers, which transpires into a relationship attachment forges an enduring, yet endearing association characterised by preference, patronage, and premium. between the company and its Loyalty is a higher-order measure of customer attachment customers which transpires than satisfaction. Loyalty involves an emotional commitment into a phenomenon called to the brand. It usually has an attitude component (“I feel better Customer Loyalty characterized about it, so I’ll keep using it”) and a behaviour component by preference, patronage and (“I’ll keep buying it, regardless”). Attitudes are important premium. ” because repurchase alone doesn’t always mean a customer is emotionally invested. For example, you might not find your insurance agent efficient, but you may still maintain your relationship due to paucity of time that obstructs you from searching and evaluating a new agent. But once you get a reliable referral for a new agent, you make a switch. In this case, the perceived loyalty was actually nothing more than convenience.

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Loyalty is best demonstrated when customers have options to choose from, rather than momentum from an existing supplier or being roped into a long-term contract. When a customer is loyal to a brand or service, he is less likely to defect, more likely to buy again, to think about his preferred brand first, and to refer it to others. True loyalty, in its most basic sense, leads to customer retention, repurchase, and a deeper long-term commitment. In general, customer loyalty can be understood as the predilection of a customer to purchase a particular company’s goods or services over the alternatives readily available in the market. 4.5.

SIGNIFICANCE OF CUSTOMER LOYALTY

Acquiring the customers is an important business activity but retaining these customers is crucial to business. Rosenberg et al. (1984) suggested that new customer acquisition can cost as much as six times than the cost incurred in retaining an existing one. Reichheld and Sasser (1990) pointed that depending upon a particular industry; an increase of 25% to 125% in profits can be achieved if potential switching is reduced by 5%. Ehrenberg and Goodhardt (2000) analysed and concluded that the increase in profits can be attributed to lower costs associated with retaining existing customers, rather than constantly scouting for new ones, especially within mature, competitive markets. Grayson and Ambler (1999) predicted the rewards from this group as long term and cumulative as these retained customers become loyal over time and in the long run, more likely to expand their relationship within the product range. Customer loyalty has been drawing attention from both the corporate and academic worlds as it holds a place of immense importance in most businesses. The relevance of customer loyalty has been aptly highlighted by Singh and Sirdeshmukh (2000) who stated that customer loyalty is quickly turning into, “the marketplace currency of the twentyfirst century”. The significance of customer loyalty relating to different business and marketing dimensions is highlighted as follows: ∑ Kotler (1997) linked loyalty to the strategic aspects of business and opined that loyalty constitutes an underlying objective for strategic market planning. ∑ Lado (2003) opined that customer loyalty bears a powerful impact on a firm’s performance and if managed properly, can serve as an important source of sustainable competitive advantage. ∑ Gomez et al. (2005) postulated that relationship between a loyal customer and the business is seen as an investment in building competitive advantage, thereby securing future revenues. ∑ Naumann et al. (2001) stated that customer loyalty leads to increased profitability, market share, and growth. ∑ Lee, Lee and Feick (2001) recognised hard-core loyalty for devotion to the enterprise, repeat purchase probability, staying with the current provider, and recommendations for the enterprise to friends, colleagues and family members. ∑ Oderkerken-Schroder et al. (2003) considered customer loyalty of primary importance because it had positive impact on sales, share of wallet, and customer retention. ∑ Hoisington and Naumann (2003) found that loyalty diminishes costs of attracting new customers, and customer loyalty is an essential condition to implement effective business strategy.

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∑ Petrick (2004) emphasised that better customer satisfaction and customer loyalty result in greater profitability, favourable publicity, a big pool of customers and lower marketing costs. Several advantages accrue to companies by making customers loyal to them. These specific advantages are as follows: 1. Helps customer retention: The biggest advantage of loyalty is that the customer stays with the company for a long time. This customer retention contributes directly to the company’s bottom-line. 2. Unremitting returns: A loyal customer acts as a perpetual source of revenue and profit by staying with the company. 3. Emissary customers: A satisfied customer is likely to make positive remarks about the company among other potential customers. 4. Premium prices: A loyal customer is likely to be less price-sensitive and will be ready to pay a premium for the products just to avoid taking risks with a new company. 5. Lowers cost of sale: Acquiring such customers does not cost anything. Hence, it lowers cost of sales. 6. Reduces marketing time: Through positive referrals and opportunities to cross-sell and upsell, the customer acquisition becomes easier and leads to reduced marketing time. 7. Provides opportunity to cross-sell and up-sell: As a loyal customer remains with the company, it provides an opportunity to cross-sell and up-sell and contributes to the company’s profitability. These advantages elucidate that creating loyalty among customers is extremely important in modern businesses. The success of a business is dependent on how successfully the firm creates loyalty among its customers and retains them. Companies often spend significant time and money to bring customers to their fold and then fall short on their follow-up strategy. Companies need to engage customers throughout their relationship. Only then will the customers reward the companies with their loyalty, which might translate into the marketing and business benefits discussed earlier. Enhancing customer loyalty is a core objective of marketing – a strategy employed by businesses to enhance the loyalty of customers as well as other stakeholders in the drive to meet and exceed commercial objectives. 4.6.

FINAL THOUGHTS

To survive or even thrive in the current economic environment, organisations need to revisit their customer retention strategies—and if necessary, renew their commitment to customer centricity. The threat of declining customer revenues and defection is real and

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must be addressed urgently. However, the economic climate also creates new opportunities to strengthen market position and growth by building customer trust, providing meaningful brand differentiation, tailoring offers in light of new customer needs and, if appropriate, negotiating new terms. The combat for customers has its own set of champions and laggards. However, those who realize the needs and expectations of customers at the earliest and continuously strive for delighting them through a series of successful encounters will outwit those who merely rely upon market dynamics for survival. Customer centricity is the need of the hour and companies with a focussed approach and long-term outlook acknowledge the significance of loyalty for the well-being of their businesses through a plethora of loyalty programmes. Review Questions 1. What is Customer Loyalty? Why does a company build loyalty among its customers? 2. Elaborate upon the satisfaction – emotion quadrate model of customer loyalty. 3. Do loyalty parameters need to be different for goods and services? If yes, what are the points of differences? 4. If it is a pure give and take relationship between the buyer and the seller, why should a customer be loyal? 5. What is classification of customer loyalty? What is the need for such classification? 6. “Loyalty is an extension of satisfaction.” How far do you agree with this statement and why? Explain with suitable illustrations. 7. Explain how is customer loyalty developed? 8. Does the development of customer loyalty differ for different products? If yes, what are the reasons? 9. “Loyal customers are more profitable customers.” Why? 10. Explain the concept of Proxy Loyalty? Why is Proxy Loyalty no loyalty?

Project Assignments 1. Conduct a study of loyalty development in the FMCG sector. Design a customer loyalty development program for a new packaged water company. 2. Assess the net advantages accruing to the company on account of loyal customers in special reference to the banking industry. The cost incurred on building loyalty also needs to be accounted for.

References 1. Accenture Customer Satisfaction Survey Report retrieved from http://www.accenture.com/ Microsites/basle-switzerland/Documents/PDF/Accenture_2009_Global_Consumer_Satisfaction_ Report.pdf on 1 April 2013. 2. Anderson, Eugene W. (1996). Customer Satisfaction and Price Tolerance. Marketing Letters, 7 (3), 256–274. 3. Bhote, K. R. (1996). Beyond Customer Satisfaction to Customer Loyalty – The Key to Greater Profitability, American Management Association, New York, 31. 4. Caruana, A (2002). Service loyalty: The effects of service quality and the mediating role of customer satisfaction. European Journal of Marketing, 36 (7/8), 811–828. 5. Cronin, J. J. Jr and Taylor, S. A. (1992). Measuring service quality: A re-examination and extension. Journal of Marketing, 56, 405–20.

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6. Cunningham, R. M. (1956). Brand Loyalty - What Where How Much? Harvard Business Review, 34, 116–128. 7. Dick, A.S. and Basu, K. (1994). Customer loyalty: toward an integrated conceptual framework. Journal of the Academy of Marketing Science, 22 (2), 99–113. 8. Dimitriadis, S., Kouremenos, A. and Kyrezis, N. (2011). Trust-based segmentation: preliminary evidence from technology-enabled bank channels. International Journal of Bank Marketing, 29 (1), 5–31. 9. Ehrenberg, Andrew S.C. and Gerald Goodhardt (2000), “New Brands: Near-Instant Loyalty,” in 40th Annual Conference of the Professional Market Research Society. Toronto, Canada: Professional Market Research Society. 10. Fraenkel, J. (2009). Retrieved from http://cache-www.intel.com/cd/00/00/44/14/441414_441414.pdf on 31st March, 2013. 11. Ganesh, Jaishankar, Mark J. Arnold, and Kristy E. Reynolds (2000), “Understanding the Customer Base of Service Providers: An Examination of the Differences between Switchers and Stayers,” Journal of Marketing, 64 (3), 65–87. 12. Gómez, B.G., Arranz, A.G., Cillán, J.G., 2006. The Role of Loyalty Programs in Behavioral and Affective Loyalty. Journal of Consumer Marketing, 23 (7), 387–396. 13. Grayson, K and Ambler, T, (1999). The Dark Side of Long-Term Relationships in Marketing Services. Journal of Marketing Research, 36 (February), 132–41. 14. Gremler, D. D. and Brown, W. B. (1999) “The loyalty ripple effect”. International Journal of Service Industry Management, 10, 3, 271–293. 15. Heskett, J.L., Sasser, W.E. Jr and Schlesinger, L.A. (1997). The Service Profit Chain. The Free Press, New York, NY. 16. Hoisington, S. and Naumann, E. (2003). The loyalty elephant. Quality Progress, 33–41. 17. Jacoby, J and Kyner, D. B. (1973). Brand Loyalty Vs. Repeat Purchasing Behavior. Journal of Marketing Research, 10 (1), 1–9. 18. Jacoby, J. and Chestnut, R.W. (1978). Brand Loyalty: Measurement and Management (John Wiley & Sons, New York). 19. Javalgi, R.R.G. and Moberg, C.R. (1997). Service loyalty: implications for service providers. Journal of Services Marketing, 11 (3), 165–179. 20. Kandampully, J. and Suhartanto, D. (2000). Customer loyalty in the hotel industry: the role of customer satisfaction and image. International Journal of Contemporary Hospitality Management, 12(6), 346–351. 21. Kotler, P. (1997), Marketing Management: Analysis, Planning, Implementation, Control. 9th ed Prentice-Hall. London. pp: 34–40, 55–62, 76–80, 110–115. 22. Lee, J., Lee, J., and Feick, F. (2001). The impact of the switching costs on the customer satisfactionloyalty link: mobile phone service in France. Journal of services marketing, 15(1), 35–48. 23. Liljander, V. and Strandvik, T. (1995), “The Nature of Customer Relationships in Services,” in Advances in Services Marketing and Management, Vol. 4, T. A. Swartz, D. E. Bowen, and S. W. Brown, eds. London: JAI, 141–67. 24. Maydeu-Olivares, A., and Lado, N. (2003). Market orientation and business economic performance: A mediated model. International Journal of Service Industry Management, 14(3), 284–309. 25. McMullan, R. (2005). Service quality vs. price: the moderating role of customer loyalty. Journal of Customer Behaviour, 4 (3), 425–44. 26. N’Goala G (2003). Measure the loyalty to the brand from a relational perspective. Acts of 19th International Congress of the French Association of Marketing, 9, 10 May. Tunis. 27. Naumann, E., Jackson, D.W., Rosenbaum, M. S. (2001). How to Implement a Customer Satisfaction Program. Business Horizons, January–February, 37–44.

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28. Newman, J.W. and Werbal, R.A. (1973). Multivariate analysis of brand loyalty for major household appliances. Journal of Marketing Research, 10, 404–9. 29. Oderkerken-Schoder, Gaby, De Wulf, Kristof, and Schumacher, Patrick (2003). Strengthening Outcomes of Retailer-Consumer Relationships: The Dual Impact of Relationship Marketing Tactics and Consumer Personality. Journal of Business Research, 56 (3), 177–190. 30. Oliver, R.L. (1999). Whence Consumer Loyalty. Journal of Marketing, 63 (special Issue), 33–44. 31. Ostrowski, P.L., O’Brien, T.V. and Gordon, G.L. (1993). Service quality and customer loyalty in the commercial airline industry. Journal of Travel Research, 32 (2), 16–24. 32. Petrick J.F. (2004). Are loyal visitors desired visitors? Tourism Management, 25, 463–470. 33. Prus, A. and Brandt, D.R. (1995). Understanding Your Customers. Marketing Tools, 2(5), 10–14. 34. Raman, P. (1999). Way to create loyalty. New Straits Times. 35. Reichheld, F.F. and Sasser, Jr., W.E. (1990). Zero defections. Quality comes to services. Harvard Business Review, 68(5), 105–111. 36. Rosenberg L. and Czepial. J (1984). A marketing approach for customer retention. Journal of Customer Marketing, 1, 45–51. 37. Rundle-Thiele, S. (2005). Elaborating customer loyalty: Exploring loyalty to wine retailers. Journal of Retailing Consumer Services, 12, 333–344. 38. Selnes, F (1993). An Examination of the Effect of Product Performance on Brand Reputation, Satisfaction and Loyalty. European Journal of Marketing, 27 (9), 19–35. 39. Shoemaker, S. and Lewis, R. C. (1999) ‘Customer loyalty: The future of hospitality marketing’, Hospitality Management, 18, 345–370. 40. Singh, J. and Sirdeshmukh, D. (2000). Agency and trust mechanisms in customer satisfaction and loyalty judgments. Journal of the Academy of Marketing Science, 28 (1), 150–67. 41. Tim Jones, Shirley F. Taylor (deceased), “Service loyalty: accounting for social capital”, Emerald 26, (2012). 42. Uncles, M. D., Dowling, G. R. and Hammond, K (2003). Customer Loyalty and Customer Loyalty Programmes. Journal of Consumer Marketing, 20(4), 294–316. 43. http://levi.in/loop/Help.aspx accessed on 31st January 2013. 44. http://www.thewisemarketer.com/features/read.asp?id=108 accessed on 31st March 2012.

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Customer Loyalty: A Perspective

Loyal customers, they don’t just come back, they don’t simply recommend you, they insist that their friends do business with you. Chip Bell This chapter is aimed at providing an insight into: Laws of Loyalty Raison d’être of Customer Loyalty Categories of Customer Loyalty Factors Influencing Customer Loyalty Classification of Customer Loyalty 5.1.

INTRODUCTION

Research in the area of customer loyalty gained momentum when its unassailable advantages were brought to the fore by Reichheld (1996) who asserted that profitability can be increased by as much as 125% by retaining old, loyal customers. Recent studies also recognise the importance of customer loyalty in today’s volatile business environment. Reinartz et al. (2005) noted that marketing research posits customer loyalty strategies required for retaining customers as an important question. The value of customer loyalty for service industries has been recognised by many researchers who underlined its potential effect on the development of sustained competitive edge for service organisations. The distinctive nature of services, increased role of technology, and higher customer involvement in service delivery processes have furthered the importance of customer loyalty in service industries. 5.2.

LAWS OF LOYALTY

Building and maintaining loyalty for a company or a product is a subjective process. Standardisation of this process is extremely difficult. Although designing strategy for building loyalty is a prerogative of the company, responses are subject to certain principles of loyalty that are presented as follows. These principles are: 1. Identify the factors responsible for loyalty formation. Treating customer loyalty as a function of customer satisfaction only is erroneous. The belief that a higher degree of

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2.

3.

4.

5.

6.

customer satisfaction would necessarily usher in a greater level of customer loyalty is a myth. Identification and comprehension of the factors responsible for formation of loyalty and their impact on the customers’ value and loyalty intentions is a requisite for developing and managing a valuable loyalty cache. Loyalty may take diverse forms. The degree, intensity, and form of loyalty differs from customer to customer and consumption to consumption. Different forms of loyalty are: conditional (only if), emotional (come what may), passive (confined to the individual without expecting the cost), or proxy (in absence of options). A company needs to understand these different forms and respond depending on a particular situation. Loyalty begins from the beginning. The loyalty character of a customer is not a mere consumption driven resultant behaviour but starts from the first encounter between the customer and the company. A set of perception is built about the company which subsequently takes shape, gets refined, and is further verified and ratified with each stage of customer-company communication, interaction, and consumption. The journey that starts with the state of being a potential customer, moves through being a customer, graduates to a retained customer and then matures with the customer being the ambassador. Customer loyalty finds base in customer retention. Unlike love at first sight, loyalty is not developed with the first interaction. It gradually moves in a direction. The phenomenon of loyalty starts with acquisition but is developed through retention. This feature is essential for loyalty exhibition. The cost of customer loyalty is also optimised and endorsed through the retention behaviour of customers. Involve complete value chain for building loyalty. A product that is delivered to the customer in the customer’s chosen place and manner is the result of a long drawn exercise. There are several stakeholders in ensuring superior customer experience leading to customer satisfaction, which in turn would ensure customer retention and might graduate to loyalty. These stakeholders include the suppliers and channel partners who have an important role to play in the value chain. For instance, if the design of a Coke bottle impresses customers or the packaging of Nexus 4 cell phone makes the customer experience superior, credit goes to the suppliers of these components. Similarly, the cleanliness and display of coffee kiosks at airports Companies must adapt swiftly to contributes significantly to the relationship between the the growing needs of customers. coffee company and its customers. Therefore, all channel partners have a significant role to play in the overall customer experience and subsequent loyalty formation. Adapt and customise. Markets are changing and so are the customers. The position, demands and consumption power of customers are also changing in complex market environment. Customers are forcing companies to respond to their growing needs and expectations. This scenario calls for an urgent need to adapt swiftly to the changing market dynamics and customise as per customer requirements.

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Box 5.1: Adaptation – Key to Loyalty Building

While the Escorts Group promoted Rajdoot, a popular two-wheeler model, the Eicher group promoted Royal Enfield, whose model ‘Bullet’ was an extremely popular motorcycle in the late 70s and early 80s in India. With the entry of fuel efficient four-stroke motorcycle engines (Hero Honda CD 100) in 1985, introduced by the then Hero Honda Motorcycles Limited (HHML), the motorcycle industry underwent a major facelift. While Rajdoot competed in the regular use segment, Enfield was placed in the niche segment, focusing more on style. The market shifted to four-stroke engines but Escorts could not respond to this change quickly, thereby losing its market to new age two wheeler companies. On the contrary, Royal Enfield constantly focused on its niche segment and kept introducing new models. It also introduced four-stroke engines early in the market. As a result, Escorts two wheelers vanished from the market while Enfield still has a strong hold on its loyal customers by operating smartly and catering effectively to its niche customer segment.

5.3.

RAISON D’ÊTRE OF CUSTOMER LOYALTY

In a milieu of cross border competition and undifferentiated products, reducing customer defection and building loyalty can prove to be a significant tool for business growth. Loyalty experts agree that retaining customers is more cost effective than acquiring them. They generally agree that loyal

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customers stick around longer and buy more frequently. This behaviour is driven by the customers’ attitude that they really want to continue to do business with the company. As a result, loyalty leaders enjoy a substantial advantage in terms of revenue, growth and profitability. Additionally, it has been found that when a company works with existing customers, it often experiences shorter sales cycles because the business scores on the basis of familiarity and trust. Customer satisfaction and loyalty also affect a company’s ability to acquire new customers. Word of mouth publicity from these customers can either poke a hole in the company’s sales or pump it up momentously. On an average, a satisfied customer speaks to three people about the experience the customer had with a particular product or service. However, a dissatisfied customer notifies anywhere between eight to sixteen people! Therefore, the overall impact on the referral base can easily be predicted. Sometimes, customers do not switch to other brands or businesses due to lack of alternatives or high exit barriers. These “trapped” customers, as defined by loyalty research firm Walker Information, should not be confused with “truly loyal” customers who have a positive attitude towards the business relationship and are willing to recommend it to their peers. Loyalty guru Frederick Reichheld described the “loyalty effect” as a powerful profit maker since loyal customers are likely to allocate a greater share of wallet, recommend to others, and entail lesser service cost. Reichheld, author of The Loyalty Effect and Loyalty Rules, observed various industries and found that on an average, loyalty leaders achieve a growth rate twice the industry average. The following reasons justify that building customer loyalty is an undeniably important business concern: Recurring Purchases: Loyal customers, by definition, purchase goods or services repeatedly. There might be a situation when the company manages to sell to a loyal customer more than what it sells to 10 new customers if the business type and sales cycle permit. Larger Volume: Relationships with loyal customers enable a company to sell larger volumes without difficulty. This may take place naturally or else, the company might offer some incentives exclusively meant for customers who buy more. The ability to sell larger volumes translates into greater profits. Cross Selling: Loyal customers share a relationship with the company that is largely based on the trust that the company would provide quality products every time. Selling various product lines is not a difficult task if the company manages to generate trust among its customers. Cross selling results in greater sales volumes and compensates the potential profits that could be garnered by acquiring new customers. Thwarting the Competitive Forces: A company with a sound base of loyal customers is most likely to be cosseted from competitive pressures since loyal customers act as a cushion against uncertain business environment and aggressive strategies of rivals. Loyalty is the only tool that is capable of developing immunity against competition, especially in industries with negligible entry barriers. Positive Publicity: The most important and crucial projectile that loyal customers keep in their arsenal is word of mouth publicity. It is natural for customers to speak about the consumption experience they have with a particular company. A happy and content customer is likely to not only revisit the company but also refer it to other potential customers.

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Box 5.2: Handling Grievances at McDonald’s McDonald’s has a very quick system of resolving customer complaints using a process called Customer Recovery Process (CRP), under which it is the responsibility of the restaurant manager to resolve all complaints or issues “then & there.” A quick resolution of problems leads to the service recovery paradox, where customers experience greater satisfaction post successful recovery management. The restaurant manager calls up the customer within an hour of the complaint enquiring about the experience at McDonald’s and requests the customer to revisit the restaurant. A recovery letter is also sent to the customer within 24 hours. Customer Feedback Book is the set protocol at McDonald’s in which the customers can provide feedback, suggestions, or register their complaints.

Ignoring Mistakes: The intrinsic nature of businesses make 100% error-free products and services a distant dream. Errors occur even in the best of organisations known for unparalleled customer service. Some of these are uncontrollable in nature. Nonetheless, these mistakes have the potential to destroy the image of the company if customers are unaware of its past record and its commitment to provide excellent service. A simple error related to a delivery schedule can convey an impression of being disorganised and unreliable that is sure to lead to customer defection. A loyal customer, however, tends to ignore such mistakes of the company to an extent. There remains a wider tolerance zone and a willingness to support the company in the event of service failure if the customers are loyal and the company is visibly making efforts to maintain the level of product quality and customer services it provided to achieve customer loyalty. 5.4.

FACTORS AFFECTING CUSTOMER LOYALTY

Customer loyalty has widely been acknowledged as a business mantra worth rehearsing and reciting. Several distinguished analysts and researchers repetitively demonstrated the significance of loyalty in terms of a greater share of wallet, higher satisfaction, profitable customer relaSatisfaction tionships, diminished rate of defection, and inimitable competitive advantages. Jacoby and Chestnut (1978) suggested Core Elasticity that the role played by the belief, attitude, offering level and conative structure of the customer’s oriFactors entation of the focal brand in determining Influencing his loyalty gained importance and led to the Customer Loyalty three stages of loyalty formation: (a) Cognitive Share of Demographics (b) Affective, and wallet (c) Conative Peter Clark, co-editor of The Wise Marketer The market and co-author of The Loyalty Guide report place series, underlined six factors which play vital roles in affecting loyalty and commitment of the customers: Figure 5.1 The Loyalty Guide II (The Loyalty Guide)

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5.4.1.

Core Product

A high level of loyalty is a matter of solid and reliable core product that has a higher appeal for customers than loyalty cards and programmes. Companies holding an enviable loyalty base intently focus on crafting the right product with a value proposition desired by the target segments and strive to deliver the brand promise consistently. The core product entails the following factors which affect customer loyalty: ∑ Location and edifice: The location of a brand outlet and its premises play a considerable role in loyalty building, especially in retail business where attractiveness of location and functionality of premises are given utmost importance. ∑ Service: Delivering prompt and error-free service in a courteous manner is important in both manufacturing and services industries. The kind of service the customers receive shapes their loyalty to a considerable extent. A few businesses put prices in the most decisive position and operate on the premise that low prices are all that a customer desires. This view cannot be rejected completely. However, it should also be understood that such customers will be loyal to the low prices, not the company. They will switch to whoever offers them the lowest cost products. Companies who are more interested in designing sales gimmicks such as Everyday Low Prices (EDLP) are likely to lose to companies who build their business around superior product quality in the long run. Box 5.3: McDonald’s: Customisation at its Best Respect for Indian customs and culture is ingrained in the business of McDonald’s as the company is recognized worldwide for maintaining a high degree of respect for local culture. The following points provide a glimpse of the kind of customisation that McDonald’s offers for its Indian customers: 1. McDonald’s has developed a menu especially for India with vegetarian dishes to suit the Indian palate and has also re-engineered its operations to address the special requirements of vegetarians. India is the first country in the world where McDonald’s does not offer any beef or pork items. 2. Special care is taken to ensure that all vegetable products are prepared separately, using separate equipment and utensils. This separation of vegetarian and non-vegetarian food products is maintained throughout the various stages of procurement, cooking and serving. So much so that the mayonnaise and soft serves are also 100% vegetarian, and McDonald’s uses only vegetable oil as a cooking medium in India. 3. Every month, McDonald’s adds new dishes to its menu. These dishes are designed keeping in view the taste and preferences of Indians. 4. The company tries to provide its customers value for money by providing meals that are easily affordable. Customers can opt for the same meal in small, medium and large quantities. 5. For its non-vegetarian customers, McDonald’s offers chicken and fish items. 6. The Limited Time Offers (LTO) at McDonald’s is another customised technique for its customers where prices are brought down to nearly 50%. The LTOs take place at various occasions such as Independence Day, Children’s Day, and Diwali. 7. During special offers, customers get free coupons of McDonald’s by using the services of companies that have tie-ups with McDonald’s such as Club Mahindra.

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Tangibles in the services industry play a crucial role due to the inherent intangible nature of the services. Having realized this, McDonald’s maintains transparency in its processes. It promises a neat and clean environment in its front end as well as back end operations. The seating arrangement is also well planned. The employees are smart and customer friendly. Uniformity in their appearance and expressions signify a professional yet empathetic attitude towards customers. Apart from managing tangible cues, McDonald’s also recognises the importance of providing additional facilities to customers that might elevate customer satisfaction to customer delight and help in building an enduring association with the customers. Some of these extra benefits are: Wonderful toys with McHappy meals: McDonalds is famous among Indian kids in almost all age groups, but kids below 10 years are extremely fond of the wonderful McDonald’s toys they get with McHappy meals. This helps the food retailer in attracting and enjoying the loyalty of parents along with their kids. Below are some of the prominent service features which reflect the customised approach of McDonald’s towards its customers: 1. Play Place and Parties: A service that attracts customers with family and kids is McDonald’s Play and Party zone wherein birthday parties can be organised and celebrated. Parents do not have to worry about their kid’s birthday arrangements or other celebrations for their kids. Happy Meals and birthday arrangements attract a lot of families and serve as a wonderful experience for the customers. 2. Quick service delivery: McDonalds aims to deliver the order within 60 seconds of the transaction. This creates a favourable image in the eyes of the customers since it not only communicates valuing customers’ time but also shortens the waiting time before actual consumption. 3. Proper communication to the customers: McDonald’s Customer Relationship Executive specially maintains the database of customers and contacts them for organising events such as birthday or kitty parties. This helps the food retailer in cross selling, up selling and even expanding the customer base through customer referrals. 4. Home delivery: McDonald’s also offers the facility of home delivery to its customers. Orders can be placed either by calling its hotline number or a particular outlet. Customers can place the order online as well on the company website (mcdelivery.co.in).

∑ The product or service: Products and services should be designed the way customers want. Customer empowerment has paved the way for products that are virtually designed by the customers and merely manufactured by companies. The paramount importance customers receive in new age businesses simply suggests that customer expectations are sure to be met, if not by you then someone else. 5.4.2.

Satisfaction

Although, satisfaction is a vital business metric that is capable of determining customer loyalty, but isolated measurement of satisfaction is not effective in predicting loyalty. Many auto manufacturers claim satisfaction levels of about 90% or even more, yet, few can claim the repurchase levels of even half that. People might discontinue consumption not

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only because of dissatisfaction but because of other factors such as increase in their income and availability of superior options. For example, with an increase in income, a person might upgrade from a 100 cc motorcycle to a 150 cc bike, from a small car to a sedan, or from an MIG flat to an HIG apartment. At the same time, satisfaction is an essential factor. In its absence, loyalty can never be attained. Low degree of customer satisfaction generally means a small degree of customer loyalty but not vice versa. A higher level of customer satisfaction does not necessarily correspond to a high level of customer loyalty. Customers today regard satisfaction as an intrinsic and innate part of any deal and therefore, merely being satisfied does not qualify as a reason strong enough to deter the customers from defection. Customer satisfaction can be considered as the starting point of customer loyalty formation but it certainly is not a guarantee of customer loyalty. 5.4.3.

Elasticity level

Elasticity stands for the significance and credence involved in a purchase decision. ∑ Customer’s Participation: Customer’s participation is a decisive factor in loyalty formation as it determines the level of a customer’s attention and seriousness towards preconceived expectations and the corresponding evaluation of the product or service. The more involved a customer is, the more information he will search for and this will result in a stable decision. Customers participate closely while purchasing something related to high value involvement, such as a house or a car, or something that affects style, or both, such as a cell phone as compared to daily use items such as snacks and grocery. The type of product being offered should be considered while designing loyalty strategies. Customer’s decisiveness: A state of uncertainty or indecisiveness in a customer’s decision making is largely driven by the level of involvement as there are certain decisions that call for higher involvement and thus, greater clarity is required about the expected performance and attributes. However, commodities which are available in abundance without any significant differentiation confuse the customer and impede the customer in taking a firm decision of staying with a single brand. 5.4.4.

The marketplace

Markets also have a power to affect the formation of customer loyalty. Some of the elements of marketplace that are closely related to loyalty are: ∑ Switching Prospects: The quality and quantity of easily available alternatives strongly affect a customer’s intentions of switching or staying. The lower the switching costs and the more the options, the higher will be the instances of switching. Likewise, the amount of time and efforts that have been invested in a business relationship cause a customer to think twice before switching. The quality and standard of competitive offerings also become a part of the information processing that takes place while taking a decision to switch. Undifferentiated products and services that lack a unique selling point are likely to lose in the formation of customer loyalty. ∑ Inertia loyalty: Inertia is a state where a customer chooses to stay with a business just to avoid the trouble and uncertainty associated with searching and dealing with an unfamiliar

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brand. Most banking customers display inertia loyalty as customers avoid changing their banks due to complicated and time consuming processes involved in transferring accounts, direct debits and standing orders.

Products and services must have a Unique Selling Point to engage customers.

5.4.5.

Demographics

Jan Hofmeyr and Butch Rice, developers of The Conversion Model (meant for facilitating the users in customer segmentation as per their commitment towards the brand and non-customer segmentation according to openness to switching brands), suggested that there are low chances of educated and well-off customers staying committed to a particular brand. According to them, less affluent customers have petite risk taking ability and they cannot afford to try out various brands freely. Thus, their commitment tends to be stronger. Hofmeyr and Rice also observed that younger customers have a more variety seeking attitude than old customers and therefore, younger ones are less likely to stay loyal to a particular brand. 5.4.6.

Share of wallet

Share of wallet stands for the money a customer is ready to allocate to a particular brand in a category. Increased competition and saturated markets have made share of wallet a metric worth working for as it is less costlier and more profitable to increase the share of what a customer has already been spending than attracting and convincing a new customer to allocate his money. Share of wallet also implies that loyal customers will be willing to allocate all their spending in a particular product category to the brand they are loyal to.

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Academicians and marketers failed to develop a theoretical framework that could underline the factors which lead to customer loyalty formation (Gremler and Brown, 1997). Nevertheless, most of them consented that customer satisfaction and service quality are rudiments of loyalty (Cronin and Taylor, 1992; Gremler and Brown, 1997). The technical, economical and psychological aspects which drive and determine customers’ switching intentions are considered to be supplementary nuts and bolts of loyalty (Selnes, 1993; Gremler and Brown, 1997). Recent research suggests that a company’s corporate image also affects customer enthusiasm, value, delight, and loyalty (Bhote, 1996). Box: 5.4: Levi’s Loop Levi’s launched its Loop program in December 2010 across its exclusive stores in India. The program boasts of more than 5,00,000 members today. The store employs data related to transaction behaviour for observing the pattern of a customer’s purchase, choice of merchandise as well as their usual timings. With the help of these observations, customers are segmented into various categories and appropriate and relevant marketing communication including a reference to their previous transactions and an offer for potential next purchase is targeted. Mobile marketing is also used and communication via SMSs and e-mails are strategically planned in order to ensure maximum responses. Levi’s philosophy pertaining to loyalty enables it to use customer insight across the organisation. The customer loyalty program not only serves the purpose of repeat patronage but also plays an important role in the company’s policies related to purchasing, inventory, and pricing decisions.

5.5.

CLASSIFICATION OF CUSTOMER LOYALTY

Different researchers classified customer loyalty based on their research premise and research techniques. Ganesh et al. (2000) pointed that two elements of loyalty, attitude and behavioural intentions, have been the focus of several definitions and categorised loyalty into: active loyalty (word-of-mouth and usage intentions) and passive loyalty (refusing to switch even in the face of not so favourable situations). McMullan (2005) presented studies concerned with the classification of customer loyalty in the following table: Customer Loyalty Classifications Author(s), year

Contribution

Jacoby and Chesnut (1978)

Three-fold classification characterising approaches to measuring brand loyalty: Behaviour Psychological commitment Composite indices

Dick and Basu (1994)

Study concentrated on the relative attitude and potential moderators of the relative attitude to repeat-patronage based on social norms and situational factors. Relative attitude is the degree to which the consumer’s evaluation of one alternative brand dominates another. True loyalty exists only when repeat patronage coexists with high relative attitude. Classification including spurious, latent and sustainable categories of loyalty.

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Christopher et al. (1993)

81

The Loyalty Ladder. Examined the progress up or along the rungs from prospects, customers, clients, supporters and advocates. Progression requires increased discussion between exchange parties, commitment and trust, which develops in a consumer’s attitude based on their experiences including dialogue.

Baldinger and Ruben (1996) A composite approach. Investigated the predictive ability of behavioural and attitudinal data towards customer loyalty across five sectors. Hallowell (1996)

Examined the links between profitability, customer satisfaction, and customer loyalty.

O’Malley (1998)

Effectiveness of loyalty programmes.

Raju (1980)

Developed scale to measure loyalty within the Exploratory Tendencies in Consumer Behaviour Scales (ETCBS).

Beatty et al. (1988)

Developed scale to measure commitment, based on the assumption that commitment is similar to loyalty. This scale included items, which reflected ego involvement, purchase involvement, and brand commitment.

Pritchard et al. (1999)

Conceptualised customer loyalty in a commitment-loyalty measure, termed Psychological Commitment Instrument (PCI).

Gremler and Brown (1999)

Extended the concept of customer loyalty to intangible goods with their definition of service loyalty. They recommended a 12-item measure; with a seven-point scale described at either end strongly agree to strongly disagree.

Oliver (1999)

Greater emphasis on the notion of situational influences. Developed a four-phase model of customer loyalty development building on previous studies but uniquely adding the fourth action phase.

Jones et al. (2000)

Explored a further aspect of customer loyalty identified as “cognitive loyalty,” which is seen as a higher order dimension involving the consumer’s conscious decision-making process in the evaluation of alternative brands before a purchase is affected. One aspect of cognitive loyalty is switching/repurchase intentions, which moved the discussions beyond satisfaction towards behavioural analysis for segmentation and prediction purposes.

Knox and Walker (2001)

Developed a measure of customer loyalty. Empirical study of grocery brands. Found that brand commitment and brand support were necessary and sufficient conditions for customer loyalty to exist. Produced a classification: loyals, habituals, variety seekers, and switchers. Provides guidance for mature rather than new or emerging brands.

McMullan (2005)

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5.6.

Customer Loyalty

FINAL THOUGHTS

To survive and flourish in today’s complex economic conditions, organisations are lending greater attention to customer centricity and devising novel strategies and ways of customer retention. Customer defection and the resultant decline in revenues pose a real threat to organisations and demand a prompt response. However, the present economic climate also offers numerous opportunities to fortify the growth rate as well as the market share through acquiring customer trust, proposing significant brand differentiation, and customising the market offerings by focussing on customer needs. Customer loyalty has become a compelling business issue that possesses the energy to drive a firm’s performance and allows the business to sail through choppy waters. Researchers have largely perceived loyalty as a twofold concept consisting of a customer’s intentions to purchase repeatedly and a positive attitude towards the firm and its products. It is important to ensure that both, positive behavioural intentions and favourable attitude, remain consistent over a considerable period of time otherwise it would be difficult to ascertain whether the customer is truly loyal or his stay is a consequence of situational factors overpowering the urge to switch.

Companies must design a demand distinguished approach.

The numerous benefits of customer loyalty and its potential impact on the growth and profitability of the firm render it an unparalleled attraction for marketers. However, marketers need to be careful while focusing on customer loyalty and investing resources in building it as there are distinct categories of customers characterised with differing attitudes and behaviours. Each company needs to design a demand distinguished approach and customized loyalty strategy for spawning desired results for the business.

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Review Questions 1. Elaborate on the principles of loyalty building. 2. What are the reasons behind the growing importance of customer loyalty in a modern business arena? 3. Explain the Laws of Loyalty? Why are they called so? 4. What are the advantages that accrue to a firm on account of customer loyalty? 5. “Switching cost is one reason that forces people in a sustained relationship that is assumed as a loyal relationship.” What is your take on this notion? 6. What are the factors that influence customer loyalty of an organisation? 7. Explain the basis of customer loyalty classification. How far do you agree with the prevalent basis? 8. How important is satisfaction as a factor affecting the formation of customer loyalty? 9. What is Jacoby and Chestnut’s theory of loyalty formation? 10. Who are trapped customers? What are the repercussions on the organisation’s prospects because of these customers?

Project Assignments 1. As a relationship manager of a branded beauty salon, identify the factors that might affect loyalty among your customers. Devise a strategy to leverage this finding for loyalty formation. 2. Classify the customers of the only organised sector branded gym located in a Tier II city. What is the basis of your classification and what benefits would accrue to your organisation as a result of this exercise?

References 1. Bhote, K. R. (1996). Beyond Customer Satisfaction to customer Loyalty–The Key to Greater Profitability, American Management Association, New York, p. 31 2. Cronin Jr, J.J. and Taylor, S.A. (1992). Measuring service quality: a reexamination and extension. Journal of Marketing, 56 (July), 55–68. 3. Ganesh, J., Arnold, M. J. and Reynolds, K.E. (2000), Understanding the Customer Base of Service Providers: An Examination of the Differences between Stayers and Switchers, Journal of Marketing, 64(3), 65–87. 4. Gremler, D. D. and S. W. Brown (1997). Towards a conceptual model of service loyalty. Marketing Theory and Applications AMA Winter Educators’ Conference, Chicago, IL, 218–219. 5. Gremler, D.D. and Brown, S.W. (1996). “Service loyalty; its nature, importance, and implications” in Edvardsson, B., Brown, S.W., Johnston, R. and Scheuing, E. (Eds), QUIS V: Advancing Service Quality: A Global Perspective, ISQA, New York, NY. 6. Jacoby, J. and Chestnut, R.W. (1978). Brand Loyalty: Measurement and Management (John Wiley & Sons, New York). 7. McMullan, R (2005). A multiple-item scale for measuring customer loyalty development. Journal of Services Marketing, 19 (7), 470–481. 8. Reichheld, F. F. (1996). Learning From Customer Defections. Harvard Business Review, (March– April), 56–69. 9. Reinartz, W., J. S. Thomas, and V. Kumar (2005). “Balancing acquisition and retention resources to maximize customer profitability.” Journal of Marketing, 69, 63–79. 10. Selnes, F (1993). An examination of the effect of product performance on brand reputation, satisfaction and loyalty. European Journal of Marketing, 27(9), 19–35.

6

Customer Loyalty: The Emerging Paradigms

If you make customers unhappy in the real world, they might each tell six friends. If you make customers unhappy on the Internet, they can each tell 6,000 friends. Jeff Bezos This chapter is aimed at providing an insight into: v Customer Loyalty Development Models v Building Customer Loyalty v The Role of Social Media in Building Customer Loyalty 6.1.

INTRODUCTION

Every day, customers take decisions about products or services most worthy of their time, money, and efforts. This decision making does not take place in corporate board rooms but is done by individual customers. Therefore, there lies a great challenge before sellers to position their offering as a unique and best choice. To make their product or service a preferred choice, sellers may initiate the following practices: ∑ ∑ ∑ ∑

Create differentiation in their offerings Induce demand Communicate the superior value of their products or services Build and sustain customer relationships

The universal nature of every business enterprise in the modern economy is customer centricity. It is the key to success in business and includes understanding and addressing the needs of customers as well as other stakeholders. This customer centricity might result in distinct forms and degrees of customer responses such as Customer Relationship, Customer Experience, Customer Engagement, Customer Satisfaction, or Customer Loyalty. Customer loyalty has always been critical to business success and profitability. The interest in customer relationships mounted first in business to business relationships and later extended to business to customer relationships. Sheth and Parvatiyar (1995) opined that customer relationship management has got the concepts of customer loyalty and business performance fore-grounded in its framework. Hence, the concept of customer loyalty needs to be incorporated as an essential construct in the theory and practice of relationship management. Therefore, it is imperative to explore the dimensions that contribute to the development of customer loyalty.

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6.2.

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CUSTOMER LOYALTY DEVELOPMENT: EMERGING MODELS

Development of customer loyalty as a phenomenon is an important function to explain and understand. McMullan (2005) found that due to the benefits of retaining existing customers, the development of customer loyalty has become an important focus for marketing strategy research in recent years. Scholars like Tsaur et al. (2002) researched to understand the process of developing customer loyalty. Some important concepts of customer loyalty that have been adopted by the industry are as follows: 6.2.1.

The Loyalty Business Model

Strategic management offered a business model based on the premise that all company resources need to be employed to increase customer loyalty and other stakeholders’ commitment with an expectation that this is the path to achieve and exceed corporate goals. A better way to understand this model is to study a detailed service quality model conceptualised by Storbacka et al. (1994). Under this model, the initial level of customer satisfaction is determined by using the product or service in the recent past. A customer’s evaluation of a product mainly depends on the comparison between pre-conceived expectations regarding the overall quality compared to actual performance. Customer satisfaction tends to be higher if the recent product or service experience is better than prior expectations. However, it can be high in case of mediocre performance also if expectations are low or if the performance is seen as worthwhile. Customer satisfaction can be high if the overall quality was found to be good although service encounter was dissatisfactory. Another significant element of this model is the strength of business relationship, which is determined by the degree of satisfaction with recent experience, overall quality perceptions, a customer’s level of commitment in the relationship, and bonds between the parties involved.

Customer satisfaction is high if the product or service experience exceeds expectations.

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A customer’s tolerance zone depicts the gap between a customer’s expected quality and the minimum level of quality that the customer is willing to accept. The strength of the business relationship will not be adversely affected in case of a few dissatisfactory encounters if the customer’s perception of overall quality is high, if switching barriers exist, if other satisfactory alternatives are available, if the customers feel committed towards the relationship, and if there is a bond with the company which acts as a reason to continue the relationship. Such bonds like legal bonds (contracts), technological bonds (shared technology), economic bonds (dependence), knowledge bonds, social bonds, cultural or ethnic bonds, ideological bonds, psychological bonds, geographical bonds, time bonds, and planning bonds play the role of exit barriers in the relationship. The factors responsible for the formation of customer loyalty are: ∑ Relationship strength ∑ Perceived alternatives ∑ Critical episodes A relationship is likely to face problems in the following situations: ∑ The customer moves to an area alien for the company’s service ∑ Changing and growing needs of customers that make a company’s products or services redundant. ∑ Availability of more appropriate alternatives ∑ Decreased vigour of relationship ∑ Inefficient management of a critical episode ∑ The company’s failure in appropriately communicating the price changes in time The model emphasises the impact of customer loyalty on profitability. Most of the loyalty models are based upon a fundamental assumption that customer retention costs much lesser than customer acquisition. Buchanan and Gilles (1990) postulated that efforts directed at customer retention correspond to higher profitability due to the following economic reasons: 1. The preliminary outlay of catching the fancy of new customers and recruiting those gets wiped out gradually as the relationship ages. In other words, older relationships bring in lower amortised cost. 2. Account maintenance costs as a fraction of total costs (or as a proportion of revenue) also decline. Customers who are older in terms of their association with the brand have minor switching intentions and price sensitivity. 3. These customers also act as an expanded wing of the company’s sales force as they are likely to offer favourable word of mouth publicity and strong recommendations. 4. Opportunities of cross selling increase as long-term customers are more likely to try out ancillary products and high-margin supplemental products. These customers act as a competitive tool due to a feeling of satisfaction in their relationship with the company which results in developing apathy towards competitors. 5. Regular customers also prove to be advantageous due to their familiarity with the service delivery processes which reduces their need for assistance during service encounters and increases consistency in their order placement, making them less expensive to serve. 6. Employees also find serving satisfied or loyal customers less cumbersome and consequently, feel more satisfied in their jobs. Happy employees contribute by striving for higher customer satisfaction and thus, a virtuous circle is formed.

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It is important to note that a relationship must be lucrative in order to sustain. Therefore, identifying profitable loyal customers is vital for every organisation. Unprofitable relationships will only consume a company’s resources and add to its costs. Thus, each customer’s “relationship costs” need to be assessed in relation to their “relationship revenue.” 6.2.2.

Customer Loyalty Development Model

Oliver (1999) presented the Customer Loyalty Development Model and categorised it into four sequential phases: The customer is choosing product over others on the basis of a belief in the superiority of the offer. Cognitive loyalty

Affective loyalty

Conative loyalty

Action loyalty

The purchasing decision is influenced by the knowledge about the brand and its benefits.

Results from the repeated confirmation of customer expectations and develops a particularly favourable attitude towards the brand.

An intense form of loyalty generated from high involvement and motivation with strong purchase intentions.

Sustained not just by strong motivations but results in actions undertaken by the ‘desire to overcome obstacles’ in the way to buy the brand to which a person is loyal.

Figure 6.1

Customer Loyalty Development Model. Oliver (1999)

Oliver (1999) also suggested that action is perceived as a necessary result of engaging the three phases and is accompanied by an additional desire to overcome obstacles that might prevent a customer from patronising the service organisation. Palmer et al. (2000); Knox and Walker (2001); Rowley (2005) proposed that the development of customer loyalty involves different stages and the customers who are at different stages require differentiated strategies. These phases of loyalty development served as a soundboard for further research. Roy et al. (2009) undertook an empirical investigation into the influence of the individual loyalty states conceptualised by Oliver (1999), that is, Cognitive, Affective, Conative, and Action Loyalty, on the word-of-mouth behaviour in context of retail websites and found that conative, affective loyalty, and action loyalty states initiate word of mouth (WOM) behaviour with the former two being more effective. However, cognitive loyalty base was not found to be effective in prompting the positive WOM behaviour among online customers.

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Customer Loyalty

Cognitive Loyalty

Affective Loyalty

Action Loyalty

Conative Loyalty

Online Word of Mouth

Figure 6.2

Influence of the individual loyalty states on WOM behaviour.

Roy et al. (2009) When customers praise the firm, express preference for the company over others, recommend its services to others (Parasuraman, Berry, and Zeithaml, 1991), say positive things about the company (Boulding et al., 1993), increase the volume of their purchases, or agreeably pay a price premium (Rust and Zahorik, 1993), it is a mark of their readiness to form a bond with the company. Keiningham et al. (2006) proposed the following model of loyalty with five main steps: 1. Observation

2. Scoring

3. Selection

4. Prioritisation

5. Leveraging

4b. The Exploitation Allocation Behaviours and Characteristic

Break-even Customers

Purchase Record

Profitability (Activity Cost)

Feelings and Desires

Desired Customers

Desired Customers Inertia CLV

Brand Equity High Low Share of Spending Value Equity

Break-even Customers Costly Customers

Share-of Spending (Actual or SR)

Satisfaction 4a. The Recovery Allocation Relationship/ Trust

Break-even Customers Costly Customers

Customer Demographics Objective Measures

Attitudinal Measures High Low Share of Spending

Figure 6.3

Adapted from Sahu and Vyas (2007)

According to the model in Figure 6.3, the customer loyalty process involves the following steps:

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1. Observation: At the initial stage of building loyalty, an organisation should accumulate as much information about its customers as possible. Some of the most reliable and useful sources include: ∑ ∑ ∑ ∑

Purchase records and history Servicing costs of each customer Demographic information Information regarding a customer’s share-of-wallet dedicated to a particular category

2. Calculating inertial CLV (Customer lifetime value): At the second stage, each customer’s contribution to profit (estimated procures minus expected service costs) needs to be calculated. Referred to as inertial CLV, this acts as a suitable metric for segmentation of customers in the next step. 3. Selection: Customers are segmented into three categories by using inertial CLV: Desired Customers, Breakeven Customers, and Costly Customers. According to Keiningham et al. (2006), the ratio of costly customers to the total number of customers should not be more than 15%, failing which the company’s bottom line would be adversely affected. The model advocates a healthy balance between these three categories of customers to sustain the financial health of the organisation. 4. Prioritisation: At the stage of prioritisation, the earlier mentioned three groups of customers should be divided into pairs, for example, low share of spending and high share of spending. A company should determine the class of customers that it is going to focus on for developmental efforts only after assessing their share of current spending. The following strategies can be used at this stage: ∑ Reduction in the servicing cost for low-share costly customers and shifting them to the class of low-share breakeven customers, thereby increasing the profit of the company. ∑ Encouraging the low-share costly customers to increase their share of expenditure and, graduating them to high-share breakeven customers. ∑ Controlling offers for low-share breakeven customers, reducing servicing costs and shifting them to low-share Desired customers. ∑ Increasing share-of-spending and controlling the servicing cost of low-share Breakeven customers, thereby rendering them the high-share Desired customer status. ∑ Increasing the share of spending of low-share Desired customers and moving them up to the category of high-share Desired customers. ∑ Getting rid of low-share costly customers and low-share Breakeven customers whose purchasing behaviour cannot be altered. 5. Leveraging: Brand equity, value equity, relationship equity, and satisfaction are some leveraging tools which must be used while moving the customers to advanced stages of the brand building process. Brand equity consists of customers’ attitudes towards a brand, a company’s integrated communications, and association with community events. Similarly, quality perceptions, price and convenience form value equity. 6.2.3.

Righteous Circle Model of Customer Loyalty

Schlesinger and Heskett (1991) improved the basic customer loyalty model by including employee loyalty as an important element of the model. They hypothesized the concepts of “cycle of success”

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and “cycle of failure.” The cycle of success suggests Training and empowerment that investment targeted at enhancing employees’ of employees ability to deliver superior service to customers Employee High sales can be viewed as a virtuous circle. To ensure that satisfaction and and profit employees remain competent as well as satisfied, a competence margins company should carefully undertake an effective selection and training program and build a corporate culture that accepts the importance of employee empowerment. Such efforts lead to Customer Superior loyalty service better service delivery and customer satisfaction delivery followed by superior customer loyalty, enhanced sales, and higher profit margins. A definite share Customer satisfaction of profit needs to be reinvested in employee training and development thereby kicking off Figure 6.4 The cycle of success another iteration of a virtuous cycle. Jones and Taylor (2012) approved the inclusion of service employees in loyalty building and stated that “loyalty to the service employee translates into loyalty to the service firm. The link between customer loyalty to the service employee and customer loyalty to the service firm has been well established in previous research such as the work of Palmatier et al. (2007).” Moving beyond customers and employees, Reichheld (1996) applied the loyalty business model to suppliers, employees, bankers, customers, distributors, shareholders, and the board of directors and put forth the benefits associated with obtaining the loyalty of these parties. Box 6.1: McDonald’s Internal Customer Management Employees play an important role in the development of any organisation and for businesses where direct contact with customers is involved, the role of employees becomes even more crucial as their attitude and behaviour determines customer repurchase and revisit intentions to a great extent. Therefore, it is important to satisfy the employees before expecting them to achieve customer satisfaction. At McDonald’s, employees are treated as internal customers who need to be satisfied first in order to create and deliver value to external customers. Some of the measures that McDonald’s takes to enhance the efficiency of its employees are listed below: 1. At McDonald’s, employees are well trained to serve customers with utmost zeal and hospitality. It is only after proper training that an employee is sent to the customer service desk to handle customers. This training has proved to be an asset for the company as it enables the employees to become smarter and customer oriented. They greet their customers with a smile on their face, which generates a positive customer response. 2. McDonald’s conducts Mystery Shopping at its stores where senior staff visits an outlet without the knowledge of the outlet staff. They evaluate the entire working and environment of the restaurant, take feedback from customers and then send the Customer Satisfaction Opportunity (CSO) report to the head office at New Delhi. This happens twice a month. The employee’s behaviour and conduct is also evaluated through this report. The CSO helps the employees in improving their weaknesses, and if required, the employees are trained again to competently deal with customers. (Contd.)

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Box 6.1: (Contd.) 3. Employee appraisal is based on the satisfaction of customers. With the help of customer feedback and the CSO report, the employees are rewarded. 4. The employees are caring and smart and remember the names and other details of regular customers. They address these customers by their names and recommend best food options to them by keeping in mind customer preferences. This creates a sense of belonging for the customers.

Model of Customer Loyalty Categorisation

Loyalty in general and customer loyalty in particular is not just declared by consistently and willingly staying in the relationship but is determined on the basis of distinct character it exhibits. Dick and Basu (1994) proposed the following four types of loyalty on the basis of interaction between attitudinal and behavioural loyalty: 1. 2. 3. 4.

High (true) loyalty Latent loyalty Spurious loyalty Low (or no) loyalty

Relative attitude

6.2.4.

High

True loyalty

Latent loyaly

Low

Spurious loyalty

No loyalty

High

Low

True Loyalty: Combining high levels of both repeat Figure 6.5 Repeat Patronage purchase and commitment towards a firm, truly loyal customers try to overcome obstacles and make sacrifices in order to purchase its products or services. A truly loyal customer offers a business the full-extent of benefits associated with loyalty. When it comes to truly loyal customers, small changes in a product’s price might only affect the quantity of their purchases but not their actual choice of brand. High or true loyalty demands strong attitudinal affiliation and high levels of repeat patronage. Truly loyal customers nearly always support a particular company and remain rigid towards competitive decoys. Latent Loyalty: Latent loyalty is characterised with petite patronage despite the existence of strong commitment towards the company. Situational factors responsible for low patronage levels include affordability, narrow distribution channels, inconvenient store location or business hours, and lack of consistent availability. A company that can successfully recognise and develop ways to remove these barriers definitely benefits from high levels of repeat patronage. Spurious Loyalty: Also referred to as “inertia,” or “phantom” loyalty. This category includes customers with high levels of repeat patronage despite a low level of commitment to the brand. For example, a woman might continue to go to a specific hair salon although not particularly pleased, but out of habit or convenience or lack of a better alternative. However, such customers will most likely switch to an alternative as soon as their main constraint ceases to exist. There is high potential for a business to turn inertia into true loyalty, although it is important to understand that exit barriers such as loyalty schemes or discounts are not the solution. For a company to convert inertia into latent or truly loyal customers, there must be an increase in the product’s perceived added value against competitors.

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Spurious or artificial loyalty lies in regular repeat buying from the company even in the absence of any emotional connection (The customers may even dislike the company even though they continue to make purchases). The high patronage levels of spuriously loyal customers can be explained by factors such as habitual buying, financial incentives, convenience, and lack of alternatives as well as factors relating to an individual customer’s situation. No Loyalty: As the name suggests, this category refers to clients who exhibit no or low levels of commitment and a low number of repurchases. Customers of this category are very hard to switch to “truly loyal” customers and a business’s revenue potential from this category is relatively limited. This group exhibits weak or low levels of both attitudinal attachment and repeat patronage. Spurious and low-loyalty groups are highly volatile and susceptible to incursions from competitors. 6.2.5. Apostle Model of Customer Loyalty Harvard Business Review proposed the Apostle Model which offers an insight into customer loyalty by segmenting the customer into four quadrants as per their loyalty status. This model is operationalised by obtaining the overall satisfaction ratings of customers on a scale of 1 to 10 (horizontal axis) and their likelihood to stay with the business on a scale of “Definitely Will” to “Definitely Will Not” (vertical axis). The four quadrants are labelled as Defectors, Hostages, Mercenaries, and Loyalists. In this model, Defectors are defined as those who answer the satisfaction question with a score of 6 or less and report that they definitely or probably will not carry on their business with a company in the future. The following section elucidates each of these segments and suggests customised loyalty strategies that, if implemented effectively, can enhance the loyalty state of the customers categorised in these segments:

Loyalty Likelihood to renew/repurchase

The Apostle Model

Definitely will Hostages

Loyalists

Defectors

Mercenaries

1 Very Dissatisfied

10 Very Satisfied

Probably will

Probably will not Definitely will not

5 Satisfaction

Figure 6.6

The Apostle Model

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Strategies for each customer segment ∑ Loyalists can be considered as evangelists as they are ready to lend positive word of mouth publicity to the company. They enjoy high levels of both satisfaction and loyalty. In quintessence, these customers act as an extension of the sales force and also tend to increase their expenditure on a company’s products and services more rapidly than other customers. As the relationships with loyalists are likely to sustain for a longer duration, and they play an active role in generating referrals, customer acquisition costs for loyalists tend to be lower than those for other customers. A company needs to include action plans to strengthen and expand these relationships and prioritise strategies pertaining to managing and preserving the loyalists. The best strategy would be to understand, serve, and protect these customers and focus on developing communities for (and with) them. ∑ Hostages are marked for displaying high loyalty despite low satisfaction. This situation typically arrives in the event of monopoly or oligopoly characterised with little competition or when switching to another supplier entails a high risk or costs such as economic costs or time investments. Customers who fall into this category are almost “trapped.” An appropriate strategy for this segment is to convert hostages into loyalists by paying attention to their needs and preventing them from negatively publicising the company or leave it altogether by addressing their problems. Communication bears a crucial responsibility in such segments. Customers will be less prone to reducing their expenditure and more inclined to talk positively about the company if the company’s efforts of communicating with them, resolving their issues and making the product or service usage a better experience is visible to them. ∑ Mercenaries are those with high satisfaction but low loyalty. This segment is characterised by high price-sensitivity as well as high switching intentions. To retain these customers and induce loyalty, a company has to communicate superiority of the value they receive from the company’s products and services. ∑ Defectors are low on both dimensions of satisfaction and loyalty. These customers not only inflict higher cost of customer turnover on the company but also prove to be detrimental by spreading negative word of mouth publicity. Defectors are typically held responsible for 80 to 90 per cent of a company’s negative word-of-mouth publicity. Besides, they have higher frequency of complaints, thereby consuming customer service resources. It would be better to leave these customers with a carefully projected positive image. Else, the company needs to implement a well-designed customer win-back program. 6.3.

BUILDING CUSTOMER LOYALTY

To achieve customer loyalty, a company needs to recognise the importance of customer expectations and its effect on perceived performance. Customer expectations are not easy to manage as sometimes customers themselves remain unclear as to what they expect out of a particular service encounter. Many customers prefer to remain silent about their expectations as they like companies to interpret it. Expectations have a significant role to play in loyalty building. Based upon the interplay of customers’ unarticulated expectations and their clearly expressed demands, a customer loyalty map consisting of four customer experience points is proposed and explained as follows:

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Unexpected

PLEASURE

LOYALTY

Expected

SATISFACTION

APATHY

Expressed

Figure 6.7

Unexpressed

Customer Loyalty Map

∑ Apathy: The quadrant of apathy denotes the basic expectations of the customers that are to be fulfilled without asking. It talks about unexpressed expectations. Meeting these expectations is unlikely to make a big difference in a customer’s satisfaction level. However, a customer would be highly dissatisfied and might even feel insulted if the company fails to meet these expectations. An appropriate example would be a customer’s expectation to be treated with respect and courtesy. ∑ Satisfaction: This is a region of expressed expectations. It involves customers talking about their expectations from the product or service. This is a juncture where customer satisfaction or dissatisfaction is determined and the level of loyalty a company is going to achieve gets decided. For example, a customer might expect discounts just because the customer receives this facility from other companies. The customer would like to negotiate with the company and would feel dissatisfied if altogether denied any such a favour. ∑ Pleasure: A customer experiences pleasure when the customer receives more than expected. The quadrant of pleasure refers to the stage where the customer anticipates a better experience but does not really expect it. The customer might be vocal about personal preferences but does not feel dissatisfied if these expectations are not fulfilled. However, fulfilling these unexpected expectations can do wonders for the company. If a company manages to exceed the expectations of its customers, it would achieve customer pleasure, which is an important stepping stone for building customer loyalty. For example, a customer might ask for an additional service that is usually not provided by the company. ∑ Loyalty: The loyalty quadrant is the place of confluence of unexpressed and unexpected customer experiences. This is where a company infuses loyalty into its customers by providing them something they did not expect. It deals with innovative ideas and proactive approach on part of the company. A company can capitalise upon its expertise in the products or services it provides and bring out new ways to improve the overall customer experience. For example, customers could not have imagined that phones can be used for other purposes except making and receiving calls before they were introduced to value added services as well as innovative features like music, gaming, internet and social networking, photographs, and much more.

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The first three quadrants are prerequisites for achieving the ultimate goal of loyalty. Underestimating the importance of any one of them can cause the company to suffer from losses and competitive pressures. A company may be very good at innovation, which is an important factor in loyalty, and therefore can amaze its customers by providing new experiences. However, if it lags behind in fulfilling the expressed expectations of its customers, innovation may be of no use as customers would be dissatisfied and would not appreciate the overall approach of the company. All points are equally important in order to get to the point of loyalty. An organisation must first conquer all points as there are no shortcuts. If an organization is really good at innovations (the key factor in creating loyalty), but struggles at reliability (the key factor in creating satisfaction), then it is likely to be found struggling at all four ends. Building customer loyalty takes a deep comprehension of a customer’s stated as well as unstated expectations and an unending tryst to meet them effectively. A customer crosses the stage of apathy, satisfaction and pleasure in order to reach the final stage of loyalty. Loyalty demands time and regularity of interaction on the part of customers and companies. It needs an understanding of a customer’s unarticulated expectations and providing unexpected returns. 6.4.

BUILDING LOYALTY THROUGH FUN

The strategy of using games along with the rewards meant for inducing loyal behaviour with the help of an achievement system is becoming increasingly popular with leading-edge organisations. PepsiCo recently used the social networking site Foursquare to pinpoint loyal consumers and reward them with “Gold Tickets” to a Big Boi concert. According to a campaign blog piece, the Golden Ticket was unlocked by 2,400 people, and there were more than 2,000 Foursquare checkins at the Big Boi concert, giving the Pepsi campaign extra fizz.

The application of location–sensitive and mobility technologies can also facilitate organisations to achieve customer engagement at the point of presence by increasing the frequency of interaction incorporating appropriate offers. 6.5.

RECENT RESEARCH IN CUSTOMER LOYALTY

“Customer loyalty is a complex, multidimensional concept.” Majumdar (2005) Customer Loyalty is reached through an interaction of several psychological variables and is impacted differently with different customer related constructs. Taylor, Hunter, and Longfellow (2006) noted a number of important gaps in the understanding of loyalty and other relationship marketing constructs. The following is an account of recent research, conducted in varied business settings and cultural contexts that have viewed customer loyalty from different perspectives and made significant contribution to the existing body of customer loyalty literature: ∑ Espejel et al. (2008) examined the particularities of a traditional food product with protected designation of origin and the way these particularities affect consumer satisfaction, loyalty,

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and buying intention. They concluded that higher degree of satisfaction leads to greater levels of loyalty and buying intention of the PDO food products. Ibrahim and Najjar (2008) developed a model incorporating self-image congruence, attitudes, satisfaction and explained their role on behavioural intentions in the context of retailing. Their findings suggested that in retail environment, improved self-image congruence, attitudes, and customer satisfaction can result in repeat visitation and positive word-of-mouth publicity. Martenson (2008) assessed the impact customer contact executives exercise on attitudinal and behavioural loyalty with reference to the three distinct groups of customers who differ from each other in terms of competence and motivation to process stock market information. A path model was developed that confirmed the influence of customer contact persons on attitudinal and behavioural loyalty. Another finding was that in case of high elaborators, who possess greater knowledge as well as motivation to understand stock market information, the impact is higher in comparison to low elaborators. Walsh et al. (2008) assessed the moderating effects of various firm-related variables, variables that result from firm/employee-customer interactions and individual-level variables (i.e. loyalty cards, critical incidents, customer age, gender, income, and expertise). The findings suggested that only critical incidents and income significantly moderate the relationship between customer satisfaction and customer loyalty. Lin and Chen (2009) carried out a study among the travellers on Taiwan tourist trains as an attempt to analyse the effect of purchase intentions on repurchase decisions and also to observe the moderating effects of reference groups and perceived risks. They found that traveller’s purchase intentions have positive impact on their repurchase decisions. In other words, “the strength of purchase intention is a surrogate to the measure of future buying behaviour.” Different perceived risks and reference group influence have a positive moderating effect on a traveller’s purchase intentions and repurchase decisions. Ogba and Tan (2009) demonstrated that there is a positive impact of brand image on a customer’s perceived quality of a market offering and it also enhances customer satisfaction, loyalty, and commitment towards a market offering. Wu (2011) conducted a research to analyse how inertia varies with differing levels of alternative attractiveness, relationship length, and commitment in affecting customer loyalty. The results revealed that alternative attractiveness mitigates the effect of inertia on customer loyalty whereas commitment and the duration of relationship strengthen the relationship between inertia and customer loyalty. However, only commitment was found to cause resistance to attractiveness from alternative offerings, generating action loyalty. Cheng et al. (2011) based their study on the premise that in the fast food industry, the effect of negative publicity on customers is often short and feeble. They developed an integrated model of customer satisfaction and loyalty for the fast food industry that combined variables related to fast food industry characteristics, such as consumption frequency, perceived price, and convenience. The study confirmed customer relationship inertia as a key mediator in the relationship of customer satisfaction with customer loyalty. Also, a negative effect of perceived price on customer satisfaction and relationship inertia has been traced whereas convenience enhanced customer satisfaction and consumption frequency enhanced customer relationship inertia.

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∑ Coelho and Henseler (2012) focussed on the potential of service customisation and established its indirect effect along with the direct effect on customer loyalty. They found empirical evidence for numerous positive relationship outcomes of customisation: perceived quality, customer satisfaction, customer trust, and ultimately, customer loyalty. Besides quantifying the direct and indirect effects of customisation, they facilitated the researchers and managers to evaluate the “efficacy of service customisation” with that of other relationship marketing instruments. Another significant contribution of their research is the finding that the effects of service customisation on customer loyalty are contingent on relationship quality, that is, the combined level of customer satisfaction and trust. ∑ Wang and Wu (2012) took into account the varying length of customer/provider relationships while studying the relationship between customer loyalty and its antecedents. They found that in both newer and older relationships, corporate image has an influence over customer loyalty. As far as switching costs are concerned, corporate image has a cardinal influence in newer relationships whereas in more-established relationships, they are mainly affected by perceived value. In both cases, switching costs influence customer loyalty. ∑ Olsen et al. (2012) assessed the role of habit strength in explaining loyalty behaviour in a food consumption in-home context. They took the traditional model proposed by Oliver (1999) as a starting point for studying loyalty behaviour formation that proposes an individual’s intentions to be full mediator between satisfaction and loyalty behaviour. The empirical evidence from a survey conducted among the customers of Denmark and Spain revealed that individuals’ settled intentions mediate the satisfaction–loyalty behaviour in the early stage of product adoption and in later behaviour continuance associated with unstable contexts (Ajzen, 2002). However, in later behaviour performed frequently in stable contexts, consumer behaviour is involuntary and less directed by formation of intentions that signifies plans and deliberations. Once a habit starts to develop and gains strength through satisfactory execution of the behaviour, the satisfaction–action loyalty sequence may occur automatically, through habit strength and is thus less guided by behavioural intention. ∑ Jones and Taylor (2012) opined that at its most general level, customer loyalty is an echo of various customer propensities towards the service provider. Customer loyalty manifests itself in number of forms such as repurchase intentions, relative attitude, willingness to pay more, advocacy, fidelity, and identification. They viewed customer relationships as social capital and suggested that the form and content of such relationships are vital in terms of influencing customer loyalty. 6.6.

CUSTOMER LOYALTY: THE ROLE OF SOCIAL MEDIA

With growing awareness and intensifying competition, switching has become an easy and prompt affair for customers. Companies can do nothing to restrain customers except consistently providing them a great experience which exceeds their expectations. Companies often go for customer loyalty programmes in a hope to secure the loyalty of their customers without strengthening their core offerings and implementing effective experience management during the delivery and consumption of service. Indeed, some loyalty programmes do trigger loyalty among customers and affect customer experience to a considerable strength. Certain industries, such as aviation

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and car rentals, are characterised by ongoing loyalty programmes based upon the reward points system where customers gain rewards or incentive points commensurate to their share of wallet apportioned to the company. However, these loyalty programmes cannot be relied upon if a company wants to capture real loyalty. A customer who is a part of a successful loyalty programme does not guarantee his commitment towards the firm. It is common to have a hoard of loyalty cards stuffed in one’s wallet but people tend to choose offers that are less expensive or have greater benefits in comparison to others in the market. Thus, getting engaged in a war of discounts and reward points serves no real purpose. Rather, companies need to identify customers with significant current value as well as lifetime potential and build loyalty among them through customised perks that directly address their personal wants. Reichheld (1996) strongly suggested that a customer’s willingness to advocate the company and its products or services is the only useful testimony of loyalty. Thus, loyalty contains a social element as well which cannot be ignored. The ideal juncture in the journey of loyalty building comes when in lieu of value provided by the company, its customers start acting as advocates for the products and services offered by it. A truly loyal customer willing to recommend the company among his social group is considered to be a treasure. With the advent of information technology, customers have attained a number of online platforms that not only provide them options for making an informed and better decision through websites displaying and comparing the brands and a facility of instant transactions at online shopping portals with a number of online payment methods but also enhance the social interactions, thus, giving them easier and effective means to build or destruct a brand. Customers now can speak about the brand, engage others in discussions about it and influence more people to buy its products and services using social environments like Facebook. Social media has significantly changed the way of shopping. Customer loyalty cannot remain aloof from the effect of online social interaction. There are a few exceptions but the larger picture of loyalty has bright and dominant colours of social media. Edelman Trust Barometer for 2011 revealed that in search of information, people tend to prefer a search engine (29%) to a corporate website (11%). The simple reason is that opinions of peers are more trusted than the corporate– controlled information. Another interesting revelation is that it takes three to five times before a great number of people – and that goes as high as 60% – believe what they hear about a specific company. This highlights the impact and importance of advocates’ frequent communications. Box 6.2: How FedEx rode the turtles to win! Through its social media monitoring programmes, FedEx came to know about a rare breed of sea turtles that was endangered due to a BP oil spill in the Gulf of Mexico. The company provided free of cost “vibration free” trucks and logistics expertise to facilitate the delicate task of shifting extremely fragile turtle eggs to safer nesting areas. FedEx used Twitter and other social media platforms to verbalise the story of the journey of the turtle eggs as it unfolded, and received high extol from consumers and environmentalists alike who, in turn, shared this touching story among their social circles. This effort resulted in the development of a stronger emotional association between consumers and FedEx. As the trucks were already operating in the area, this initiative did not cost much to FedEx yet, ensured a good amount of social endorsement while reinforcing its personal relations to the social community in a favourable way.

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Recommendations and referrals have become a vital sign of loyalty in new age businesses. The current concept of loyalty suggests that if a customer is loyal to the company, the customer would speak about its products or services and share the experience on social networks, thereby increasing the brand equity. Loyalty programmes can prove to be useful as a lucrative membership programme offering rewards and recognition can elicit more good feelings and encourage the customer to discuss his experience in his real as well as virtual social network. Such loyal customers would definitely want to repeat their good experience and thus, are likely to get engaged in repeat buying, cross buying and purchasing greater volumes. If handled carefully, this would result in more instances of satisfaction and loyalty. Hence, this cycle goes on. Modelling social advocates is critical to building loyalty and requires increased interaction with the customers. 6.6.1.

Advocacy and Social Media

The key to achieving competitive edge over rivals lies in building advocates for the company and its brand. The prominence of the social element cannot be ignored as loyalty building strategies would be ineffective without incorporating the careful handling of word of mouth publicity. Further, the unstructured data obtained with the help of social media should be incorporated into the company’s structured CRM system and other back-end systems so that a holistic idea of the customer can be developed. Recognising the immense potential of online communications that cause considerable publicity today, a company needs to mark and reward its loyal brand advocates who help the company through their social capabilities. This would also pave the way for attracting and recruiting new brand advocates, boost sales, reduce the customer acquisition cost and offer a base of loyal customers with apathy towards competitive brands. 6.7.

FINAL THOUGHTS

In the backdrop of homogenous products and global competition, reducing the rate of customer defection by building a base of loyal customers seems to be an attractive proposition. It is widely accepted that retaining an old customer is more cost effective than acquiring a new one as loyal customers stay with the business for a longer duration of time and buy repeatedly.

Loyal customers stay with a business longer and repurchase often.

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The motivation behind a customer’s repeat buying behaviour is his favourable attitude towards the company that encourages him to maintain a relationship with the company. This combination of favourable attitude and positive behavioural intentions helps in achieving substantial advantage in terms of growth and profitability. Another advantage that customer loyalty offers is shorter new sales cycles that are a result of trust and commitment of the existing customers. Review Questions 1. How is Customer Loyalty developed? Explain with suitable examples. 2. Discuss the role of employee satisfaction in building customer loyalty. 3. If loyalty can be built, why are all companies not equally successful in building customer loyalty for their products? 4. Discuss the role of customer expectations in building customer loyalty. 5. Elaborate on the ‘apostle model of customer loyalty’. 6. What is the difference between cognitive and conative stages of customer loyalty development? 7. “The growth of Social Media has an important role to play in building brand ambassadors.” Comment. 8. What is the finding of recent research in the field of customer loyalty in special reference to the service industry? 9. What are the advantages of loyal customers to a service company? 10. Suggest ways to boost advocacy among loyal customers. Also, discuss the role of social media in building customer loyalty.

Project Assignments 1. With higher service cost and greater bureaucracy, customers have been fast moving away from service centres. As a customer service manager of an automobile service centre, what measures can you take to build loyalty among your customers? 2. Conduct a study of private insurance companies. Make a comparative study of the top three players about their customer loyalty initiatives and segment them based on the category of their practice.

References 1. Boulding. W, A. Kalra and V. A. Zeithaml (1993). A dynamic process model of service quality: From expectations to behavioral intentions. Journal of Marketing Research, 30(1), 7–27. 2. Buchanan, R. and Gilles, C. (1990). Value managed relationship: the key to customer retention and profitability. European Management Journal, 8(4), 523–526. 3. Cheng, C. C., Chiu, S, Hu, H and Chang, Y (2011). A study on exploring the relationship between customer satisfaction and loyalty in the fast food industry: With relationship inertia as a mediator. African Journal of Business Management, 5(13), 5118–5126. 4. Coelho, P. S. and Henseler, J (2012). Creating customer loyalty through service customization. European Journal of Marketing, 46 (3), 331–356. 5. Dick, A. S. and Basu, K (1994). Customer Loyalty: Towards an Integrated Framework. Journal of The Academy of Marketing Science, 22 (2), 99–113. 6. Espejel, J, Fandos, C and Flavián, C (2008). Consumer satisfaction: A key factor of consumer loyalty and buying intention of a PDO food product. British Food Journal, 110 (9), 865–881. 7. Ibrahim, H and Najjar, F (2008). Assessing the effects of self-congruity, attitudes and customer satisfaction on customer behavioral intentions in retail environment. Marketing Intelligence & Planning, 26 (2), 207–227.

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29. Taylor, S.A., Hunter, G.H. and Longfellow, T.A. (2006). Testing an expanded attitude model of goal-directed behavior in a loyalty context. Journal of Consumer Satisfaction, Dissatisfaction and Complaining Behavior, 19, 18–39. 30. Tsaur S.H, Y.C. Chiu and C.H Huang (2002). Determinants of guest loyalty to international tourist hotels – a neutral network approach. Tourism Management, 23, 397–405. 31. Walsh, G, Evanschitzky, H and Wunderlich, M (2008). Identification and analysis of moderator variables: Investigating the customer satisfaction–loyalty link. European Journal of Marketing, 42 (9), 977–1004. 32. Wang, C and Wu, L (2012). Customer loyalty and the role of relationship length. Managing Service Quality, 22 (1), 58–74. 33. Wu, L (2011). Inertia: Spurious Loyalty or Action Loyalty? Asia Pacific Management Review, 16(1), 31–50.

Part Two Customer Loyalty: The Research Framework

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Determinants of Customer Loyalty Formation

Customers don’t always know what they want. The decline in coffee-drinking was due to the fact that most of the coffee people bought was stale and they weren’t enjoying it. Once they tasted ours and experienced what we call “the third place”... a gathering place between home and work where they were treated with respect.. they found we were filling a need they didn’t know they had. Howard Schultz, Chairman and CEO, Starbucks This chapter is aimed at providing an insight into: Drivers of Customer Loyalty Formation of Customer Loyalty Determinants of Customer Loyalty Impact of Customer Loyalty Determinants on Customer Loyalty Formation 7.1.

INTRODUCTION

Globalized markets and borderless flow of information have resulted in intense competitive pressures and increased customer expectations. Productivity, quality, and customer satisfaction are the buzzwords in today’s business scenario that demand considerable efforts on part of a company. Further, to attain the basic business goals of survival and growth, businesses are looking for ways to attract and retain customers in the long run. Every business needs to understand and meet customer expectations in order to strive and thrive in the market. Customers have become the focal point of all businesses and therefore, deserve attention and importance. However, due to heightened expectations, escalated competition, and rapid ingress of novel ideas and formats of business, companies find it difficult to retain their customers besides managing profitability. Instability of the economic environment in recent times has also contributed to loyalty issues in businesses. In order to develop and sustain loyalty among customers, it is important to find what drives loyalty in a particular market. The factors which lead to loyalty need to be uncovered and understood before designing and implementing strategies for customer retention and loyalty. Existing studies propose relationships between customer loyalty and various other business constructs such as quality, satisfaction, and trust. These relationships need to be investigated as understanding the effect of these constructs on loyalty provides an insight into customer loyalty formation.

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7.2.

DRIVERS OF CUSTOMER LOYALTY

Many well-known companies have fashioned mission, values and vision statements that claim to begin and end with their customers. These carefully crafted proclamations are not only informative but also valuable because they serve to remind companies of their high calling and to help them measure how far from their standards they have strayed. An organisation must identify the factors responsible for driving customer loyalty since these factors might enable the organisation in managing customer loyalty more effectively and efficiently as discussed in the following sections: Box 7.1: Ford CarGainz Ford CarGainz was an innovative and exclusively designed programme by automobile giant Ford for Ford vehicle owners in India. It was a pioneering initiative in its class that depicted Ford’s strong focus and commitment towards customer satisfaction. It was a customer loyalty programme which offered rewards for servicing, regular maintenance, and purchase of accessories from Ford authorized dealers and service centres. CarGainz attempted to make customers aware of the risks inherent in using fake or unbranded spare parts and unauthorised service centres by giving rewards to customers who followed scheduled maintenance procedures through authorised Ford dealerships. CarGainz encouraged Ford owners to maintain their car as per prescribed procedures, thereby enjoying the best performance from their vehicles and ensuring a higher resale value. Within a year of its launch, CarGainz attained over 60,000 enrolments from customers, which shows the impact of this innovative programme on customers.

7.2.1.

Trust

Trust in a relationship imparts confidence. The importance of trust in a business relation can be gauged from the following points: ∑ ∑ ∑ ∑

Customers expect a fair and honest treatment without exception. Customers feel more secured and relaxed in a trusted environment. Customers prefer to be retained by an organisation that retains its employees Customers expect consistent and predictable patterns of employee behaviour; any unexpected change in behaviour must be delightful instead of disturbing. Illustration: There have been few relationships that customers have trusted over years. Bata has been one of the most trusted brands in the Indian footwear industry. People trust the brand and have used it for generations. Whether a kid needs to buy the first school shoe or the eldest family member needs to buy a shoe for his morning walk, Bata is the brand they choose to trust. Similarly, Colgate is another brand that has been enjoying the largest selling toothpaste tag for years, which was a reflection of people’s trust. The company also reciprocated this trust by consistently updating the product with innovations and launched variants for different market segments, especially catering to new age customers.

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7.2.2.

107

Concern for the Customer

Expressing concern for the customer’s interest is another driver of customer loyalty. This requires an empathetic communication while exhibiting the company’s marketing plan and execution and may call for the following expression by the company: ∑ Honest concern for and appreciation of the customer’s needs, wants, and desires ∑ Genuine efforts to exceed customer expectations Illustration: Companies in organised food retail have been constantly endeavouring to meet customer expectations. Changes have been introduced in preparing hygienic and healthy food, environmental friendly packaging, customer friendly pricing, and size variants. Using latest packaging, customers are also informed about the calorie content or the ingredients used in the product. 7.2.3.

Regularity of Contact

New age customers are more demanding which makes regular interaction and frequent communication with them even more important. Increased communication is crucial to sort issues that arise between parties involved in a transaction. It also provides an opportunity to express happiness and allows one party to appreciate the value of the other. Consistent and regular meetings of both the stakeholders in the relationship are also an important driver in loyal relationships. This would increase communication which leads to a feeling of ownership and belongingness. The benefits of communication are: ∑ Personalised and consistent contact is highly valued by customers. Regular and personalised contact is likely to make customers more open and responsive of any marketing messages from the company, consequently, reducing the advertising costs while increasing revenue. ∑ Such contact in all forms (written, verbal, face-to-face) should be event-driven and value added; anything that does not seem to be value-added is perceived to be adding pressure. 7.2.4.

Ownership Benefits

Benefit in the relationship is an important driver in customer loyalty formation. For sustenance of a loyal relationship, the interest of both parties needs to be served. ∑ While being in a consistent relationship with the company, a customer would require a certain set of benefits and privileges which make him feel a special affiliation. Special privileges such as frequency programmes, access to areas of the facility that are normally unavailable, exclusive lounges or meeting places, partnering opportunities with both forprofit and non-profit organisations are some ways of imparting this feeling. ∑ Recognition of individual customers and genuine expressions of appreciation for consistent stay with the company are important. Illustration: Most banks organise special get-togethers for their valuable customers. Customers are asked to present their point of view on the different aspects of banking functions in these gatherings. In many cases, banks also invite their senior officials so that customer views get directly transferred to the decision makers. This also serves as a confidence-building measure.

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7.2.5.

Convenience to the Customer

Care and concern for the interest and well-being of the customers includes ensuring a convenient consumption experience by walking a mile extra such as providing them quicker billing cycles in an organised retail store and a waiting lounge in a bank. ∑ Deference for customers’ time is important. A company that can provide valuable information in order to help customers to make an informed decision in the least amount of time has high chances of earning their loyalty. ∑ Customers tend to opt for shopping and purchasing processes that are hassle free. The company that develops processes that not only streamline the customer’s experience but also make it enjoyable are likely to capture more business. Box 7.2: Customer Convenience in Financial Markets The earlier model of financial investment was restricted to post office schemes, bank fixed deposits, and gold. The growth and maturity of money and capital markets gave a plethora of options to the average Indian investor. These new financial avenues along with technological developments have made investment management extremely complex. This posed a new business opportunity for financial companies and the need for infusing customer loyalty among them to reap benefits on a sustainable basis. For example, a customer of a Demat account might not want to change the service provider because this change involves a substantial amount of time and procedural pains. But if the customer is offered convenience of access to a variety of investment options, the customer would surely develop loyalty for the service provider.

7.2.6.

Consistency of Performance

Another important driver in loyalty is the consistent delivery of all promises in anticipation of which the customer has entered into the relationship. ∑ The organisation must inculcate processes that enable all employees to deliver a consistent message of care and competence whenever customers interact with them. This philosophy must run through all levels of the company, at all times, in all ways and with all customers. Illustration: Many corporate and professional relationships are initiated on the base of promises that are difficult to be delivered on a consistent basis. Insurance companies, be it general or life, make promises of settlement of claim within 24 to 48 hours at the time of acquiring new customers, but when it actually comes to delivery, they apply time-consuming conditions that make the entire process extremely cumbersome. Instead of driving loyalty among customers, such attitude drives customers away from the company. Based on the discussion held earlier, it can be concluded that the best way to increase profitability is to increase customer loyalty because loyal customers allocate higher amount of money to be spent in a particular product category while entailing low cost of service in comparison to new customers. When acquiring new customers, these drivers will serve to develop the quality of the relationship that will keep them loyal to the business.

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7.3.

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FORMATION OF CUSTOMER LOYALTY

The formation of customer loyalty is a thorough process that involves a series of customers’ evaluative judgements and other psychographic variables that stem from these service evaluations. Over the years, researchers have recognised and studied many antecedents of customer loyalty to retail stores, companies, and brands. Beerli et al. (2002) indicated that factors affecting customer loyalty have been attracting a lot of attention in the recent years from academicians as well as marketers in the service industry. Many academicians have accepted the significance of loyalty in the service industry and its potential impact on the development of sustainable competitive edge for the service firms. This can be attributed to the unique nature of services, increased dependency on technology, and greater customer involvement in service delivery. Customer loyalty clearly brings in significant benefits to the business and calls for a deeper investigation into the factors that act as its originator and contribute in its enhancement. Terblanche and Boshoff (2006) said that it is imperative to understand the precursor drivers of loyalty in order to leverage the greatest benefits available from it. However, modern research and existing literature fail to present an agreement among various researchers on determining the main drivers of customer loyalty. The factors leading to loyalty are complex and dynamic that are changing and evolving over time. Different studies proposed different combinations of variables that are responsible for the formation of customer loyalty.

The quality of service is an important factor in the determination of loyalty.

Dick and Basu (1994) revealed that satisfaction along with service quality are the main antecedents in the context of service loyalty with special reference to banking and other service industries. Heskett et al. (1994) presented customer satisfaction as the major driver of customer loyalty in their conceptual model of the service-profit chain. Jones and Sasser (1995) disagreed by giving instances when customer satisfaction did not help in obtaining customer loyalty and

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believed brand image and product quality to be of greater importance when it comes to building customer loyalty. Oliver (1999) emphasised that customer satisfaction and switching costs are key variables that influence customer loyalty. Service quality was identified as an important factor in the determination of loyalty. It was considered as a prerequisite for loyalty formation but not as a sufficient condition. Gremler and Brown (1996) conceptualised service loyalty as a multidimensional construct, composed of three dimensions: (i) Behavioural loyalty (ii) Attitudinal loyalty (iii) Cognitive loyalty They undertook a comprehensive review of literature combined with over 40 in-depth interviews. Based upon the analysis of qualitative data so collected, they developed a model of service loyalty proposing satisfaction, switching costs, and interpersonal bonds to be the three antecedents of loyalty. Customer Satisfaction Interpersonal bonds

Switching costs

(Familiarity, Care, Friendship, Rapport, and Trust)

(Habit/Inertia, Setup costs, Search costs, Learning costs, Contractual costs, and Continuity costs)

Service Loyalty Behavioural Loyalty

Attitudinal Loyalty

Cognitive Loyalty

Figure 7.1 Gremler and Brown (1996) said service loyalty is composed of three dimensions.

Nguyen and Leblanc (2001) perceived service quality, customer satisfaction, and image as key drivers of customer loyalty. In their structural equation model for the personal computer industry, Smith and Wright (2004) found brand image, product quality, service quality, and firm viability to have a direct relationship with customer loyalty. Bloemer et al. (1998) chose the retail bank setting to examine the role of image, perceived service quality, and customer satisfaction in determining loyalty at the global construct level, as well as the level of construct dimensions. They undertook a large-scale empirical study and found an indirect relationship between image and bank loyalty via perceived quality at the global level whereas service quality is both directly and indirectly linked to bank loyalty via satisfaction with the latter having a direct effect on bank loyalty. At the level of the dimensions underlying the aforementioned constructs, the study revealed that retail bank loyalty is relatively more driven by reliability (a quality dimension) and position in the market (an image dimension).

Determinants of Customer Loyalty Formation

Service quality, customer satisfaction, and image are the key drivers of customer satisfaction. (a) At the Global Construct Level Perceived Service Quality

Loyalty Image

Satisfaction

(Measured as consumer preference)

(b) At the Construct Dimensions Level Society Driven

Empathy

Satisfaction

Customer Contacts

Reliability

Efficiency

Position in the market

Figure 7.2

Bloemer et al. (1998)

Consumer Preference

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Clottey et al. (2008) regarded a customer’s willingness to recommend as the only measure of customer loyalty and employed an ordered logistic regression model to identify the drivers of customer loyalty. They found product quality, service quality, and brand image as major influences in customer loyalty equations where “brand image was the strongest driver of customer loyalty followed by product quality and then service quality.” They concluded that these drivers of customer loyalty can be improved by better training, recognition and reward programmes, day-to-day store operations, job, product, and process and store design.

Enhancers of Loyalty Drivers Better training, Recognition and reward programmes Day-to-day store operations Job, product, process and store design

Drivers of Customer Loyalty Service Quality

Product Quality

Customer Loyalty measured as Customer’s Willingness to Recommend

Brand Image

Figure 7.3

Clottey et al. (2008)

Hume and Mort (2010) assessed the influence and role of appraisal emotion in the performing arts context and found repurchase intention to be largely based on satisfaction with perceived value mediating the relationship. Core service quality, appraisal emotion, and peripheral service quality influence perceived value for time and money, with core service quality and peripheral service quality in turn influencing appraisal emotion. Although directly related to customer satisfaction, appraisal emotions were found to have no direct relationship with repurchase intentions. However, peripheral service quality influences repurchase intentions directly. Kassim and Abdullah (2010) empirically investigated the relationships among perceived service quality, satisfaction, trust, and loyalty at the level of construct dimensions in the cultural settings of Qatari and Malaysian e-commerce. Their findings revealed that perceived service quality affect customer satisfaction considerably which affects trust. Both customer satisfaction and trust were found to be exercising significant influences on loyalty through word of mouth (WOM) which was

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Core Service Quality

Appraisal Emotions

Perceived Value

Customer Satisfaction

Repurchase Intentions

Peripheral Service Quality

Figure 7.4 Hume and Mort (2010).

proposed to be an antecedent of revisit or repurchase intentions. The study also suggested that trust has no direct relationship with repurchase intentions while no significant difference was observed between the effects of perceived service quality on satisfaction, satisfaction on loyalty, and trust on loyalty among the Qatari and Malaysian customers implying that the relationships in the model did not differ across the two cultural groups due to the similar cultural background of respondents. The only exception was the effect of satisfaction on trust which was found to be dissimilar for both set of customers. Service Quality

Satisfaction

Ease of Use

Customer Loyalty

Word of Mouth

Web Design Assurance

Trust

Figure 7.5

Retention Intentions

Kassim and Abdullah (2010).

Chen et al. (2012) attempted to develop a broader understanding of the factors responsible for customer satisfaction throughout the financial services industry by incorporating the perceptions of fairness in service delivery (FAIRSERV) and outlining the importance of FAIRSERV in determining customer satisfaction. They suggested that it is important to ensure that perceptions of fairness are propagated throughout the organisation and financial institutions must carefully implement policies and practices to do that since fair service not only affects customer satisfaction strongly but also plays a role equivalent to service quality in ascertaining customers’ trust and perceived value, which in turn result in customer satisfaction.

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Customer Loyalty Interpersonal Informational

Service Fairness

Trust

Procedural Distributive Satisfaction

Tangibility Reliability Responsiveness

Perceived Service Quality

Customer Perceived Value

Assurance Empathy

Figure 7.6

Chen et al. (2012).

Ball et al. (2004) reviewed the literature regarding the antecedents of loyalty, both in terms of the business-to-business and business-to-consumer cases. They mentioned that measuring customer loyalty and its determinants into different markets and countries may bring out significant variance in the explanation of loyalty. Further, they explored the antecedents and categorised them into the following four groups: Consumer perceptions of the firm or the relationship with the marketing firm

Characteristics of the Environment

Characteristics of the Dyadic Relationship

Characteristics of the Consumer

Competitive attractiveness and perceived switching costs (Jones et al., 2000)

Shared norms (such as solidarity, mutuality, flexibility, and conflict/complaint resolution) (Gundlach et al., 1985)

Relationship tendency or proneness (Ganesh et al., 2000)

Overall product or service satisfaction (Oliver 1997)

Deal proneness (Lichtenstein et. al., 1995)

Performance trust and Benevolence trust (Ganesan, 1994)

Involvement in the category

Depth or value of communication (Morgan and Hunt, 1994)

Technological changes (Parasuraman and Grewal, 2000) Legal, economic, or environmental changes

Equity (Oliver and Swan 1989) Spatial proximity and relationship duration (Price et al., 1995)

Firm or brand image (Anderson and Weitz, 1989) Relationship quality (Crosby et al., 1990) Relationship satisfaction (Morgan and Hunt, 1994)

Ball et al. (2004)

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Verhoef et al. (2007) found that research in the field of marketing has brought in many determinants of loyalty which can be segmented into two categories: (i) Perceptual determinants (ii) Behavioural determinants Perceptual Determinants: Perceptual determinants such as satisfaction, trust, perceived value, and perceived switching costs are generally subjective constructs, which are related to a customer’s perception of various aspects of a customer-firm relationship. Burnham et al. (2003) identified four commonly used perceptual determinants: customer satisfaction, trust, customer switching costs, and attitude towards switching: 1. Customer Satisfaction: Customer satisfaction is an extensively important topic in marketing, often linked with loyalty. Although loyal customers are generally found to be satisfied, satisfaction does not universally translate into loyalty. Customer satisfaction and loyalty are found to be driven by the value of a service to customers. Working on the same line, Reichheld (1996) coined the term “satisfaction trap” which states that between 65% and 85% of customers are called as satisfied or very satisfied and these customers hardly defect. This decreased customer defection is called a state of customer loyalty. So, customer satisfaction is a Satisfaction does not universally translate into loyalty. necessary condition for customer loyalty but not a sufficient condition. 2. Trust: Trust is defined as a customer expectation that the provider is dependable and can be relied on to deliver promises. Trust has been found to be an important determinant of loyalty which has been widely acknowledged and even received a preference over satisfaction when it comes to predicting loyalty. 3. Customer Switching Cost: Burnham et al. (2003) identified different types of switching costs as procedural cost, psychological cost, financial cost, relational cost, and legal cost. The higher the cost of switching from the relationship, the greater is the customer’s retention in the relationship and the greater, the loyalty. 4. Customer’s Attitude: Customer’s attitude towards switching behaviour is decided by the very character of the customers. There are customers who believe in the principle, “Variety is the spice of life,” and they keep changing their consumption patterns. So even if a customer is satisfied, he can change his preference for dining frequently or occasionally. It could be south Indian cuisine one day, Chinese on another, and Italian on yet another day. Even amongst the same restaurant category, he can change the restaurant once in a while for variety. A customer’s attitude towards the switching behaviour is also an important determinant of loyalty.

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Behavioural Determinants: Along with perceptual determinants, behavioural determinants are also considered as an important factor in determining customer loyalty. Research results of Verhoef (2003) described the behavioural determinants as consequences of customer actions capable of being measured objectively, such as usage, length of relationship, and number of products or services purchased. Perceptual Determinants

Behavioural Determinants

Customer satisfaction

Usage

Trust

Length of the relationship

Customer switching cost

Number of products or services purchased

Attitude towards switching

Figure 7.8 Verhoef et al. (2007)

Despite various studies focussing on drivers of loyalty, scholars as well as practitioners have been lacking in the understanding of loyalty determinants and their relative importance in loyalty formation. Cahill (2007) proposed three distinct groups of customer loyalty determinants: Customer Related Factors Individual consumer characteristics

Relationship Related Factors Previous experience Quality Trust Emotional closeness

Company Related Factors Company's reputation The price-quality ratio The appropriate customer loyalty program

Figure 7.9 Cahill (2007)

Based upon the earlier discussion, the following factors can be considered as antecedents to loyalty as they play decisive roles in formation of customer loyalty towards a particular firm:

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7.3.1. Service Quality Service quality has often been viewed as the most important antecedent of loyalty as a customer’s decision to stay with the company gets largely affected from the quality of the core offering. Service quality is one of the main antecedents of customer satisfaction that is also treated as a primary source of loyalty. A customer’s behavioural intentions such as repeat purchase get affected by the perceived service quality. The customer’s decision to recommend a company’s product through positive word of mouth depends upon the level of product quality. Ranaweera and Neely (2003) confirmed that a direct linear relationship exists between perceived service quality and customer retention. While examining the relationship between service quality and customer loyalty in the context of web based services, Wan-Jin, (2009) found that the former bears a direct and linear impact on the latter. Box 7.3: Lululemon: Putting loyalty over profits Recently Lululemon Athletica, a Vancouver-based retailer, dealing in trendy workout gear, recalled its black Luon pants due to a manufacturing defect that rendered these pants too sheer. This step certainly impacted the revenues of the retailer negatively but the company operating through 211 stores in North America and Australia considers customer loyalty to be of paramount importance. CEO Christine Day stated that “Delivering the top quality our guests expect is a critical factor in our differentiation in the marketplace.” Clearly, the company is not ready to hurt the loyalty of its customers by compromising on the quality of products even at the cost of a decline in profits.

Rust and Oliver (1994) described perceived quality from the price perspective and stated that despite carrying an excellent quality, a service might get unsatisfactory ratings from customers due to unreasonably high prices. However, this does not mean that low prices correspond to better customer ratings as asserted by Heskett et al. (1997) who said that value does not necessarily connect with low prices as services with a high perceived value may carry high or low prices in business practice. GrÖnroos (2000) observed that the possibility of retaining a customer increases when perceived value increases while a decline in value will make the customers more open to the marketing communications of the competitors. Service quality and satisfaction are different as service quality is a global evaluation of a company’s delivery mechanism unlike customer satisfaction, which is a “post consumption” experience that emerges from a comparison between perceived quality and expected quality. 7.3.2. Customer Satisfaction Satisfaction is a post consumption attitude or evaluative judgement which varies along the hedonic continuum focussed on the product. It is understood as an overall attitude that customers hold towards a service provider. Customer satisfaction is a “cognitive or affective reaction” that surfaces in the form of a response to a single or prolonged set of service encounters. This response is evoked from a comparison of a product’s performance with some pre-purchase standard during or after consumption. Giese and Cote (2000) proposed three main components of consumer satisfaction, namely cognitive, affective, or conative.

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Customer Satisfaction and Customer Loyalty: Customer satisfaction has often been held responsible for customer loyalty. Existing research provides empirical evidences of satisfaction influencing customer loyalty, which is referred to as continuous positive buying behaviour of a customer towards a certain company or brand. Satisfaction is the most significant factor and essential ingredient in the formation of customer loyalty. Customer satisfaction has a remarkable impact on future purchase intentions and consequently, on customer loyalty building. Coyne (1989) established that loyalty and customer satisfaction share a weak relationship when customer satisfaction is low, moderate when customer satisfaction is intermediate and strong when customer satisfaction is high. Fornell (1992) pointed that high customer satisfaction will lead to improved loyalty for the firm and it will also decrease customers’ sensitivity towards competitive offers. Jones and Sasser (1995) also supported him stating that customers enjoying higher position on the satisfaction scale are more likely to be loyal with an increase in customer satisfaction that reflects the strong impact of satisfaction on loyalty. They found that the satisfaction - loyalty relationship is neither simple nor linear and defection may take place among satisfied customers also. Oliver et al. (1992) supported the non-linear relationship viewpoint stating that in the event of satisfaction reaching above a certain level, customer loyalty will increase swiftly. Bloemer and Kasper (1995) affirmed that satisfaction and loyalty share a complex relationship which further gets complicated due to a customer’s level of elaboration playing the role of a relationship moderator. Ruyter and Bloemer (1999) argued that when levels of satisfaction are relatively higher, customer satisfaction acts as a major antecedent of customer loyalty. It has also been found that higher degree of satisfaction is generally associated with superior service quality. Cassel (2001) examined the relationship between satisfaction and loyalty and found it to be related to higher loyalty in ECSI model. Kristensen et al. (2000) defined ECSI model as “a structural equation model with unobservable latent variables . . . that link customer satisfaction to its determinants and, in turn, to its consequence, namely customer loyalty.” Barsky (1992) perceived customer satisfaction as a key element in service delivery due to benefits like increased market share from repeat business and referrals that are possible to achieve only by understanding and satisfying customer needs and wants. Eriksson and Vaghult (2000) argued that customer satisfaction is enough to achieve customer loyalty and customers could be retained by merely satisfying them. On the contrary, Jones and Sasser (1995) contended that there is no direct link between satisfaction and loyalty, particularly in competitive environments by stating that “merely satisfying customers that have the freedom to make choices is not enough to keep them loyal.” Oliver (1999) opinionated that while satisfaction might be seen as an essential stage of loyalty building, ultimate loyalty cannot be achieved without combining superior perceived quality, personal determination, social bonding and their synergistic effects. Fredericks (2001) agreed with Oliver and clarified that satisfaction is a passive state of the customer, whereas loyalty refers to an active or proactive relationship with the supplier and thus, both differ from each other greatly. 7.3.3. Corporate Image The image of the company has an important bearing in the customer’s mind regarding customer loyalty formation. Barich and Kotler (1991) suggested that corporate image is the overall impression of a company in the minds of the public. Corporate image is related with a company’s physical and

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behavioural aspects such as business identity, infrastructure, product/service lines, and employees’ quality of interaction during service encounters. Several studies and research found that customers’ overall assessment of corporate image is deemed to influence customer loyalty. Fishbein and Ajzen (1975) also found that attitudes and behavioural intentions have functional relationship, which predict behaviour. Consequently, corporate image is considered as an attitude that must affect behavioural intentions such as customer loyalty. Nguyen and Leblanc (2001) found that in three business sectors (telecommunication, retailing, and education), corporate image and customer loyalty are positively related. Besides, there were several other studies where a direct positive relationship between corporate image and customer loyalty has been established.

Corporate image and customer loyalty are directly related to each other.

Lindestad and Andreassen (1997) perceived corporate image as an extrinsic information cue that may or may not influence customer loyalty and it applies for both existing and new set of customers. Rowley and Dawes (1999) revealed that the brand or corporate image and customers’ expectations regarding the nature and quality of services influence customer loyalty. So, corporate image affects customer loyalty in a positive manner. Customers might turn loyal towards a company or brand due to the fact that it is perceived in positive light among other customers. Corporate image bears a direct effect on customer loyalty and the two are positively related. Wang (2010) suggested that customers may act loyal to a company or brand due to the positive image it enjoys among other customers, and this holds true especially in the context of credence goods which might also help in controlling the switching behaviour. 7.3.4.

Trust

Trust has been given great importance in building and maintaining long-term relationships in business. The greater the trust, the greater is the confidence and the willingness to remain in the relationship and hence, the loyalty. To achieve customer satisfaction, retain the customer and consequently ensure long-term business profitability, it is important to fulfil promises. So

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trust is a significant factor for achieving relationship commitment and forming customer loyalty. Reichheld et al. (2000) perceived trust as a conceptual and important antecedent of customer loyalty. Garbarino and Johnson (1999) also identified trust as a driver of customer behavioural intentions that might lead to customer loyalty. Ranaweera and Prabhu (2003) stated that trust is likely to result in customer retention when it comes to maintaining long-term relationships between the service provider and the customer. Moorman et al. (1993) defined trust as “a willingness to rely on an exchange partner in whom one has confidence”. Trust exists “when one party has confidence in an exchange partner’s reliability and integrity”. Selnes (1998) found a direct link between trust and loyalty whereas Doney and Cannon (1997) perceived trust as the principal antecedent of repurchase intentions. Garbarino and Johnson (1999) found that trust and commitment are key antecedents to Trust is a driver of a customer’s behavioural intentions. loyalty for customers who value relationships. Foster and Cadogan (2000) showed that in a company, trust works as an antecedent to attitudinal loyalty. According to Pavlou (2003), trust is a prerequisite for patronage behaviour that is an important component of customer loyalty. Trust is a critical factor for relationships, both logically and experientially. Building trust achieves greater significance in building long-term customer relationship in a volatile business environment. 7.3.5.

Commitment

Loyalty by nature is characterised as staying committed to the relationship because then only can one consistently stay in the relationship. Customer loyalty has been characterised as a longterm commitment to repurchase involving both repeated patronage and favourable attitude. Commitment in service provider-customer relationships is “an implicit or explicit pledge of relational continuity between exchange partners.” It is an enduring desire to preserve a valued relationship. Customer loyalty is a feeling of attachment to or affection for a company’s products, services and people. Customer loyalty is an assurance of repeat purchase or continued usage of the same product or other products of the same organisation, thereby ensuring good business referrals, and intentional or even unintentional word-of-mouth references and publicity. In the business context, customer loyalty is a customer’s commitment to do business with a particular organisation, purchasing their goods and services repeatedly, and recommending the services and products to other people. Weiner (2000) found customer loyalty desirable because a customer who has an “attitudinal and behavioural commitment” to a service for loyalty to truly exist, the customer needs to be committed in the relationship and resist pressures to switch to another brand.

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Gundlach et al. (1995) proposed that commitment is an essential determinant of the strength of a marketing relationship as well as a useful construct for assessing the possibility of customer loyalty and forecasting future purchase frequency. Jacoby and Kyner (1973) suggested that commitment is an important tool to differentiate loyalty from repeat purchase behaviour. Garbarino and Johnson’s (1999) research proposed that for customers who share a strong relationship with an organisation, trust and commitment were the mediators between attitudes and future intentions. 7.3.6.

Communication

Communication is another ingredient found essential and important during research for loyal relationships. Anderson and Norus (1990) presented a new idea of communication that is an interactive dialogue between the company and its customers, which takes place during pre-selling, consuming and part-consuming stages. Ndubiri and Chan (2005) opined that communication is responsible for building awareness in the early stage, developing customer preference, convincing and encouraging the customers to make the buying decision. The more the communication between the service provider and the customer, the greater would be the opportunity to express themselves, leading to a more informal relationship which ultimately ensures their stay in the relationship and thus forms customer loyalty. 7.3.7. Service Recovery Service failure leads to the need for service recovery. Service recovery is the response of a service provider in the event of service failure. Boshoff (1997) stated that “Mistakes are an unavoidable feature of all human endeavour and thus also of service delivery.” Zemke and Bell (1990) defined service recovery as a “thought-out, planned process for returning aggrieved customers to a state of satisfaction with the firm after a service or product has failed to live up to expectations.” Duffy et al. (2006) defined service failure as the real or perceived service breakdown either in terms of outcome or process. Service recovery is aimed at resolving the problems, managing the negative attitudes of dissatisfied customers and ultimately keeping these customers. Service recovery needs to be differentiated with complaint management. Since most dissatisfied customers are reluctant to complain, service recovery attempts to solve problems at the service encounter before customers complain or before they leave the service encounter dissatisfied. Service recovery is a service focussed outlook of complaint management and a set of practice for handling mistakes, failures, and problems regarding customer relationships. The purpose of service recovery is to retain customers with the company by servicing them and addressing their concerns in a manner so that long-term profitability of the company is improved with long-term customer relationship. Johnston (2005) found that literature related to traditional services presents substantial work regarding the impact of service failure and recovery on customer loyalty. It brought out four major findings:

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∑ McCollough et al. (2000) opined that loyalty intentions get negatively affected with service failures, and failures work as a prominent driving force for switching behaviour. ∑ According to Colgate and Norris (2001), service failures lead to the disconfirmation of expectations from service resulting in the negative effects on different types of loyalty, word-of-mouth, and customer retention. ∑ Miller et al. (2000) contended that satisfaction with service recovery not only resolves the problem but also increases customer loyalty. ∑ McCollough et al. (2000) found that initial service failures negatively affect loyalty whereas recovery actions mitigate these effects. Smith and Bolton (2002) reviewed the service recovery literature and found that it gives evidence of customer satisfaction and affects loyalty with the resolution of customer problems. Customers’ perception of a firm depends on consistently implementing service recovery in the event of failures. Customer loyalty gets influenced favourably with effective management of service recovery. A good recovery can turn angry, frustrated customers into loyal ones. In many cases, it creates stronger bonding than before. Illustration: Consider a hotel customer, whose booking was ignored due to negligence on part of a hotel employee, reaches the hotel at midnight and finds no booking against his name. The customer gets extremely agitated and disappointed, leading to a service failure. When the customer shows his e-mail to the staff, if the manager and other staff are extremely courteous to him and offer him an upgraded room at no additional cost, the customer feels extremely pampered. This service recovery creates customer satisfaction and also contributes towards infusing customer loyalty. The confidence that customer complaints will be redressed by the management contributes significantly in the loyalty decision of the customers. So, satisfaction with service recovery has a strong impact on customer loyalty. Since service failures play an important role behind customers’ switching intentions, a proper understanding of service recovery might result in customer retention, which in turn leads to increased profits of the firm. Therefore, customer loyalty can be increased by developing a good mechanism of resolving customer complaints. 7.3.8. Switching Costs Switching cost in marketing is considered to be the sum of economic, psychological, and physical costs involved in switching the consumption. Gremler and Brown (1996) defined switching cost as the time, money and effort invested by the customer which makes it difficult to switch. Porter (1998) defined switching cost as the cost a customer incurs in the process of changing service providers. Switching cost is the customer’s assessment of the personal loss or sacrifice he is supposed to incur in terms of time, effort, and money associated with shifting from one service provider to the other. Klemperer (1987) suggested that switching cost can inspire brand loyalty among customers surrounded with number of functionally identical brands. Fornell (1992) found switching cost to be an important factor among others that influence the relationship of customer satisfaction and customer loyalty. Hauser et al. (1994) analysed the relationship between switching cost and satisfaction level, that is, an increase in switching cost leads to a decrease in satisfaction, thereby exercising a moderating impact on customer loyalty. Customers may turn loyal when faced with high switching barriers or lack of real substitutes. A Tata Sky subscriber may want to switch to Dish TV, Big TV, or Airtel with lower cost and superior technology but might not want to invest time in

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calling different companies, finding rates, inviting people, and ensuring and supervising the entire change. Box 7.4: Switching Cost and Indian Railways Common Indians have been relying on Indian railways as a means of travel since decades. There is generally a wait for reservation, long queues at train ticket counters, crowded waiting halls, unhygienic or inadequate food and water stalls or canteens, a near stampede at the time of boarding and several other issues. However, staying in the relationship cannot be taken as a reflection of loyalty. People continue to travel with Indian Railways in the absence of any other viable option because the Railways has failed in providing convenience to all its customers.

Switching cost affects customer responses to price levels, which in turn, influences customer loyalty. Another important fact about switching cost is that it operates as an antecedent of loyalty in both business-to-business and business-to-consumer transactions. 7.3.9.

Emotions

Emotions are the primary motivators of behaviour. How a customer behaves in a relationship is influenced by the emotional connect that the stakeholders have. Emotion is generated with customer experiences and has a direct relationship with postpurchase behaviour, such as re-purchase intentions. But assessing emotional attachment has always been a difficult exercise. Research conducted by various researchers in different industries found a significant relationship between emotions and loyalty and concluded that a customer’s emotional attachment is an absolutely important condition for customer loyalty formation.

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Illustration: People prefer products and brands that they have been around since their childhood. Since childhood, if a person used Colgate toothpaste, as an adult, the person might prefer using the same brand because of the emotional connect. Similarly, there are several other instances of consumption where people buy brands because of emotional attachment. Cadbury chocolate’s catch line, “A gift for someone you love,” continues to be extremely popular, and most brand loyals prefer this as a gift for their partners. 7.4.

DETERMINANTS OF CUSTOMER LOYALTY AND THEIR IMPACT ON LOYALTY

Customer loyalty has emerged as an effective means of business growth. Loyalty experts such as Rosenberg et al. (1984) proposed that it is cheaper to retain a customer than acquire a new one. Moreover, loyal customers tend to stay with the company for a longer duration, which results in higher buying frequency as well as larger volumes of purchases over a period of time. This results in saving the advertising and other promotional costs that generally occur when attracting new customers. Companies with steady customer loyalty enjoy better financial results triggered from higher and more frequent purchases, shorter sales cycles, positive word of mouth publicity and a favourable attitude. The factors leading to loyalty must be clearly discussed by individual companies. A clear understanding of these factors leads to preparation of effective loyalty practices as they provide a concrete base for designing efficient loyalty programmes. Service quality can bring in customer satisfaction, positive word of mouth (WOM) publicity, and favourable behavioural intentions. Customer satisfaction enhances the customer’s desire to stick with the company in the long run and encourages repeat buying behaviour. It also results in cross selling opportunities and favourable WOM. Other antecedents such as trust and commitment work hand in hand when it comes to loyalty development and result in repurchase intentions, dedication towards the company, and an emotional connect with it, which increases the possibility of long-term customer relationships. Commitment deals effectively with switching intentions by fostering resistance towards attractive competitive offerings. Switching cost is another important antecedent of loyalty that is directly related to the level of satisfaction among customers. The corporate image of a company affects the concept of image congruence and encourages repeat patronage. Service failures can be managed but can’t be stopped completely. Service recovery, though designed to tackle failure, can win back customers with a greater level of satisfaction and trust. If managed appropriately, service recovery can lead to positive behavioural intentions and reduce switching intentions. Emotions are an inseparable and powerful part of any customer experience. Positive handling of emotions results in favourable behaviours such as repeat visits, repurchase and recommendation. Communication is the most vital part of any relationship, whether interpersonal or business. It helps in creating awareness and enables decision making in the favour of the company. Customer satisfaction and loyalty strongly influence the process of customer acquisition. Positive WOM from existing customers might increase a company’s revenues but negative feedback from the same customers may also ruin its profits and prospects. A satisfied customer shares his consumption experience with three people on an average whereas a dissatisfied customer talks to anywhere between 8 to 16 people. The impact a dissatisfied customer might leave on existing as well as potential customers of the company is huge and results in strong consequences.

Determinants of Customer Loyalty Formation

S. No. 1

Determinant Perceived quality

service

Contributing Author(s)

Consequential Behaviour

∑ Anderson and Sullivan (1993); Parasuraman, Zeithaml, and Berry (1994); Anderson, Sullivan, and Lehmann (1994); Fornell et al. (1996); Athanassopoulos (2000); Cronin, Brady, and Hult (2000) ∑ Zeithaml et al. (1996), (2000)

∑ Customer satisfaction (confirmation of expectations)

∑ Anderson and Mittal (2000) ∑ GrÖnroos (2000) 2

Customer satisfaction

∑ Fox and Poje (2002)

∑ Cronin and Taylor (1992); McAlexander et al. (1994) ∑ Liang and Wang (2007)

∑ Fornell (1992)

∑ Barsky (1992) 3

Trust

∑ Doney and Cannon (1997) ∑ Berry (2007) ∑ Bendapudi and Berry (1997)

∑ Morgan and Hunt (1994) ∑ Ranaweera and Prabhu (2003) 4

Commitment

125

∑ Beatty et al. (1998); Morgan and Hunt (2004) ∑ Pritchard, Havitz and Howard (1999)

∑ Positive behavioural intentions (Repurchase, recommendation, etc.) ∑ Positive word of mouth ∑ Hostility towards competitors’ marketing communication ∑ Willingness to stay with the company for a longer duration of time ∑ Future Purchase Intentions (Repeat purchases) ∑ Customers’ active participation in terms of buying additional services and spreading favourable word-of-mouth communication ∑ Decrease in customers’ sensitivity towards competitive offers ∑ Increased market share from repeat business and referrals ∑ Repurchase intentions ∑ Dedication ∑ Reduction in the cost of negotiations and removal of customer’s fear of opportunistic behaviour by the service provider ∑ Formation of highly valued exchange relationships ∑ Maintenance of long-term relationships ∑ Liking and emotional attachment to the firm ∑ Resistance to switching behaviour

126

S. No. 5

Customer Loyalty

Determinant Switching cost

Contributing Author(s) ∑ Kon (2004) ∑ Fornell (1992) ∑ Aydin and Ozer (2005)

6

7

Corporate image

Service recovery

Emotions

∑ Image congruence

∑ Swanson and Kelley (2001)

∑ Affecting favourable behavioural intentions ∑ Impact on switching intentions

∑ Westbrook (1987); Allen et al. (1992); Laverie, Kleine, and Kleine (1993); Mano and Oliver, (1993) ∑ Westbrook (1987); Mano and Oliver (1993)

9.

Communication

∑ Ndubiri and Chan (2005)

Figure 7.10

7.5.

∑ Repeat purchase behaviour ∑ Impact on customer satisfaction ∑ Dissuade customers’ attraction towards competitive brands

∑ Sirgy (1982), (1985); Zinkham and Hong (1991) ∑ Tepeci (1999) ∑ Nguyen and Leblanc (2001)

∑ McCollough, Berry, and Yadav (2000) 8.

Consequential Behaviour

∑ Reinforcement of self-image ∑ Repeat patronage

∑ Impact on post-purchase behaviour such as ∑ repeat visit ∑ recommendation and ∑ repurchase intentions ∑ Influence the post consumption satisfaction judgement ∑ Responsible for ∑ building awareness in the early stage ∑ developing customer preference, convincing and ∑ encouraging the customers to make the buying decision

Rai and Srivastava (2012).

FINAL THOUGHTS

Survival and growth of a company in today’s complex business environment characterised with increasing competition and incessant entry of new market players demand a broad vision as well as strong strategies directed at customer relationship management. Companies need to understand and assess the potential of retaining customers in the long run and make customer centricity a focal point of all business activities. Customer defection results in decreased revenues and acts as a warning for the company. Economic conditions may pose challenges before the company but a lot depends upon the company also whether it succeeds in identifying and creating opportunities or sinks in the turbulent waters. To strengthen its market position and attain better growth rate, a company needs to foster trust among its target audience, offer products and services with significant differentiation and understand customer expectations.

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The research pertaining to the antecedents of loyalty “Survival and growth of a bears important implications for managers as it brings company in today’s complex into light the antecedents of customer loyalty as well as business environment their individual role in loyalty formation. With increased characterised with everuse of technology in service delivery, there is little increasing competition and entry scope for differentiation. The approach of service firms of new market forces demand towards customer relationship is what stands out against a broad vision as well strong competitors. Customer loyalty has become the new mantra strategies directed at customer for sustained growth and profitability. It is important to relationship management.” understand and communicate with the staff about the role customer loyalty can play in the long-term interest of business. Service personnel should be educated and trained for comprehending and managing customers’ expectations with the right attitude. Further, the antecedents of loyalty can serve as an effective base of brand building strategies. A careful analysis will reveal the factors a service firm is falling short at in terms of loyalty and enable the managers to rectify the situation with appropriate loyalty building practices. Review Questions 1. What role do the drivers of customer loyalty play? 2. What are the drivers of customer loyalty? 3. “Switching Cost is the most important factor in customer loyalty determination.” Critically analyse this statement. 4. Different drivers have different weights in customer loyalty determination. How far do you agree with the statement? 5. How does Service Quality effect customer loyalty formation? 6. What role does the image of a company or a brand play in the determination of customer loyalty? 7. Emotional connect is the most crucial issue in determining the strength of customer loyalty? Explain with reasons and examples. 8. How does ownership benefit qualify as a driver of customer loyalty? Explain with an illustration 9. The greater the communication, the greater is the customer loyalty. Analyse this statement. 10. Loyalty increases with superior service recovery system. Comment with an example from the food retail business.

Project Assignments 1. Prepare a questionnaire for assessment of Customer Loyalty in apparel retail. Conduct the study and compare customer loyalty in grocery retail with apparel retail. List your reasons. 2. As manager of a media company engaged in a news broadcast, you are supposed to conduct a study for designing a set of programmes and address related issues that may build customer loyalty among your viewers. What course of action would you adopt and how would you carry out the study?

References 1. Anderson, J.C. and Narus, J. (1990). A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 48 (Fall), 62–74.

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8

Customer Loyalty Outcomes

If you do build a great experience, customers tell each other about that. Word of mouth is very powerful. Jeff Bezos CEO, Amazon.com This chapter is aimed at providing an insight into: v v v v

8.1.

Conceptualisation of Customer Loyalty Outcomes Types and Forms of Customer Loyalty Outcomes Variables affecting the different types of Customer Loyalty Outcomes Significance of Customer Loyalty Outcomes

INTRODUCTION

Customer Loyalty is a psychological state that companies try to create in the mind of their customers. Those who try to comprehend and assess its significance generally advance with one of the two popular perspectives–attitudinal perspectives or behavioural perspectives. Each of these perspectives is valid despite bringing in varied implications and diverse recommendations for the business. Including both the dimensions while assessing loyalty is completely rational in terms of conceptual and practical accuracy. The behavioural perspective is marked by customer repurchase of company products whereas the attitudinal perspective is related to a customer’s commitment towards his association with the company. Studies in the area of customer loyalty found it to be a multidimensional concept that consists of both behavioural (repeat purchases) and attitudinal (commitment) perspective. After analysing the two-dimensional approach, researchers insisted that focussing on only the behaviour (i.e., repeat purchases) would lead to an incomplete understanding of the reasons behind the purchases. In other words, examining the behaviour alone cannot confirm whether the repeat purchase is merely a result of convenience or pecuniary incentives or whether the product really means something to the customer. On a similar note, observing customer attitude alone cannot project the reality about the situation involving competitive effects (e.g., multi-brand or shared loyalty), familiarity, and situational factors. Customer loyalty is reflected by customers’ wilful and consistent stay in the relationship with their service provider. To induce this stay, companies devise and implement loyalty programmes

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that are aimed at incentivising purchase. If a customer remains in a relationship only due to the incentives offered by the company, he is likely to switch to a rival company when offered bigger incentives. So, loyalty programmes need to be judged for their significance and their control over final loyalty outcomes. Zeithaml et al. (1996) have integrated various researches in the field of customer loyalty and related evidence. They concluded that loyalty can be expressed through the following behaviours (Figure 8.1): Demonstrating a preference for a company over others

Continuing business with the company

Increasing the positive buying behaviour in the future

Figure 8.1

Behaviours expressing loyalty

The purpose of a business organisation is to create customers who need to be satisfied. The emergence of competition has redefined the bargaining power of customers and made them extremely demanding, which forced marketers to acknowledge the need of imbibing loyalty among them through customer delight. Customer loyalty might result in the following advantages to the company:

Repurchase intent

Actual repurchase

Loyalty

Referral intent

Share of purchase

Figure 8.2

Customer loyalty and advantages to the company

Ruyter et al. (1998) pointed out that literature brings forth three different dimensions of service loyalty: Preference loyalty, price indifference loyalty and dissatisfaction response. On the other hand, Butcher et al. (2001) found that four distinct dimensions of loyalty have been proposed by

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the service literature: Positive word-of-mouth, resistance to switch, identifying with the service and preference for a particular service provider. 8.2.

OUTCOMES OF CUSTOMER LOYALTY

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 a firm. Research has established a multitude of behavioural, attitudinal and cognitive outcomes of customer loyalty, some of which are widely recognised and accepted whereas others demand further probe for clarity. The manifestations of loyalty among customers are generally pinned down through their actions or their attitude towards the company or a particular product or service. However, recent studies suggest that another outcome of loyalty is a customer preferring a particular service provider over others on the basis of conscious evaluation of brand attributes. Jones and Taylor (2007) affirmed that advanced literature has proposed loyalty to be a three dimensional construct as the resultant outcomes of loyalty can broadly be classified as behavioural, attitudinal and cognitive loyalty. The following section enlists these outcomes of customer loyalty as identified through an extensive survey of literature: 8.2.1.

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 focusses on a customer’s actual demeanour, irrespective of the attitudes or preferences that lie beneath the conduct. According to this definition, 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. Loyalty is perceived and presented as a result of brand preference instead of causing a penchant for the brand. Going by this definition, 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. Reichheld (1994) asserted that the reason behind most of the customer loyalty researches considering customer retention as a proxy for loyalty is that retention can be calculated and a precise net present value obtained. The typical behavioural outcome of loyalty involves favourable word-of-mouth comments and cooperation as well as lesser efforts to search other options. Box 8.1: Number Portability in the Mobile Phone Industry – A Threat to Proxy Loyalty The revolution in the mobile phone industry started in India in the late 90s, but the real growth started after 2000. There was a big price war in the industry in the background of several customer friendly initiatives. Switching a mobile phone number involves an extremely high opportunity cost as a person shares his number with several others. This high switching cost forces people to remain in the relationship with their cellular service provider and not shift to another even when the person is not a satisfied customer. Therefore, assuming such a customer as loyal is a false assumption. However, with the advent of number portability, customers were empowered to change their service provider and retain their number. This resulted in huge losses for the service providers who considered mere customer retention as a symbol of customer loyalty.

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Behavioural variables: The behavioural measures of loyalty include: (1) Proportion of a given visit. Measures the frequency of purchase as compared to other brands in the same product category. (2) Time spent. (3) Cooperation and word-of-mouth recommendations. Cooperation has been defined as a joint effort in the direction of mutual goals; and also as a customer’s willingness to support the company. Positive word of mouth includes recommending and promoting the company, giving favourable comments and business referrals. This slightly confusing behavioural element concerns a necessary distinction between repeat purchase and the intention that may not necessarily lead to re-purchase. A truly loyal customer exhibits actual repeat buying behaviour of repetitive purchase and not simply an intention to do so. A management student from a leading management institute, who currently has low disposable financial resources and a high future financial prospect, might buy a low end cell phone during his student life. If he has a repeat purchase intention, he may upgrade the same company’s product once he musters adequate financial resources. He might go for repeat purchase and his repeat purchase intentions may bring out positive results. Buying probability is an appropriate explanation of loyalty. Loyalty is also considered as the function of the share of total purchases or buying frequency or buying pattern. Tellis (1998) considered relative volume of same brand purchasing as an indicator of loyalty or as put by Kandampully and Suhartanto (2000), behavioural dimension is simply a customer’s repeat purchase frequency. Proximity

Habit

Price

Reasons of Repurchase Behaviour Repeat Purchase Behaviour Customer Retention

Financial Performance

Error

Relationship

Monopoly

Figure 8.3 Allen (2010)

Tellis (1998) asserted that the behavioural approach has been used by simply measuring behavioural variables to predict a future customer’s purchasing behaviour. Tepeci (1999) postulated that repeat purchases are not always the result of a psychological (decision making or evaluative) commitment to the brand/store and this poses a major limitation to this approach. Repeat purchases do not always translate into a customer’s continued recommendation or maintaining a positive

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attitude towards the service provider. As put by Dick and Basu (1994), the behavioural approach neglects customer decision-making processes that do not differentiate brand loyalty from simple repeat purchasing behaviour. Jones and Taylor (2007) noticed that the behavioural outcomes including repeat buying intentions or customers’ chain buying behaviour has been the focus of initial researches in the area of service loyalty. Behavioural outcomes of loyalty include: (i) Repurchasing from the same service provider (ii) Lower switching intentions (iii) Making all purchases in a particular category from a single service provider 8.2.2.

Attitudinal Loyalty

Attitudinal dimension of customer loyalty refers to favourable customer intention to repurchase and recommend, which are good indicators of a loyal customer. The 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 exhibits a positive and preferential attitude toward it. Loyal customers tend to be fond of the company, its products or its brands, and therefore, choose to buy from it over others. In entirely economic terms, the attitudinal definition of customer loyalty implies that anyone who is ready to pay a premium for Brand A and select it over other brands, even when the products Brand A stands for are virtually undistinguished, is a “loyal” customer of Brand A. Pulsar, NOKIA, Volkswagen Polo, and Amul Ice-cream are some examples of the brands which could fetch premium. Still, the emphasis remains on willingness instead of actual behaviour if one goes by the attitudinal definition of loyalty. Increasing customer loyalty in terms of attitudes is about enhancing customer preference for the brand. Customer satisfaction is a closely attached concept for customer loyalty, which can be increased by improving product, corporate image and other customer experience elements of a company’s performance. Box 8.2: Customer Loyalty through Customer Convenience Future Group partnered with TATA Docomo for “Shop More, Talk More” and “Talk More, Shop More” rewards programme. Unlike other conventional loyalty programmes, the programmes offer instant benefits to the customers. T24, a prepaid TATA Docomo service has been combined with purchasing at Future Group outlets such as Pantaloons, Big Bazaar, Food Bazaar and Home Town. Customers making a purchase of a specified minimum amount get free talk time under T24. Reversely, customers topping up a T24 connection receive benefits while purchasing at Future Group outlets. Customer convenience has been paid special attention as the promo slips obtained from these outlets are already printed with free air-time that can be availed at any adjacent free recharge desk. The underlying assumption of this programme is to cash in on the wide spread affinity for mobile phones among Indian consumers. Source: http://www.futuregroup.in/businesses/the-T24-proposition.html

Attitudinal variables: The attitudinal measures of customer loyalty include trust, emotional connection and switching cost. 1. Emotional connection involves liking the partner, taking pleasure in the partnership, and experiencing a sense of belongingness to the company.

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2. Several studies in the recent past concentrated on the loyalty – trust relationship, where trust covered elements such as honesty (fulfilling promises), competence, benevolence, reliability, and customer orientation. The “commitment-trust” theory proposed commitment and trust as vital aspects of relationship marketing. The theory defined trust as one’s confidence in an exchange partner’s dependability and honesty or the willingness to rely on an exchange partner one has confidence in. The conceptual framework of the theory propounded that trust and commitment (or attachment) are components of relationship quality. 3. Bowen and Shoemaker (1998) investigated service relationships to understand the antecedents and consequences of commitment and trust in the context of luxury hotels. Their model covered trust, switching cost and commitment, plus behavioural-outcome variables such as product or service usage and voluntary partnership (a combination of cooperation and word-of-mouth) as key attitudinal variables. Switching cost has been defined as the time, effort, and expense involved in switching from one company to another. According to marketing theory, apart from repetitive purchase, true customer loyalty is accompanied by a favourable attitude towards a product or service. A truly loyal customer will not be limited to repurchase behaviour but exhibit strong preference and a relative commitment. Getty and Thompson (1994) suggested that this attitudinal dimension can adequately measure customer loyalty because a customer who is deeply committed or has strong intentions to repurchase and recommend is likely to remain with the brand/store. Oliver (1997) indicated that attitudinal loyalty develops through a sequence of three conceptual phases: cognitive, affective, and conative (Fig. 8.4): al

Attitudin

Conative Affective e

Cognitiv

Figure 8.4

Attitudinal loyalty through a sequence of three conceptual phases

Kandampully and Suhartanto (2000) described attitudinal dimension as a psychological (decision making or evaluative) commitment toward the brand/store. Jones and Taylor (2007) pointed that relative attitude refers to an affective assessment of the brand and has been explained in different ways such as: ∑ ∑ ∑ ∑ ∑

Considering the service provider the first choice among alternatives (Mattila, 2001) Willingness to recommend (Butcher et al., 2001) Strength of preference (Mitra and Lynch, 1995) Feelings of attachment to a product, service, or organisation (Fournier, 1998) Altruistic behaviour such as assisting the service firm and other customers (Patterson and Ward, 2000)

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So, an attitudinally loyal customer of a cell phone service has several options to select from like Airtel, Vodafone, Idea, Reliance, BSNL/MTNL, Aircel, and Uninor. The customer here: ∑ ∑ ∑ ∑ ∑

May consider Vodafone over the other available options. Strongly recommends Vodafone to friends and family members. Has a strong preference for Vodafone and does not think of switching to other brands. Feels for the brand. Is even ready to pay a premium for the brand that he is so closely and affectively associated with.

8.2.3. Attitude vs. Behaviour There have been discussions about the superiority of behavioural definition over attitudinal explanation of customer loyalty. It has been argued that 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 has been regularly using it, might have an equally favourable attitude towards the product, but both of them cannot be considered as loyal customers. In case of Customer A, the more useful attitudinal concept to use is simply “preference,” not loyalty. It has been unanimously accepted that customer loyalty should display a clear and direct impact on a company’s financial results. In other words, the strategies a company devised and implemented for the sake of customer loyalty must generate actual and relatable monetary outcomes. An organisation must be able to connect the dots between customer loyalty and the economic gains of the business. It is important to understand that 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 and thus, hold no intrinsic value for the company. In order to achieve a positive impact on the financial results, attitudes need to be manifested in some form of behaviour. 8.2.4. Cognitive Loyalty Cognition 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 take the following forms: Top of mind First choice Price tolerance Exclusive consideration (i.e. thinking about a particular service provider whenever a need of service arises) ∑ Identification with the service provider (i.e. viewing the service provider as an expansion of one’s self and admitting it by referring to the service provider as “my service provider” or through collective representations such as “us” and “we”) ∑ ∑ ∑ ∑

Customer Loyalty is formed with the drivers of affective and cognitive loyalty as discussed earlier (Fig. 8.5). Such loyalty leads to increased repurchase tendency among customers and also keeps them with the company, which in turn leads to superior financial performance.

Customer Loyalty Outcomes Affective Drivers

139

Cognitive Drivers

Repurchase Customer Retention

Customer Loyalty

Financial Performance

Figure 8.5 Customer Loyalty formed with the drivers of affective and cognitive loyalty Allen (2010)

8.3.

CUSTOMER LOYALTY OUTCOMES – AN EXPLANATION

Companies make several attempts to build loyalty among their customers through a variety of initiatives that are extremely engaging and costly. Customer loyalty thus formed is yet to be deciphered in terms of the kind of response it generates. Does this simply keep the customers with the company or does it also motivate them to contribute in other ways? If it is simply keeping them with the company, what is the benefit to the companies that deal in high value items which do not have a recurring purchase tendency? It is also to assess their significance in relation to the cost incurred to make them loyal. It is therefore imperative for companies to understand the variety and quality of outcomes that customer loyalty may result in (Table 8.1). An all-inclusive bouquet of customer loyalty outcomes and their respective manifestations has been offered by Rai (2012): Table 8.1

Outcomes of Customer Loyalty

Manifestations

Strength of Preference

Attitudinal

Advocacy/ Willingness to Refer

Altruism

Outcomes of Customer Loyalty

Definition

Literature Source

Customer’s degree of predilection Mitra and Lynch (1995); for a service based upon its de Ruyter et al. (1998); affective evaluation. Chaudhuri and Holbrook (2001) Customer’s willingness to commend and advocate a service into his social group at the risk of his own reputation.

Rust and Zahorik (1993); Boles et al. (1997); Anderson (1998); Bloemer et al. (1999); Naylor (1999)

Customer’s readiness to support Price et al. (1995) the service provider by providing feedback or helping co-customers in order to ensure successful service delivery.

140

Customer Loyalty

Outcomes of Customer Loyalty

Behavioural

Manifestations

Literature Source

Re-patronage Intentions

Customer’s willingness to sustain Zeithaml et al. (1996); a relationship with his service Bolton and Lemon (1999); provider and repurchase from Jones et al. (2000) the same provider in a particular category.

Resistance to Change

Customer’s imperviousness Hozier and Stern against substitutes available in Zeithaml et al. the market Walker and Knox Narayandas (1999); et al. (2000)

Share of Wallet/ Exclusive Purchasing/ Share of Category Price Indifference/ Price Insensitivity

Cognitive

Definition

Customer’s relative willingness to allocate all his purchases in a category to a particular service provider.

(1985); (1996); (1997); Ganesh

Day (1969); Reynolds and Beatty (1999); Reynolds and Arnold (2000); White and Schneider (2000)

Customer’s apathy towards the Anderson (1996); Zeithaml disparity between the price et al. (1996); de Ruyter et al. charged by his service provider (1998) and that of others charging in the same category.

Customer’s set of consideration Dwyer et al. (1987); Exclusivity/ Top comprising a single service Ostrowski et al. (1993); of Mind provider exclusively while Gremler and Brown (1996) procuring a particular service.

Identification

Customer’s feeling of ownership over the service, his belongingness with the service provider or the analogy of his values with that of the service provider.

Iacobucci (1992); Gremler and Brown (1996); de Ruyter et al. (1998); Butcher et al. (2001)

Rai (2013)

A brief explanation of customer loyalty manifestations is presented as follows: 8.3.1. Strength of Preference 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 the brand.

Customer Loyalty Outcomes

8.3.2.

141

Advocacy/ Willingness to Refer

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 their fraternity form a separate category named ‘customer evangelists’ as propagated by McConnell and Huba (2003). They are devoted consumers who are not just loyal but are also ready to actually back the company by offering positive word of mouth publicity. 8.3.3.

Altruism

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. 8.3.4.

Patronage Intentions

Patronage intentions refer to a customer’s willingness to emotionally connect with the company, and there is greater likelihood to purchase from the same company in future as well.

8.3.5.

Resistance to Change

Resistance to change can be described as a customer’s readiness to continue with an organisation regardless of pleasant or unpleasant service encounters and consumption experience. Resistance to change is due to the cost involved in switching consumption from company A to company B. A customer may be a happy and satisfied customer of a bank and the convenience of nearness of the branch from his place puts him in such a situation where his shifting from the bank would disturb his comfort even though it might lead to better banking in terms of service and experience. This way, a customer provides immunity or protection from competing offers to his current company. ‘Resistance to change’ is an important reason as well as the primary evidence of commitment.

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Commitment is found to be the principal antecedent of loyalty and thus, links resistance to change with loyalty. Baumann et al. (2009) replaced switching barriers with resistance to change in their study involving predictors of customer loyalty. However, resistance to change and loyalty share a two-way relationship as the decision to stay with the company initially comes from a series of satisfactory service encounters and continues after the customer turns loyal to the company. Thus, it can be regarded as one of the key manifestations of loyalty. 8.3.6. Share of Wallet/Exclusive Purchasing/Share of Category Another behavioural manifestation of loyalty is deciphered by referring to the portion of a customer’s total expenditure in a particular category that he commits to the company he is supposed to be loyal to. A loyal customer of Colgate would spend a majority of his expenditure of oral care on the products of Colgate, be it toothpaste or toothbrush or mouthwash. Similarly, if a customer is loyal to Hindustan Unilever, he would spend a majority of his expenditure on the products of HUL across available product categories. 8.3.7. Price Indifference/Price Insensitivity Indian customers are extremely price sensitive. The level of imperviousness that a customer shows towards price changes also reflects his level of loyalty. It means that the customer values the relationship more than the changes in service agreement or availability of alternatives at relatively lower prices. So, their loyalty towards the company does not get affected by prices and they remain indifferent and insensitive towards prices. Loyal customers are even ready to pay a premium for their consumption. 8.3.8.

Identification

The notion of consumer-company identification suggests that 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. Pratt (1998) linked the components of a person’s need to define himself. These self-definitional needs and their implications in terms of loyalty are tabulated in Table 8.2. Table 8.2

S. No. 1. 2. 3.

Self-definitional needs and their implications in terms of loyalty

Self-definitional Needs Need for selfenhancement Need for selfdistinctiveness Need for selfcontinuity

Implications for Loyalty Building Identifying with prestigious organisations gives satisfaction. Identifying with the organisations that are perceived to be distinct and unique on the parameters that the customer values, satisfies him. Identifying with the organisations that enable its customers express their particular traits completely provide satisfaction.

These self-definitional needs are met to some extent through this relationship with the company. There exists a significant and positive relationship between the length of a customer’s

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active involvement with an organisation and the strength of their identification with it. Therefore, the greater the duration of relationship, the stronger is the identification and subsequent loyalty manifestation. Box 8.3: The Rewards of Loyalty Loyalty programmes have been considered as the easiest way to ensure that the best customers keep returning to the business. The concept of loyalty programmes is too simple and involves membership earning loyalty points to the customers. The number of points corresponds to the rewards customers get entitled to. These rewards could range from offering special benefits like no-queue payment, priority based service, free parking, etc. to giving out free gifts and special discounts. Such simplicity should encourage more and more shoppers to opt for products and services adorned with loyalty programmes. However the actual number of customers who choose to get enrolled in loyalty programmes is disappointing with even lower number of customers actively participating in such programmes. It seems that the marketers are using primitive technologies just to collate data without giving due attention to customer convenience which calls for highest concern. The simplicity of the concept could not get translated into easy procedures and customers often get miffed with complications in filling up the forms and redemption of points. However, the loyalty programmes cannot be tagged unadvisable or useless altogether. A carefully designed and strategically targeted programme can help in loyalty building in several ways like high brand value, feedback about the purchasing behavior of consumers and increased profitability. Caroline Papadatos, senior vice- president, LoyaltyOne, pointed that “Loyalty programmes are an effective device for identifying the best customers and moving them through the stages of customer engagement by giving them rewards, recognition and relevant communications.” Relevance should be the basis premise of any loyalty programme as customers need to be placed at the heart of everything that aims to achieve the sustained patronage of customers. Thus, simplicity, relevance and transparency are the keywords while designing the rewards and deciding upon the way to earn them. The redemption of such rewards should follow easy mechanisms for greater reach and participation. An apt example is local vegetable vendors and the way they don’t forget to put in some free coriander leaves/chilies/ lemon for his best customers without charging them extra.

8.3.9.

Exclusive Consideration

Literature often associated exclusive consideration with ‘top of mind’ position that a brand enjoys or with customers perceiving a particular product or service as their first choice (Ostrowski et al., 1993). 8.4.

FINAL THOUGHTS

A customer can express his degree of loyalty towards a service provider by either displaying a positive attitude or indulging into favourable actions or making conscious evaluations and finding a particular service worth sticking to. Behavioural loyalty is generally seen in the form of repurchase intentions, low level of inclination towards switching and exclusive intentions. On the other hand, attitudinal loyalty is based upon the strength of preference and willingness to recommend. Cognitive outcomes of loyalty are

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characterised by a customer’s consideration of a service provider above others in the same category, stemming from his evaluation of the benefits associated with re-patronage. CUSTOMER LOYALTY

Behavioural outcomes

Attitudinal outcomes

Repurchase intentions

Relative attitude

Willingness to pay more

Switching intentions

Willingness to recommend

Exclusive consideration

Exclusive intentions

Altruism

Identification

Cognitive outcomes

Figure 8.6 Outcomes of Customer Loyalty Rai and Srivastava (2012)

The relationships between customer loyalty and its outcomes hold significance for the marketers intending to design fruitful loyalty programmes (Fig. 8.6). With an understanding of the various sets of outcomes of customer loyalty, marketers can effectively segment their customers based upon the type of loyalty they exhibit and thereby, design effective loyalty programmes to enrich and reinforce the existing loyalty. Managers can develop loyalty programmes specifically designed for different loyalty groups as per the loyalty outcomes and work upon enhancing the existing level of customer loyalty. Review Questions 1. 2. 3. 4. 5. 6. 7. 8.

What do you understand by the outcomes of Customer Loyalty? What are the factors that affect customer loyalty outcomes? Why do the outcomes of customer loyalty vary? What are the different types of outcomes of customer loyalty? What are the variables that affect determination of attitudinal loyalty? Can the outcome of customer loyalty be controlled? If yes, how? What do you mean by Altruism? Discuss its significance in the study of customer loyalty. Repeat purchase is comparatively easy to obtain as compared to preparing the customers to pay a premium. Comment. 9. What do you mean by customer patronage? Explain with suitable illustrations from the service industry. 10. Cognitive loyalty is the most difficult form of loyalty to obtain. Analyse this statement.

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Project Assignments 1. Assume that you are a business development manager and have undertaken several initiatives to infuse loyalty among customers. Since all these initiatives cost a lot, you are bothered about the result of your initiatives. What steps would you take to assess the outcome of the customer loyalty measures? 2. Design a research programme to analyse the reasons that customers restrict their loyalty to repeat purchase and refrain from patronising the company. Also suggest remedial measures to upgrade customer loyalty in special reference to the service industry.

References 1. Allen, D. R., (2010). Customer Satisfaction Research Management. New Age International (P) Ltd., Publishers, New Delhi. 2. Baumann, A.A., Abreu–Rodrigues, J. and Souza, A.S. (2009). Rules and self–rules: Effects of variation upon behavioral sensitivity to change. The Psychological Record. 59(4), 641–670. 3. Bowen, J. and Shoemaker, S (1998). Loyalty: A Strategic Commitment. Cornell Hotel and Restaurant Administration Quarterly, 2, 12–25. 4. Butcher, K., Sparkes, B. and O’Callaghan, F. (2001). Evaluative and relational influences on service loyalty. International Journal of Service Industry Management, 12 (4), 310–27. 5. Chris Baumann, Greg Elliott and Hamin (2011). Modelling customer loyalty in financial services: A hybrid of formative and reflective constructs. International Journal of Bank Marketing, 29 (3), 247– 267. 6. Dick, A. S. and Basu, K. (1994). Customer Loyalty: Toward an Integrated Conceptual Framework. Journal of the Academy of Marketing Science, 22, 99–113. 7. Fournier, S. (1998). Consumers and their brands: Developing relationship theory in consumer research. Journal of Consumer Research, 24 (4), 343–373. 8. Getty, J.M, Thompson, K.N (1994). The relationship between quality, satisfaction, and recommending behaviour in lodging decision. Journal of Hospitality & Leisure Marketing, 2(3), 3–22. 9. Jones, T and Taylor, S. F. (2007). The conceptual domain of service loyalty: how many dimensions? Journal of Services Marketing, 21 (1), 36–51. 10. Kandampully, J. and Suhartanto, D. (2000). Customer loyalty in the hotel industry: the role of customer satisfaction and image. International Journal of Contemporary Hospitality Management, 12(6), 346–351. 11. Mattila, A.S. (2001). The impact of relationship type on customer loyalty in a context of service failures. Journal of Service Research, 4(2), 91–101. 12. McConnell, B and Huba, J (2003). Creating Customer Evangelists: How Loyal Customers Become a Volunteer Sales Force. Chicago: Dearborn Trade Publishers. 13. Mitra, A. and Lynch, J. (1995). Toward a reconciliation of market power and information theories of advertising effects on price elasticity. Journal of Consumer Research, 21(4), 644–60. 14. Oliver, R. L. (1997). Satisfaction: A Behavioral Perspective on the Consumer, New York, NY: McGraw– Hill. 15. Patterson, P.G. and Ward, T. (2000). “Relationship marketing and management”, in Swartz, T.A. and Iacobucci, D. (Eds), Handbook of Services Marketing and Management, Sage Publications, Thousand Oaks, CA. 16. Pratt, M. G. 1998. To be or not to be? Central questions in organisational identification. In D. A. Whetten & P. C. 30 Academy of Management Review January Godfrey (Eds.), Identity in organisations: Building theory through conversations: 171–207. Thousand Oaks, CA: Sage.

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17. Rai, A. K. (2013). Customer Relationship Management: Concepts & Cases. PHI Learning: New Delhi. 18. Rai, A.K. & Srivastava, M. (2012). Customer Loyalty Attributes. NMIMS Management Review, 22 (October–November), 49–76. 19. Reichheld, F. F. (1994). Loyalty and the renaissance of marketing, Marketing Management, 2 (4), 10. 20. Ruyter, K., Wetzels, M and Bloemer, J (1998). On the relationship between perceived service quality, service loyalty and switching costs. International Journal of Service Industry Management, 9 (5), 436– 453. 21. Tellis, G.J. (1998). Advertising exposure, loyalty and brand purchase: a two stage model of choice. Journal Of Marketing Research, 25(2), 134–144. 22. Tepeci, M. (1999). Increasing Brand Loyalty in the Hospitality Industry. International Journal of Contemporary Hospitality Management, 11(5), 223–228. 23. Zeithaml, Valarie A., Leonard L. Berry, and A. Parasuraman (1996). The Behavioral Consequences of Service Quality. Journal of Marketing, 60 (2), 31–46.

Customer Loyalty Assessment: Methods and Measurement

9

Consumers are statistics. Customers are people. Stanley Marcus

This chapter is aimed at providing an insight into: Profiling Loyalty Segments Research Techniques in Customer Loyalty Assessment Measurement Models in Customer Loyalty Measurement Measurement Scales for Customer Loyalty as ∑ ∑ ∑ ∑

9.1.

Behavioural Intentions Battery Net Promoter Score SERVLOYAL Secure Customer Index

INTRODUCTION

The basic assumption of most economic theories is that customers are economically rational beings. Therefore, a majority of their business decisions are economically rational decisions. The Equity theory of relationship by John Stacey Adams (1963) suggested that one prefers entering into a relationship that yields the greatest profit. For customers to become loyal, it is extremely essential that they consistently feel that they are getting the desired products and services. Rational customers see their products and services to be superior to the alternatives available in the market and hence, they tend to develop loyalty towards their consumption and purchase. These customers don’t just transact. Rather, they form bonds with the company and regard their relationship important enough to resist switching. For example, purchasing Maruti cars would be the best and most preferred choice for those who are looking for a “Value for Money” car with the largest service network. At the same time, the emotional model of relationship emphasises upon other considerations of loyalty formation. A buyer might love to stay with a brand of SKODA despite not getting the best in class mileage, limited service network (especially in tier 2 and tier 3 cities) or even a price premium attached with the purchase.

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Box 9.1: Samsung: The Ghana Programme With approximately 40% market share and around 56% revenue share, Samsung is considered the mobile handset market leader in Ghana. To reward loyalty among its Ghanaian customers, Samsung has launched a new e-loyalty promo ‘Di bi na sa di biom.’ Under this programme, a period of 90 days was ascertained during which customers who purchase any of the selected Samsung phones are considered qualified for getting instant rewards and entering a lucky draw with a chance to win weekly and monthly prizes by registering their phone on an e-warranty platform. Hyundai i10, Samsung LED TV sets, Microwaves, airtime from Airtel, Samsung phones, branded clothes and other exciting items constitute the list of prizes in the lucky draw. Samsung also plans to hold weekly and monthly draws nationwide, especially in Accra, Kumasi, Takoradi, Tamale, Cape Coast, Sunyani and Ho. Source: http://loyaltyandcustomers.com/2013/03/samsung-launches-e-loyalty-promo/

Measurement of customer loyalty is all about measuring the strength of this relationship between a customer and the business. Having the ability to assess and comprehend customer loyalty is thus imperative for the significance of customer loyalty. However, the multi-dimensional and subjective nature of loyalty poses difficulty before the companies intending to measure it. This could be the reason why companies so often succumb to simply measuring loyalty in terms of repeat buying instances or a regular pattern of purchase behaviour. Loyalty communicates different notions to different people. The best way that remains viable is to measure attitudes as well as behaviours responsible for forming the loyalty makeup. Some of these attitudes and behaviours specific to a loyal customer are: ∑ Perceiving a particular product or service as the best option. ∑ Likelihood to continue purchasing the usual amount of same products and services, if not more. ∑ No active search for alternatives. ∑ Cross buying and up-scaled purchases. ∑ Willingness to recommend. ∑ Willingness to give second chances in case of service failure at any level and valuing the relationship with the provider. These points can serve as a basis for creating the loyalty profile of customers and segmenting them as per their responses. These loyalty segments may classify the customers as loyal, nonaligned and susceptible. Irrespective of the basis for loyalty segmentation, it should be sufficiently flexible to identify and take care of the peculiarities of the business. It should stem from sound and well-tested research principles and validated modelling. The focus of every organisation should be on increasing the number of loyal customers while reducing the vulnerable ones as such approach will lead to long-term profitability and business success. 9.2.

ASSESSING CUSTOMER LOYALTY

Customer loyalty is a psychological state that is subjective in nature. The intensity and strength of loyalty may vary from person to person and across different product and consumption categories.

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But without making an objective assessment, it is not possible for companies to take a meaningful decision either to infuse loyalty or sustain it. Assessing customer loyalty by way of an objective and quantifiable method is extremely important. This requires a systematic process, which is as follows: 1. Customer Segmentation: Customers can be segmented based on their post consumption behaviour (action oriented or emotionally or mentally oriented) as discussed in the previous chapter which would determine their loyalty status. 2. Customer Profiling: After segmenting the customers as per their loyalty status, a profiling of these segments should be done on the basis of demographic and other customer descriptors. 3. Loyalty Comparison: A thorough comparison across the loyalty profiles can divulge interesting and, may be surprisingly, large differences which otherwise would not have been noticed. However, such demographic and descriptive profiling is only a portion of a remarkably large amount of information that an organisation requires to manage customer loyalty. This mainly includes understanding the rationale behind a particular loyalty segment’s existence. The best way to get reliable information is through the customers as any guess estimates or gut feelings cannot yield useful results that can be relied upon. Without taking customers opinion into account, companies may Taking cue from the “Law remain hostage to a loyalty goal that may not fruit results. of Demand” of Economics, Once the segmentation has been accomplished, the subsequent which states that ‘demand phase involves retaining the loyal customers while increasing is inversely proportional to their number through carefully crafted migration strategies that price,’ if a perfume maker aim at shifting vulnerable and neutral customers to the loyalty reduces the price of the segment. The inputs received from customers may serve as a base product, the consumption for companies striving to manage customer loyalty as it does not may take a hit as the very only help companies improve their core offering but also identify nature of the product does desirable customers with high ROI and devise programmes to not go with the popular increase the percentage of their loyal customer base. Return on perception of product and investment is a proxy to the potential value a customer may offer price. by maintaining the relationship in long term. It is important to evaluate the value dimension of each relationship as it enables a company to determine future investment into the relationship. Customer loyalty migration calls for developing strategies that encourage the customers from lower level loyalty segments to move to the higher levels, while maintaining and protecting the customers who already belong to the loyal segment. Companies who fail to establish communication with its customers will never be able to get the right perspective as inputs from customers are the only source of reliable information about them. Taking cue from the “Law of Demand” of Economics, which states that ‘demand is inversely proportional to price,’ if a perfume maker reduces the price of the product, the consumption may take a hit as the very nature of the product does not go with the popular perception of product and price. Similarly, if a five-star hotel lowers the room tariffs or food prices, the brand may get adversely affected. Objective and valid measurement tools and techniques need to be employed to capture customer responses and analyse them to bring out useful insights for companies. The research work pertaining to customer loyalty is divided on the most appropriate method of loyalty assessment and fails to offer a universal measurement scale of loyalty. Some of the prominent customer loyalty measurement scales are listed in the subsequent sections:

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9.3.

MEASUREMENT MODELS IN CUSTOMER LOYALTY RESEARCH

Customer loyalty is an important and widespread construct in modern marketing literature. The richness of customer loyalty construct implies that any researcher, who wants to evaluate customer loyalty through an empirical study, has to take important decisions regarding inclusion of particular loyalty dimensions and ways to handle their interrelatedness. There are two major multi-item measurement models which differ in terms of assumptions a propos both, item selection and evaluation of measurement. These are: (i) Reflective model: The reflective measurement model operates on the assumption that the latent construct leads to co-variation among the measurement items as it is the underlying factor. Thus, each individual measurement item of a multi-item scale is required to adequately echo the underlying latent construct. It means that the insertion or elimination of any single item should not change the measure’s validity considerably. Jarvis et al. (2003) stated that the assumption behind the reflective model is that the indicators are unidimensional, which validates the use of Cronbach’s alpha (a) for reliability assessment in terms of internal consistency. Gerbing and Anderson (1988) pointed that to find about unidimensionality, factor analysis would be appropriate. SÖderlund (2006) reviewed the studies concerning loyalty and noticed that the reflective model has been used to capture many dimensions of loyalty such as such as re-patronage intentions, repeating business with the same salesperson and preference for a particular retailer. He also suggested that such studies offer instances of an approach where focus is on a particular and discrete loyalty aspect and in order to assess it, a multi-item measure comprising carefully selected items is employed so that each item reflects a single aspect. Another simple application of a reflective measurement is developing separate multi-item measures for different aspects of loyalty. Yet, this approach is a bit uncommon in the area of loyalty. (ii) Formative model: The formative measurement model works on the assumption that the individual measurement items perform as change agents with reference to the latent construct, which typically gets conceptualised at a higher hierarchical level than the measurement items. This approach discards the need for unidimensionality as it hypothesises the items to be completely uncorrelated. Since the measurement items are not supposed to be correlated with each other under this approach, there is little possibility of obtaining high degree of internal consistency among individual measurement items and thus, Cronbach’s α may not prove to be helpful in estimating reliability here. 9.4.

METHODS AND MECHANISM FOR ASSESSING CUSTOMER LOYALTY

Most companies today recognise the importance of customer loyalty for profitability and sustained business growth. Escalating competition and high acquisition costs have led companies to work for building and maintaining customer loyalty. Customer attitudes and intentional loyalty behaviours are the most popular measures of customer loyalty. Bowen and Chen (2001) advocated three distinctive approaches to measure customer loyalty: 1. Behavioural measurements: The behavioural measurements of loyalty represent a customer’s repetitious purchase behaviour as an indicator of loyalty for a service or brand.

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2. Attitudinal measurements: Attitudinal measurement is a key indicator of customer loyalty, related to emotional and psychological attachment or commitment and switching cost. 3. Composite measurements: The amalgamation of the first two dimensions that resulted in a third approach where loyalty is measured by preferences, frequency of purchase or visits, and propensity of brand-switching. 9.4.1.

Measurement Scales for Customer Loyalty

Companies often invest a considerable amount of resources into measuring customer satisfaction and rest in a comfort zone if they get good satisfaction ratings. The underlying assumption is that customer satisfaction is a precursor of customer loyalty which, to a certain extent, is right. However, cultivating loyalty among customers takes more than just satisfaction. Customer satisfaction alone cannot be relied upon as the most appropriate measure of customer loyalty. Loyalty should be measured through scales constructed with proper attention towards the variables of attitudinal and behavioural loyalty. Having identified Customer Loyalty as a key marketing goal, researches have been contemplating on measuring customer loyalty accurately and adequately. This is an area where academic and corporate researches have been working hand in hand. A number of techniques and scales have been worked upon. The important ones are as follows:

Behavioural Intentions Battery (Zeithaml et al., 1996)

Net Promoter Score (Reichheld, 2003)

SERVLOYAL (Sudhahar et al., 2006)

Secure Customer Index (Brandt, 1996)

Antecedents based Approach (Rai & Srivastava, 2013)

Fig. 9.1

Customer Loyalty Scales

These scales have been widely accepted and adopted by companies in order to assess the nature and degree of loyalty of their customers. The following section explores the conceptual significance as well as the perceived limitations of these scales:

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Behavioural Intentions Battery Zeithaml et al. (1996) conceptualised this model incorporating the behavioural and financial outcomes of service quality and empirically tested it at the individual-customer level in a multicompany context. The distinguishing features of their study’s empirical component consist of: (a) Development of a more extensive behavioural-intentions battery. (b) Examination of alterations in the quality-intentions connection at different service levels relative to customer expectations. Table 9.1

Behavioural-Intentions Dimension Loyalty

Switch

Pay More

External Response

Internal Response

Dimensions of behavioural intentions Item Wording

Item Label

Say positive things about XYZ to other people.

I1

Recommend XYZ to someone who seeks your advice.

I2

Encourage friends and relatives to do business with XYZ.

I3

Consider XYZ your first choice to buy services.

I4

Do more business with XYZ in the next few years.

I5

Do less business with XYZ in the next few years (–).

I6

Take some of your business to a competitor that offers better prices (–).

I7

Continue to do business with XYZ if its prices increase somewhat.

I8

Pay a higher price than competitors charge for the benefits you currently receive from XYZ.

I9

Switch to a competitor if you experience a problem with XYZ’s service.

I10

Complain to other customers if you experience a problem with XYZ’s service.

I11

Complain to external agencies, such as the Better Business Bureau, if you experience a problem with XYZ’s service.

I12

Complain to XYZ’s employees if you experience a problem with XYZ’s service.

I13

Zeithaml et al. (1996)

Zeithaml et al. (1996) developed and tested a 13-item battery to measure a wider range of behavioural intentions that have been offered by the literature or by specific evidence from companies. They included several features of behavioural intentions such as the likelihood of paying a price premium and staying with the company in the event of price hikes, intention to do more business with the firm in the future, and intentions to complain in case of service problems. These facets were earlier ignored and were not incorporated in the previous studies on service-quality battery. The 13 items were classified into four a priori categories: Word-of-mouth communications, purchase intentions, price sensitivity, and complaining behaviour, with the last two categories

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taking care of the items not included in prior service-quality research. The items were measured on a 7-point likelihood scale (1 = not at all likely to and 7 = extremely likely). Dimensions of Behavioural intentions Zeithaml et al. (1996) examined the dimensionality of the items through factor analysis of the behavioural-intentions battery. A four-factor solution was obtained for each company separately and an oblique rotation was conducted to allow for potential correlation among the categories. The item clusters implied by the factor loadings differed from the priori clusters and varied across the four companies. In order to reconcile to these differences, a five-factor solution was obtained that produced an unambiguous factor pattern consistent across all companies. The 13 items were reconfigured into five dimensions: Loyalty to company (loyalty), propensity to switch (switch), willingness to pay more (pay more), external response to problem (external response), and internal response to problem (internal response). 1. Attitudinal Loyalty ∑ Say positive things about xyz to other people ∑ Recommend xyz to someone who seeks your advice. ∑ Consider xyz your first choice to buy. ∑ Do more business with xyz in the next few years.

2. Switching Propensity ∑· Do less business with xyz in the next few years. ∑ Take some of your business to a competitor who offers better prices. Behaviour 3. Pay More ∑ Continue to do business with xyz if its prices increase somewhat. ∑ Pay a higher price than competitors charge for the benefits you currently receive from xyz.

4. External Response (if you experience a) problem with xyz’s service ∑ Switch to a competitor. ∑ Complain to other customers. ∑ Complain to external agencies. 5. Internal Response ∑ Complain to xyz’s employees if you experience a problem with xyz’s service.

Figure 9.2

Items of behavioural intentions battery (Allen, 2010)

Though the factor structure of the behavioural intentions battery differed from the a priori specification, the loadings supported the dichotomy in behavioural intentions and classified them into favourable and unfavourable categories. The largest factor, loyalty, consisted of five favourable

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behavioural-intentions items: Saying positive things about the company, recommending the company to someone who seeks advice, encouraging friends and relatives to do business with the company, considering the company the first choice from which to buy services, and doing more business with the company in the next few years. ‘Pay more’ contained two favourable items: continuing to do business with the company even if its prices increase somewhat and paying a higher price than competitors charge for the benefits currently received from the company. The second and fourth factors belonged to all unfavourable behavioural-intentions items. Switch contained two of them: doing less business with the company in the next few years and taking some business to a competitor who offers better prices. External response included items that relate to experiencing a service problem: switching to a competitor, complaining to other customers, and complaining to external agencies. The authors reached an equivocal interpretation of internal response, the fifth factor with one item–complaining to the company’s employees if a service problem is experienced. Customers who have a favourable disposition towards a company may be more likely to give the company a “second chance” and complain internally. On the other hand, the dissatisfied customers bearing an unfavourable image of the company may be more likely to complain internally simply to vent their frustrations. Such unclear interpretation and representation by just one item prompted the authors to delete this single-item measure from all subsequent analyses as its meaningfulness was doubted on conceptual and psychometric grounds. Allen (2010) represented the items of behavioural intentions battery in the manner given in Fig. 9.1: Net Promoter Score Net Promoter Score is a management tool used by companies to measure the loyalty intentions of customers. It was proposed by Fred Reichheld in 2003 in his article, “The One Number You Need to Grow,” published in Harvard Business Review. This scale was popularised with emphasis upon a single merit of simplicity. The concept of this scale suggests that a company can build loyalty by creating more promoters and lesser detractors. The complex techniques associated with satisfaction measurement can be avoided by simply asking the customers a single question: “How likely are you to recommend us to your friends and colleagues?” Reichheld (2003) stated that since recommending a product or service involves risk of damaging one’s reputation, if a customer is so affiliated with the company that he’s ready to take this risk, he can be termed as a loyal customer. Its simplicity renders it an ability to be used for measuring business performance across various business units as well as industries. Box 9.2: NPS @ JetBlue New York-based JetBlue received the highest customer loyalty ranking in the airline industry based on the Satmetrix 2011 Net Promoter® industry rankings. JetBlue received a Net Promoter Score, or NPS® of 60%, 45 points higher than the industry average that profiled eight national carriers. NPS is determined on the basis of customers’ likelihood to recommend JetBlue to others. It is calculated as the percentage of Promoters, customers who rate the airline 9 or 10 on a zero-to-ten point scale, minus the percentage of Detractors, who rate 6 or lower. Consumer’s ratings pertaining to various aspects of customer experience, including product or service features, customer service and overall value, have also been sought to analyse drivers of loyalty and performance gaps.

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Reichheld (2003) submitted that to calculate its net promoter score, a company should ensure a statistically valid sample and find out the promoter: detractor ratio by floating a single question: “How likely is it that you would recommend our company to a friend or colleague?” The responses should be anchored on a one to ten point Likert scale. Top ranking question (most effective across industries): 1. How likely is it that you would recommend Company X to a friend or colleague? Questions (effective predictors in certain industries): 2. How strongly do you agree that Company X deserves your loyalty? 3. How likely is it that you will continue to purchase products/services from Company X? Other questions (useful in a particular industry but little general applicability) 4. How strongly do you agree that Company X sets the standard for excellence in its industry? 5. How strongly do you agree that Company X makes it easy for you to do business with it? 6. If you were selecting a similar provider for the first time, how likely is it that you would choose Company X? 7. How strongly do you agree that Company X creates innovative solutions that make your life easier? 8. How satisfied are you with Company X’s overall performance?

Calculating the Net Promoter Score NPS segments the customers into three categories based upon their response to these questions. Customers are asked to rate their likelihood of recommending the company on a scale of 0 to 10 where 0 is “unlikely” and 10 is “extreme likeliness”. Customers who rate from 0 to 6 are termed as “detractors” whereas customers with 7 and 8 ratings are “passives”. “Promoters” are supposed to rate their answer from 8 to 10. To obtain NPS, the percentage of detractors should be subtracted from the percentage of promoters. NPS is expressed in positive or negative terms instead of in terms of percentage. For example, an NPS of –50 reflects that there are more detractors than promoters. The formula of NPS can be expressed as follows: NPS

=

Percentage of Promoters

-

Percentage of Detractors

Reichheld (2003)

Companies using NPS to assess customer loyalty should supplement the ‘ultimate question’ with open-ended questions also to find out the specific reasons behind their ratings. Reichheld (2003) observed that companies that enjoy profound loyalty obtain 75% to more than 80% net promoter scores.

Servloyal Sudhahar et al. (2006) conceptualised SERVLOYAL as a point of interaction between attitude and behaviour depicting that the strength of relationship between relative attitude and repeat patronage determine loyal behaviour. The dimensions of loyalty under SERVLOYAL include behavioural, attitudinal and cognitive processes.

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The attitudinal dimensions of loyalty were expressed through word of mouth orientation whereas in order to measure the behavioural loyalty, items related to brand allegiance, price elasticity, share of category (number of times a brand is purchased in a given period) and price until switching were used. Preference to the service organisation, the belief that the service organisation provides best offer and suiting customer needs are the attributes of the cognitive loyalty component. Furthermore, items pertaining to trust and commitment have also been included with full acknowledgement that they serve as antecedents of customer loyalty instead of being its components. Sudhahar et al. (2006) identified the following seven dimensions for the scale construction process: 1. 2. 3. 4. 5. 6. 7.

Behavioural dimension Attitudinal dimension Cognitive dimension Conative dimension Affective dimension Trust dimension Commitment dimension Dimensions

Behavioural (a) (b) (c) (d)

I will transact with this bank again for future needs. I will try new services that are provided by this bank. I will recommend other people to patronise this bank. I will say positive things to other people about the services provided at this bank.

Attitudinal (a) (b) (c) (d)

I will continue to patronise this bank even if the service charges are increased moderately. I have strong preference for this bank. I will keep patronising this bank regardless of everything being changed somewhat. I am likely to pay a little bit more for using the services of this bank.

Cognitive (a) (b) (c) (d) (e)

To me, this bank would rank first among other banks. I would patronise this bank for a long period of time. I will deal exclusively with this bank. I think of this bank as my bank. The bank I patronise reflects a lot about who I am.

Conative (a) I have found this bank better than others. (b) I always find the terms of this bank are inferior. (c) Repeatedly, the performance of this bank is superior to that of its competitor. Affective (a) (b) (c) (d)

I dislike the bank terms. I like the performances and services of the bank. I have a negative attitude towards this bank. I am satisfied with my decision to stay with this bank.

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Dimensions Trust (a) (b) (c) (d)

This bank is like a friend to me. The bank employees go out of the way for me. The people in the bank respond caringly when I share my problems. The bank personnel are filled with professionalism and dedication.

Commitment (a) (b) (c) (d)

I am very committed to this bank. Even when I hear negative information about this bank, I still stick with this bank. I like switching from one bank to another. My continued association with this bank is important to me. Sudhahar et al. (2006)

Authors regarded their study as a maiden effort of measuring customer loyalty through a comprehensive scale. They investigated the aptness of the aforementioned seven dimensions of the SERVLOYAL scale to check their suitability for usage in the service marketing literature. A confirmatory factor analysis was conducted to conclude that the seven dimension model fit the data well. The reliability coefficient for each dimension was found to be high (greater than .80) in all cases. Furthermore, each item in the scale developed was found to be contributing greater variance to the model as the parameter estimates indicate. However, the authors rightfully cautioned that since only the reliability aspect of the proposed scale has been examined, future studies should be careful while adapting the scale. They regarded the validity aspect of paramount importance and indicated that the scale should be validated by checking its nomological, discriminant and convergent validities.

Secure Customer Index Another measure of customer loyalty was proposed by Brandt (1996) who argued that a secure customer is one who admits that he or she is: ∑ Very satisfied with the service. ∑ Definitely will continue to use the service in the future. ∑ Definitely would recommend the service to others.

Very Satisfied Secure Customer Definitely Repeat

Definitely Recommend

Figure 9.3 Secure Customer Index (Brandt, 1996)

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He put forth the Secure customer index (Fig. 9.2) which coalesces responses to the depicted three items — overall satisfaction, likelihood to continue using the service, and likelihood to recommend and creates multiple classifications or segments on the basis of degree of customer security. For example: ∑ Secure Customers = % very satisfied/definitely would repeat/definitely would recommend ∑ Favourable Customers = % giving at least “second best” response on all three measures of satisfaction and loyalty ∑ Vulnerable Customers = % somewhat satisfied/might or might not repeat/might or might not recommend ∑ At Risk Customers = % somewhat satisfied or dissatisfied/probably or definitely would not repeat/probably or definitely would not recommend Brandt (1996) further stated that the design of any organisation’s customer satisfaction measurement process must entail the capacity to establish relationships between customer satisfaction, customer loyalty, and business results.

Antecedents Based Approach Rai and Srivastava (2013) examined the “most decipherable and widely applicable antecedents of customer loyalty” and went on to design an antecedents based instrument for measurement of customer loyalty in life insurance industry. This antecedent’s based approach of customer loyalty measurement is thoroughly conceptual due to being built out of academic researches in the area of customer loyalty. The antecedents based approach of customer loyalty assessment is based upon the antecedents of customer loyalty and is denoted as following: CL = f (SQ, CS, SC, Tr, CI, Cm, E) = a + x1 SQ + x2 CS + x3 SC + x4 Tr + x5 CI + x6 Cm + x7 E 9.5.

FINAL THOUGHTS

Customer loyalty is a practice worth nurturing. The advantages of having a loyal customer have been enlisted in terms of higher share of wallet, greater level of satisfaction, increased profits, reduction in switching and most of all, exclusive competitive edge. With so many expectations, efforts and resources at stake, customer loyalty initiatives must be evaluated and assessed in terms of their reach and effectiveness. Companies often chalk out carefully planned customer loyalty programmes and execute them with utmost sincerity but forget to take feedback and improve accordingly. Measuring customer loyalty not only gives a glimpse of the present status of loyalty among customers but also speaks a lot about the areas the company needs to work upon. Measurement models and methods discussed here can be used as a pedestal for development of a more parsimonious measurement instrument for identification and assessment of the most dominant form of customer loyalty in a particular context. Review Questions 1. What are the different models of measuring customer loyalty? Explain. 2. What do you mean by Research Design? Discuss its types.

Customer Loyalty Assessment: Methods and Measurement

3. 4. 5. 6. 7. 8. 9. 10.

159

Explain the different types of scales used in research. What are the relative merits of these scales? What are the criteria of a good measurement scale? Explain the concept of the Composite measurement scale in customer loyalty measurement. Elucidate the Net Promoter Score model in customer loyalty assessment. What is the benefit of using this model for customer loyalty assessment? Interpreting customer loyalty research findings is always the most difficult part of measuring customer loyalty. Answer in reference to the issues that complicate interpretation. What is the role of pilot study in any research? How is this done? What is pretesting of a questionnaire? What are the advantages of pretesting? The fundamental premise of SERVLOYAL is SERVQUAL. How far do you agree with this statement?

Project Assignments 1. Do you think the existing scales are sufficient for assessment of customer loyalty across industries and sectors or do the scales require customisation with industry, sector, geography etc? How would you develop a new scale for assessment of customer loyalty, especially for customers in the banking industry? Mention the steps you would undertake for the study in detail. 2. Private participation is now allowed in the Indian insurance industry which has resulted in increased competition. This may create difficulties for the existing government behemoth Life Insurance Corporation of India. As a manager of LIC, what would you do to find out the status of customer loyalty to take preventive measures for any prospective customer loss?

References 1. Adams, J.S. (1963). Toward an understanding of inequity. Journal of Abnormal Social Psychology, 67, 422–436. 2. Bowen, J. T. and Chen, S.–L. (2001). The relationship between customer loyalty and customer satisfaction. International Journal of Contemporary Hospitality Management, 13(4/5), 213–217. 3. Brandt, D. (1996). Customer Satisfaction Indexing, Conference Paper presented at American Marketing Association, USA. 4. Gerbing, D.W. and Anderson, J.C. (1988). An updated paradigm for scale development incorporating unidimensionality and its assessment. Journal of Marketing Research, 25 (2), 186–192. 5. Jarvis, C.B., MacKenzie, S.B., and Podsakoff, P.M. (2003). A critical review of construct indicators and measurement model misspecification in marketing and consumer research. Journal of Consumer Research 30 (2), 199–218. 6. Rai, A.K. & Srivastava, M (2013). Inter-Scale Assessment & Comparison Of Customer Loyalty In Banking Industry: An Empirical Study. Metamorphosis, Vol. 12 ISS: 2. 7. Reichheld, F.F. (2003). The only number you need to grow. Harvard Business Review. 8. Sudhahar, J.C., D. Israel, A.P. Britto and M. Selvam, 2006. Service loyalty measurement scale: A reliability assessment. Am. J. Applied Sci., 3: 1814–1818. 9. Zeithaml, V. A., Berry, L. L. and Parasuraman, A. (1996). The Behavioural Consequences of Service Quality. Journal of Marketing, 60 (2), 31–46.

10

Customer Loyalty: The Relationship Influencers

The easiest and most powerful way to increase customer loyalty is really very simple. Make your customers happy. Just keep ’em smiling. Do that every day and your business will be fine. Kevin Stirtz This chapter is aimed at providing an insight into: v v v v v v v v v v v 10.1.

The concept of customer loyalty and its relationships The concept of Mediation in Relationship Mediating Influencer in Customer Loyalty Relationships Estimating and Testing the Mediating Effects Comprehending the Service Quality–Customer Loyalty Relationship Role of Customer Satisfaction as a Mediator The concept of Moderation in Relationship Relationship Influencers moderating the Service Quality–Customer Loyalty relationship Identifying Moderating Variables Testing the Moderating Effects Moderating Variables in the Service Quality–Customer Loyalty Link INTRODUCTION

With an ever-increasing focus on customer relationships and the profound impact that customer’s evaluative judgements exercise on customer loyalty, it has become all the more important to uncover the factors that direct customer loyalty formation. Also there is a need to identify factors that affect customer loyalty in its relationship with other factors that constitute its formation. A complete understanding of a relationship’s nature, strength and its influencers would contribute to developing a comprehensive model that may not just clearly define the form and structure of a relationship for future research but also help industries in building loyalty and rationalise the marketing expenditure. Morgan and Hunt (1994) observed that customer relationships gained significance first in business-to-business relationships and it is only at a later stage that they received importance in business to customer services context. The concept of customer loyalty is foregrounded in the framework of customer relationship management. Ball et al. (2004) also shared a similar notion and pointed that the theoretical as well as practical scaffold of relationship marketing should integrate customer loyalty as a fundamental aspect. Rai (2013) defined Customer Relationship

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Management as “a continuously updated process of identifying relative value of customers and designing customised company interaction to delight them so that they do not just remain with the company profitably but also be the company’s ambassador. Full involvement and empowerment of employees and appropriate technology are two essentials for successful CRM.” Rai emphasised on establishing a long term, sustainable and mutually profitable relationship. Every business that is mature enough to keep a finger on the pulse of the market understands that customer centricity is the key to growth and profitability. This customer centricity brings in customer responses in discrete forms and degrees such as Voice of the Customer, Customer Engagement, Customer Experience, Customer Satisfaction and Customer Loyalty. Among these, customer loyalty has broadly been acclaimed to significantly affect business success and profitability. Thus, organisations are suggested to regard customer loyalty as a source of competitive advantage. Service quality is another significant aspect of business that has received considerable attention from academic as well as corporate minds. It has been seen as a principal antecedent of customer satisfaction and loyalty. The relationship between customer satisfaction and customer loyalty holds true across various cultural contexts and industrial settings. Thus a research model, assimilating service quality as the precursor and customer loyalty as the outcome of customer satisfaction, may yield valuable insights into the relationships among these concepts. This chapter endeavours to present an integrated conceptual framework of service quality, customer satisfaction and customer loyalty. The service quality–customer loyalty relationship and the directional effect that customer satisfaction exerts over this relationship have been explored and delineated with the help of a meticulous review of literature, which resulted into a mediation model of service quality, customer satisfaction and customer loyalty. Further, moderating effects on the service quality and customer loyalty link have been investigated and four moderating variables namely, customer knowledge and expertise, price perceptions, service convenience and switching costs have been extracted from the literature. 10.2.

MEDIATING INFLUENCER IN CUSTOMER LOYALTY RELATIONSHIP

10.2.1. 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). Baron and Kenny (1986) put forth a path model to illustrate the causal links between predictor, mediator and criterion: a Predictor

Mediator

b

c

Criterion

Figure 10.1 Baron and Kenny (1986)

Figure 10.1 explains that a variable function acts as a mediator when it meets the following conditions: (a) Variations in levels of the independent variable significantly account for variations in the presumed mediator (i.e., Path a)

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(b) Variations in the mediator significantly account for variations in the dependent variable (i.e., Path b) (c) When Paths a and b are controlled, a previously significant relation between the independent and dependent variables is no longer significant, with the strongest demonstration of mediation occurring when Path c is zero. So, mediator is a variable that serves as an explicatory link in the relationship between two other variables, one dependent and one independent. They further elaborated that the test of mediational effect helps a researcher in determining the explanatory role of a third variable between the other two in the relationship. Preacher and Hayes (2004) projected the simplest form of mediation through segregating the Baron and Kenny’s (1986) mediation model into two panels. Panel A of their model represented the effect of a proposed cause (X) on an outcome (Y) whereas panel B denoted the simplest form of mediation—the type that occurs when one variable (M) mediates the effect of X on Y. Panel A

c X

Y

Panel B

M a X

b c¢

Y

Preacher and Hayes (2004)

Preacher and Hayes (2004)

Hayes (2009) extended this model by introducing more panels to the figure that denote a number of possibilities in case of an intervening variable. He explained that c in panel A represents X’s total effect on Y. While describing panel B, he stated that “Panel B is the simplest of all intervening variable models, the simple mediation model. In this model, a is the coefficient for X in a model predicting M from X, and b and c¢ are the coefficients in a model predicting Y from both M and X, respectively. In the language of path analysis, c¢ quantifies the direct effect of X, whereas the product of ‘a’ and ‘b’ quantifies the indirect effect of X on Y through M. If all three variables are observed, then c = c¢ + ab (in latent variable models or models of dichotomous outcomes, this will not always be true). Simple algebra shows that the indirect effect, ab, is the difference between the total and direct effect of X: ab = c – c¢. The indirect effect is interpreted as the amount by which two cases who differ by one unit on X are expected to differ on Y through X’s effect on M, which in turn affects Y. The direct effect is interpreted as the part of the effect of X on Y that is independent of the pathway through M.” Mediation is defined as a series of relations such that a mediating variable is caused by an independent variable, which in turn causes a dependent variable. Kraemer et al. (2008) proposed M as a mediating variable between T, a target variable and O, an outcome variable given that M

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assists in explaining the relation between T and O. A mediating variable “transmits the effect of an antecedent variable on to a dependent variable, thereby providing more detailed understanding of relations among variables.” The basic setup of mediation implies that an independent variable X is considered to cause a dependent variable Y via a mediating construct, M’s mechanism. The very nature of a meditational model is causal. Kraemer et al. (2008) further stated that “Even if one’s data does not permit causal conclusions (for example, the data are cross-sectional and non-experimental), the theory that underlies such a model is still inherently causal because it suggests a direction of influence. Typically, mediator mechanisms are proposed only after a predictor–criterion effect has been fairly well established in the literature (i.e., indicating that there is, in fact, an effect to mediate). In other words, one does not typically begin study in a new research area by proposing mediational models. Such models are usually a more natural extension of a well-established body of literature. At the same time, in some studies and cases, it may not be necessary to have a significant “effect to be mediated” as a significant indirect effect would suffice for establishing mediation. So, c¢ is the total effect instead of direct effect or “effect to be mediated” and the significance of c¢ is not a necessary sign of mediation and its non-significance does not imply lack of mediation. Rucker et al. (2011) suggested that a researcher studying the intervening effects in a proposed theoretical model should not pay undue importance to the significance of the relationship between independent and dependent variables and shift their focus towards testing the mediation effect itself. They agreed to discard the importance of establishing a significant total effect (c) as a requisite to testing the indirect effects. They also questioned the usage of the terms, full mediation and partial mediation, by stating that “researchers’ exploration of mediation should be guided by theory. If there are theoretical reasons to predict the presence of an indirect effect or multiple indirect effects, researchers should explore these effects regardless of the significance of the total or direct effect.” 10.2.2.

Establishing Mediation

Baron and Kenny (1986) provided guidelines for establishing the indirect effect and declared the following conditions as requisite for establishing mediation: i. The independent variable must affect the mediator in the first equation ii. The independent variable must be shown to affect the dependent variable in the second equation iii. The mediator must affect the dependent variable in the third equation. They proposed that in case of all these conditions holding in the predicted direction, the effect of the independent variable on the dependent variable in the third equation must be lesser than that in the second. 10.2.3. Types of Mediation Baron and Kenny (1986) proposed three classes of mediation: (a) Full mediation (presence of an indirect effect but no direct effect) (b) Partial mediation (presence of both indirect and direct effects) (c) No mediation (absence of indirect effect)

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Zhao et al. (2010) found this classification to be “coarse and misleading” due to conceptualisation of mediation as a single dimensional concept. They avowed mediation to be a non-recursive threevariable causal model and proposed a typology of mediations and non-mediations consisting of three patterns consistent with mediation and two with non-mediation: 1. Complementary Mediation: Existence of both mediated effect (a × b) and direct effect c, pointing at the same direction 2. Competitive Mediation: Existence of both mediated effect (a × b) and direct effect c, pointing in opposite directions 3. Indirect-Only Mediation: Existence of mediated effect (a × b), with zilch direct effect 4. Direct-Only Non-Mediation: Existence of direct effect c, without any significant indirect effect (a × b) 5. No-Effect Non-Mediation: Existence of neither direct nor indirect effect 10.2.4. Estimating and Testing the Mediating Effects To test the mediation effect, one should estimate the following three regression equations: (i) Regressing the mediator on the independent variable (ii) Regressing the dependent variable on the independent variable (iii) Regressing the dependent variable on both the independent variable and on the mediator Separate coefficients for each equation should be estimated and tested. (1) M = a0 + Ax + e0 (2) Y = a1 + Cx + e1 (3) Y = a2 + c¢X + Bm + e2 Y denotes the dependent variables whereas X and M stand for independent and mediating variables respectively. A0, a1 and a2 e0, e1 and e2 are regression error terms. They recommended Sobel’s (1982) significance test for the indirect effect of the independent variable on the dependent variable via the mediator. The exact formula, given multivariate normality for the standard error of the indirect effect or ab, is: b2 sa2 + a2 sb2 + sa2 sb2 where, sa = standard error of path a (the path from the independent variable to the mediator), sb = standard error of path b (the path from the mediator to the dependent variable). Recent research found certain problems with Sobel’s (1982) test such as low statistical power and recommended bootstrap framework as an alternative method to test direct and indirect effects in mediation models. The standard approach propounded by Baron and Kenny (1986) suffers from a major shortcoming, that is, the underlying assumption of this approach gets violated due to the nature of data generally examined in management research. The key assumption of Baron and Kenny’s (1986) test of mediating variables is that the regression error terms in the set of estimated equations are uncorrelated. Shaver (2005) explicitly demonstrated the potential of correlation between the error terms across equations through a hypothetical example and suggested an alternative approach of testing mediation through two distinct estimation procedures: (1) Two-stage least squares method and (2) structural equation modelling.

sab =

Hypothesized Mediator

Evidence for:

Likely

Yes

no

Likely

Yes

Competitive Mediation

Is c significant?

Figure 10.2

no

Unlikely

Yes

yes Is c significant?

Neither direct nor indirect effects are detected. Wrong theoretical framework.

Unlikely

No

No-effect Non-Mediation

no

Problematic theoretical framework. Consider the possibility of an omitted mediator of matching sign in the “direct” path.

Likely

No

Direct-only Non-Mediation

no

Mediatoridentified consistent with hypothesized theoretical framework

Indirect-only Mediation

Is axb significant?

Decision Tree for Establishing and Understanding Types of Mediation and Non-Mediation (Zhao et al., 2010)

Incomplete theoretical framework. Mediator identified consistent with hypothesized theoretical framework. But consider the possibility of an omitted mediator of matching sign in the “direct” path.

Omitted Mediator

Is axbxc positive?

Complementary Mediation

yes

yes

yes

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10.2.5. Researching Customer Related Constructs

Service Quality – Customer Satisfaction Hurley and Estelami (1998) opined that a customer’s level of satisfaction with an organisation or a service provider is determined by the evaluation of service quality along with other factors. Several discussions have taken place in the field of customer relationship management about the distinctiveness between the concepts of service quality and customer satisfaction. Researchers also held arguments regarding the causal path between service quality and customer satisfaction to determine whether satisfaction is an antecedent or an outcome of service quality. It has been found that service quality plays the role of an antecedent to satisfaction in a number of industries. Moreover, studies established service quality to be the most influential precursor of customer satisfaction. Al-Hawari et al. (2009) pointed out that recent studies that explored factors, which affect customer satisfaction in the financial services industry, mainly focused on service quality. Rai and Srivastava (2012) suggested that a direct relationship exists between service quality and customer satisfaction. Kassim and Abdullah (2010) noted that though literature is full of evidences regarding the aggregate relationships between service quality, customer satisfaction, trust, and loyalty, it does not give an account for the individual dimensions of these constructs. They conducted a study among the customers of Malaysia and Qatar and agreed that service quality is an antecedent of customer satisfaction but only three dimensions of service quality, namely, ease of use, website design and assurance, affect customer satisfaction whereas the other two, that is, customisation and responsiveness, do not correspond with it. Chen et al. (2012) confirmed the well-established relationship between service quality and customer satisfaction and suggested that although service quality can increase customer satisfaction both directly and indirectly, but in the financial services context, service fairness is also considered along with service quality while forming satisfaction levels. Parasuraman et al. (1988) described perceived service quality as the overall evaluation of a service in the long-run and satisfaction as an evaluation based on a specific transaction. They stated that incidents of satisfaction over time determine the service quality perceptions. Bitner (1990) proposed a model of service encounter evaluation and demonstrated empirical evidence in support of satisfaction’s effect on service quality. On the contrary, Woodside et al. (1989) carried out an empirical study in the context of health care and showed evidence in support of the proposed causal relation between service quality and satisfaction. Cronin and Taylor (1992) undertook a structural analysis to investigate the causal relations among satisfaction, overall service quality, and purchase intention and reported significant coefficients for the path service quality – satisfaction – purchase intention, where they found path satisfaction – service quality – purchase intention to be insignificant. Spreng and MacKoy (1996) modified the satisfaction/service quality model proposed by Oliver (1993) and found that the hypothesis related to service quality affecting satisfaction helped in fitting the data in the modified model. Lee et al. (2000) investigated the causal order of the relationship between satisfaction and service quality and concluded that service quality acts as an antecedent to customer satisfaction. They also noted that customer satisfaction has a stronger impact on purchase intention in comparison to service quality. There were conflicting views on the satisfaction – service quality relationship. On one hand, a few researchers opined that satisfaction is a forerunner to service quality, which has a direct impact

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on behavioural intentions whereas others reported vice versa and declared service quality as a causal variable in the quality-satisfaction link. Cronin and Talyor (1992) observed four service industries (banking, pest control, dry-cleaning, and fast food) to study the impact of perceived service quality on consumer satisfaction and found them to be positively related. Subsequent examination of the relationship into six service industries by Cronin and Bei and Chiao (2006) in three service settings (petrol station, baking, and automobile repairs) also got similar results and established a significant linkage between service quality and satisfaction. In their study of service industries in USA, Australia, The Netherlands, Hong Kong, and Morocco, Brady et al. (2005) affirmed the direct impact of service quality on satisfaction. It is evident that despite offering conflicting opinions, literature heavily advocates the notion of service quality being a precursor to satisfaction.

Customer Satisfaction – Customer Loyalty Customer satisfaction is generally assumed to be a significant determinant of repeat sales, positive word of mouth and consumer loyalty. High customer satisfaction leads to an increase in customer loyalty towards the firm and such loyal customers are less likely to fall for competitive overtures. There has also been a positive relation of quality of service with repurchase intentions and willingness to refer. Perceived satisfaction is also a predictor of relative attitude as it is instrumental in formation of a positive attitude towards a particular brand. Customer satisfaction also determines customer loyalty to a great extent. Bloemer et al. (1998) pointed out that a positive relationship exists between perceived service quality, preference loyalty and price indifference loyalty. Ping (1993, 1999) posited that decrease in relationship satisfaction leads to a drop in loyal behaviour with an increased likelihood of relationship termination. In case ending the relationship is not feasible and solving the problem is important, loyal behaviour takes a hit with decline in satisfaction. High degree of relationship satisfaction is able to reduce the intensity of blame and anger in damaged relationships. Studies also demonstrated a positive association between satisfied customers and repurchase intentions. Satisfaction among customers across product categories can strongly be related to repurchase intentions. Murray and Howat (2002) reviewed the literature related to impact of customer satisfaction on customer loyalty and found evidence suggesting that customers’ level of satisfaction plays a significant role in determining their future intentions and behaviour towards the service. There is also a direct influence of customer satisfaction over customers’ intentions to re-use the service. Howat et al. (1999) investigated the link between customer satisfaction and customers’ willingness to refer in a sports and leisure context and concluded that satisfaction of customers has a positive relationship with their willingness to recommend the service. McDougall and Levesque (2000) gave a causal path wherein the perception about service quality affects satisfaction, which in turn influences the repurchase intentions of customers. Murray and Howat (2002) supported them in their study centered on a sports and leisure centre context and stated that satisfaction seems to be a principal antecedent of customers’ future intentions. Several recent studies offer evidence of a direct and positive relationship between relationship satisfaction and loyalty. They reviewed the relevant literature and suggested that the association of customer satisfaction with brand loyalty is well established at both the “transaction-specific” level and the “overall” level. They reported that in the context of ski resorts, customer satisfaction operates as a main determinant

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of customer loyalty and a customer’s intentions to repurchase a product or service as well as his readiness to recommend and reflect the positive effects of satisfaction. They established a causal model of customer satisfaction along with image predicting customer loyalty and posited that ski resorts that got the highest ratings in customer satisfaction and image enjoy the highest scores in loyalty also. Kiran, K. and Diljit, S. (2011) developed a structural model for testing the links among web-based library service quality, service value, customer satisfaction and customer loyalty and their findings suggested that customer satisfaction exerts a direct and positive effect 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. Zeithaml et al. (1996) found a positive relationship between service quality and willingness to pay more as well as loyalty. Wong et al. (1998) conducted a study in the hospitality industry and found a positive relationship between service quality dimensions and customer loyalty. Baker and Crompton (2000) reported a positive relation between service quality and willingness to pay higher prices to customer loyalty. Alexandris et al. (2002) revealed that all the SERVQUAL dimensions exert a significant impact on repurchase intentions but four of the five dimensions relate to word-of-mouth communication. Wang and Sohal (2003) attempted to assess the impact of service quality dimensions on customer loyalty at two levels of retail relationships, that is, interpersonal (person to person) level and store (person to firm) level. Their findings suggested that there is a positive association between service quality and customer loyalty and this association is stronger at the company level than at the interpersonal level with tangibles being the most significant predictor of loyalty at the store level and empathy at an interpersonal level. The functional as well as technical aspects of quality influence the behavioural intentions considerably. Chow et al. (2007) carried out their study in the hospitality (restaurant) industry and found that frequent patronage of guests is related to high levels of service quality. Storbacka et al. (1994) examined the effect of service quality on satisfaction as well as satisfaction on customer loyalty and found service quality to be positively related to satisfaction that results in increased purchase (loyalty). Ishak et al. (2006) discovered that the construct of client satisfaction mediates the relationship between service quality and client loyalty. Dabholkar et al. (2000) undertook a review of literature and found it to be full of conflicting arguments regarding the causal relationships between service quality, satisfaction and loyalty. They conducted a longitudinal study involving customers of a national photographic company

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which revealed customer satisfaction to be strongly mediating the link between service quality and behavioural intentions. Their study could not trace any significant direct impact of perceived service quality on customer loyalty. However, it is found to affect customer satisfaction positively. Cronin, Brady and Hult (2000); Marthensen and Gronholdt (2003); Zeithaml et al. (2006) affirmed the mediating role of customer satisfaction in the relationship between service quality and customer loyalty. Olorunniwo et al. (2006) reported that in the context of service factory, the indirect effect of service quality on behavioural intentions with customer satisfaction mediating the effect is stronger than the direct effect of service quality on behavioural intentions. Tsoukatos and Rand (2006) verified the findings of Parasuraman et al. (1988); Reichheld and Sasser (1990); Fornell (1992); Cronin and Taylor (1992); Anderson and Sullivan (1993) about the causal relations between service quality perceptions, satisfaction and loyalty and accepted the path, service quality customer satisfaction loyalty, to be valid in the Greek insurance industry. Caceres and Paparoidamis (2007) empirically verified the mediating role of relationship satisfaction in the business to business context and asserted that the relationship between functional and technical dimensions of service quality and business loyalty is mediated by relationship satisfaction whereas no support has been found for the direct effect of service/product performance on customer loyalty. Juga et al. (2010) supported a satisfaction-loyalty model in the logistics outsourcing context and stated that instead of directly influencing loyalty, service perceptions influence loyalty through the shipper’s overall satisfaction with the service provider. Table 10.1

Relationship

Studies on Relationships among Service Quality, Satisfaction and Loyalty Authors

Context of the study

Technique

Findings

SQ, SV, CS, Cronin, Brady and BI (loyalty) Hult (2000)

Fast food, health care, sporting events

CFA

SQ, SV, CS directly influence BI.

SQ, CS, BI

Dabholkar, Shepherd and Thorpe (2000)

Photographic CFA directory services

CS has a strong mediating effect of SQ on BI. CS is a good predictor of BI.

SQ, SV, CS, CL

Marthensen and Gronholdt (2003)

Library

CFA

SV has a direct effect on CS and loyalty. CS has a direct effect on CL.

SQ, CS, CL

Wolfinbarger and Gilly (2003)

e-retailing

CFA

SQ (website design) has a direct effect on CS and loyalty.

SQ, CS

Dabholkar and Overby (2005)

Real estate agent

Content analysis of interview data

SQ has a direct effect on CS.

SQ, CS, SV

Landrum and Prybutok (2004)

Library

Regression analysis

SQ has a direct effect on SV. SQ has a direct effect on CS.

Customer Loyalty

170

Relationship

Authors

Context of the study

Technique

Findings

SQ, SV, CL

Parasuraman et al. (2005)

e-purchase

CFA

SV has a direct effect on loyalty. SQ has a direct effect on SV and loyalty.

SQ, CS, BI

Zhang and Prybutok e-purchase (2005)

CFA

SQ has a direct effect on CS which then has a direct effect on BI. SQ also affects BI through CS.

SQ, CS, CL

Birgelen, Ghijsen e-catering and Semeijn (2005)

PLS

SQ has a direct effect on CS. CS has a direct effect on CL.

SQ, CS, BI

Collier and Beinstock (2006)

e-retailing

CFA

CS has a mediating effect between SQ (outcome) and BI.

SQ, CS, CL

Cristobal, Flavian and Guinaliu (2007)

e-retail

CFA

SQ has a direct and indirect effect on CS, CS has a direct effect on loyalty, CS is a mediator.

SQ, CS, CL

Ho (2007)

e-travel

CFA

SQ has a direct effect on CS and loyalty.

SQ, CS, BI

Ladhari (2009)

e-hospitality

CFA

SQ has a direct and indirect effect on BI. CS is a mediator.

SQ = service quality; CS = customer satisfaction; BI = behavioural intentions; SV = service value; CL = customer loyalty; CFA = confirmatory factor analysis Kiran, K. and Diljit, S. (2011)

Customer Satisfaction M = b20 + b21 X Y = b30 + b31 X + b32 M

Service Quality

Figure 10.3

Y = b10 + b11 X

Customer Loyalty

Conceptual Model Depicting Mediating Effects of Customer Satisfaction in Customer Loyalty.

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10.3.

171

RELATIONSHIP INFLUENCERS MODERATING THE CUSTOMER LOYALTY RELATIONSHIP

The concept of moderating variables was brought into light by Saunders (1956) who introduced it in psychology research. Its usage in marketing has also increased considerably. The concept of moderating variables resolves the following issues and thus, helps in understanding and forecasting buyer behaviour: 1. The possibility of existence of independent variables that essentially share no relationship and start working at distinct points in time. 2. The possibility of existence of independent variables that relate to each other at specific points in time but not always. Sharma et al. (1981), in their landmark paper about identification and analysis of moderator variables, discussed the confusion that persisted among researchers regarding the concept and functioning of moderating variables. They highlighted the following three major notions in this regard: 1. A variable can be considered a moderating variable based upon its interaction with a predictor or independent variable. This branch of moderation concept ignored the possibility that a hypothesised moderating variable can be an important predictor variable itself. 2. Cohen and Cohen (1975) discarded the proposed relationship between a moderating variable and a predictor variable. They further rejected the possibility of a moderating variable being a predictor variable. 3. Bennett and Harrell (1975) emphasised the usage of analytic procedure to compare the individuals grouped on the basis of moderating variable. 10.3.1. Moderation–The Conceptual Framework Sharma et al. (1981) stated that a moderating variable is one that influences the relationship between a predictor variable and a criterion variable by systematically altering its form or strength. Baron and Kenny (1986) also described moderator as a qualitative or quantitative variable that influences the form or strength of association between an independent and a dependent variable. They further specified moderating variable with regard to correlation analysis and stated that “it is a third variable that affects the zero-order correlation between two other variables.” 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. Sharma et al. (1981) proposed a two-dimensional typology of moderating variables that sorted them into four distinct categories (Fig. 10.4). They stated that moderating variables can be considered as a subset of “test or specification” variables which are widely used in social sciences. The specification variables are the variables affecting the strength of the relationship and/or form of the relationship between predictor and criterion variable.

172

Customer Loyalty Related to Criterion and/ or Predictor

Not Related to Criterion and/ or Predictor

No Interaction with Predictor

1 Intervening Exogenous Antecedent Suppressor, Predictor

2 Moderator (Homologisers)

Interaction with Predictor Variable

3 Moderator ("Quasi" Moderators)

4 Moderator (Pure Moderators)

Figure 10.4 Two-dimensional typology of moderating variables (Sharma et al. 1981)

Baron and Kenny (1986) showed that in a typical research question involving interaction effects, three causal paths to the outcome variable exist. They depicted the moderating effects in a predictor–criterion relationship through the following model (see Fig. 10.5): Predictor Moderator

Predictor x Moderator

a Outcome Variable

b c

Figure 10.5 Moderating effects in a predictor–criterion relationship (Baron and Kenny, 1986)

Baron and Kenny (1986) postulated that the hypothesis related to moderating effects is supported if path c is found to be significant. They further added that in order to obtain succinct interpretation, moderator variable should be unrelated to predictor as well as criterion variable and it should coexist with predictor variable at the same level as an independent variable. 10.3.2. Identifying Moderating Variables Sharma et al. (1981) underlined a couple of methods for identification of moderating variables: (a) Subgroup analysis (b) Moderated regression analysis They proposed a framework for identifying the presence and type of moderator variables and put forth the following four models: Model 1: No moderating effect (Y = a + bx + e) Model 2: Homologizer (y = a + bx + ze) Model 3: Quasi Moderator (y = a + bx + cz + dxz + e) Model 4: Pure Moderator (y = a + bx + dxz + e)

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To bring greater clarity about which variable is a moderator and which is moderated, MacArthur approach specifies that for a variable to be classified as a moderating one, two conditions need to be met: (i) Temporal Precedence: The moderating variable must be a predecessor to the predictor variable. (ii) Absence of Association: The moderator and predictor variables must be independent of each other. 10.3.3. Testing the Moderating Effects Whisman and McClelland (2005) pointed that although the concept of moderators has gained popularity in the field of research, there exists a perplexity regarding the most suitable method of testing and interpreting them. They proposed guidelines for testing and interpreting the interaction effect and recommended a statistical comparison of the following two models for testing the interaction or moderating effects: 1. Y = b0 + b1 X + b2 Z 2. Y = b0 + b1 X + b2 Z + b3 X Z Several methods for testing the existence and statistical significance of the difference between the earlier mentioned models are available. Whisman and McClelland (2005) shortlisted the following three as the most useful ones: (a) Testing whether the increase in the square multiple correlation (R2) is significantly greater than 0. (b) Testing whether b3 ≠ 0. (c) Testing whether the partial correlation between the product XZ and Y differs from 0 when X and Z are controlled. The natural question that arises at this stage is an enquiry about the statistical methods that can be used to assess the moderating effects in a relationship. There are three techniques which have prominently been used by researchers for testing the moderating variables: (a) Multiple Regression (b) ANOVA (c) Hierarchical Multiple Regression Table 10.2 shows a framework for identifying the most appropriate technique in case of different sets of variables. Table 10.2 A framework identifying the most appropriate technique with different sets of variables

Variables/ Statistical Techniques

Multiple Regression Analysis

ANOVA

Hierarchical Multiple Regression Analysis

Predictor

Categorical/ Continuous

Categorical

Continuous

Moderator

Categorical/ Continuous

Categorical

Continuous

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Step 1

Does moderator, Z interacts significantly with the predictor variable, X? (Y = (b0 + b2Z) + (b1 + b3Z)

No

Yes

Is Z related to predictor, X, or criterion variable, Y? (Evaluate rxz and rxy)

No

Pure or quasi moderator influences form of relationship

Yes

Split sample into subgroups

Step 2

Not a moderator

Homologiser moderator influences strength of relationship

Yes

Test for significance of differences in predictive validity across subgroups

No

Not a moderator

Step 3

Figure 10.6

Framework for identifying moderating variables (based on Sharma et al., 1981)

10.3.4. Moderating Variables in the Service Quality–Customer Loyalty Link The study on service quality–customer loyalty relationship can be taken to an advanced stage by assessing and incorporating the function of various relationship influencers which have the ability to leave moderating effects on the aforementioned relationship. However, the concept of moderating variables and their potential to affect marketing relationships has mostly been ignored by academicians in the area of marketing and consumer behaviour. Caruana et al. (2000) opined that these subjective constructs influence customer choices and their decisions to strengthen or cease a relationship to a considerable extent which fortifies their roles in shaping customer retention and long-term profitability. Hence, a discussion pertaining to the moderating effects on service quality–customer loyalty link becomes all the more important. A thorough review of extant literature suggests that the relationship between service quality and customer loyalty is moderated by the following variables:

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Prior Knowledge and Expertise Familiarity and expertise are two important components of consumer knowledge. Familiarity is the collection of a consumer’s product related experiences whereas expertise refers to a consumer’s ability to perform product related functions. Terms such as familiarity, expertise and experience were used interchangeably by the researchers for the purpose of referring to prior knowledge. A customer’s level of expertise pertaining to a product is expected to affect his way of evaluating the available information and making choices. Customers with high expertise are likely to be more confident about their quality evaluation based on the technical aspects of service as they are able to probe the functional levels and assess the core product. Customers’ efficiency at refining the information received from their advisor increases as they achieve expertise since the information can be evaluated in the milieu of previous knowledge and experiences. Customers with lower levels of expertise get engrossed into assessing the quality across a range of various service aspects. The reason behind such behaviour is that in the absence of technical knowledge, these customers rely more on tangible and relational attributes of the service, which are obvious elements of functional service quality. Such tendency of depending solely upon the functional attributes of the service is to the higher degree of perceived risk involved in decision making. So, high expertise enables customers to undertake a more complex processing of information. Expertise helps in assessing the outcomes of service like appropriateness of advice, portfolio performance and return on investments more assertively whereas lack of expertise leads to greater reliance upon the credence qualities associated with the service such as friendliness of the staff and empathetic approach of the advisors while making a decision to switch. Testing moderating effects of customer expertise resulted in the finding that customers with high expertise are more reliant upon the technical attributes of service quality than its functional elements when it comes to deciding upon their intentions to stay with the organisation.

Price Perceptions Pricing is an extremely important component in every purchase and therefore, should be considered as an inner element of consumer behaviour. Voss, Parasuraman, and Grewal (1998) postulated that since services cannot be inventoried, demand based pricing that is variable in nature is adopted in service industries and thus, price plays a vital role in services. A customer’s perception of pricing may take both positive and negative forms, which finally influences his purchasing behaviour. There are two main constructs supported by literature that signify the positive role of pricing: 1. Price/quality schema: It is a consumer’s idea of price of the product being positively related to the quality of the product. However, there have been differing opinion that the general price-quality link is not a reality as consumers’ discretion to use price as a signal for quality is subject to the availability of other cues like the price-quality feature of complementary, supplementary and substitute products, and awareness about pricing. However, many feel that high level of prices are generally believed to be the indicators of superior quality by customers. In many consumption cases, price sets expectations for the quality of the product, particularly when other cues to quality are not available. The price–quality relationship cannot be generalised and depends from individual to individual across different purchase situations.

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2. Prestige sensitivity: Price is also linked with prestige. In many of the purchases, it is believed that “the higher the price, the greater is the respect attached to it.” Mercedes, Rolls Royce, and BMW are highly priced sedans that are generally understood as highly valued products. Same is the case with hotels. The higher the room rent, the greater is the exclusivity.

Service Convenience Service convenience has a positive impact on a customer’s perceived value and loyalty. This in turn affects a company’s profits and market share by influencing customers’ decision about continuing with the same service provider. Service convenience is a vital component of the non-monetary value of service provided to customers. So, it is essential for service providers to provide service convenience to customers operating in today’s dynamic and competitive service market.

Berry et al. (2002) conceptualised service convenience as “the consumers’ time and effort perceptions related to buying or using a service” and put forth a service convenience model. Various studies in the area of service convenience have explored its impact on distinct factors related to services. It was found that service convenience plays a significant role in customers’ switching intentions as inconvenient service will result in customer’s decision to switch. Service convenience has got a direct bearing on customer satisfaction as well. Customers’ perceptions of service convenience directly influence their perceptions of a firm’s service quality. They further clarified that the perception of service convenience changes the customer’s overall assessment of the service which includes satisfaction with the service and perceived service quality and fairness. Besides being an antecedent, service convenience also plays a crucial role of moderating the service quality–customer loyalty relationship. The existing literature of service quality includes information about its antecedents as well as outcomes. It is imperative to understand that service convenience’s ability to moderate a relationship differs from industry to industry. It has got greater strength in industries with higher degree of customer–company interface such as retail, food retail,

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hotels, banks, and airlines whereas in case of industries like insurance, telecom and entertainment, service convenience has comparatively little role to play. Also, it was found to have different types of moderating effects on the relationship between service quality and its sub-aspects, namely interaction, environment, and outcome quality in diverse service settings.

Switching Costs Switching barriers specific to service industries categorised interpersonal relationships, switching costs, and attractiveness of alternatives as significant barriers that are helpful in the customer retention process. Switching cost is the consumer’s perception of the time, money, and effort associated with changing the service providers. Switching cost is the sum total of economic, physical and psychological costs. Switching costs may involve search costs that occur due to different geographic locations of service alternatives and learning costs that stem from the inherent customisation of service encounters. Switching costs may range from termination costs imposed by the current service provider to costs of joining another service provider. For example, when a person withdraws his mutual fund investment and shifts it to another company, the first company often imposes a penalty. Similarly, insurance companies also levy such costs. Banks also levy charges on premature withdrawal of fixed deposits. These costs also form part of switching costs. Switching cost is also described as “customer’s perception about the size of necessary extra costs which are required to finish the present relationship and ensure acquisition of a new one.” Sharma (2003), in his empirical research on the role of switching cost and alternative attractiveness in building up long-term relationship between the client and the service-provider in personal financial planning services, conceptualised switching cost to cover search cost, financial cost, stress, loss of confidentiality, inferior service quality and the relationship investment. Sharma and Patterson (2000) opined that the experiential nature of services poses difficulty before the customers in evaluating the core service offered by alternative service provider without purchasing and trying it once. Caruana (2004) also argued that since a service cannot be evaluated before buying it due to its specific nature, switching to a different service provider involves significant risks. Cognitive Loyalty Switching cost reduces a customer’s degree of sensitivity towards satisfaction levels. Similar effects Social Benefits of switching costs are observed for trust and perceived service quality. A customer’s perception of higher Affective Loyalty cost of switching restricts him from being tempted to competitive offers. Attractiveness of Alternatives Blut et al. (2007) empirically established the moderating influences of switching costs, social benefits, Conative Loyalty and the attractiveness of alternatives on the links in the four-stage loyalty model propounded by Oliver (1997). Switching Costs Barroso and Picón (2012) chose the Spanish insurance market for studying various dimensions of switching Action Loyalty costs and their antecedents as well as outcomes and proposed that switching cost is a higher-order construct, which is a constituent of six dimensions, namely: Figure 10.7 Four-stage loyalty model (Blut et al., 2007)

178

(i) (ii) (iii) (iv) (v) (vi)

Customer Loyalty

Benefits loss costs Personal relationships loss costs Economic risk costs Cost of searching and evaluation Set-up costs Monetary loss costs

Each of these six dimensions reflected a customer’s perception of time, money or efforts involved in switching.

Research proposed three broad and distinct roles of switching cost in relation to customer loyalty: (i) Switching cost is a direct antecedent of customer loyalty (ii) Switching cost moderates the relationships of customer loyalty with its antecedents (iii) Switching cost is a mediating variable that intercedes the relationship between various variables and customer loyalty In their study on the moderating role of switching cost in the service quality– customer loyalty link, Bloemer et al. (1999) assumed three forms of loyalty, namely:

Service Quality

Customer Knowledge and Expertise

(i) Preference loyalty (ii) Price indifference loyalty (iii) Dissatisfaction response Their findings suggested that switching cost moderates only preference loyalty that is made up of recommendation and repurchase intentions. 10.4.

Customer Loyalty

Price Perceptions Service Convenience Switching Costs

Figure 10.8

Conceptual model for testing moderating effects on customer loyalty.

FINAL THOUGHTS

Service quality not only precedes customer loyalty, but it also acts as a predecessor to customer satisfaction which in turn, has emerged as a colossal indicator of customer loyalty. Literature

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suggests that besides the direct relationships between aforementioned constructs, there exists an indirect effect which links service quality to customer loyalty via customer satisfaction. The unique position of customer satisfaction with service quality as its primary antecedent and customer loyalty as its obvious outcome, allows it to exert a directional influence on the service quality– customer loyalty relationship. This requires testing the conceptual research model implicating the interrelationships of these variables along with their relative impact in diverse business contexts. Moreover, the linear relationship between service quality and customer loyalty is subject to influences from a host of other psychographic variables that play considerable roles in customer decision-making process and their evaluative judgements. Literature primarily offers four moderating variables that affect the aforementioned relationships: Customer knowledge and expertise, price perceptions, service convenience and switching costs. The conceptual framework of customer loyalty needs to be tested in different contexts to affirm the moderating effects of these variables as well as reveal newer ones which may be industry or culture specific. These findings underline the need to test a research question aimed at establishing a conceptual model of customer loyalty by integrating indirect effects of customer satisfaction with the direct relationship of service quality with customer loyalty while incorporating the role of moderating variables as well. This chapter aims to present a framework for: ∑ Establishing a mediation model intended to analyse the directional influence of customer satisfaction on the service quality–customer loyalty relationship ∑ Identifying the probable moderating variables which affect the form and/or strength of service quality–customer loyalty relationship by interacting with the former ∑ The proposed customer loyalty framework would provide a holistic view to the marketing practitioners and aid them in ensuring optimised allocation of marketing resources which would lead to better growth prospects and increased profitability. Review Questions 1. What is Mediation? Explain in light of the role played by mediators. 2. Mediators are indirect influencers of a relationship. Explain. 3. “Service Quality has a direct bearing on the formation of customer loyalty, especially in the services sector.” Explain with examples. 4. How do you evaluate the relationship of service quality with customer loyalty? 5. What role does customer satisfaction play in determination of customer loyalty? 6. What is the role of moderator in a relationship? 7. What are the moderating variables that affect the relationship of customer loyalty with its relationship variables? 8. How is the moderating strength assessed? 9. Do the variables between the relationship of service quality and customer loyalty change according to the industry type or do they remain unaffected? If yes, elaborate on those factors and their functioning that might bring a change in these variables? 10. How would you identify the variables in a particular relationship?

Project Assignments 1. Numerous variables influence the formation of customer loyalty. The association between service quality and customer loyalty is mediated by customer satisfaction but customer satisfaction itself is

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a strong determinant in customer loyalty formation. Is this a direct relationship or mediated by an indirect influencer? Conduct a study for a service industry of your choice and find an answer. Also, identify variables that mediate this relationship, if at all. 2. Moderators are of two types, positive and negative, but they both have strong influence in the relationship. Assess the moderating type and strength of a service quality–customer loyalty relationship for an organised retail store. As a manager of a retail store, what significance does this set of information play and how would you use this information?

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17. Caruana, A., Money, A.H. and Berthon, P.R. (2000). Service quality and satisfaction- the moderating role of value. European Journal of Marketing, 34(11/12), 1338–1352. 18. Chen, H, Liu, J. Y., Sheu, T. S. and Yang, M (2012). The impact of financial services quality and fairness on customer satisfaction. Managing Service Quality, 22 (4), 399–421. 19. Chow, I. H., Lau, V. P., Lo, T. W., Sha, Z and Yun, H (2007). Service quality in restaurant operations in China: Decision- and experiential-oriented perspectives. Hospitality Management, 26, 698–710. 20. Cronin Jr, J.J. and Taylor, S.A. (1992). Measuring service quality: a re-examination and extension. Journal of Marketing, 56 (July), 55–68. 21. Cronin, J.J., Brady, M.K., and Hult, G.T.M. (2000). Assessing the effects of quality, value, and customer satisfaction on consumer behavioural intentions in service environments. Journal of Retailing, 76 (2), 193–218. 22. Dabholkar, P.A., Shepherd, C.D. and Thorpe, D.I. (2000). A comprehensive framework for service quality: an investigation of critical conceptual and measurement issues through a longitudinal study. Journal of Retailing, 76 (2), 139–73. 23. Hayes, B. E. (2010). Measuring Customer Satisfaction and Loyalty. New Age International Publishers. 24. Howat, G., Murray, D., and Crilley, G. (1999). The relationships between service problems and perceptions of service quality, satisfaction, and behavioural intentions of Australian public sports and leisure centre customers. Journal of Park and Recreation Administration, 17(2), 42–64. 25. Hurley, R.H, and Estelami, H (1998). Alternative indices for monitoring customer perceptions of service quality: a comparative evaluation in a retail context. Journal of the Academy of Marketing Science, 26, 201–21. 26. Ishak Ismail, Hasnah Haron, Daing Nasir Ibrahim and Salmi Mohd Isa (2006). Service Quality, Client Satisfaction and Loyalty towards Audit Firms. Managerial Auditing Journal, 21 (7), 738–756 27. Juga, J, Juntunen, J and Grant, D. B. (2010). Service quality and its relation to satisfaction and loyalty in logistics outsourcing relationships. Managing Service Quality, 20 (6), 496–510. 28. Kassim, N. and Abdullah, N. A. (2010). The effect of perceived service quality dimensions on customer satisfaction, trust, and loyalty in e-commerce settings: A cross cultural analysis. Asia Pacific Journal of Marketing and Logistics, 22 (3), 351–371. 29. Kiran, K. and Diljit, S. (2011). Antecedents of customer loyalty: Does service quality suffice? Malaysian Journal of Library & Information Science, 16 (2), 95–113. 30. Kraemer HC, Kiernan M, Essex M, Kupfer DJ (2008). How and why criteria defining moderators and mediators differ between the Baron and Kenny and MacArthur approaches. Health Psychology, 27(2): S101–S108. [PubMed: 18377151]. 31. Lee, H, Lee, Y and Yoo, D (2000). The determinants of perceived service quality and its relationship with satisfaction. Journal of Services Marketing, 14 (3), 217–231. 32. McDougall, G.H., and Levesque, T. (2000). Customer satisfaction with service: Putting perceived value into the equation. Journal of Services Marketing, 14(5), 392–410. 33. Morgan, R.M. and Hunt, S.D. (1994). The commitment-trust theory of relationship marketing. Journal of Marketing, 58 (3), 20–38. 34. Murray, D and Howat, G (2002). The Relationships among Service Quality, Value, Satisfaction, and Future Intentions of Customers at an Australian Sports and Leisure Centre. Sport Management Review, 5, 25–43. 35. Oliver, R. L. (1993). Cognitive, affective, and attribute bases of the satisfaction response. Journal of Consumer Research, 20 (3), 418–430. 36. Olorunniwo, F, Hsu, M. K. and Udo, G. J. (2006). Service quality, customer satisfaction, and behavioural intentions in the service factory. Journal of Services Marketing, 20 (1), 59–72. 37. Parasuraman, A., Zeithaml, V. A. and Berry, L. L. (1988). SERVQUAL: a multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing, 64 (Spring), 12–40.

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38. Ping, R.A. Jr (1999). Unexplored antecedents of exiting in a marketing channel. Journal of Retailing, 75 (2), 218–41. 39. Ping, R.A., (1993), “The effects of satisfaction and structural constraints on retailer exiting, voice, loyalty, opportunism, and neglect”, Journal of Retailing, 69 (3), 320–353. 40. Preacher, K. J., and Hayes, A. F. (2004). SPSS and SAS procedures for estimating indirect effects in multiple mediator models. Behaviour Research Methods, Instruments, and Computers, 36, 717–731. 41. Rai, A.K. and Srivastava, M. (2012). Customer Loyalty Attributes. NMIMS Management Review, 22 (October–November), 49–76. 42. Rucker, D. D, Preacher, K. J., Tormala, Z. L. and Petty, R. E (2011). Mediation Analysis in Social Psychology: Current Practices and New Recommendations. Social and Personality Psychology Compass, 5 (6), 359–371. 43. Saunders, D. R. (1956). Moderator Variables in Prediction. Educational and Psychological Measurement, 16 (Summer), 209-22. 44. Sharma, N (2003). The role of pure and quasi-moderators in services: an empirical investigation of ongoing customer–service-provider relationships. Journal of Retailing and Consumer Services, 10, 253–262. 45. Sharma, N. and Patterson, P.G. (2000). Switching costs, alternative attractiveness and experience as moderators of relationship commitment in professional, consumer services. International Journal of Service Industry Management, Vol. 11 No. 5, pp. 470–90. 46. Sharma, S., Durand, R. M. and Gur-Arie, O. (1981). Identification and Analysis of Moderator Variables. Journal of Marketing Research, Vol. XVIII (August 1981), 291–300. 47. Shaver, J. M. (2005). Testing for Mediating Variables in Management Research: Concerns, Implications, and Alternative Strategies. Journal of Management, 31 (3), 330–353. 48. Sobel, Michael E. (1982). Asymptotic Confidence Intervals for Indirect Effects in Structural Equation Models in Sociological Methodology, ed. S. Leinhardt, San Francisco, CA: Jossey-Bass. 49. Spreng, R.A. and MacKoy, R.D. (1996). An empirical examination of a model of perceived service quality and satisfaction. Journal of Retailing, 72 (2), 201–14. 50. Storbacka, K., Strandvik, T. and Gronroos, C. (1994). Managing customer relationships for profit: the dynamics of relationship quality. International Journal of Service Industry Management, 5, 21–38. 51. Tsoukatos, E. and Rand, G.K. (2006). Path analysis of perceived service quality, satisfaction and loyalty in Greek insurance. Managing Service Quality, 16 (5), 501–519. 52. Voss, G., Parasuraman, A. and Grewal, D (1998). The Role of Price and Quality Perceptions in Prepurchase and Postpurchase Evaluation of Services. Journal of Marketing 62 (October), 46–61. 53. Whisman, M. A. and McClelland, G. H. (2005). Designing, Testing, and Interpreting Interactions and Moderator Effects in Family Research. Journal of Family Psychology, Vol. 19, No. 1, 111–120 54. Wong, A and Sohal, A (2003). Service quality and customer loyalty perspectives on two levels of retail relationships. Journal of Services Marketing, 17 (5), 495–513. 55. Wong, A., Dean, A. and White, C. (1999). The impact of service quality on customer loyalty in hospitality industry. International Journal of Customer Relationship Management, 2(1), 81–89. 56. Woodside, A.G., Frey, L.L. and Daly, R.T. (1989). Linking service quality, customer satisfaction, and behavioural intention. Journal of Health Care Marketing, 9 (December), 5–17. 57. Zeithaml, V.A., Berry, L.L. and Parasuraman, A. (1996). The behavioural consequences of service quality. Journal of Marketing, 60 (2), 31. 58. Zeithaml, Valarie, Mary Jo Bitner and Dwayne D. Gremler (2006). Services Marketing: Integrating Customer Focus Across the Firm. 4th edition, New York: McGraw-Hill. 59. Zhao, X, Lynch Jr., J. G. and Chen, Q. (2010). Reconsidering Baron and Kenny: Myths and Truths about Mediation Analysis. The Journal of Consumer Research, 37 (2), 197–206.

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11

Customer Loyalty in the Services Sector

Customer service is just a day in, day out, ongoing, never ending, unremitting, persevering, compassionate, type of activity. Leon Gorman, CEO, L.L.Bean This chapter is aimed at providing an insight into: v v v v v

11.1.

Status of the Services Sector in India Characteristics of the Services Sector Issues of the Indian Services Sector Significance of Customer Loyalty in the Services Sector Application Model of Customer Loyalty in the Services Sector

INTRODUCTION

The services sector has been the chief contributor to the gross domestic product (GDP) of several nations by providing more than 60% share of global output and an even larger share of employment opportunities in the last two decades. It has surfaced as the biggest and fastestgrowing sector in the world economy. Such massive growth rate has come with an increase in the share of services in world transactions. International demand and supply of services has attained new heights with services being traded as much as goods in the period of 1990 to 2003. Global Foreign direct investment (FDI) has also shifted significantly towards services which testify the growing importance of services worldwide. India has attained a distinct position among the developing nations with the fastest growth rate due to the immense potential of its services sector. The initial industrial development across the nation was dependent upon the labour-intensive manufacturing sector. Developing countries like India were agriculture based and services had little role to play in the overall economic growth. However, the scenario has changed and the services sector has taken centre stage in most developing economies. Apart from India, there are number of other developing nations where the service sector’s contribution to GDP exceeds the share of the manufacturing sector by a great extent. However, India stands out with its service sector equipped with exceptionally growth oriented dynamics and magnetic resources and facilities.

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11.2. THE SERVICE SECTOR IN INDIA: A PERSPECTIVE In line with the global trend, India’s service sector has reached significant landmarks with services accounting for around 59% of the overall (GDP) for the year ending March 31st, 2012. During FY 2011–12, the services sector recorded a growth rate of 9.4%. According to statistics obtained from FICCI and CSO, the sector wise growth rates are as follows (Table 11.1): Table 11.1

FICCI and CSO Data on sectorwise growth rates (FY 2011–12)

Industry

2011–12

2012–13

Q1

Q2

Q3

Q4

Q1

Agriculture

3.7

3.1

2.8

1.7

2.9

Industry

5.6

3.7

2.5

1.9

3.6

– 0.2

– 5.4

– 2.8

4.3

0.1

Manufacturing

7.3

2.9

0.6

– 0.3

0.2

Electricity, gas and water supply

7.9

9.8

9.0

4.9

6.3

Construction

3.5

6.3

6.6

4.8

10.9

Services

10.2

8.8

8.9

7.9

6.9

Trade, hotels, transport and communication

13.8

9.5

10.0

7.0

4.0

Financing, insurance, real estate and business services

9.4

9.9

9.1

10.0

10.8

Community, social and personal services

3.2

6.1

6.4

7.1

7.9

GDP at factor cost

8.0

6.7

6.1

5.3

5.5

Mining and quarrying

However, the growth of India’s service sector has exhibited certain unique characteristics. It has been noticed that the total drop in Agriculture’s contribution to GDP, i.e., from 32% in 1990 to 22% in 2003, has largely been compensated by the rising share of the services sector whereas the manufacturing sector remained aloof from any significant change. Such a trend has never been witnessed in the context of developing nations but has generally been observed in developed countries. Apart from sector dynamics, the employment generation statistics related to the services industry have shown that the employment opportunities are lagging behind in comparison to the sector’s burgeoning share in GDP and trade. Growth of jobless in any sector raises doubts pertaining to sustainability and long-term viability. Moreover, the growth trend has not been uniform across the various sub-sectors of the service industry with some services like software and telecom accelerating at a higher pace than others in terms of their contribution to GDP as well as their share in FDI and trade. Some of the important constituents of service industry such as healthcare and education, have not been able to mark their presence in international transactions worldwide while some others have even registered negative growth.

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Such asymmetrical growth can be attributed to the structure of reforms that revitalised the Indian economy. These reforms were largely implemented at the sectoral level instead of being executed as a coherent and comprehensive growth strategy. Despite being a dominant contributor to the economy, the service industry is deprived of an exclusive and integrated service industry policy. As a consequence, there is a visible lack of uniformity in development across the sectors. Moreover, some of the critical services that act as a backbone of any economy have been managed under public administration for a long time which poses significant challenges in terms of trade barriers and constraints associated with high regulation. India’s growth in the services sector since independence is shown in Table 11.2. Table 11.2

Percentage Contribution of Different Sectors in the GDP of Indian Economy over the Years

Sector

50–51

90–91

2000–01

2010–11

Agriculture

55.4

30.9

25.5

18.98

Manufacturing

31.8

25.4

22.1

18.19

Services

12.8

43.7

52.4

62.83

These statistics explicitly bring forth the importance of the services sector in the Indian economy and the figures have grown from 12.8% in 1950–51 to 62.83% in 2010–11. The growth rate in the sector was both high and consistent; the statistics for which are presented in Table 11.3. Table 11.3

Growth Rates and Sectoral Composition of Real Gross Domestic Product (At 2004–05 Prices) (In per cent)

Sector

Growth Rate Share in real GDP Average 2005–06 to 2010–11

2006–07

2007–08

2008–09

2009–10*

2010–11#

Agriculture and Allied Activities

3.7

4.2

5.8

– 0.1

0.4

6.6

Agriculture

3.1

4.1

6.3

– 0.6

– 0.1



Manufacturing

9.3

14.3

10.3

4.2

8.8

8.3

10.0

10.1

10.4

9.5

9.7

9.2

8.6

9.6

9.3

6.8

8.0

8.5

Services Gross Domestic Product at factor cost

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11.3.

GROWTH OF THE SERVICE SECTOR IN MODERN ECONOMY

In the new phase of economic growth, the services sector has emerged as the backbone of business structure in most developed and developing nations across the world. The services sector has exhibited an excellent growth rate and exceeded both the agriculture and manufacturing sectors in this respect. The services sector includes a broad array of activities such as trading, transportation, communication, financial, real estate and business services. Most important amongst these subsectors are the health and education sectors that tend to be largest and most challenging for any country to manage. However, these services hold immense potential for driving the growth of the country’s economic and social structure. To preserve a healthy, skilled and productive workforce, it is important to ensure that a sound education system and healthcare facilities are in place. The services sector is the largest contributor to the Indian economy with the contribution percentage being over 65% in 2013 whereas manufacturing and agriculture are almost at the same stage. Even with the growth of other sectors, in value terms, the services sector has overtaken others. From hospital to hospitality, from tourism to technology, from education to entertainment, from fashion to finance and design to decor, the services sector has made its mark everywhere. An extremely popular modern day gadget, a mobile phone, was earlier differentiated based on its hardware. A mobile with a bigger screen, softer keys, larger memory, more battery life, better speaker, or superior display cost more than other available handsets in the market. But the current price differentiation has moved beyond these hardware driven distinctions. Modern-day differentiators are more software driven. So, mobile phones with the latest software versions, greater manoeuvrability, universally compatible software and software with advanced features cost more than others. Even in manufacturing, there is an intrusion of the services sector. Business process consultancy, software, design, and logistics are components of the services sector that are extensively used in manufacturing to increase efficiency and performance. The following important factors have led to tremendous growth of the services sector: 1. Policy Shift: Liberalization has a great role in accelerating the growth and importance of the service industry in modern business. India is undergoing a transition from being agriculture oriented to becoming a knowledge based economy which creates, disseminates and utilizes knowledge to achieve sustained growth and development. The Information Technology (IT) industry and IT-enabled services (ITeS) industry have a significant role to play in a knowledge based economy. IT has become one of the most important sectors that contributes to the overall growth of the Indian economy. Besides IT, another sector that has the potential to turn around the Indian economy is retail in general and organised retail in particular. Organised retail in India has been witnessing an unprecedented growth and a remarkable profit potential. Lately, various national and international business houses have made huge investments in the retail business, making this sector further lucrative and growth oriented. 2. Educational Shift: Because of an increased focus on enhancing the business climate for private investment, there has been a shift in the psyche of the country’s young talent pool and instead of resorting to conventional education, pursuing vocational courses has gathered momentum. The implication of this shift was increased urbanisation as people moved from their native places for higher education, particularly professional education, and later settled there with jobs or other economic activity.

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3. Occupational Shift: Increased business activity post liberalisation, privatisation and globalisation led to change in the demographics of the country. A significant change that was observed was the change in the occupational pattern that saw more people being engaged in the corporate sector. Employment opportunities created by the government reduced on account of: (i) (ii) (iii) (iv)

Cost cutting measures Government opting out of several businesses The trend of outsourcing Less preference by the youth to public sector

The youth increased consumption of the products and services of the fast developing services sector and its output became an input of instant consumption by this growing segment.

4. Lifestyle Shift: The changing dynamics of the economy, education and occupation made a significant impact on changing lifestyles. There was a creation and growth of a class living in metros, professionals marrying professionals, children going to public schools, weekends being celebrated with wining and dining out, apartment residences, four-wheeler for commutation and increased dependence on service providers ranging from gym/swim instructors to psychotherapists. The need for service providers was felt for even routine household activities such as sending rakhis to brothers to depositing telephone bills or children’s school fee or buying school uniform or school books. This changed the lifestyle of an average Indian and provided opportunity for service companies to cater to the different needs of this growing “New Age Indian Middleclass.”

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A country’s services sector possesses great capacity to enhance its economic growth rate and ensure general welfare of the citizens. Apart from providing huge business prospects for investors, it also generates ample employment opportunities as well as increases the country’s per capita income. At present, a shift in the composition of the services sector is noticeable, away from traditional services such as transport and distribution, towards finance, insurance, and business services. Strategic business services that consist of software, information processing, research and development, technical services, marketing, business organisation, and human resource development have emerged as the dominant sources of growth for this sector. These services also account for a major share in employment. Technological advancement and innovation, especially in the field of information and communication, have resulted in a change in the ways of conducting business and shortening the product cycle through increased productivity. 11.4.

CHARACTERISTICS OF THE SERVICES INDUSTRY

Services have been widely researched and analysed for their peculiar nature and unique characteristics. Some of the major concepts that have been studied to explore the true nature of services are Service Quality, Customer Satisfaction, Customer Relationship Management, Customer Loyalty, Complaint Management Systems, and Service Recovery Management. Services are understood as experiences designed to meet specific needs of customers. Services possess certain characteristics that distinguish the services sector from manufacturing businesses (Fig. 11.1). While posing a great challenge before the service providers, these characteristics also present an opportunity to differentiate and consequently endeavour to delight the customers.

Intangibility

Perishability

Services

Inseparability

Variability

Figure 11.1

characteristics of the services industry

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A detailed description of the peculiarities of services and the appropriate strategies to tackle them are given in the following section: ® Intangibility: Services are characterised with intangibility. The intangibility may not always be in an absolute sense but it might be present in varying degrees depending upon the industry. For example, in professional legal advisory services, the degree of intangibility would be extremely high while in case of a restaurant, the degree of intangibility would be low. Intangibility simply implies that services are performances rather than articles. Intangibility is recognised as the decisive point of difference between goods and services that generates all other differences. Intangibility is further classified into two broad categories: ∑ Physical intangibility (impalpable or untouchable) ∑ Mental intangibility (difficult to grasp or measure even psychologically) The intangibility aspect of services has the following implications for marketers: ∑ Services cannot be inventoried or stored. Hence, there is a high degree of perishability that affects future sale of the service. ∑ Unlike goods that may involve patented technology and restrict others to copy the technique and maintain exclusivity, services are easily imitable by competitors. This poses another threat to exclusivity of services. ∑ Another constraint that acts against services is that services cannot be readily put on display or communicated which results in highly subjective evaluative judgements of common users. Because of standardisation and the ability of being displayed, goods can be put before the customers but services cannot be displayed. ∑ Because of difficulty in complete standardisation of services, specialised promotional and advertising campaigns are required. ∑ Determining prices of services is also a difficult call that a service provider has to take as there may be conflicting viewpoints about the real cost of a unit of service. The price–quality relationship is complex in the context of services. Essentials of Service Sector Responses to Intangibility: The peculiar nature of the services sector towards intangibility requires specific marketing response by the service sector players. While visiting a restaurant, a customer provides necessary instructions while placing an order. In many service sector businesses, the product is prepared, altered or changed as per the customer’s feedback. Customer Feedback based content customisation in the Television Software business A relatively new age service sector business of television content development involves television serials, daily soaps, and game shows that are a part of a fast emerging industry. The growth of channels and advanced direct to home technology besides changing consumer preferences have made this industry flourish. Balaji Telefilms has been a premier content provider with several leading and popular programmes on Indian Television. Kyunki Saas Bhi Kabhi Bahu Thi was a popular daily soap produced by Balaji Telefilms Ltd. in early 2000 on Star Plus. At one stage in the story, the lead male character Mihir Virani died. This did not go well with the viewers. After receiving viewer feedback, the creative team of the serial was forced to bring back the male lead.

192

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Marketers can employ some of the following measures to surmount the intangibility issues in the services industry: 1. Companies may design and use tangible cues to create awareness and add greater feel to their services. Banks provide free ATM cards linked to bank accounts that customers generally carry with them. This addition of tangibility to the banking service is extremely convenient and makes the service available at all times for the customers. 2. Because of increasing competition, customers are becoming highly demanding and thus require greater customised and personalised services based upon carefully accumulated and analysed customer data. 3. Post-purchase interaction should be increased as this leads to an opportunity for greater interaction and scope for development of superior relationship between customers and service providers. 4. Service marketing intangibility also calls for strengthening of internal marketing of the company, that is, to have superior relationship and practices with the employees. 5. Service marketing also calls for effective relationship management initiatives with the customers. ® Inseparability Services also have the characteristic of being produced and consumed simultaneously and are impossible to store. This aspect refers to the inseparability of production and consumption in the service context. It also implies that unlike manufactured goods, customers need to be present while the service is being delivered. Thus, timely and acute delivery of service is of great importance in maintaining customer satisfaction. Further, customers’ role in service delivery goes beyond payment and consumption as they co-create the service and thus, are responsible for the overall customer experience management in service organisations. Inseparability necessitates the presence of the customer and his role is that of a co-producer in the customer-employee and customer-customer interaction. For example, India has recently been attracting a good deal of healthcare tourism due to the availability of skilled, efficient and affordable healthcare services. The inseparability aspect of services applies to the healthcare industry also. Several medical care chains have tied up with reputed names in the hospitality industry to offer a great combination of health and hospitality to medical tourists. The inseparability of services leads to the following challenges: ∑ There is difficulty in centralised mass production of services. ∑ Higher dependency on the human element involved in the delivery of service makes customer experience management complex and the outcome of the service delivery process subject to customer propensity. Further, co-customers get into a position to influence the consumption experience leading to an uncontrollable service encounter. ∑ Operations have to be decentralised in order to deliver service at locations convenient to consumers. Essentials of Service Sector Responses to Inseparability: A crucial issue is that any services company is largely represented by its employees, is evaluated on the spot and there is hardly any

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scope to make good the losses incurred. To overcome these challenges posed by this feature of the services sector, marketers can use the following strategies: 1. There should be careful selection and training of frontend personnel who directly deal with customers. 2. Companies should devise effective incentives to attract and satisfy customers. 3. The marketing process can be initiated at multi-site locations. This would reduce the dependence on one system. 4. Companies should maintain as much standardisation as possible and ensure personal attention to each customer. 5. A distribution network with effective quality control mechanism should be put in place. Coping Inseparability in the Services Sector People might be discontent with the services offered by the government such as Railways, electricity boards, municipal corporations, government schools and public sector banks. An important reason for this is poor orientation towards customers and ill trained employees. There is an urgent need for these service providers to shift customers to an alternate delivery channel. This system may prove to be advantageous in a variety of ways. On the one hand, it reduces customer service load on employees and on the other hand, alternate channels, especially technology driven systems, minimise customer employee interaction, which is the main cause of unrest. Technology can serve as an effective tool in this regard. For example, a bank sets a time-frame for completion of a specific task depending upon careful analysis of the nature of the assignment and the strength of the banking system and training of its employees. For withdrawing a certain amount of money from the bank, it might fix a time frame of three minutes. This is monitored by technology. The time log starts the moment the request is entered and closes when the customer transaction is closed. If the time limit is exceeded, analysis is undertaken and suitable accountability fixed.

® Variability The services sector is mostly found to be struggling with uniformity in output. The variability aspect of service stems from the excessive human element involved in producing, communicating and consuming the service. Sasser, Olsen and Wyckoff (1978) noted that the behaviour and performance are subject to variation at different points in time and involvement of different people. An employee cannot provide a perfect experience to each customer, at all the times and in all the service encounters. The variability aspect also stems from heterogeneity in customer demands and expectations. While teaching the same topic, a professor of marketing uses a different approach for the students of undergraduate classes, postgraduate classes, and sessions for professionals. Here, he not just changes the content but the approach of teaching as well suiting the receptive ability of the different sets of students. As a result of high human interaction involved in the service delivery process, the quality and essence of service vary from provider to provider, customer to customer, and from day to day. The marketing implications of service variability are as follows: ∑ Difficulty in maintaining standardised processes ∑ Inability to assess service quality before consumption

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∑ Difficulty in setting quality control mechanisms ∑ Difficulty in communicating the exact features of the service to clients Essentials of Service Sector Responses to Variability: The following strategies can be employed to cope with the variability aspect of services: 1. Increased standardisation 2. Proper attention to training sessions for employees, performance evaluation and internal marketing 3. Adhere to licensing and other forms of credential requirements 4. Differentiation as an innovative strength Levitt (1972) stated that “specific techniques to substitute organised pre-planned system for individual service operations (for example, travel agents could offer pre-packaged vacation tours to obviate the need for selling, tailoring, and haggling involved in customisation). This strategy is the opposite of customisation.” ® Perishability Perishability is another important nature of the services sector. Services cannot be stored, kept, or saved for future consumption. An unutilised service capacity is wasted as it cannot be sold, reused or returned later. This makes marketing of services extremely complicated. The following are the implications of perishability of the services sector for marketers: ∑ Short-lived value of services ∑ No inventories can be created which results in time pressures while selling Essentials of Service Sector Responses to Perishability: Marketers can tackle the perishability aspect with the help of the following solutions: 1. Efficient projection of demand and creative planning for exploiting the capacity in a manner where there is little scope for demand and supply gaps 2. Effective strategies to manage demand fluctuation 3. Strong grievance handling mechanism for successful service recovery 4. Focussed approach towards achieving competence and expertise 5. Constant analysis of demand patterns and competitive business practices 6. Provide creative pricing options such as early bird or frequent flier specials Advertising is an extremely important tool in marketing but is considered as a “sunk cost” in economics. Advertisements are an important marketing tool but at the same time, an expensive affair. Given the cost involved in preparing and releasing advertisements, these advertisements generally have an absolutely small time frame to generate response. The moment the newspaper reader turns over the page or the television viewer surfs the channel, the advertisement might be forgotten. Such is the perishability of services. Companies have been trying to address this extremely important issue by diversifying their expenditure across different media. This has twopronged benefits. On the one hand, it ensures customer receptivity towards the communication and on the other hand, it leads to the multiplier effect of communication when customers are exposed to more than one media, which is known as media multiplier effect in advertising.

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11.5.

195

SIGNIFICANCE OF CUSTOMER LOYALTY IN THE SERVICES SECTOR

The role of customer loyalty gains even more prominence when applied in the context of services due to the high human involvement in comparison to goods. Such people-intrinsic character of services along with its intangible and perishable nature, enhance the scope for errors during service delivery and amplify the role and significance of human relationships in business transactions. Also, intense competition has resulted in fewer possibilities for differentiation. To tackle the competitive pressures and gain an edge in the market, companies are now looking to leverage upon the intangible nature of services and the significant human interface involved. Customer loyalty has been included in the strategic objectives of many companies due to the competitive strength it offers. Many academicians have accepted the significance of loyalty in service industries and its potential impact on the development of sustainable competitive edge for the service companies. This might be attributed to the unique nature of services, increased dependency on technology and greater customer involvement in service delivery. A base of loyal customers can do wonder in terms of economic rewards and new business prospects as winning a new customer can cost as much as six times more than the cost of retaining an old one whereas profits can be increased from 25% to 125% if the potential migration is decreased by 5% depending upon the particular industry. 11.6.

APPLICATION MODEL OF CUSTOMER LOYALTY IN THE SERVICES SECTOR

1. VLCC Way of Life: VLCC runs a reward program named ‘Way of Life,’ which is targeted at encouraging a customer to be a regular customer and bring along her family and friends also. This program claims to provide extra benefits at no additional costs. It is based upon accumulating reward points with each visit and redeem an exclusive gift once a specific level of points are credited to the customer’s name. It ensures referrals and recommendations from the existing customers as they are encouraged to share their loyalty card with their friends and acquaintances who are not yet VLCC customers. 2. Pantaloons’ Green Card Program: Pantaloons offers its Green Card customers, exclusive days for shopping when latest merchandise and special discount offers are allowed on every purchase. Other benefits include a number of privileges such as exclusive billing counters, extended exchange periods and complimentary drops for alteration. 3. “i-mint” is India’s first and largest coalition loyalty program that operates at the national level involving multiple partnerships between India’s leading brands such as Airtel (Telecom), HPCL (petroleum), ICICI Bank, Indian Airlines (Airlines), Lifestyle (Retail) and MakeMyTrip.com (Travel). The program had a presence in over 20 cities and at 20,000 select i-mint outlets in its initial phase i.e., August, 2006. I-mint benefits its members through the largest ecosystem of business partners on a single rewards platform. It allows customers to earn points from multiple partners on each transaction. Another exciting proposition of i-mint is its rewards catalogue. Customers are offered over 300 exciting

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rewards from partners as well as other merchants, across various categories and at all point levels. Customers can aggregate and transfer points within family, which enables them to increase their pace of point accumulation. Coalition loyalty programmes have generally worked well in other parts of the globe. The participating organisations of i-mint have been designing their products and services on the basis of careful analysis of needs and aspirations of Indian consumers. My Starbucks Rewards™ Starbucks boasts of its world-class My Starbucks Rewards™ loyalty program that is not only popular with customers but also brings in higher profits, footfalls and purchases while creating differentiation. Adam Brotman, chief digital officer, introduced the growth of My Starbucks Rewards™ loyalty program, which makes it the world’s first cross-channel, multi-brand loyalty program. Key features of the program are: ∑ Purchasing Starbucks packaged coffee in grocery channels will earn My Starbucks Rewards™ Stars for customers. These Stars can be exchanged for free foodstuff or beverages available at Starbucks retail stores. ∑ Starbucks Card and My Starbucks Rewards™ loyalty programme are planned to be integrated with several of the company’s emerging brands, including Teavana. As a result, customers who are registered and make purchases with a Starbucks Card or through the Starbucks mobile app at any of over 300 Teavana retail stores will earn Stars for their purchases. According to Brotman, these innovations are expected to contribute towards a swift and substantial boost in My Starbucks Rewards™ membership, from 4.5 million active members at the end of October 2012 to about 9 million members by the end of fiscal 2013. Source: http://loyaltyandcustomers.com/2013/03/starbucks-introducesinnovative-cross-channel-multi-brand-loyalty-program/

4. Bharat Petroleum (BPCL)’s “PetroBonus” is one of the largest fuel card programmes in India. It also offers variants for fleets and convenience store customers. 5. Indian Oil Corporation (IOC) has a Fleet Card programme “Xtrapower” and a loyalty programme “Xtrarewards” for Retail Customers. 6. Retail major Shopper’s Stop has one of the country’s oldest and probably most popular loyalty programme – “First Citizen.” 7. The Taj group of hotels also has a programme and a co-branded credit card with Citibank and Diners’ Club. 8. All major banks and credit cards offer customer loyalty programmes. Co-branded credit cards are also available, for example Citibank offers credit cards that are co-branded with Shopper’s Stop/IOC /Jet Airways. 9. All major airlines (such as Jet Airways and Indian Airlines) have frequent flyer programmes. 11.7.

FINAL THOUGHTS

India’s potential as a service economy is unparalleled due to its burgeoning middle class with enhanced aspirations, changing consumption pattern, growing retail, emerging domestic and

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international market for IT/ITES, government initiatives (such as introduction of UID), new avenues in the form of service subsectors (lifestyle based consumer services like personal care and health care) and expected BPO/KPO growth in future. Rise in domestic demand, resurgence of the US economy and potential demand of the Indian IT-BPO sector in various markets is expected to further boost the services-led economy. Review Questions 1. What is the difference between goods and services? 2. Explain the nature of the services industry and its characteristics. 3. The services sector has been growing constantly and has outperformed the manufacturing and agriculture sector. Elaborate. 4. The services sector has peculiar requirements that make success in the services sector a little difficult. What are these peculiarities and how can they be overcome? 5. Customer encounters are the most crucial issue to deal with in the services sector. How and why do customers acquire centre stage in the services sector? 6. Why does building loyalty among customers hold greater significance for the services sector than any other sector? 7. Tangibility is not the sole criteria for differentiating goods with services as in modern marketing, every good has an intangible element and every service has a tangibility component. Comment with examples. 8. Simultaneous production and delivery is an important factor of the services sector, which on one hand puts liability on the service provider to serve the customer better and at the same time, provides the service provider an opportunity to build loyalty among them through superior service. Analyse this statement. 9. Write a note on the benefits of infusing customer loyalty in the services sector. 10. Most developed countries have high contribution of the services sector in their GDP. Why? Explain what does this convey?

Project Assignments 1. Loyalty programmes are all about incentivising purchase. The more the customer purchases, the more are his loyalty points and the more are his discounts and better the services. If the fundamental premise of loyalty programmes is to retain customers with more discounts and to incentivise their purchase, how can this interest-based purchase infuse loyalty as a customer might opt for another company that offers more discounts and greater incentives. Conduct a study of a company of your choice and assess the success of loyalty programmes in reference to their ability to impart loyalty. 2. As a management consultant, you have to advise your client on a business proposition. Since creating customers is the purpose of any business organisation, you want to refer an industry that has a greater prospect of building customer loyalty among its customers. Conduct a study of a few service industries and arrive at conclusions to back your suggestions.

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References 1. Sasser, W. E., Jr., P. R. Olsen, and D. D. Wyckoff. (1978). Management of Service Operations: Text and Cases. Boston: Allyn & Bacon. 2. Levitt, Theodore (1972). Production Line Approach. Harvard Business Review, (September–October), 41–52.

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Customer Loyalty in the Retail Industry

“It’s much harder to provide a great customer service than I would have ever realised. It’s much more art than science in some of these other areas and not just about the facts but about how you are conveying them.” David Yu Chief Operating Officer, Betfair This chapter is aimed at providing an insight into: v General status of Customer Loyalty Practices in the Retail Industry v Customer Loyalty Practices of the following Retail majors: ∑ Shoppers Stop ∑ Tanishq ∑ Future Group 12.1.

INTRODUCTION

The last few years have witnessed an unprecedented growth in modern organised retail. In a bid to secure a profitable place in the Indian retail market with a huge potential of USD 300 billion, big Indian businesses have invested heavily into food and grocery retail. Some of the major foreign apparel brands including the luxury segment have established and expanded themselves extensively in the Indian market through the franchisee or joint venture route. Global retailers stuck due to saturation in other markets are eyeing India to achieve organic growth and profitability. Some of these are already operating here in the Cash and Carry (wholesale) format. Yet others have made plans to use the Cash and Carry business model for setting foot in the Indian market and ensuring a share of the market and brand awareness. The retail revolution in India has transformed the market from a product oriented selling space to a market oriented industry with a careful appreciation of the importance of good service delivery aimed at ensuring better customer experience. Customers have become the focal point of retail operations all over the country, which has made the industry extensively customer-centric. This customer centricity has paved ways for implementation of customer relationship management in organisations and instead of satisfaction; customer delight has become the standard measurement of performance in the industry. Companies are striving hard to attain and retain customers to gain benefits such as repeat buying, cross-selling, decline in various customer costs such as acquisition cost, service cost and defection cost.

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Box 12.1: Pizza Hut: The CHAMP of Customers Pizza Hut’s idea of customer interaction consists of: 1. Identifying the customers. 2. Differentiating customers in terms of their needs and their value to the company. 3. Interacting with customers to improve knowledge about their individual needs and to build stronger relationships. 4. Customizing products, services, and messages for each customer. 5. Reducing the rate of customer defection. 6. Increasing the duration of the customer relationship. 7. Enhancing the potential of each customer through “share-of-wallet,” cross-selling, and upselling. 8. Making low-profit customers more profitable. With a view to satisfy its customers always and provide them a delightful experience, Pizza Hut offers them “The Best.” It follows the “3F’s policy” that is focussed on making the customer’s experience full of Fun, Friendliness and Familiarity with the restaurant. Pizza Hut follows C.H.A.M.P.S, a full-fledged customer relationship driven practice, which ensures that customers receive a flawless experience. It involves taking utmost care about the cleanliness of the restaurant. Hospitality is considered of great importance in maintaining longterm relations with customers. Accuracy is kept in mind while dealing with customers so that the customer does not feel cheated. If any order is expected to take more time than promised, it is informed beforehand to the customer. Proper maintenance is ensured to facilitate right functioning of the equipment in order to avoid any delays. Product quality is preserved to prevent any dissatisfaction among customers. Speed of product delivery is what Pizza Hut strives to achieve so that the customers experience delightful consumption. Pizza Hut has also taken note of the growing trend of social media and presented itself at all prominent social platforms popular among the youth endorsing modern lifestyle such as Facebook, YouTube and other onsite advertisements to extend and enhance its reach. Its own website is also operational that has increased pizza consumption by offering easy online order placement and delivery.

(Contd.)

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Box 12.1: (Contd.) Pizza Hut understands the importance of technology in a dynamic and global business environment characterised with high competitive standards. In order to retain its customers, Pizza Hut tries to provide customers an enhanced consumption experience by using latest technologies to augment the basic offering. Not only has it adopted various technologies to achieve operational efficiency but also extended its interaction with customers by launching a number of technology based initiatives. The chain launched an iPhone App, “The killer app for your appetite.” This interactive application allows customers to order pizza by using the App or by text message. This App has gained wide popularity and there were about 600,000 downloads taking it to the Number 2 spot in lifestyle applications on the App Store. The company also plans to explore other mobile platforms in anticipation that mobile phones will continue to be a strong interactive channel for customers.

Customer loyalty is treated with great reverence in almost all customer centric industries characterised by intense rivalry, lower costs of switching and shorter product cycles. It has found significance in the retail industry as well with a large number of retail Organisations operating in distinct categories coming up with loyalty programmes offered either solely or in partnership with other non-rival Organisations. Organisations are also trying to ensure superior customer service in a bid to create satisfied and loyal customers. These customer care mechanisms are designed with a latent objective of securing customer loyalty by retaining customers and satisfying them on all fronts. Retailers provide numerous benefits under loyalty programmes such as gift cards, frequent purchase programmes, point programmes, rewards, offers, schemes, and value added services. The content that follows intends to explore customer loyalty practices in the retail industry by providing a glimpse of its most successful loyalty programmes launched and maintained by India’s prominent retailers operating in diverse categories. Box 12.2: Loyalty Programmes in Indian Retail The adoption of loyalty programmes in India is at a nascent stage. While it is difficult to estimate the exact figures in terms of spending, some leading retailers have started investing in loyalty programmes. According to industry estimates, about 20 million people in India are enrolled in top 10 organised loyalty programmes. The number is very small compared to the country’s population of 1.2 billion. Going by industry estimates, almost 50% of consumer brands in India are taking their loyalty programmes seriously and are likely to bring in investments to rev up their IT infrastructure to support these programmes. The retail industry is one of the fastest growing industries in India, estimated to be worth $470 billion in 2011, accounting for nearly 35% of the GDP. The industry has been growing at 10% CAGR over the past six years. However, the IT spending in retail has been miniscule. A recent study estimated IT spending by retail in 2011 to be about $ 1.6 billion. According to research firm Gartner, the retail industry is likely to chart steady growth in 2012– 2015, where IT spending is predicted to reach 11.8%. Caesar Peter, Director – CRM & CX Solutions, Oracle, pointed out that of this entire spending, only 5–8% is being directed towards consumer loyalty programmes (CLPs).

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12.2.

CUSTOMER LOYALTY PRACTICES IN THE RETAIL INDUSTRY

India’s retail customer loyalty is characterised by a multitude of loyalty programmes, discounts, add-on value offers and other attractive schemes. These loyalty initiatives from retailers are their explicit efforts to ensure long-term patronage of their customers. Customer Loyalty schemes are developed with a variety of objectives: ∑ ∑ ∑ ∑

To offer rewards for being a loyal customer To procure more comprehensive information about consumer behaviour To influence consumer behaviour To put up a defensive measure against competitive schemes

The retail revolution in India was initiated by the Raheja Group in 1991. Today, a host of national and international players are reaping fortunes from India’s retail bandwagon. India’s leading retailer Future Group’s founder Kishore Biyani suggested that the only way to ensure customer retention in retail is through providing value in terms of price, quality, or service. Retailers recognise the fact that repeat customers bring more business than other customers and thus, customers need to be encouraged to revisit the store. Retail stores offer special discounts to customers who take the membership of their loyalty card programmes. The loyalty programme of Lifestyle is called ‘The Inner Circle.’ Pantaloons offers a ‘Green Card’ whereas Westside has ‘Club West’ and Shoppers Stop has ‘First Citizen’ to appeal to the customer’s loyalty intentions. Retailers such as Reliance Fresh and Subhiksha have also introduced membership programmes. Pyramid group’s Truemart plans to launch a credit card to enable its shoppers to purchase goods on credit. The basic idea is to imitate the business practices of the local kirana stores who enjoy loyalty and patronage of their customers. Stores such as Lifestyle, Westside, Pantaloons, Titan, and Landmark now issue membership cards. Archies Gallery runs its loyalty programme, Archies Club, where each buyer is entitled to membership and the various benefits associated with it.

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Reliance commenced its retail operations in December 2006 and for the initial few days, it distributed free 1/2 kilo sugar and ice-cream on every purchase of Rs 100 to attract customers. The company also launched a free Reliance card that earned its holder one point for every purchase worth Rs 100 and after 25 points, issued a cash-voucher.

Reliance also put in place a proper feedback system to avoid missing valuable inputs from regular customers. According to an FMI study, a number of food retailers in the US held their loyalty programmes accountable for 10 to 20% rise in sales. Tesco, UK’s largest supermarket chain, attributed one-third of its 6% volume increase in sales over six months to its Clubcard. Such boost in profits is a product of various advantages that retailers extract from their loyalty programmes. Some of them are: ∑ ∑ ∑ ∑ ∑

Arrival of new customers Higher customer retention Increase in purchasing volume A shift towards own (private) label and other high profit lines Recovery of defectors

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Other reasons include greater value from marketing expenditure as above-the-line marketing costs can be significantly reduced by targeting offers specifically and partnering with other manufacturers and service providers at different levels. The following section throws light on some of the most successful loyalty initiatives taken by pioneer retail Organisations in India such as Shoppers Stop, Tanishq, and Future Group. 12.2.1. Shoppers Stop K Raheja Corp forayed into the Indian retail sector with the brand name, Shoppers Stop, which was incorporated as a private limited company on June 16, 1997, and became a deemed public limited company on December 8, 1997. Following an amendment to the Companies Act in the year 2000, the company was converted to a full-fledged public company from a deemed public company with effect from October 6, 2003. The company’s operations had started much before its incorporation through a store in suburban Mumbai in the year 1991. Initially, it offered only men’s wear. Ladies’ wear and kids’ wear as well as non-apparel items were introduced in 1992 and 1993 respectively. Important Milestones: 1991: ∑ 1992: ∑ 1993: ∑ ∑

IPHL opened its first Shoppers Stop store selling men’s wear at Andheri (Mumbai). Introduction of the Ladies section.

Introduction of children’s and non-apparel accessories sections. Disney carnival event with participation of official Disney characters (Mickey, Minnie, Donald and Goofy). ∑ Commencement of in-house Retail Management Trainee Programme. 1994: ∑ Introduction of first Citizen Club loyalty card. 1995: ∑ Opening of the second store in Bangalore. 1996: ∑ Celebration of Festival of Britain in association with the Commercial Department of the British Consulate. 1997: ∑ Incorporation of Shoppers Stop Limited on June 16. ∑ Event ‘Parikrama,’ a festival of Indian tradition and culture. ∑ Launching of co-branded credit card for FCC members in partnership with HSBC. 1998: ∑ Opening of third store at Hyderabad, the largest at that time with 72,287 sq ft of retail area. ∑ SSL co-opted as India’s only member to the Intercontinental Group of Department Stores (IDGS). 1999: ∑ JDA Retail ERP (a global leader in retail ERP packages) implemented.

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∑ 2000: ∑ ∑ ∑

205

Opening of fourth and fifth stores at Jaipur and Delhi. Opening of sixth and seventh stores at Chennai and Chembur, Mumbai. Raised Rs 600 million through an IPO. Acquisition of one of India’s leading book retailing chain, Crossword, from India Book House in partnership with ICICI Trusteeship Services Limited.

2001: ∑ Implementation of Warehousing Module of JDA, Auto Replenishment and Auto Purchase Order system and business to business connectivity. ∑ Opening of the eighth and ninth store at Pune and Bandra, Mumbai. ∑ Profit Linked Reward System (PLRS). 2002: ∑ Opening of the tenth store at Kandivali, Mumbai. 2003: ∑ Awards and recognition from CMAI (including Best Retailer of the Year) and Nasscom (Best IT Practice in the Retail category). ∑ Inked Austin Reed licence for men’s outerwear for India exclusively. ∑ Opening of three stores at Mulund (Mumbai), Gurgaon, and Kolkata taking the total number of stores to 13. 2004: ∑ Opening of three more stores at Malad (Mumbai, February 2004), Salt Lake City (Kolkata, June 2004) and Banerghatta (Bangalore, October 2004) respectively taking the total retail area to 752,848 sq ft. ∑ Achieved the status of Superbrand in 2003 and 2004. ∑ Images Retail award for the “Most favoured retail destination of the year.” ∑ “Organisation with Innovative HR Practices” award at the HR Excellence Awards organised by Mid-Day, Big Break and Daks. ∑ Declared as the Top Retailer, 2004. ∑ India Bronze award given by Retail Asia-Pacific Top 500 awards. 2005: ∑ The IPO of Shoppers Stop was oversubscribed by 5.3 times on the first day of the offer, with bids received for 3.04 crore shares as against 57.6 lakh shares on offer in the price band of Rs 210 to Rs 250. ∑ The Shoppers Stop IPO, which began on April 28 and closed on May 4, was subscribed 8.6 times. ∑ The Shoppers Stop scrip made a sparkling debut on the bourses on May 23. The counter closed at Rs 372.60 on the Bombay Stock Exchange (BSE), 56.60% higher than its issue price of Rs 238. The counter opened at Rs 335 on the BSE, a premium of 40.9% over the issue price. ∑ A franchisee agreement with Mothercare PLC, UK. ∑ A new outlet in Bangalore. Today, the company has grown into a multi-channel retailer with 24 large format department stores and online presence. It has transformed into a Fashion and Lifestyle store for the entire family from being a single brand showroom in the beginning. Shoppers Stop enjoys household recognition

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for its superior quality products and services and providing a complete shopping experience. The company offers a retail range of branded and own label apparel, footwear, perfumes, cosmetics, jewellery, leather products and accessories, home products, books, music and toys while operating in cities like Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Pune, Jaipur and Gurgaon. Customer Loyalty Practices at Shoppers Stop: Counted amongst India’s biggest hospitality and real estate players, the company set another milestone with its lifestyle venture. The objective was to create a fashion and lifestyle store for all brands under its roof. It tried to bridge the gap between the unprofessionally managed and poorly stocked merchandise, ill-mannered staff, and the growing urban upper middle class who had money to spend but desired a quality environment. Since its inception, Shoppers Stop has progressed from being a single brand shop to becoming a leading fashion and lifestyle store for the family. A pioneer of organised retail in India, it has become a benchmark for the Indian retail industry. Its stores are present across various Indian cities such as Bangalore, Hyderabad, Jaipur, Delhi, Chennai, Mumbai, Pune, Gurgaon, and Kolkata. It has a national presence of over 6,00,000 sq ft of retail space, stocking over 250 brands of garments and accessories. The vision of the company was to position itself as a global retailer while holding top position in the departmental store category of Indian retail. Being at the helm of a customer-centric business, there has been a strong emphasis on customers and to induce loyalty among them to keep them with the company, willingly and consistently. Customer Loyalty Initiatives: The company says it has taken its CRM initiatives to a new height through its loyalty programmes. Close analysis of the company’s sales trends and patterns helped realise that most of the sales were coming from old customers, primarily through repeat purchases. So, the company focussed on these customers. Shoppers Stop tried to leverage data by providing suitable information to customers that might benefit both the company and its customers. For example, if a customer bought a pair of trousers, the customer was informed about a new range of shirts that was available in the store. As per the Customer Loyalty programme, its members are called “First Citizens.” At Shoppers Stop, First Citizens are given the following exclusive benefits and privileges: ∑ ∑ ∑ ∑ ∑

Reward points every time they shop Exclusive offers Updates on what one can look forward to shop for Exclusive benefits and privileges Exclusive cash counters so that they can spend more time shopping rather than waiting in queues

There are three membership categories: 1. Classic Moments 2. Silver Edge 3. Golden Glow The company believes in providing the best possible experience, including the best benefits and privileges. The programme gets more rewarding as a customer upgrades his membership status depending upon the cutoff of purchase during a specific period.

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Co-branded CRM initiatives: Shoppers Stop has regularly launched several schemes to

First Citizen Citibank credit card:

∑ Earn double reward points ∑ 0% EMI scheme First citizen Citibank debit card: The First Citizen ATM/debit card is India’s first co-branded ATM/debit card in the retail sector. While this card can be used as a regular debit card and at an ATM to withdraw cash, it also helps a customer collect reward points every time he purchases merchandise at any Shoppers Stop outlet. This also provides automatic membership to First Citizen Shoppers Stop Loyalty programme for those who are not First Citizen members yet. The company also undertook a major IT initiative to be able to offer customer support. It chose software tools for facilitating the analysis of customer data. The company uses a combination of business objects and the Statistical Analysis System (SAS) solutions for trend analysis, promotion management, consumer behaviour, segmentation, buying basket analysis, profitability and lifecycle analysis. Shoppers Stop started engaging its customers earlier than others in the Indian retail sector and is definitely reaping massive returns from First Citizen, its classic, enrolment, earning, redemption, and upgrade loyalty programme. The first store was launched in 1991 and introduced its loyalty programme as early as 1994. First Citizen can be considered as a stalwart with 2.5 million members and a significant contribution to sales figures as high as 72% of the store’s total sales on an annual basis. Shoppers Stop customers who sign up for its First Citizen membership get various offers and special privileges such as the exclusive First Citizen lounge at every store, facility to redeem their reward points directly at the cash counter, exclusive cash counters for Golden Glow members, exclusive preview of Sale and other annual offers.

12.2.2. Tanishq Tanishq, a product of Tata, is considered to be India’s largest, most trusted and fastest growing jewellery brand. It offers traditional as well as trendy designs in gold, diamond and platinum. ‘Tanishq’ was christened as a combination of Tata/Tamil Nadu and Nishq (meaning a necklace of gold coins) and, again, from Tan, meaning body, and Ishq, an Urdu word for love. It was launched in early 1990s, primarily due to Tata’s entrepreneurial spirit as well as compelling business requirements at that time. Tata required foreign exchange to meet the rising demand of imported

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components and machines for its major business unit, Titan watches. However, since the country was going through a foreign exchange crisis, Tata thought of foraying into a business segment that could earn it the required foreign exchange currency. Indian jewellery was already doing well in foreign markets and thus, was well-supported by the government also. It also aligned smoothly with Tata’s watch business as both the businesses are meant to serve the customers’ desire to enhance their appeal. Besides, big brands in Europe have a practice of offering watches and jewellery together proving the intrinsic link between the two segments. The jewellery business was not only profitable but also rendered a much needed feminine dimension to Tata’s particular product line that largely attracted men. Tata also banked upon its excellent manufacturing, marketing, and retailing skills and the trust it enjoys among Indian customers to take the decision of opening its jewellery business unit. However, by the time Tanishq assessed the market potential and suitability and set up its manufacturing unit primarily meant for the markets in Europe and USA, the underlying market dynamics changed altogether as India went ahead with the LPG process that made foreign currency easily accessible. In the new scenario, foreign currency and import licences were easily accessible which shifted global demand and supply mechanism in the favour of buyers. Accordingly, Tanishq also shifted gears and positioned itself as a grandiose brand encompassing the value propositions of some of the highest benchmarks in the global jewellery market like Cartier, Tiffany, Esprit, and Ernest Jones in the Indian market. It introduced specialised retailing in the fragmented jewellery market of India. Currently, there are over 130 Tanishq stores in 83 Indian cities. Tanishq based its exquisite designs with fine finishing on the extensive and in-depth research of Tata in the jewellery market. It maintains stringent standards of quality while designing. Various innovative measures and technology backed initiatives such as the karat meter, which it claims to be the ‘the only non-destructive means to check the purity of gold,’ are employed to enhance customer satisfaction. Further, to secure customer trust, it certifies the purity of the metal used and reselling policies. It also ensures that artisans who create the jewellery are treated in line with ethical policies and practices. Its units are located at Hosur (Tamil Nadu) and Dehradun (Uttarakhand). The 1,35,000 sq ft manufacturing unit is equipped with the latest technology and tools. All labour and environmental standards are also complied with at the unit.

GoldPlus GoldPlus is another Tata venture that caters to the jewellery preferences of the semi-urban and rural Indian customers. It has a wide network spread across 31 towns in five states. GoldPlus is the largest jewellery retail chain in Tamil Nadu. Apart from gold, GoldPlus also deals in diamonds, American diamonds (Cubic Zirconia) and other precious stones. It gives an assurance of purest 22-karat (916) and 18-karat (750) gold and premium craftsmanship to its customers. Every GoldPlus product is endorsed by a certificate that declares the purity of the gold and the quality of diamonds used in the piece of jewellery. To provide guaranteed purity and quality, GoldPlus has incorporates detailed yet, intense quality checks during the manufacturing process. It procures gold in the form of bars from Reserve Bank of India (RBI)-certified banks only. This gold is used in the jewellery designed at its manufacturing

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units located at Hosur, Tamil Nadu. It hires the services of highly skilled artisans to create traditional and modern designs. Customer Loyalty Practices at Tanishq and GoldPlus: Tanishq and GoldPlus run their loyalty programmes under the names of ‘Anuttara’ and ‘Ananta’ respectively. Both these programmes are seen as one of the best loyalty programmes in the country. The reason is their focus on the aspect of relevance and a keen eye for key customer loyalty trends. These programmes have tailored their offerings in line with the customer’s jewellery desires. Jewellery is designed and customized through an active participation of customers. Tanishq has full appreciation of the customers’ preference towards the brands they feel emotionally connected to. To meet its customer expectations, Tanishq has put them at the epicenter of its designing as well as marketing activities.

12.2.3. Future Group Future Group is India’s leading multi-format retailer that inspires trust through innovative offerings, quality products and affordable prices. Future Group is operational mainly in three sectors: Retail, allied services and finance. Although retail is the focus of its core business activity, the group’s subsidiaries are operational in consumer finance, capital, insurance, leisure and entertainment, brand development, real estate development, retail media and logistics. The group’s broad objective has been to play the role of a catalyst in India’s consumptionled growth, which it sought to align business opportunities. Future Group aspires to capture a significant portion of India’s consumption and contribute to a significant proportion of the country’s GDP as it believes that while the Indian economy is maturing, it is important to guide the consumption landscape of India while creating sustainable value and an inclusive and profitable growth trajectory. The group banks upon strong understanding and knowledge of Indian consumer preferences, habits and aspirations to build some of the most revered retail brands in the country. The retail business across the value and lifestyle segments focuses on four key consumption verticals: Food, fashion, general merchandise, and home. Mission: The mission statement of the Group is as follows: “We share the vision and belief that our customers and stakeholders shall be served only by creating and executing future scenarios in the consumption space leading to economic development. We will be the trendsetters in evolving delivery formats, creating retail realty, making consumption affordable for all customer segments – for classes and for masses. We shall infuse Indian brands with confidence and renewed ambition.

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We shall be efficient, cost-conscious and committed to quality in whatever we do.

Vision: Indianness: Leadership: Respect and Humility: Introspection: Openness: Valuing and Nurturing Relationships: Simplicity and Positivity: Adaptability: Flow: To Important Milestones: 1987: ∑ Manz Wear Private Limited incorporated. ∑ One of India’s first formal trouser brands, Pantaloons, was launched. 1991: ∑ Launch of BARE, an Indian denim brand. 1992: ∑ Initial public offer (IPO) by Pantaloon Retail India Ltd. 1994: ∑ Launch of Future Group’s exclusive menswear store in a franchisee format, The Pantaloon Shoppe, across the nation. The company also started distributing branded garments through multi-brand retail outlets all over the country. 1995: ∑ Launch of John Miller, a formal shirts brand. 1997: ∑ Launch of the first 8000-sq ft Pantaloons store in Kolkata that marked the groups’ foray into modern retail. 2001: ∑ Launch of three Big Bazaar stores within a span of 22 days in Kolkata, Bangalore, and Hyderabad. 2002: ∑ Launch of the supermarket chain Food Bazaar. 2004: ∑ Launch of India’s first seamless mall, Central, in Bangalore. 2005: ∑ Acquisition of a stake in Galaxy Entertainment, Indus League Clothing, and Planet Retail. ∑ India’s first real estate investment fund, Kshitij, was set up to build a chain of shopping malls. 2006: ∑ Future Capital Holdings was established to manage over $1.5 billion in real estate, private equity, and retail infrastructure funds.

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∑ Launch of Home Town, a retail chain exclusively designed for home building and improvement products along with consumer durables format Ezone and furniture chain Furniture Bazaar. ∑ Joint venture agreements to launch insurance products with Italian insurance major Generali. ∑ Joint ventures with US office stationery retailer Staples. 2007: ∑ Future Group crosses the $1 billion turnover mark. ∑ Operationalisation of specialised companies in retail media, logistics, IPR and brand development and retail-led technology services. ∑ International Retailer of the Year award at US-based National Retail Federation convention in New York, and Emerging Retailer of the Year award at the World Retail Congress held in Barcelona to Pantaloon Retail. ∑ Online portal Futurebazaar.com becomes India’s most popular shopping portal. 2008: ∑ Initial Public Offering (IPO) of Future Capital Holdings. ∑ Big Bazaar crosses the 100-store mark, marking one of the fastest expansions of the hypermarket format anywhere in the world. ∑ Total operational retail space crosses the 10 million sq ft mark. ∑ Acquisition of rural retail chain Aadhar from the Godrej Group, which has a presence in 65 rural locations. 2009: ∑ Event of first Shopping Festival across all retail formats in key Indian cities. ∑ Commencement of Future Innoversity campuses in Ahmedabad, Bangalore, and Kolkata to offer degree programmes through a tie-up with IGNOU. ∑ Partnership with Hong Kong-based Li & Fung Group to strengthen its supply chain and logistics network across the country. 2010: ∑ Launch of T24, the group’s telecom brand in partnership with Tata Teleservices to provide additional loyalty benefits to its customers. ∑ Launch of products in key FMCG categories through Sach, a brand co-created with Sachin Tendulkar. ∑ Future Group connects over 4,000 small and medium Indian manufacturers and entrepreneurs with consumers. 2011: ∑ Opening of 200 Fairprice stores in India. ∑ ISO certification for Future Supply Chains. The basic ideology of the Future Group is ‘Rewrite rules, retain values.’ The group aspired to create a new kind of marketplace with an aim to transform Indian retail. It claims its core values to be the guiding light in the business that seeks to improve the quality of life of the people it serves. Future Group’s Retail Division: A multi-format retail strategy has been designed to capture almost all the consumption needs of Indian customers. This strategy is based upon the group’s confidence in its profound knowledge about consumers in India. Future Group is also committed to be a part of modern retail that entails novel demands and consumption patterns in new formats

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through designing and implementing innovative and customised strategies which take care of different buying behaviour of consumers with diverse regional ethnicities. The strategic focus of the company revolves around the goal of achieving inclusive, sustained and profitable growth with three levers: The retail business division leverages on its strength in two areas: Scale and efficiencies. With these two in place, Future Group takes the responsibility of protecting the customers from the overall rate of inflation. Besides bringing in greater efficiencies, the scale and size of the Group also offers superior value to customers. Future Group’s retail business consists of four principal verticals of Food, Fashion, General Merchandise and Home. According to the Group’s website, these four categories together account for nearly 65% of the consumption in the country and represent mass consumer aspirations. The Group is employing strategies such as divestment and demerger of nonretail businesses to put in concentrated efforts in these verticals. Future Group has also worked upon ensuring wide availability of products in every store format. Its reach and approach can be understood through the following points: ∑ Future Group’s formats have become household names in more than 93 cities and 60 rural locations across the country putting them at the forefront in Indian retail space. ∑ Its stores are spread in about 17 million sq ft of retail space and attract around 300 million customers each year. ∑ Pantaloon Retail (India) Limited focusses on the lifestyle retail segment led by the Pantaloons and Central formats. ∑ Future Value Retail focusses on the value retail segment through the Big Bazaar, Food Bazaar, and KB’s Fairprice formats. The pricing strategy of Future Group takes special care of the affordability aspect and is usually accompanied with innovative and customised offerings. Customer Loyalty Practices at Future Group: Future Group crafted its loyalty programme through an alliance with PAYBACK, which is known as one of the most successful multi-partner loyalty programmes of Europe. PAYBACK is India’s largest loyalty programme. Under this programme, customers earn points through a single card while shopping from the online and offline participating commercial parties. Almost all Future Group formats such as Big Bazaar, Food Bazaar, Pantaloons, Central, Home Town, eZone, Brand Factory, and Future Bazaar are covered under this programme. PAYBACK Loyalty Programme: PAYBACK is a major customer loyalty programme of Europe. Its headquarters are located in Germany with 25.5 million active cardholders in Germany and Poland. PAYBACK’s foray in India was marked by grabbing a major stake in i-Mint. Today, it has presence across all major sectors of the Indian business arena. It has more than 30 partners with 1,500 outlets and 10 million card members. The companies (ICICI Bank, HPCL, Univercell, BookMyShow, and MakeMyTrip to name a few) that have joined hands with PAYBACK are mostly market leaders in their respective industries such as banking, travel, petroleum and online sectors.

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T24 Programme: Future Group has combined the fun of shopping with the Indian customers’ liking for chatting on mobile phones. T24 offers a unique value proposition to the customers who patronise its stores through a partnership with Tata Teleservices Limited. T24 tariff plans are based upon the competitive per-second call rates that Tata Teleservices Limited’s GSM network offers to its prepaid customers. Customers who make a purchase of Rs 500 or more at any of the Future Group outlets are rewarded with free talk-time and other attractive perks. The Pantaloons’ Greencard: With free membership and a simple procedure to get enrolled, Pantaloons Greencard makes earning customer loyalty a simple affair. Under this loyalty initiative, customers are not required to spend money by making purchases or paying a nominal fee. They are just required to provide their regular personal details and preferences by filling up a form that would be used by Pantaloons to communicate new or customised offers that might interest them. Some of the major advantages of Pantaloons Greencard are as follows: ∑ ∑ ∑ ∑ ∑ ∑

Instant discounts Complimentary parking Complimentary home drop (after alterations) Relaxed return policy (90 days) Complimentary shipping across India Exclusive sale preview

Apart from these benefits, 3/5/7 star GC Members are given exclusive billing counters and a complimentary home delivery whereas 7 Star GC members are entitled to assisted shopping as per their needs and timings at all the 51 outlets across the country. 12.2.4.

GLOBUS

Launched in January 1998, Globus is part of the Rajan Raheja group. The company opened its first store at Indore in 1999, followed by the launch of its second store in Chennai (T-Nagar). Soon to follow was another store in Chennai located in Adyar. As on April 1, 2013, Globus has more than 35 stores spanning all across the country. Recently, Globus has also opened its stores in Bilaspur and Chennai. Globus Stores Private Limited was formed to contribute to the revolution sweeping the Indian retail industry. Globus boasts of being strong, competitive, innovative, and adaptive in this intensely competitive market. Globus promises to bring about a perceptible change in the way of apparel and lifestyle retailing. Towards this end, the company has brought in modern international technology and made considerable investments in acquiring the best, tried and tested processes and procedures of operation. Future: Globus combines state-of-the-art international information technology, the highest quality of human resources and sustained financial commitment to realise its long-term vision. The company is expanding rapidly and planning an additional 100 fashion stores by the end of 2017. The target is to be the “most admired fashion retailer in India.” Globus believes in being strong, competitive, innovative, and adaptive.

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Brands: The company’s mission is to transform Indian fashion and attain the position of an iconic fashion brand for the youth. The company also seeks to form a subterranean association with the Indian youth by offering them exciting product designs, remarkable store experiences and persuasive marketing strategies. Globus intends to create inimitable products that initiate fashion trends and inspire young customers to experiment more and build individual style statements. The company credits this mission to strengthen its team of dynamic and passionate employees and business partners to continually develop and innovate to achieve consumer delight. Youth Fashion Brand According to Globus, being vibrant, maverick and expressive is the fortitude of the youth and it strives to achieve these three qualities by producing vibrant and maverick designs that not only start new fashion trends but also enables its customers to express themselves. Globus houses fashionable apparel for men, women, kids as well as accessories at attractive prices. The range spans across occasions: Work wear, campus wear, club and lounge dressing; and genres: Western, Indian and mix-n-match. Well researched sizing ensures a good fit for the Indian silhouettes. Eye candy fashion Eye candy fashion F21 is an accessible hi-fashion brand, offering high-quality apparel. F21 – the edgy fashion brand – is designed to appeal to the more experimental and adventurous consumers who seek cutting edge fashion. Styling and fabric innovations help F21 offer high-end fashion at affordable prices to young customers. From casual wear to club wear, F21 promises consumers unlimited attention. The Globus Design Hub The heart of a business lies in the creative workplace of an Organisation. Located in Andheri, Mumbai, Globus Design Hub was launched in July 2007 and is in the embryonic stages of becoming

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the leading design talent floor. Globus claims its Design Hub to be the most well-equipped design studio in India in current times. Customer Loyalty Practices Customer relationship management is an emerging tool that enables marketers to maintain their presence in a dynamic marketing environment. Several new brands such as More by Birla, Nahar Retail Pyramid by Bharti Walmart have also contributed to the organised retail market of India. In order to survive tough competition, Globus practices various CRM tools. For instance, under its Customer Loyalty Programmeme (CLP), customers get various benefits by becoming a member of the store by making a minimum purchase of Rs 500. The CLP software is used for collecting customer data and utilising it to provide customer delight. The customer loyalty initiatives of Globus can be classified into the following heads: 1. Customer relationship schemes 1. Under the Customer Loyalty Programme, a one-time purchase of Rs 500 gives customers access to the Globus Privilege Club through the Globus Temporary card. If purchases worth Rs 2,000 are accumulated within three months, then the customers get the sought-after Globus Silver Card. For those who need it immediately, the Globus Silver Card can also be obtained by paying a nominal fee of Rs 150. 2. The privileges that Globus customers receive are: Privileges

Silver Card

Gold Card

Validity at all Globus Stores

Yes

Yes

New product launch privileges

Yes

Yes

Birthday Discount

Yes

Yes

Exclusive shopping day for end of season sale

Yes

Yes

Regular Updates: Sale and In Store Promotion

Yes

Yes

Automatic membership renewal

Yes

Yes

Special tie-ups

Yes

Yes

Free home delivery of altered merchandise

Yes

Reserved car parking

Yes

Special counters

Yes

Complimentary soft drinks

Yes

Free card in case of loss/damage

Yes

3. Globus keeps its members well informed about the latest offers, services, and products so that customers might shop as per their requirement at discounted prices. 4. Store managers try to remain on the floor most of the times and monitor the working of the employees and try to immediately solve customer problems so that the customers feel cared for. 5. Purchased apparel can be easily altered at Globus without affecting the original look. The alteration of the apparel is free of cost, making customers happy as they do not have to pay for the alteration or compromise on the overall look of the apparel.

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6. Home delivery is also available at Globus stores so customers do not have to lug all their shopping home themselves. Just shop and leave it to the store to deliver the purchase to the customer’s address. 7. To solve customer queries over the telephone, customers can call the customer care number 9223508000 or even mail at [email protected]. This saves the customers time, money, and effort. Customers can also share their opinion via SMS on 09223508000. 8. Online shopping can also be done at the Globus website, www.globusstores.com. Here, the customers can get all products with quality assurance available at the stores without physically visiting the store. 9. A feedback and suggestion register is available for interested customers. The store’s manager also takes feedback from the customers and asks for suggestions to improve the quality of service and satisfy customers more effectively. 2. Offer Customisation 1. Identifying the customers: Globus identifies different types of customers by the loyalty programme in which they offer different cards to different types of customers on the basis of their purchases. ∑ Temporary card holders: Low value shoppers ∑ Silver card holders: Medium value shoppers ∑ Gold card holders: High value shoppers These customers are provided customised services as well as products to suit their needs. 2. Return offer: Globus follows a 30-days return policy. If customers are not satisfied with their purchase, they can return the product within 30 days, but it is up to the store manager to allow return even after 30 days. This is a big reason for customer delight. 3. Gift vouchers: Globus makes gifting more simple. Gift your near and dear ones a Globus gift voucher, available in many flexible denominations. When you give someone Globus Gift Vouchers, you give them exactly what they want. When it comes to birthdays, anniversaries and special celebrations, this is one gift that is guaranteed to please. This leads to customer retention. 4. No hidden charges: Globus Gift Vouchers are redeemable against any purchase made in the store. There is no charge/tax on purchase of gift vouchers. For instance; if you want to buy gift vouchers for Rs 1001, you need to tender Rs 1001 only and you can buy anything worth Rs 1001 from any Globus store.

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5. Gifts: Cumulative Purchase (Rs.)

Purchase of goods worth (Rs.)

5,000

GV worth 100

10,000

GV worth 200

15,000

GV worth 350

25,000

GV worth 650

50,000

GV worth 950

1,00,000

GV worth 2,000

6. Globus Gift Vouchers are available in denominations of Rs 101, 251, 501 and 1001. However, you can also decide on your own denomination. Just contact the service desk at any Globus Stores to give a thoughtful gift. 3. Complaint Handling Mechanism A customer complaint is one thing that no company wants. However, complaints might arise during everyday transactions. Globus tries to resolve the complaints of its customers in such a way that they feel satisfied and happy. 1. Any complaint of the customer is directly taken to the CLP desk where the staff checks for the genuineness of the problem and tries to resolve it as soon as possible. If the salesperson is unsuccessful, then the store manager directly handles the problem and tries to resolve it in a kind manner. 2. There is a feedback and suggestion diary that the customer fills after making his purchases. 3. If there is any complaint in the diary regarding any aspect, the customer is called via telephone and asked if the complaint was resolved. Again, the customer is asked for feedback and suggestions and is assured of problem-free shopping the next time. 4. An e-mail is also sent to the customer regarding complaint redressal. All these efforts lead to customer satisfaction as the customer feels that the store is guilty and is apologising for its mistakes. 5. A complaint should be resolved within 24 hours. At Globus, the time taken for the problem solution is very quick and the store manager has to submit a report to the head office daily regarding the number of complaints and their solution status. 6. To solve customer queries over the telephone, customers can call the customer care number 09223508000 or even mail at [email protected]. This saves customers time, money, and effort. Customers can also share their opinion via SMS on 09223508000. 4. Technology Initiatives 1. CLP Software: Globus uses the CLP software that maintains customer database and keeps track of all customer purchases and helps in providing discounts in case the customers reach the cut-off limit. This shows transparency in the functioning of the company and increases customer trust. 2. Electronic media: Globus uses various electronic media to reach out to various customers and expand its customer base by providing information about its products and offers. Various media used for providing information to the people are:

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∑ T.V. advertisements ∑ Direct Mails ∑ Mobile SMS These technologies help the company to connect to a vast customer base. 3. Online shopping: Globus has its own online store where customers can make online purchases as well as make online payment or through cash on delivery. 4. Newsletter: Globus sends emails regarding its products and offers to its customers who have subscribed to the online newsletter. This helps to enhance communication with the customers, who are informed about new offers and products. 5. Online customer service: Customers can get information regarding any Globus products, services, or offers using the customer service number 022 30783515, and online customer service facility, [email protected]. 6. Online store locator: Store addresses can be located online so that customers do not waste efforts in finding the nearest store to their location. 5. Services Delivery i. Along with providing quality apparel, Globus also provides various services to its customers to retain them and enhance profitability. ii. Trial rooms are provided so that the customers can check out their clothes before purchasing and feel fully satisfied. iii. Home delivery is also available at Globus so that the customers do not have to lug their shopping bags along. Just shop and leave delivery of the purchased items to the customer’s address to the store. iv. Purchased apparel can be easily altered at Globus without affecting the original look. The alteration of the apparel is free of cost, making customers happy as they do not have to pay for the alteration or compromise on the overall look of the apparel. v. Free shipping for online orders worth Rs 1000 and above. vi. Gift wrapping services for online as well as store purchases. 6. Employee Behaviour i. At Globus, employees are well trained to serve customers with utmost zeal and devotion. After imparting proper training to each employee, the company sends them on the shop floor to handle customers. They put in their best efforts to satisfy the customers by offering them what suits their requirements. ii. The employees are smart, young, energetic and well trained to understand the fashion needs of the people and help them in choosing the best apparel as per their needs. iii. There is uniformity in their dresses and uniformity in their behaviour also as they all are trained to treat the customers with hospitality. iv. At the very first step that a customer takes into the store; the customer is greeted at the security check at the entrance. Then the customer is greeted by the sales person and is accompanied by the sales staff till the transaction is made. v. There is smile on their faces which shows that they are happy to serve their customers. vi. The store manager is a highly talented and skilful person who is present to keep an eye on the staff ’s functioning and also assists them in serving the customers. The manager often helps the customers with their shopping if the other staff members are busy with other

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customers. People feel good when they are helped by a senior employee or the manager himself. The Road Ahead There is intense competition and Globus has realised the importance of superior customer service that will give it a positively perceived image in the minds of its consumers. Although the company has initiated several customer service initiatives but there is always scope for more. Globus must strive to consistently provide the best products and implement more aggressive customer relationship practices to make customers happy. 1. In spite of various technology used to enhance the customer experience, Globus is yet to work on its technology usage to achieve overall efficiency. Various CRM software can be used for this purpose. Advertisements at others sites may also prove beneficial. 2. Quality is another important thing that must always be top-of-mind. 90% of the apparel is of the Globus brand while 10% are of other brands. The customers must not feel any quality difference in the apparel or they might feel cheated. 3. Competitive prices should be maintained for retaining the customers as high prices may lead the customers to shift to other companies such as Pantaloons and Westside. 4. Due to its differentiation of customers on behalf of their purchase, people may expect best treatment. Sometimes, the customer with a gold card is also given the same treatment as the silver card customer. This may affect the customer’s shopping experience. 5. The staff at Globus is young and energetic. But it has been noticed that they are sometimes found talking to each other while the customer is looking for suitable apparel. Such behaviour can be checked by the store manager who should motivate them to focus on customer satisfaction and delight. 6. Globus should carry out various CSR activities in order to remain in the public eye as a socially responsible company. This will help the company to survive and perform better in the long run. 7. The gift vouchers are very low compared to the amount of shopping done by the customers. Therefore, customers might not feel attracted to such offers. For example, a customer gets a gift voucher worth just Rs 100 on purchase worth Rs 5,000. 8. There are various terms and conditions regarding the usage of the card and the benefit sought but the customers are unaware of them. They are not informed in detail about the benefits that could be received and the conditions required for getting these benefits. The customers must be properly informed about the usage and conditions on which they would get the benefits. This is very important to gain customer trust and show the transparency in the functioning of the company. 12.2.5.

VISHAL MEGA MART

Vishal Retail Limited has a strong presence in manufacturing and retailing of readymade garments (apparels); retailing of non-apparels and a large variety of FMCG products. The jewel in Vishal Group’s crown is its flagship company, Vishal Retail Limited, a company engaged in hyper market stores with an average area of 25,000 to 30,000 sq ft through an impressive chain of 172 fully integrated stores spread over an area of more than 24,00,000 sq ft in 129 cities across 24 states in

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India. The turnover of the company for 2009–2010 was Rs 1105 crore. Maintaining high standards in quality and design, these stores offer the finest fashion garments at low prices. It also has 29 warehouses located in 9 key cities in India covering an area of 1,053,066 sq ft. The company’s two manufacturing plants are located in Gurgaon and Dehradun. It started as a retailer of ready-made apparel in Kolkata in 2001. At the time of incorporation, the registered office of the company was situated in Kolkata. In 2003, it acquired the manufacturing facilities from Vishal Fashions Private Limited and M/s Vishal Apparels. It follows the concept of value retail in India. In other words, the company’s business approach is to sell quality goods at reasonable prices by either manufacturing themselves or directly procuring from manufacturers (primarily from small and medium size vendors and manufacturers). The prices at Vishal Mega Mart are comparably low, especially targeted at middle and lower middle class. Uniform pricing policy is practised in all stores. They also provide psychological discounting and special prices for special events. The stores facilitate one-stop-shop convenience for their customers to cater to the needs of the entire family. Mr Ram Chandra Agarwal, CMD, Vishal Retail Ltd, has been ranked as the 28th most powerful person in the Indian retail industry. The story of Vishal Group dates back to 2001 when its directors foresaw the emerging potential in the retail industry, which is indeed the largest sector in the global economy. Punch line: Value for Money, “Sabse Sasta, Sabse Achcha.” Headquarters: Delhi Website: www.vishalmegamart.com

Products offered: 1. FMCG 2. Consumer durables 3. Apparel

Customer Loyalty in the Retail Industry

4. 5. 6. 7.

221

Electronics Stationery Canteen billing Other services

Customer Loyalty Practices: Customer relationship management is an emerging tool that enables marketers to maintain their presence in the dynamic marketing environment. The marketing of Vishal Mega Mart has a customer-centric approach and a specifically designed Customer Relationship Management programme to enhance customer loyalty and ultimately survive in this cut throat competition. In order to maintain its cost along with good customer relationship, the company conducts Customer Profitability Analysis (CPA). Various surveys are conducted to check that the company follows its CRM practices. For example, surveys carried out to access the Customer Loss Rate. At Vishal Mega Mart, customer relationship programmes are taken very seriously and the company tries to maintain strong and long-term relations with its customers. 1. Customer Relationship Schemes i. At Vishal Mega Mart, customers of various types such as frequent shoppers or low value shoppers are classified into different groups so that the company knows which customer is more profitable and can accordingly market to them. This is done by Customer Profitability Analysis (CPA) under which the customers are given cobranded cards with State Bank of India. As per the transactions made, the customers are classified into the following categories: ∑ Platinum customers (most profitable) ∑ Gold customers (profitable) ∑ Iron customers (low profitability but desirable) ∑ Lead customers (unprofitable and undesirable) Vishal Mega Mart differentiates its customers on the basis of two factors: ∑ Their needs ∑ Their value to company After this differentiation, the employees interact with these customers to gain proper knowledge about the customer’s satisfaction level with products bought. Proper interaction is done to comprehend customer needs and analyse the feedback so as to build strong relationships. ii. To improve its services and management, the employees try to gauge the problems faced by the customers from the customer’s perspective. This helps them to improve the quality of their service as well as the product quality, which ultimately leads to customer satisfaction. iii. Effective communication is very important for the company where the customers need to be heard properly and then responded to with proper suggestions and solutions. This is one aspect where the store manager plays a vital role in motivating the sales force to perform their job efficiently. iv. A proper process is followed by the company that focuses on the long-term consequences of service break-downs. This helps the employees to avoid break in the services delivery which results in development of better customer relations as well as be cost effective for the company.

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v. The store maintains customer database in order to maintain long-term relationship with its customers. The retail store does this to have an additional advantage over the other players in the retail industry that do not maintain customer database. vi. There are four type of analysis done for CRM at Vishal Mega Mart to improve the customer’s shopping experience and revisits to the mart: ∑ Periodic Survey: A periodic survey is carried out every quarter. It is an inclusive survey done by company authorities and CRM is a part of it. ∑ Customer Loss Rate: By this analysis, the company comes to know about the loss of customers. This helps in analysing the reasons for the customer loss and improving the areas that are directly connected to customer relationship. ∑ Mystery Shoppers: They pose as general customers, perform specific tasks such as purchasing a product, asking questions, registering complaints or behaving in a certain way and then provide detailed reports or feedback about their experiences. ∑ Monitor Competitive Performance: Monitoring the performance of the employees for their ability to develop friendly relationships with the customers is a very effective tool to enhance customer relation 2. Offer Customisation i. To improve the relationship with its customers, the stores create a list of customers who are most profitable. These customers are known as Platinum customers who include frequent shoppers, high value shoppers, and bulk shoppers. They are given priority by giving special discounts and offers. ii. There are various offers that are specially given for various purposes as follows: 25% Off on All Items – Every Month ∑ ∑ ∑ ∑ ∑ ∑

2 din Ki Maha Loot Great Savings 5 Din Ki Maha Bachat Discount offers at various festive occasions, such as Dhanteras Dhamal Grand Winter Sale – 50% and 60% discount for two days Paise Bachao Andolan – 9 Din Ki Maha Loot

iii. On the basis of various methods such as entry forms, bill records, and feedback forms, personal information pertaining to a customer’s occupation and family information is collected and customers are accordingly informed about the products that suit their preferences. iv. Value Pricing (EDLP - Every Day Low Pricing): Vishal Mega Mart banks upon its ability to offer products at the lowest available price where customers are spared from coupon clipping, waiting for discount promotions, or comparison shopping. v. Promotional Pricing: Vishal Mega Mart also provides the facility of financing at low interest rate. It extensively uses psychological discounting by pricing its products at Rs 99 or Rs 49. Besides these, the company also puts up Special Event Pricing on occasions such as Diwali, Holi, Raksha Bandhan and Durga Pooja. vi. Differentiated Pricing: Vishal Mega Mart aggressively uses time pricing, which is, charging different rates in peak and non-peak hours or days.

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vii. Bundling: Combo-packs and discount offers are also available to customers to add value. viii. Vishal Reward Plus: Consumers can make purchases at any store and accumulate points at a central level. These points are redeemable at any of the VMM stores. ix. Cross category promotions are now catching up where discounts are being offered on grocery purchases, redeemable against purchase of apparel and household products. x. The return policy followed at Vishal is appreciated as the store manager has the authority to exchange the product as per his scrutiny into the genuineness of the customer compliant. Customer can return any product even if the return or exchange date has passed by the consent of the store manager. 3. Complaint-Handling Mechanism Vishal Mega Mart strives to minimise the complaints from the customers by providing them better products and resolving their issues efficiently. For this purpose, there are various arrangements: i. Complaint-cum-suggestion box: A complaint-cum-suggestion box is placed at the store so that customers can write their complaints and suggestions and put it in the box. The box is checked daily and customers are contacted and their complaints resolved as soon as possible. ii. Feedback forms: The sales person stands near the billing counter of the store and asks the customer for feedback and suggestions, if any, after the customer has finished shopping. iii. Suggestions’ implementation: The suggestions that are received from the customers are discussed by authorities at the head office. If found feasible, then the suggestions are implemented. This practice makes the customer believe that they are being heard. iv. Call the customer: After the complaint is made by the customer, the store manager calls up the customer and asks about the problem faced and if the problem was resolved. The customer is assured that on the next visit to an outlet, the customer would be given proper attention and the lapse in service would not be repeated. 4. People i. Strong management with proven execution capability: Vishal Retail has been established by Mr Ram Chandra Agarwal, a first generation entrepreneur. He has been instrumental in expanding the business from an apparel store in Kolkata to 82 value retail stores with panIndia presence. ii. The management team has a pool of talented professionals with the right mix of working experience. Professionals are one of the key assets for any Organisation. iii. Monthly, weekly and daily sales targets are communicated to the staff and efforts are made to consistently achieve the set targets. iv. Employees are motivated to think out-of-the-box. The retail sector is in its growth stage, so the staff is encouraged to take innovative steps. v. Multiple counters for payment, staff available at all stores to keep baggage and security guards at every gate, make for a customer-friendly environment. vi. VMM motivates and retains store staff and maintains a positive work environment. vii. Well-dressed staff improves the overall appearance of the store. viii. Strong Recruitment Cell, 2,509 employees joined in 2009. The total employee strength is 8,500.

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Rs. Cr

Due to intense competition, the requirement of skilled manpower is increasing. At the same time, the availability of skilled manpower is declining and attrition rates are increasing throughout the industry. VMM foresees an increase in the employee cost going upwards due to each company’s efforts to attract and retain employees. Although the employee cost is increasing; still the company’s motive is to retain valuable employees in the company as good employees are costlier but also beneficial. 210

7%

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0 FY05

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Figure 12.1

Technology is an initiative that Vishal Mega Mart has to work on. Retail Exchange Software Solution – PRIL Integrated with SAP and ERP are software that are functional to improve the efficiency of the company. The site of the company leaves a lot to be desired. Although payments are accepted through debit and credit cards but apart from this, no special CRM software is available for improvement in customer service. Vishal Mega Mart is trying to implement a new CRM software system to achieve competitive advantage in the long run. It uses various electronic media such as TV, Radio (FM) and roadside signage. 6. Tangibles This consists of final deliverable or the display of written facts; it includes the current system and available facilities. Infrastructure: Standalone commercial buildings Clean, air-conditioned outlets Equipment: Computers, BCR, Desks Drinking water facility for customers Different sections for different types of products so that the consumers can easily find what they need ∑ Use of mannequins to display apparel so customers can know the look of the apparel ∑ ∑ ∑ ∑ ∑

7 i. Members receive additional discount at registration. ii. Members receive a free unit when they purchase a specific number of units. iii. Members receive rebates or points based on cumulative purchases.

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iv. Members receive targeted offers and mailers. Members are divided into segments based on their purchase history. Comprehensive database of demographics and purchase history is recorded to serve the customers well. v. Loyalty programme name “Maha meetha” offer cobranded with SBI credit card. Bond with Bennett Coleman and Company Limited issued on request. The benefits available are 11 kg sugar-free throughout year, Rs 250 discount voucher, eight reward points for Rs 100 spent, credit-point system, gifts, discounts, and credit. vi. Different kind of discounts and special offers. The Road Ahead: There is cut-throat competition in the market and Vishal Mega Mart has realised the importance of superior customer service that will give it a positively perceived image in the minds of the consumers. There are several customer service initiatives that ultimately make the customer happy and delighted and consequently fulfil the very purpose of existence of a business organisation. Yet, there is a need to take various steps to enhance its customer loyalty: 1. Interactions with store personnel as well as consumers revealed that they were not fully aware about the role of each party in case of co-branded cards. Communication about full details of the programme were lacking at the front end. Therefore, the store personnel should have proper knowledge about the cards and its benefits. 2. Use of technology and its proper maintenance is very important to enhance customer relationships. VMM has scope for improvement when it comes to e-commerce and online marketing, which can be improved by adopting new technologies and software. 3. The quality of products is also an issue as the upper income group customers find the product quality below satisfaction. The overall quality of the products should be improved. 4. The staff is confused about the available offers and sometimes offer wrong information to the customers. This creates customer distrust. Therefore, proper information should be made available to all staff members so that they can readily offer answers to customer queries. 5. Proper segregation in different sections should be done. The customer must easily get what he is looking for without wasting any time. 6. There should be proper seating facility for aged customers so that they can sit while other family members shop. 7. Proper parking place is an issue in most cities. Underground parking can be made for parking vehicles so that theft, traffic problems and other mishaps do not occur and customers can shop at ease. This will lead to customer satisfaction and customer retention. 8. Employees should be properly trained so that they are polite with the customers and deal in a friendly manner. The employees should be skilful so that they can quickly understand the requirement of the customers and provide them with the required product type. 9. There should be full-length mirrors and trial rooms so that the customers do not have to wait for long to check their clothes. 10. Home delivery services and online shopping can also be implemented and improved for customer comfort and satisfaction.

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12.3.

FINAL THOUGHTS

India has long been recognised for the immense potential that it holds for retail businesses. Various geographic, demographic and psycho-graphic factors have shaped India as an impeccable retail destination that has room for all formats and all peculiarities of retail. According to Future Group, the share of organised retail has increased up to 6% of the country’s total share of wallet dedicated to retail. Roughly estimated at around USD 400 billion, India’s organised retail offers huge opportunities for growth to modern retailers.

To secure a ride on the spectacular retail Ferris wheel, retailers in India must keenly observe the changing needs and preferences of the customers and provide them maximum value in terms of quality, prices, and location. With increased customer awareness, purchasing decisions are more informed and rational and capturing the loyalty of customers flooded with several options is no longer a piece of cake. To sustain growth, maintain profitability, and secure a competitive edge in the market, customer loyalty needs to be treated as a business goal with strategic concern. To win customer devotion and unwavering loyalty, retailers need to deliver a distinct and branddefining memorable experience to them instead of trying to lure them with occasional price cuts and points-based rewards system that are simply designed to instigate reckless purchasing. Review Questions 1. Why is building customer loyalty important in the retail industry? 2. How is loyalty built in the retail industry? 3. Write a note on development of organised retail in India? Is this growth constrained with limitations? If yes, what are these limitations? 4. Discuss the role of customer retention in the country’s retail industry. 5. What is the Inner circle concept in retailing? 6. What is your opinion on the ability of loyalty programmes to build customer loyalty in the retail industry?

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7. There is a bigger need to build customer loyalty in organised retail than the unorganised retail industry. Comment with suitable reasons. 8. Discuss the role of technology in modern organised retail. How do you assess the role of technology in infusing customer loyalty in organised retail? 9. Different categories of retail formats require different set of loyalty practices. How far do you agree with this statement? 10. What factors are considered in designing loyalty programmes for a retail store?

Project Assignments 1. As a manager of an organised super store, how would you design loyalty programmes for your customers to make them loyal to your company? 2. Conduct a study of existing organised apparel retail stores and make a comparison of their loyalty programmes. Which one do you think is the most sound based on the principle of building loyalty among customers?

References http://www.indiainfoline.com/Markets/Company/Background/Company-Profile/Shoppers-StopLtd/532638 visited on 28th January, 2013. http://economictimes.indiatimes.com/shoppers-stop-ltd/infocompanyhistory/companyid-2646.cms visited on 28th January, 2013. http://www.titan.co.in/business-divisions/jewellery-division/tanishq visited on 28th January, 2013. http://www.tanishq.co.in/tanishq-story visited on 28th January, 2013. http://www.goldplus.in/ visited on 28th January, 2013. http://www.titan.co.in/business-divisions/jewellery-division/goldplusl visited on 28th January, 2013. http://www.pantaloonretail.in/promotions/payback-loyalty-programme.html visited on 28th January, 2013. http://hbr.org/product/customer-loyalty-schemes-in-the-retail-sector/an/511077-PDF-ENG visited on 28th January, 2013. http://www.forbes.com/sites/forbesleadershipforum/2012/01/06/the-key-to-customer-loyalty-the-totalshopping-experience/visited on 28th January, 2013. http://www.freepatentsonline.com/article/European-Journal-Management/272511401.html visited on 28th January, 2013. http://www.facultyjournal.com/webmaster/upload/__Paper2.pdf visited on 28th January, 2013.

13

Customer Loyalty in the Aviation Industry

“We don’t want to push our ideas on to customers, we simply want to make what they want.” Laura Ashley

This chapter is aimed at providing an insight into: v General status of Customer Loyalty Practices in the Aviation Industry v Customer Loyalty cases of the following major players in the Aviation Industry ∑ Jet Airways ∑ Spice Jet ∑ Indian Airlines

13.1.

INTRODUCTION

The aviation industry has been an extremely volatile industry impacted hugely by a variety of both national and international factors. Of late, the industry has been flying a little low due to problems such as recession, increasing aviation fuel prices, labour and staff issues, and delayed government policies. Another universal challenge that hassles airline companies is intense competition amongst them to be the preferred choice of customers. Opening up of the sector through deregulation and liberalisation especially in developing economies, increasing disposable incomes, and changing lifestyles have provided a huge impetus to the growth of the sector. This growth has attracted large investments resulting in a “brutally competitive” market and highly volatile nature of the aviation industry. The peculiarity of the industry also lies in its unique characteristics that are a combination of aviation, hospitality and, entertainment industries. From receiving customers at the airport by its dedicated porters to special airport lounges to inflight food and entertainment, this industry is required to get a hold on everything. Against this backdrop, customer centricity has become an imperative element of airline businesses who aim to survive and thrive. Companies need to understand that the key to success lies in identifying the needs and desires of the customers and meeting those needs with innovative and interactive solutions. In addition to learning and entertaining the customer specifications, airline companies also need to realise the importance of customer loyalty. Kivetz and Simonson (2003) suggested that loyalty in the context of the aviation industry implies the chance of a customer’s repeat business and willingness to work as a partner with the airline. Most aviation industry players

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have initiated lucrative loyalty programmes to attract repeat purchasing, with an aim to infuse loyalty among customers.

13.2.

CUSTOMER LOYALTY IN THE AVIATION INDUSTRY

A fiercely competitive business landscape implies that airlines need to make huge efforts to retain their profitable customers. This is where the concept of relationship management comes into picture. It suggests giving equal or greater importance to maintaining and strengthening relationships with existing customers instead of focusing only on the acquisition of new customers with an aim to build a plain customer base for the company. To infuse loyalty among customers in competitive markets, companies regularly initiate a set of schemes to induce repeat purchases and increased purchases. These programmes are known as loyalty programmes. In the aviation industry, these loyalty programmes are known as frequent flyer programmes (FFP). Frequent flyer programmes have a point-based system, where points are accumulated by passengers for each flight. The number of points are awarded in line with the distance of the flight. Points thus accumulated can eventually be redeemed for rewards that include free flights or a free upgrade with the airline or one of its alliance partners. Loyalty programmes act as an important tool to retain customers. They work especially well with business travellers whose air travel demands are usually consistent and less affected by price variations.

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Loyalty programmes are “long-term-oriented programmes that allow consumers to accumulate some form of programme currency, which can be redeemed later for free rewards.” Liu & Yang (2009) The ‘Jet Privilege’ programme has been designed by Jet Airways to recognise and reward their ‘loyal fliers,’ instead of entertaining only the top tier. The programme groups the company’s fliers into five tiers and offers rewards via a membership card system. Under this programme, even firsttime passengers receive benefits for choosing Jet Airways.

Frequent flyer programmes in the aviation industry, especially of developed countries, have formed a considerable switching barrier. Through these programmes, airlines make their rivals appear more expensive by highlighting the opportunity costs of forgoing the loyalty programmes. The award scheme’s nonlinear design offers more incentives to customers giving them reason to stick to a particular airline.

However, the efficiency of these programmes has been a subject of debate. The fundamental question it leads to is “Can Loyalty be created out of incentives?” If a person repeatedly chooses to be the customer of a particular service provider in temptation of incentives, he would switch to a business rival the moment he is offered a more lucrative option. Making the offer more lucrative than the rivals in order to retain customers often leads to price wars and adversely affects the company’s bottom line, which by no means is the process or the outcome of loyalty. So, loyalty generated by these frequent flyer programmes is often spurious or false in nature implying that customers are drawn to the reward, not the airline. In fact, while making a choice whether to travel again or not with a particular airline company, customers often weigh up the rational and economic benefits of its frequent flyer programme.

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It has been observed that such programmes are not devoid of their own set of complications. Kearney (1989, 1990) remarked that such programmes are not cost effective and usually carry cost higher than their actual value. These programmes result in customer’s loyalty getting linked to the particular reward programme instead of the actual airline company. Referring to the business class travellers commuting on company expenses, Arnesen and Fleanor (1997) claimed that in some way, frequent flyer programmes (FFP) encourage commercial subornment. Doganis (2006) claimed that the usual members of frequent flier programmes are high-yield passengers who tend to be members of several FFPs of other airline companies. As a result, the relevance and effectiveness of these programmes diminishes when it comes to securing loyalty. Such loyalty programmes do not necessarily bring in beneficial results. They further added that airlines only with high market shares experienced a rise in sales figures on account of their loyalty programmes. 13.2.1.

Customer Loyalty Practices in the Indian Aviation Industry

Frequent Flyer Programmes were initialised by American Airlines (AA) in May 1981 with the sole objective of retaining AA’s most frequent customers by offering them rewards for their loyalty. AA maintained a database containing details of 150,000 customers who it considered best. Not lagging behind, the Indian aviation industry soon followed suit and several airlines began their own loyalty programmes. The travellers flying with a particular airline received special privileges in the form of trips or hotel stays. Such programmes required relational bonds between the commercial parties involved in order to ensure mutual benefits. Strategic Alliance of Aviation and Hospitality Players for Customer Benefit The Taj hotel group has tie-ups with various prominent international airlines such as British Airways, Virgin-Atlantic, Emirates, and Sri Lankan Airways and offers the FFP members of these airlines a range of special perks. The most recent of these tie-ups are ones with Singapore Airlines’ Kris Flyer programme and Delta Airlines’ Sky Miles programme. Initially, the members earn anywhere between 250 and 500 miles on their respective frequent flyer programme, with each stay at a participating Taj Hotel. The miles earned vary according to the hotel they stay in. Besides reward miles, these programs also give special discounts (e.g. discounts on room tariffs), room upgrades and other value added services at the hotel. Jet Airways Mileage programme is linked with Leela Hotels enabling its frequent flyers to earn a specific number of miles every time they stay at the hotel and fulfil pre-determined qualifying criteria. Some of the other benefits that are offered to members are early check-in at 9 am and a late check-out at 6 pm, no additional charges for double occupancy, and complimentary use of steam, sauna and jacuzzi in the Health Club. The members can get a room upgrade as well, subject to availability of rooms. Leela Hotels has also tied up with Singapore Airlines’ PPS Club, where members are entitled to a late check-out at 6 pm at no extra charge and free internet usage. The hotel also offers the FFP members of Sahara, Jet Airways, and Indian Airlines air tickets and three-night stays at The Leela, Goa. Air Sahara designed a Holiday plan (twin sharing) for its FFP members and tied-up with hotels in Goa. The packages were inclusive of air fare and the options differed on the basis of prices determined as per the type of property and the number of days opted for. The ‘Stars & Skies’ business plan provided a privilege of one-night stay to its members complimentary or at nominal rates. Business class fliers got one night complimentary stay at all hotels except Oberoi properties. (Contd.)

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(Contd.) Stays at a broad range of hotels in the metros were offered to economy and business travellers who could avail this facility either free or by paying a nominal amount between Rs 500 and Rs 2,500 depending on the desired hotel. The programme membership was free of cost and members could avail free rooms at participating properties with even 800 points.

A common problem encountered by these airlines is that all members of their frequent flyer programmes are not equally profitable. Many new recruits to these programmes do not even bother to fly with the airline whose programme they are a member of. The airline’s profitability declines due to such inactive members as they do not offset the cost of their acquisition. Apart from acquisition cost, the cost of serving these customers also tends to be high as they generate little or no revenue. An important rule of customer loyalty is to retain the profitably loyal customers and let the unprofitable ones go with a positive image of the organisation. Trident Loyalty System introduced an innovative amalgamation of strategy and technology to solve the problems of unprofitable memberships. Under this programme, only active flyers were selected and targeted for frequent flyer rewards. With such system of mining the database for active customers of the airline in place, managing the frequent flyer programme became easier for the company. This system facilitated segmenting, targeting, and enrolling the customers on the basis of their ticket type (i.e. premium, full-fare economy, or discounted economy). Due to this system, airlines: ∑ Save around 40 per cent of acquisition cost per active member. ∑ Generate incremental advertising revenue and in-flight merchandise sales. ∑ Deliver a personalised and magnetically encoded membership card with a welcome pack to new members within two to three minutes of starting the enrolment process. ∑ Recruit new members while retaining the existing members. An extension of FFPs are the co-branded credit cards offered by almost all major airlines. Some of these cards are associated with Diners Club or American Express. However, low cost carriers in India have been refraining from offering any sort of loyalty programmes. These airlines bank upon their cost advantage and put across discount schemes for the customers at different points in time. The following section discusses customer loyalty practices among leading airline operators of the country.

1. JET AIRWAYS Jet Airways is the oldest private carrier in Indian skies. Background: Jet Airways was incorporated on April 1, 1992 as a private company with limited liability under the Companies Act. It began its operations as an Air Taxi Operator on May 5, 1993 with a fleet of four leased Boeing 737 aircraft. It was granted scheduled airline status on January 14, 1995. Jet Airways became a deemed public company on July 1, 1996. On January 19, 2001, Jet Airways was reconverted into a private company. Jet Airways became a public company on December 28, 2004.

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Important Milestones: 2004: ∑ South African Airways tied up with Jet Airways. ∑ Jet Airways formed pact with Hertz India to offer new services. ∑ Jet Air announced launch of the ‘check fares’ scheme. 2005: ∑ Jet Airways Limited filed its draft Red Herring Prospectus with the Securities and Exchange Board of India (SEBI) to enter the capital market with its initial public offering. ∑ The price band of Jet Airways’ IPO was fixed between Rs 950 and Rs 1,125. The issue opened for bids on February 18 and closed on February 24. The total offer was for 1,72,66,801 equity shares of Rs 10 each for cash at a premium to be decided through a book-building process. ∑ Jet Airways IPO was subscribed 4.25 times on the first day of the offer. By 7:50 pm, a total of 7.32 crore bids were received on the first day. FIIs accounted for 69.93 per cent of the total issue and mutual funds accounted for 28.69 per cent of the total. Insurance companies accounted for 0.61 per cent total bids and FIs for 0.36 per cent. ∑ Jet Airways signed a lease agreement with South African Airways. ∑ Jet Airways launched its first inter-continental flight by linking Mumbai with London Heathrow by a non-stop day flight on May 23, 2005. ∑ Jet Airways executed a purchase agreement with The Boeing Company, USA. ∑ Jet Airways introduced an in-flight safety manual in Braille. ∑ Jet Airways inked a pact with Gulf Air. ∑ Jet Airways won Avaya GlobalConnect Customer Responsiveness Award. 2006: ∑ Jet Airways signed a special code sharing agreement (SPA) with American Airlines, the world’s largest carrier, for India-US flights. ∑ Jet Airways signed a contract with CAE for Boeing 777 and Airbus A330 simulators. ∑ Jet Airways won three Avion global awards for in-flight entertainment. 2007: ∑ Jet Airways signed the Memorandum of Understanding (MoU) with Lufthansa Technik AG, Germany, for A330/B777 Component Works, Personnel Assignment Services, and Maintenance Management Services. ∑ Jet Airways inked $238-million aircraft lease agreement. ∑ Jet Airways announced the introduction of its first flight from Chennai to Toronto, via its hub in Brussels. ∑ Jet Airways signed an MoU with Lufthansa Technik AG, Germany. ∑ Jet Airways won the “Most Innovative Product Launch” Award for its ‘First Class’ Suites on board its Boeing 777-300ER. 2008: ∑ Jet Airways launched daily direct flights between Mumbai and Bangkok with effect from May 14. The air carrier already operated daily services to Bangkok from Delhi and Kolkata respectively.

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∑ Jet Airways won the 2008 Galileo Express Travelworld ‘Best Domestic Full Service Airline’ Award for the sixth year in a row. ∑ Jet Airways won the “Best Cargo Airline of Central Asia” Award. 2009: ∑ Jet Airways introduced “Jet Airways Konnect,” a new All Economy No-Frills service. Customer Loyalty Practices of Jet Airways: Being the first and the biggest full carrier private operator in the country, Jet Airways started offering much-needed recognition to its customers and assigned due value to them. To lure customers of then market leader, Indian Airlines, they initiated several customer friendly measures and customer loyalty practices. Some of their customer loyalty development initiatives are as follows: Jet Privilege

1. 2. 3. 4. 5.

Blue (entry level) Blue + (casual) Silver (one-time flier) Gold (frequent flier) Platinum (more frequent flier)

Contrary to the general practice in the Indian aviation industry that involves reviewing the customer travel frequency over a fixed period and allocating points to be redeemed in the following year, the Dynamic Tier Review system was designed as a multiple criteria-based tier assessment system that enabled the members quicker tier upgrades.

Data pertaining to a customer’s regularity or volume of travel was constantly tracked and customers were segmented into one of the five tiers on the basis of information thus obtained. Customers like to be recognised and this programme employed the recognition system very well. The Dynamic Tier Review System: A tier review system was developed with the aim of providing more flexibility to passengers to use their benefits. Contrary to the general practice in the Indian aviation industry that involves reviewing the customer travel frequency over a fixed period and allocating points to be redeemed in the following year, the Dynamic Tier Review system was designed as a multiple criteria-based tier assessment system that enabled the members quicker tier upgrades. At the start of the programme, Jet Privilege members were required to earn a fixed number of Jet Airways miles within a financial year. The system automatically reviewed tier activities for the previous 12 months on a daily basis and ensured that with each calendar date, the timeframe moved a day ahead. A member could be upgraded to the next tier within a period of six months if he met the applicable criteria within a shorter period of time due to frequent travel. This system was primarily meant for business travellers and took the possibility of job change and relocation into consideration. In order to give greater robustness to the programme, Jet Airways formulated a system to reward customers on the basis of their travel plans instead of time duration. Without altering the base structure of the loyalty programme, earn and burn miles for award tickets was introduced. Jet Airways boasts of a redemption rate as high as 80 to 85 per cent. The reward process was further modified to make the process of earning and redeeming points easier and faster for customers by introducing–

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∑ an easy online system, and ∑ addition of several partnerships The online system fostered greater transparency that led to trust into the programme. In a series of changes to enhance the appeal of the programme, a record locator or tracking system was introduced that made points management easier for customers. On the basis of suggestions provided by customers, the company decided to offer redemption inventory via tie-ins with other airlines, banks, hotels and restaurants, retail outlets and even with some publishing houses. The underlying notion was to enable the customers to earn more Jet Privilege miles. The company formed strategic alliances with some of the biggest airlines in almost all the important markets of the world. It also introduced a co-branded credit card with Citibank that offered a customer frequent-flyer points every time the card was used. With almost 60 brands as partners and many more in the pipeline, Jet Airways is constantly looking for ways to make its customer loyalty programme more effective and lucrative for the customers. In an attempt to lure the next-generation customers, the company is initiating a mobile interface using which customers will be able to check their loyalty point account and even redeem those points using a simple mobile app. The programme is intended to win the trust of its customers, thereby making them loyal to Jet Airways. The company realises that customer relationships boost the brand value and ensure repeat buying, which is difficult to achieve in a fiercely competitive industry.

2. GO AIRLINES India’s renowned business house, the Wadia Group, has been one of the most prominent faces of corporate India for over 116 years. Today, the Group is broadly diversified into several growing sectors covering aviation, textiles, chemicals, petrochemicals, plantations, foods, electronics, light engineering, health, laminates, real estate and consultancy. The Group companies have consistently emerged as market leaders in every field they have entered. Over the years, the Wadia Group has developed an enviable record of successfully managing diverse technologies. Brands like Britannia and Bombay Dyeing earned it an entry into Indian homes with the reputation of a trustworthy household brand. The Group forayed into the aviation industry with Go Airlines (India) Ltd. The airline offers services under the brand GoAir. It launched its operations in November 2005. Primarily a low-fare carrier, the business goal of the company was to commoditise air travel by offering airline seats at marginal premium to train fares across India. The airline currently has operations across 22 destinations, with over 100 daily flights and approximately 707 weekly flights.

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The principal values underlying GoAir’s business model are “punctuality, affordability and convenience.” It has formed alliance with Radixx International, a leading technology provider of automated aviation and travel related software solutions, for assistance in using its Air Enterprise. GoAir seeks to attain superior process efficiency, thereby helping its passengers to save a great deal of time through adoption of such technology solutions. GoAir claims to be recording the Highest Load factors in the industry consistently since January 2007. It has been recording an average load factor of 86 per cent achieved through a balanced mix of good on-time performance and consistent quality of customer service coupled with smart fares. The GoAir route network covers prominent business metropolis as well as key leisure destinations across the Indian subcontinent. The company is currently operating in cities like Ahmedabad, Bagdogra, Bengaluru, Chandigarh, Chennai, Delhi, Goa, Guwahati, Jaipur, Jammu, Kochi, Kolkata, Leh, Lucknow, Mumbai, Nagpur, Nanded, Patna, Port Blair, Pune, Ranchi and Srinagar. Such a wide coverage of business as well as leisure destinations enables the company to ensure a smart value-for-money option for both business and leisure travellers, with maintaining utmost care for safety and service factors. GoAir based its distribution network on extensive research data and a thorough appraisal of the available mediums. The airline brought out an array of options designed to ensure easy accessibility of tickets for passengers. It provides convenient online booking options on its web site www.GoAir.in, where tickets can be booked by a passenger or his associate on a 24x7 basis. The company provides an offline (GoTravel Agents or GoCallCentre) facility of booking tickets as well. Passengers who do not have a credit or debit card or access to a Web Networked Computer can book tickets from other distribution mediums, including airport counters. GoAir is positioned as ‘the Smart People’s Airline.’ Its captivating theme, ‘Fly Smart’ is aimed at offering passengers a consistent, quality-assured and time-efficient service through ‘pocketfriendly’ fares. The airline uses the state-of-the-art Airbus A320 aircraft fleet. GoAir is based on the ‘punctuality, affordability, and convenience’ business model. The adoption of such technology solutions such as Air Enterprise enables GoAir to achieve superior process efficiency, thereby helping transfer a greater portion of time savings to its passengers. The Vision “Go Airlines strives to maintain and enhance passenger’s perception of its services, and in doing so will consistently endeavour to improve on its quality and reliability of its operations.” The Mission “To provide safe, secure and efficient transportation at all times with attention to essential details that uniquely differentiates our services, thus leading to strengthening and maintaining our position in the market.” Customer Loyalty Practices of Go Airlines Go Club is Go Air’s initiative to achieve and maintain the loyalty of its customers. The membership for this programme is free for GoAir passengers. The salient features of Go Club are as follows: ∑ Point accumulation starts as soon as the customer gets registered with Go Club. ∑ Every point is worth a rupee. ∑ Customers earn voucher codes that can be used to get discounts on a passenger’s next flight booking with GoAir. ∑ The minimum voucher level has been kept at only Rs 250.

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∑ The reward points are valid for one year from the date of joining. ∑ Customers get an alert a month prior to expiration of the validity. ∑ Customers earn birthday vouchers with a validity of two weeks, that is, one week before and after the birthday. The benefits that are offered to the members are listed as follows: ∑ Reward points that can be redeemed to gain access to GoAir Lounges for exclusive members across prominent cities and holiday destinations in India. ∑ Voucher codes that can be redeemed on the GoAir website. ∑ Get Business upgrades with GoBusiness and relish the experience of extra leg space, free in-flight meals and extra baggage allowance with your business class ticket. The Go Club programme boasts of hassle-free redemption and various flyer friendly facilities such as: ∑ Customers can get GoBusiness upgrade within six months of their enrolment into the programme. ∑ They can redeem their reward points to get free access to the airline’s modern GoAir lounges spread across major cities in India. ∑ Customers receive discount vouchers on GoAir partner network that includes top consumer brands such as Domino’s Pizza, Baskin & Robbins, VLCC, and Ferns & Petals. ∑ The vouchers are valid for six months.

3. KINGFISHER AIRLINES Kingfisher Airlines Ltd was the largest charter aviation company in India. The company was primarily engaged in commercial passenger airline business as well as private helicopter and airplane chartering services in India. Kingfisher Airlines Ltd was incorporated on June 15, 1995 as a private limited company with the name Deccan Aviation. The company was promoted by G R Gopinath, K J Samuel, and Vishnu Singh Rawal. In January 2005, the company was converted into a public limited company. In September 1997, the company opened its first base at Jakkur and launched its first helicopter. In June 1998, the company opened its second base in Hyderabad and commenced offshore flying operations in December 1998. In June 2001, the company introduced its first fixed wing aircraft and in November, introduced the second fixed aircraft. In August 2003, the first set of Air Deccan flights took off from Bangalore to Hubli and Bangalore to Mangalore. In December 2003, the company incorporated Deccan Aviation (Lanka) Pvt. Ltd, which was a joint venture company. The company was established as a 52 per cent subsidiary company to undertake helicopter services and airline operations in Sri Lanka. In August 2004, the company introduced its first Airbus A 320. In March 2005, Air Deccan entered into a tie-up with Club HP. In June 27, 2005, Deccan Aviation (Lanka) Pvt Ltd ceased to be a subsidiary consequent to the transfer of 4 per cent of their share to Sri Lanka nationals. In March 2007, they forayed into the air cargo business through a wholly owned subsidiary. The company hived off charter services into a separate entity and also transferred the Maintenance and Repair Facility into a separate entity. The airline business of Kingfisher Airlines Ltd merged with the company with effect from April 1, 2008, and the name of the company was changed to Kingfisher Airlines Ltd. Kingfisher Airlines’ head office is situated in Andheri (East), Mumbai, and registered Office in UB City, Bangalore. Through its parent company United Breweries Group, Kingfisher Airlines has a 50 per cent stake in low-cost carrier Kingfisher Red. The airline had been facing financial issues

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for many years. Until December 2011, Kingfisher Airlines had the second largest share of India’s domestic air travel market. However, due to a severe financial crisis faced by the airline at the beginning of 2012, its market share plummeted to the lowest since April 2012. The airline had to shut down its operations when on October 20, 2012, the DGCA suspended its flying licence. This suspension was a result of failure to give an effective response to the show-cause notice issued by DGCA. However, the airline had locked out its employees for several days before this suspension. On 25 October 2012, the employees agreed to return to work. On June 7, 2010 Kingfisher had become a member elect of the Oneworld airline alliance when it signed a formal membership agreement. Kingfisher confirmed in December 2011 that it will join the Oneworld airline alliance on February 10, 2012. Kingfisher would have been the first Indian carrier to join one of the biggest airline alliances. However, on February 3, 2012, owing to its worsening financial situation and two days after the International Air Transport Association (IATA) clearing house suspended Kingfisher Airlines; the airlines participation to Oneworld was put on hold. Ever since the airline commenced operations in 2005, it had been reporting losses. After acquiring Air Deccan, Kingfisher suffered a loss of over 1,000 crore (US$182 million) for three consecutive years. By early 2012, the airline accumulated losses of over Rs 7,000 crore (US$ 1.27 billion) with half of its fleet grounded and several members of its staff on strike. Kingfisher’s position in top Indian airlines on the basis of market share had slipped to last from Number 2 because of the crisis. In December 2011, for the second time in two months, Kingfisher’s bank accounts were frozen by the Mumbai Income Tax department for non-payment of dues. Kingfisher Airlines owes 70 crore (US$12.74 million) to the service tax department. The Indian tax body also stated that Kingfisher Airlines is delinquent. As response, Vijay Mallya called on the CBDT chairman and offered to pay up the dues by December 13, 2011. Kingfisher bank accounts were unfrozen on December 14, 2011. Due to non-payment, several Kingfisher’s vendors had filed winding up petition with the High Court. In the past, Lufthansa Technik and Bharat Petroleum Corporation Limited (BPCL) had also filed winding up petition against Kingfisher Airlines. On January 1, 2013, the airline’s flying permit lapsed after it missed the deadline for renewal. Customer Loyalty Practices of Kingfisher Airlines Kingfisher Airlines christened its frequent flyer programme as King Club. Under this programme, members used to earn King Miles every time they transacted with Kingfisher or its partner airlines, hotels, car rental, finance and lifestyle businesses. Four distinct levels made up the structure of the scheme: Red, Silver, Gold, and Platinum. Members redeemed points for a number of schemes. Platinum, Gold, and Silver members were entitled access to the Kingfisher Lounge, priority checkin, excess baggage allowance, bonus miles, and three Kingfisher First upgrade vouchers for Gold members and five upgrade vouchers for Platinum members. Kingfisher Lounge Kingfisher Lounges were exclusively meant for Kingfisher First passengers, along with King Club Silver and King Club Gold members. Lounges were located at: ∑ ∑ ∑ ∑

Bangalore International Airport Chennai International Airport Chhatrapati Shivaji International Airport (Mumbai) Cochin International Airport (Kochi)

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∑ ∑ ∑ ∑ 13.3.

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Indira Gandhi International Airport (Delhi) London Heathrow Airport Netaji Subhash Chandra Bose International Airport (Kolkata) Rajiv Gandhi International Airport (Hyderabad) FINAL THOUGHTS

Almost every major airline in India offers a rewards system based upon points gained through flying with the airline. With almost similar designs and rewards, these programmes no longer serve as a point of differentiation in the industry. Customers are likely to remain loyal to the airline that assures them about safety, efficient, and friendly service and recognition of their preferences. Like other service industries, managing customer experience is immensely important for aviation companies to secure loyalty of their customers. Review Questions 1. Customer loyalty programmes in the aviation industry are known as Frequent Flyer programmes. Comment. 2. Indian skies are getting competitive and the real benefit has been to the customers in terms of superior service. Comment. 3. Classifying customers based on volume of business is discrimination that restricts customer growth. How and why? 4. The greater the growth of the aviation industry, the greater is the customer empowerment and the costly it becomes to retain customers. What is your opinion on this? Give reasons. 5. Comment on the customer-friendly initiatives of Indian Airlines and also assess the impact of these initiatives. 6. How do you assess the customer loyalty practices of Jet Airways? 7. No frills airlines have been extremely successful in India because of their no nonsense approach and focus on core customer requirements. How do you see the growth of these budget airlines in India and what is the future of this sector? 8. Does the growth of no frills airlines communicate that customer loyalty does not require pampering but doing what a company is supposed to do in the best possible manner? 9. What is role of DGCA in ensuring passenger service and safety? 10. Are the customer service requirements of domestic and international customers different? Answer with suitable reasons.

Project Assignments 1. Conduct a study of airline customers and find out what are the real requirements of airline passengers that would induce customer loyalty among them. 2. Making customers happy may not always work in the larger interest of the business if not planned properly. The customer initiatives require cost and inability to manage the cost factor properly might take the airline to doom. Conduct a study of Kingfisher Airlines and find out the reason why it landed up in trouble despite having the best of customer loyalty practices. As a customer relationship manager of Kingfisher Airline, would you give your initiatives a rethink? 3. Customer loyalty through customer service starts from booking of tickets to collection of baggage. Classify the point of customer interaction in the aviation industry and design a plan so that customer loyalty with your airline can be maximised.

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References 1. Arnesen, D., and C. Fleener (1997). The ethical dimensions of airline frequent flyer programmes. Business Horizons, 40 (1), 47-56. 2. Doganis, R (2006). The Airline Business, 2nd Ed., New York. Economist Intelligence Unit 2005, Business 2010 – Embracing the challenge of change, The Economist, London. 3. Kivetz, R and Simonson, I (2003). “The Idiosyncratic Fit Heuristic: Effort Advantage as a Determinant of Consumer Response to Loyalty Programmes.” Journal of Marketing Research, 40 (November), 454–67. 4. Liu, Y., & Yang, R. (2009). Competing loyalty programmes: Impacts of market saturation, market share and category expandability. Journal of Marketing, 73, 93–108. 5. Kearney, Terrence J. (1989). Frequent flyer programmes: A failure in competitive strategy. The Journal of Services Marketing, 3 (4), 49–60. 6. Kearney, Terrence J. (1990). Frequent flyer programmes: A failure. The Journal of Consumer Marketing, 7 (1), 31–42. 7. http://economictimes.indiatimes.com/jet-airways-(india)-ltd/infocompanyhistory/companyid-4374.cms visited on 28th January, 2013. 8. http://www.businesstravellerindia.com/200310/coverstory01.shtml visited on 28th January, 2013. 9. http://en.wikipedia.org/wiki/Kingfisher_Airlines#King_Club visited on 28th January, 2013. 10. http://www.indiainfoline.com/Markets/Company/Background/Company-Profile/Kingfisher-Airlines-Ltd/532747 visited on 28th January, 2013. 11. http://www.goair.in/aboutus.aspx visited on 28th January, 2013. 12. http://www.goair.in/goclubaboutus.aspx visited on 28th January, 2013.

14

Customer Loyalty in the Banking Industry

He profits most, who serves the best. Arthur F. Sheldon

This chapter is aimed at providing an insight into: v General status of Customer Loyalty Practices in the Banking Industry v Customer Loyalty Cases of the following major players of the Banking Industry ∑ State Bank of India ∑ Punjab National Bank ∑ Bank of Baroda ∑ ICICI Bank

14.1.

INTRODUCTION

The health of an economy depends a lot on the robustness of its banking system. As the prime movers of economic life, banks occupy a significant place in the economy of every nation. They provide a major source of financial intermediation and their deposit liabilities represent the bulk of a nation’s money stock. Without an efficient banking system, both the borrowers and the savers lose. Japan is such an example, which is caught in its third recession since 1990 and unemployment is at a record high. A large part of it is due to the mess its banking system is in. In the late eighties when liberalisation gradually started becoming a global phenomenon, many countries both allowed and promoted the development of globalised finance. Many decisions taken by the authorities amounted to post acquiescence to the changed circumstances. Political choices were then made within the context of the power of business to avoid the control of state policy hurdles and to move to preferred locations. The ability of firms to evade regulations and avoid controls left countries with little choice but to liberalise. The collapse of the Bretton Woods system gradually ushered in an era of floating exchange rates in most countries. The abolition of capital control by several countries in Europe and elsewhere resulted in the development of cross border trading. Development in technology made it possible for banks to buy, sell, lend, or borrow globally on a real time basis. They could undertake transactions that virtually impacted their Profit and Loss positions. Even the distinction between banking and non-banking companies got blurred and many regulatory measures became redundant. In early

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nineties, the Indian government opened up the industry to new private sector entrants. This move spurred the start of new competition among Indian banks. From a centralised control over interest rates, the RBI ushered in a regime where interest rates were moving in tandem with market forces, allowing banks to offer flexible rates, depending on their perception of the borrowers. Liberalisation in the banking industry has created several options for customers. As a result, the concept of “customer loyalty” was severely hit. These options made customers more demanding and empowered them to ask for better services and treatment. This shift in psychology of investors and general customers forced policy makers of banks assign due importance to marketing decisions and realize the importance of customer retention and infuse loyalty among them. 14.2.

EVOLUTION OF BANKING IN INDIA

Banking in India originated in the first decade of 18th century with the General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India which was established as “The Bank of Bengal” in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, due to which the banking activity took roots there and prospered. The first fully Indian owned bank was Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank in 1895 in Lahore and Bank of India in 1906 in Mumbai – both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India’s independence in 1947, the Reserve Bank was nationalised and given broader powers. The Indian Banking industry can be discussed in three parts: ∑ Pre-independence era (1786–1947) ∑ Post-independence era (1947–1991) ∑ Post-Liberalisation (1991 onwards) 14.2.1. Pre-independence era (1786–1947) At the end of late-18th century, there were hardly any banks in India in the modern sense. At the time of the American Civil War, a void was created as the supply of cotton to Lancashire stopped from the US. Some banks were opened at that time that functioned as entities to finance industry, including speculative trades in cotton. With large exposure to speculative ventures, most banks that opened in India during that period could not survive and failed. Depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for the next several decades until the beginning of the 20th century. At the beginning of the 20th century, the Indian economy was passing through a relative period of stability. Around five decades had lapsed since India’s First war of Independence, and the social, industrial and other infrastructure had developed. At that time, there were small banks operated by Indians, and most of them were owned and operated by particular communities. Banking in India

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was controlled and dominated by the presidency banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank of Madras, which later on merged to form the Imperial Bank of India. Upon India’s independence, Imperial Bank of India was renamed the State Bank of India. A few exchange banks and a number of Indian joint stock banks also existed at that time. All these banks operated in different segments of the economy. The presidency banks were like central banks and discharged most functions of central banks. They were established under charters from the British East India Company. The exchange banks, mostly owned by the Europeans, concentrated on financing of foreign trade. Indian joint stock banks were generally undercapitalised and lacked the experience and maturity to compete with the presidency banks and exchange banks. There was potential for many new banks as the economy was growing. 14.2.2. Post-independence era (1947–1991) The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, and banking activities remained paralysed for months. India’s independence marked the end of the Laissez-faire regime for Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included the following: In 1948, the Reserve Bank of India, India’s central banking authority, was nationalised, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) “to regulate, control, and inspect” the banks in India. The Banking Regulation Act also provided that no new bank or branch of an existing bank may be opened without a licence from the RBI, and no two banks could have common directors. However, despite these provisions, control, and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on July 19, 1969. Nationalisation By the year 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it emerged as a large employer, and a debate ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled “Stray thoughts on Bank Nationalisation.” The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a “masterstroke of political sagacity.” Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on August 9, 1969.

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14.2.3. Post Liberalisation (1991 onwards) In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalisation and gave licences to a small number of private banks (new generation tech-savvy banks), which included banks such as Global Trust Bank (the first of such new generation banks to be set up) which later amalgamated with Oriental Bank of Commerce, UTI Bank (now renamed as Axis Bank), ICICI Bank, and HDFC Bank. This move, along with rapid growth in the Indian economy, kick-started the banking sector in India, which has seen tremendous growth with strong contribution from all the three sectors of banks, namely, government banks, private banks, and foreign banks. The next stage for Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all foreign investors in banks might be given voting rights that could exceed the cap of 10%, which now stands at 49% with some restrictions. The new policy changed the banking sector in India completely. Till this time, bankers were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. 14.3.

CUSTOMER LOYALTY PRACTICES IN THE INDIAN BANKING INDUSTRY

A number of changes have taken place in the Indian banking industry after liberalisation and entry of new private banks. These changes have largely manifested into intense competition in the banking space. Customer loyalty, being considered the most effective strategy against competition, attracted attention of bankers as well, and most banks began prioritising the needs of customers. Banks today unanimously focus on providing superior level of customer service, which shows the importance they place on customers and their loyalty towards the bank. Despite recognising the significance of creating and strengthening customer loyalty, there exists a lack of clarity into the objectives of the loyalty rewards programmes of banks. These programmes can be segregated into three categories: ∑ Points Programmes encourage customers to continue using a particular product of the bank. ∑ Relationship Packages offer a bank’s various products clubbed together to customers at discounts or special prices. ∑ Recognition Programmes are usually time based and acknowledge the longevity of a bank’s relationship with its customers by wishing them on their personal milestones such as birthdays or anniversaries. Though simple, such programmes often remain inflexible as far as design is concerned since they are tailor-made for masses and carry small scope for customisation. Loyalty initiatives where the customers can redeem points from a catalogue featuring a broad range of products bring in some customisation into a bank’s loyalty programmes. Since there is high competition for loyalty awards in customer dominated markets, banks often find it difficult to design unique programmes and fund enticing rewards that can differentiate them from their banking competitors and merchants as well. The following sections describe the loyalty practices of the country’s two major banks and draw a general picture of loyalty initiatives in the Indian banking industry.

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14.3.1. THE PUNJAB NATIONAL BANK Established in 1895 at Lahore, undivided India, the Punjab National Bank (PNB) has the distinction of being the first Indian bank to have been started solely with Indian capital. The bank was nationalised in July 1969 along with 13 other banks. From its modest beginning, the bank has grown in size and stature to become a front-line banking institution in India. Punjab National Bank is a professionally managed bank with a successful track record of over 110 years. PNB has one of the largest branch network in India – 4,525 offices including 432 extension counters spread throughout the country. Its strategic business area covers the large IndoGangetic belt and the metropolitan centres. ∑ It has strong correspondent banking relationships with more than 217 international banks of the world. More than 50 renowned international banks maintain their Rupee Accounts with PNB. It has well equipped dealing rooms; 20 different foreign currency accounts are maintained at major centres all over the globe. ∑ PNB has rupee drawing arrangements with M/s UAE Exchange Centre, UAE, M/s Al Fardan Exchange Co. Doha, Qatar, M/s Bahrain Exchange Co, Kuwait, M/s Bahrain Finance Co, Bahrain, M/s Thomas Cook Al Rostamani Exchange Co. Dubai, UAE, and M/s Musandam Exchange, Ruwi, Sultanate of Oman. The Profile With over 37 million satisfied customers and over 4,589 offices, PNB continues to retain its leadership position among nationalised banks. The bank enjoys strong fundamentals, large franchise value, and good brand image. Besides being ranked as one of India’s top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart from offering banking products, the bank has also entered the credit card and debit card business; bullion business; insurance business; gold coins and asset management business. Since its humble beginning in 1895 with the distinction of being the first Indian bank to be started with Indian capital, PNB has achieved significant growth in business, which at the end of March 2008 amounted to Rs 2,85,959 crore. Today, with assets of more than Rs 1,99,000 crore, PNB is ranked as the third largest bank in the country (after SBI and ICICI Bank) and has the second largest network of branches. During FY 2007–08, with 43% share of low cost deposits; the bank achieved a net profit of Rs 2,049 crore, maintaining its number one position amongst its peers. The bank’s Return on Assets at 1.15% was also the highest. During FY 2007–08, its ratio of priority sector credit to net bank credit at 44.11% and agriculture credit to net bank credit at 18.94% was also higher than the respective national goals of 40% and 18%. Amongst Top 1000 Banks in the World, ‘The Banker’ listed PNB at 255th place. Leading international credit rating index provider, Standard & Poor’s (2006) listed PNB amongst the 300 world companies and seven Indian companies that are expected to emerge as challengers to the world’s leading blue chip companies.

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Customer Loyalty Practices in Punjab National Bank 1. Common Practices followed by the Branches: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv.

Display of business hours. Render courteous services. Attend all the customers present in the banking hall at the close of business hours. Provide separate ‘Enquiry’ or ‘May I help You’ counter at large branches. Offer nomination facility to all deposit accounts (i.e. account opened in individual capacity) and all safe deposit locker hirers (individual hirers). Display interest rates for various deposit schemes from time to time. Notify changes in interest rates on advances. Provide details of various deposit schemes/services of the bank. Issues Demand Drafts, Pay Orders and other services. Display Time-Norms for various banking transactions. Pay interest for delayed credit of outstation cheques, as advised by RBI. Accord immediate credit in respect of outstation and local cheques up to a specified limit subject to certain conditions, as advised by RBI. Provide complaint/suggestion box in the branch premises. Display address of Regional/Zonal and Central Offices as well as Nodal Officer dealing with customer grievances or complaints.

2. Time Norms for Various Banking Transactions: Punjab National Bank has been a pioneer in setting time frames for most customer related transactions. Interestingly, all this information is not just restricted to bank employees but also shared with customers. This has been a unique attempt by the bank towards customer empowerment and also expresses its confidence in the system it has put in place for customer service. i. For Cash Payment (a) Through Teller (b) Through Cashier ii. Receipt of cash iii. For issuance of demand draft/ traveller cheques/fixed deposit receipt iv. Payment of demand drafts v. Payment of fixed deposit receipts vi. Opening of an account vii. Retirement of bills viii. Updating pass books ix. Statements of accounts x. Collection of Local Cheques Outstation Cheques

3 to 8 minutes 8 to 15 minutes 10 to 20 minutes 15 to 25 minutes 10 to 20 minutes 15 to 20 minutes 20 to 25 minutes 20 to 30 minutes 5 to 15 minutes Within 7 days 2 to 4 days 10 to 14 days

3. Customised Products/Services: Punjab National Bank offers several customised services. Some of them are as follows: (A) Personal Loan Scheme for Pensioners: PNB has introduced special loan schemes for senior citizens with low interest rates such as Personal Loan Scheme for Pensioners to meet

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immediate requirements such as medical expenses. The scheme helps in realising the vision of serving people for a better quality of life. (B) A few other attractions for Senior Citizens: ∑ 0.5% higher rate of interest on term deposits. ∑ Free remittance of retirement dues to any branch of PNB at the native place of a senior citizen or to the place of stay after retirement. ∑ Free collection of retirement dues in respect of retired government/public/private sector employees. ∑ Free collection of cheques. ∑ 50% concession on all types of remittances. ∑ Immediate credit of outstation cheques up to Rs 15,000. ∑ Free discount/collection of pension bills/cheques of pensioners retired from central/state government and Armed Forces. ∑ Free remittances; free cheque books and collection/discount of pension bills/cheques for freedom fighter, their widows/widowers. ∑ New attractive pass books containing a list of facilities available to Senior Citizens. ∑ Free nomination facility. (C) Women: Punjab National Bank provides the independent women of today a spectrum of financial facilities. The credit facilities provided by the bank, exclusively to women for their empowerment are as follows: (i) Finance for Women (including housewives): PNB enables housewives and other women to supplement family incomes and to use their spare time profitably through this scheme by taking up projects as artisans, or under village and cottage industries, SSI, small business and retail trade. Industrial projects requiring higher assistance may also be considered under the scheme of financing small-scale industries. Any woman/housewife, 18 years of age and above, living at a place for more than six months, who has not been a member of any industrial co-operative society and not indebted to any cooperative or state agency can avail of the loan. The term loan/composite term loan is adjusted along with interest in 36 monthly instalments starting three to six months from the date of availing the loan depending upon generation of surplus. The borrower is required to open a savings fund account with the bank in which she must deposit net income every fortnight after spending the required amount needed to meet the working/living expenses. She shall also undertake to maintain such balance in her savings fund account at the end of each month as would enable the bank to debit the said account with monthly instalment towards adjustment of the loan. (ii) PNB Mahila Sashaktikaran Abhiyan (PNB Women Empowerment Campaign): To give necessary momentum of credit flow to women, PNB extends the following relaxations in advances to women beneficiaries irrespective of the scheme and quantum of loan to boost credit flow to women as a part of PNB Mahila Sashaktikaran Abhiyan: ∑ ∑ ∑ ∑

Reduction in interest rate by 0.25% in Non-Priority Sector advances Reduction in interest rate by 0.50% p.a. in Priority Sector advances. Margin is reduced to 10%, wherever the margin requirement is more than 10%. Waiver of 50% upfront fee (wherever applicable).

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(D) Students: For students, the bank offers the following customised schemes: (i) Education Loan – Vidyalakshyapurti: The scheme aims at providing financial assistance to deserving/meritorious students pursuing higher education in India or abroad through graduation courses: B.A., B.Com., B.Sc. etc; Post-Graduation courses: Masters and Ph.D; Professional courses: Engineering, Medical, Agriculture, Veterinary, Law, Dental, Management, Computers, Computer Certificate courses of reputed institutes accredited to Department of Electronics or institutes affiliated to major Universities; courses like ICWA, C.A., CFA, etc., courses conducted by IIM, IIT, IISc, XLRI, NIFT; regular Diploma/Degree courses conducted by Colleges/Universities approved by UGC/Government/AICTE/AIBMS/ICMR; regular Degree/Diploma courses like Aeronautics, Pilot training, and Shipping approved by DGCA, courses offered by national institutes and other reputed private institutes. Interest is charged monthly on simple basis during the repayment holiday/moratorium period and concession of 1% in rate of interest is allowed, provided the same is serviced regularly during the study period. Punjab National Bank has also tied up with Kotak Mahindra Insurance to provide life insurance cover for student borrowers. (ii) Additional Benefits: ∑ Reimbursement of related expenses such as admission fee, monthly fee, boarding and lodging expenses in recognised boarding houses already incurred by way of loan taken from own sources (to meet the contingency) by the applicant, if claimed within three months of such payment and before consideration of the loan by the bank. ∑ Second time education loan can be sanctioned to the same student borrower for completion of the next higher course of study. (E) Professionals: PNB extends assistance to self-employed persons, firms, and joint ventures of such professional persons engaged in professions such as: Medical practitioners including dentists, chartered accountants, cost accountants, practicing company secretaries, who are not in regular employment of any employer, accredited journalists or cameramen who are freelancers, that is, not employed by a particular newspaper/magazine, lawyers or solicitors, engineers, architects, surveyors, construction contractors or management consultants or to a person trained in any other art or craft who holds either a degree or a diploma from any institution established, aided or recognised by Government or to a person who is considered by the bank as technically qualified or skilled in the field in which he is engaged. Loans under this scheme may be granted for the purpose of financing purchase of equipment used by the borrowers, business premises, and construction, making alterations or renovation of business premises/nursing homes or for working capital requirements in their professions. (F) Army Personnel/Ex-Serviceman: The Bank extends inter-alia the following concessions to various categories of “Defence/Ex-servicemen/Paramilitary Forces Personnel”: i. At par collection of Salary/Terminal Dues. ii. At par remittance to family up to Rs 5,000 once in a month. However, if the amount of remittance exceeds Rs. 5,000 but does not exceed Rs 10,000, 50% of the commission

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chargeable on total remittance amount will be recovered. Further, they may be allowed one time remittance for payment of school/college fee in a year. Postage and pocket expenses are to be recovered. 4. Grievance Redressal Policy: The current state of affairs in the banking industry places a lot of significance to remain competitive by providing superior customer service to achieve sustained business growth. Customer grievances are impossible to avoid in any business and they become more prominent in the banking industry due to the peculiar nature of banking services. Service industries must offer good customer service that could lead to better customer satisfaction. PNB accepts the importance of timely and efficient services not only for securing new customers but also to retain old ones. 5. Customer Loyalty Initiatives A. Customer Service Committee of the Board Customer Service Committee of the Board is primarily responsible for customer service offered to individual customers, both depositors and borrowers. This is a sub-committee of the Board that formulates the Comprehensive Deposit Policy, the product approval process, the annual survey of depositors’ satisfaction, triennial audit of such services and examines service issues for the borrowers. The committee also examines any other issues that might impact the quality of customer service. The committee is responsible for reviewing the performance of the Standing Committee on Customer Service. B. Standing Committee on Customer Service The Executive Director of the bank chairs the Standing Committee on Customer Service. Besides two to three senior executives of the bank, the committee recruits two or three reputed personalities to act as member representatives of the public. The committee performs the following functions: ∑ Evaluates feedback on quality of customer service received from various quarters: The committee reviews comments/feedback on customer service, carrying out commitments in the Code of Bank’s Commitments to Customers, and complaints related to non-compliance thereof. ∑ The committee also ensures that the bank complies with all regulatory instructions pertaining to customer service and takes necessary feedback from zonal/ regional managers/ functional heads. ∑ The committee also takes care of unresolved complaints or grievances referred to it by functional heads responsible for redressal and gives advice to rectify such situations. ∑ It quarterly reports to the Customer Service Committee of the Board. C. Nodal Officer and other designated officials to handle complaints and grievances ∑ Nodal Officer: PNB has appointed a Nodal Officer at the head office level who is responsible for customer service operations and complaint handling in the bank. Likewise, at the zonal/regional offices, respective zonal managers/regional managers are authorised to work as Nodal Officers responsible for the implementation of customer service and complaint handling in the branches under their administrative purview. The names, addresses, e-mail and contact numbers of Nodal Officers are available at the branches. ∑ Code Compliance Officer: The bank has adopted the BCSBI’s Code of Bank’s Commitments to Customers. To ensure implementation of this Code, the bank has designated a Principal

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Code Compliance Officer at the head office and a Code Compliance Officer at each of the controlling offices above the level of the branch, viz. zonal/regional offices. The names, addresses, e-mail and contact numbers of Code Compliance Officers are displayed at the branches. Complaints relating to non-compliance of the Code of Bank’s Commitments to Customers can be lodged with the Code Compliance Officers. 6. Resolution of Grievances: A Branch Manager is responsible to ensure that complaints or grievances pertaining to customer service are resolved by the branch. He is also liable to make sure that the customer is satisfied with the complaint handling procedure and its outcome and all complaints received at the branch are considered closed. In case the branch manager finds the complaints beyond his area of control, he refers them to the regional or zonal office for guidance. Similarly, if the regional or zonal office finds the problems too demanding to handle, they transfer them to the Nodal Officer at the head office. PNB believes that complaints pose an opportunity to improve the bank’s functioning and thus, the complaint received is examined from all possible perspectives. The bank sends an acknowledgement/response within one week from the date of receipt. Complaints that need some time for examination of issues involved are analysed in detail. The bank sends a final response or explanation of time taken within six weeks of receipt of the complaint. 7. Interaction with customers: Some of the complaints arise on account of lack of awareness amongst customers about the bank’s services. The bank accepts the importance of personal interaction between its staff and customers for understanding and meeting the needs, expectations, and grievances of the latter that also help the customers appreciate the banking services. In view of this, the following arrangements have been made: A. Personal Hearing: Every fortnight (next working day in case 15th is a Saturday/holiday/ closed day); the customer can meet the Branch Manager/ Regional Manager/Zonal Manager/Chairman and Managing Director in their office from 3 PM to 5 PM for redressal of his grievances or offering suggestions. B. Customer Service Committees: Customer Service Committees have been set up in all Branches/Regional/Zonal offices to look into the quality of customer service rendered and critically examine the feedback/suggestions for improvement in customer service. These committees meet once a month and customers are invited therein once a quarter. C. Customer Relations Programme: PNB also convenes Customer Relations Programmes twice a year at the zonal/regional level, where customers from different segments are invited and their grievances or suggestions are looked into. 8. Compensation Policy: The Compensation Policy of the bank is designed to cover areas relating to unauthorised debiting of account, delay in collection of cheques or other instruments, payment of cheques after acknowledging stop payment instructions, and remittances within India and abroad. The policy is based on the principles of transparency and fairness in treating customers. The objective of the policy is to establish a system, whereby the customer is reasonably compensated for the financial loss due to deficiency in service or an act of omission or commission directly attributable to the bank. ∑ The compensation is paid without the customer having to make a request. ∑ On receiving a request from any customer about compensation for delay, the incumbent in-charge ensures immediate action.

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∑ Incumbent in-charge has full powers to allow compensation. The record of all compensations paid is maintained for 20 years. ∑ The Standing Committee on Customer Service monitors the execution of the policy. ∑ Operation, Payments and Settlement Division is responsible for policy implementation and brings the issues before the Standing Committee on Customer Service. ∑ Inspection and Audit Division makes independent audit for compliance of the policy at the branch level. 14.3.2.

THE BANK OF BARODA

It has been a long and eventful journey of almost a century across 25 countries. Starting in 1908 from a small building in Baroda to its new high-rise and hi-tech Baroda Corporate Centre in Mumbai is a saga of vision, enterprise, financial prudence, and corporate governance. A visionary Maharaja’s uncanny prudence about the trade and enterprising prospect of India served as the foundation stone and on July 20, 1908, under the Companies Act of 1897, and with a paid up capital of Rs 10 lakh, Bank of Baroda (BoB) was established. The bank views its expansion as a “wisely orchestrated growth, involving corporate wisdom, social pride and the vision of helping others grow, and growing itself in turn.” The founder of the bank, Maharaja Sayajirao Gaekwad, foresaw that “a bank of this nature will prove a beneficial agency for lending, transmission, and deposit of money and will be a powerful factor in the development of art, industries and commerce of the State and adjoining territories.” The Ethics Eighty-seven Indian banks botched between 1913 and 1917. Bank of Baroda managed to beat the crisis with the help of truthful and careful leadership. The bank considers its financial integrity, business prudence, caution and an abiding care and concern for the hard earned savings of people as the cardinal philosophy that impacted every business decision over the 94 years of its existence. The bank credits its philosophy for sailing through the Great War years and the Great Depression. BoB has a clean record of ethical practices when big names came up during the revelation of the Stock Market scam and the Capital Market scam. Retail Business of Bank of Baroda The bank’s focus on retail continued as it has become the propelling region for achieving business growth. BoB launched numerous customer centric initiatives and special products to achieve sustained growth on both liabilities and assets side. The performance highlights for the year 2007–08 are as follows: The bank’s overall Retail Credit stood at Rs 16,892.32 crore as at the end of March 2008, registering a growth of Rs 2,573.31 crore over the previous year. The bank primarily focussed on maintaining and enhancing the quality and strived to create a healthy “Retail Loan” portfolio. Therefore, Baroda Car Loan and mortgage-based products viz. Baroda Home Loan, Baroda Traders Loan, and Baroda Advance against Property were highlighted during this period. In order to attract youth, Baroda Education Loan also received special emphasis from the bank during the year.

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Home Loans for the bank increased by Rs 1,195.88 crore during the year, registering a growth rate of 19.66% over March 2007. Traders Loan, Advances against Mortgages, Education Loans, and Car Loans achieved a spectacular growth of 39.35%, 56.06%, 35.59% and 37.61% respectively during the year ended March 2008. BoB regularly reviews the norms and features of all existing products and modifies, wherever required, to meet the changing needs of the customers. It also introduced new products during the year to cater to the different segments of its clientele. Customer Loyalty Practices in Bank of Baroda Customer satisfaction and loyalty have been the bank’s priority. BoB has introduced the following four Model Policy Documents, which are also available on the Bank’s website: a. b. c. d.

Model Policy on cheque collection Model Policy on compensation Model Policy on collection of dues and repossession of security Model Policy on grievance redressal mechanism

The bank has initiated measures for implementation of “Banking Codes & Standards Board of India” (BCSBI) and proactively implemented the Code for widespread awareness about the Code amongst its staff. BoB also distributed copies of the Code amongst the customers for their awareness and benefit. The Code has also been put up on the Bank’s website. The branches also distributed the “Guidance Note” on deposits and advances to new customers. The Customer Loyalty Practices of Bank of Baroda are as follows: 1. Customer Service Committee of the Board: Customer Service Committee of the Board: Formulation of a Comprehensive Deposit Policy to deal with the issues such as the treatment of a depositor’s account in the event of his death, the product approval process and the annual survey of depositor satisfaction and the triennial audit of such services. Examining loan policy, service issues related to individual borrowers and other possible issues pertaining to quality of customer service fall under the purview of this committee. It is also responsible for reviewing the operations of Standing Committee on Customer Service. 2. Standing Committee on Customer Service: Chaired by the Managing Director/Executive Director of the bank, the Standing Committee on Customer Service consists of two to three senior bank executives and another two to three prominent non-executives selected from the public to act as members. The committee’s functions are as follows: (a) To appraise the feedback about quality of customer service received from various quarters: The committee reviews comments related to feedback of customer service and implementation of commitments in the Code of Bank’s Commitments to Customers received from BCSBI. To ensure that all regulatory instructions for customer service are followed by the bank, the committee obtains required feedback from Zonal/Regional Managers/Functional Heads. (b) The committee is also responsible for the unresolved complaints or grievances transferred to it by the functional heads that are originally responsible for redressal and offering advice. (c) The complaints related to non-compliance of the Codes (of the Banking Codes and Standards Board of India) and remedial action taken by the bank are put up to the Standing Committee on Customer Services in their periodical meetings.

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(d) The committee is answerable to the Customer Service Committee of the board and submits a report on its performance on a quarterly basis. 3. Redressal of Complaints: Handling complaints and grievances is the responsibility of the Nodal Officer and other designated officials. “Customer Day” is observed at all the offices of the Bank across the organisation covering branches, Regional/Zonal Offices and Head Office, on the 15th of every month (next day, if 15th is a holiday or half day) to facilitate the customers in voicing their complaints or suggestions for better customer service. In case of complaints, the matter is first put up before the concerned Branch Manager for immediate redressal. The matter may be brought to the notice of the concerned Regional Manager/Zonal Manager if the customer is not satisfied with the redressal. The Regional Manager is nominated as a Nodal Officer liable for grievance handling in respect of the branches under his purview. However, if the complainant is still not satisfied, he can contact the bank’s Head Office with full details of the case where the Nodal Officer designated to deal with customer grievances will take care of the matter. In case of continued dissatisfaction, the last resort is to write to the Chairman and Managing Director of the Bank. In case the bank rejects the complaint or the complainant did not receive any reply within a period of one month after the bank received his complaint or the complainant is not satisfied, a complaint might be made to the Banking Ombudsman, whose name and address is displayed in the branches. The Banking Ombudsman scheme is also displayed on the website. The customer has full rights to register his complaint if he is not satisfied with the services provided by the bank. He can give his complaint in writing, orally, or over telephone/e-mail. 4. Resolution of Complaints: Resolution of complaints and grievances related to customer service of the branch is the responsibility of the Branch Manager as he is accountable for closure of all complaints that his branch receives without compromising on customer satisfaction. He is also responsible for providing alternatives for redressal in case the customer is dissatisfied with the measures taken at his level. If the manager fails to resolve the issue to the customer’s satisfaction, the branch manager can refer the matter to the Regional or Zonal Office for guidance, who, upon finding it to be beyond their purview, can refer the case to the Nodal Officer. To tackle the competition and achieve sustained business growth, providing excellent customer service has become a necessary component of the banking industry. Complaints and grievances are bound to arise in every organisation and if the organisation is engaged in delivering financial services such as banking, complaints are likely to be a part of its daily operations. Although delivering quality customer service is vital to secure customer satisfaction, the bank also pays a great deal of attention to customer service since it believes that prompt and efficient service is the prime tool of recruiting and retaining customers. The bank aims at reducing the number of complaints and grievances to a minimum by delivering adequate service and providing a review mechanism to guarantee redressal of customer complaints without delay. The review mechanism is designed to identify the weaknesses in product features or service delivery. The bank’s grievance redressal policy is based on the following principles: ∑ Fair treatment to everyone every time. ∑ The bank is committed to promptly address the complaints of customers with complete courtesy as it recognises the importance of treating its customers fairly in order to protect its corporate image from damage, thereby safeguarding its business prospects.

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∑ Customers receive clear information about the grievance handling procedure of the bank and their rights to receive alternate remedy if they remain dissatisfied even with the highest stage of the procedure. ∑ The bank treats all complaints efficiently and fairly as they can damage the bank’s reputation and business if handled otherwise. ∑ The bank’s staff is trained to work in good faith and keep prejudices at bay while dealing with the customers. 5. Timely Redressal: All complaints are acknowledged immediately on receipt. The bank endeavours to address the complaint within 21 days from the date of receipt and in some exceptional case, where it needs more time to take appropriate action to resolve the complaint, the bank communicates the same to the customer by sending an interim reply. Branch managers try to resolve the complaint within specified time frames. Every month-end, the Branch and Zonal Office send reports to the head office on actions taken in respect of complaints received. The bank takes complaints in the right spirit as it believes that complaints reveal weak areas in the bank’s operations and thus, analyses them from all possible point of views. 6. Communicating with customers: Bank of Baroda accepts that to understand a customer’s expectation/requirement/grievances, personal interaction should be initiated. It organises structured customer meets on a monthly basis to communicate with the customers and show them that the bank cares for them and values their feedback and suggestions for enhancing customer service. Often, customers experience dissatisfaction due to low awareness about banking services and norms. Such interactions educate the customers about banking services that enables them to appreciate the bank’s effort. The bank also obtains valuable input in the form of customer feedback that can be used to modify its product and services to match customer requirements. 7. Sensitising staff for grievance handling: BoB conducts training programmes for its staff to train and sensitise them about complaints and their resolution. The staff is instructed to deliver services with an open mind and a smile. The Nodal Officer ensures that the internal grievance handling mechanism is able to function smoothly and efficiently at all levels. He also assesses the training needs of the staff at various levels and gives his feedback to the HR Department. Some other loyalty initiatives are as follows: ∑ Customer Service Committee To strengthen corporate governance, Bank of Baroda has set up a Standing Committee on Procedures and Performance Audit on Customer Services that consists of four General Managers of the Bank and three other reputed public personalities. The Chairman or Managing Director of the Bank acts as the Chairman of the committee. The main focus of this committee is to identify the shortcomings in the banking services and to take care of the following: ® ® ® ® ®

Benchmark the current level of service Check progress periodically Improve the timeliness and quality Rationalise the processes by taking into account the technological developments Suggest suitable incentives to facilitate change on an ongoing basis

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The bank has also constituted a sub-committee of the Board, known as the ‘Customer Service Committee of the Board.’ The Committee has the following members: a. The Chairman and Managing Director b. Executive Directors c. One Director The sub-committee of the Board advises and implements innovative measures for improving the quality of customer services and enhancing the level of satisfaction in all the sections of the clientele. Besides these, the terms of reference of the committee are as follows: ∑ To supervise the operations of the Standing Committee on Procedure and Performance Audit on Public Services and also to ensure compliance with the recommendations of the Standing Committee on Customer Services. ∑ To review the status of the Awards which stay unimplemented for more than three months from the date of Awards and also to check the deficiency in service as observed by the Banking Ombudsman. ∑ To review the status of the number of deceased claims remaining pending/outstanding for settlement beyond 15 days pertaining to deceased depositors/locker hirers/depositor of safe custody articles. ∑ New Customised Products: The bank has been attempting to serve its customers through customised offerings. In order to offer basic banking services (such as issuance of drafts, remittance of funds, and other essential banking services) to individuals, the relevant service charges have also been altered keeping in mind the market situations and customer responses to the charges. Bank of Baroda has launched several customised products for its customers. ∑ Baroda Centenary Savings Account: This product was launched on the occasion of the bank’s centenary celebrations. This was an improved version of the existing Super Savings Account, with the following distinguishing features, and was introduced in all the CBS branches. – The default threshold limit for triggering auto sweep to term deposits was reduced to Rs 10,000 from Rs 20,000. This increased the yield for Centenary Savings Account holders. – Customers have been given the liberty to decide the amount of auto sweep subject to a minimum amount of Rs 5,000 and in multiples of Rs 1,000 thereafter, and the frequency of triggering auto sweep during a month. Thus, a wide choice was given to the customers to customise the product by selecting the product that suits their individual needs. ∑ Baroda Centenary Term Deposit: A new term deposit product was made available for a limited period offering a higher rate of interest. ∑ “Baroda Ashray” – Reverse Mortgage Loan product: In terms of guidelines circulated by the National Housing Bank (NHB), Baroda Ashray, a Reverse Mortgage Loan product was launched on the eve of the Annual Bankers’ Conference – Bancon, on November 26, 2007. The product provided loan to Senior Citizens against residential properties in their name or self-occupied properties.

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∑ Baroda Career Development: Economic reforms have opened up huge opportunities for young executives to take up challenging positions. Therefore, many working executives generally pursue Business Management courses. For catering to the financial needs of such executives, a special product known as Baroda Career Development was also launched. ∑ Baroda Traders Loan: A product meant for providing hassle-free credit to traders, it received a good response from the target segment. For enlarging the scope of the product, the credit limit ceiling was raised to Rs 2 crore. ∑ Similarly, a single rate of interest was introduced for Baroda Car Loan to make it more competitive. ® Structural Changes A. To fortify the Retail Credit Delivery System, the bank has opened Urban Retail Loan Factories (URLFs). B. Gen-Next Branch – Focussing the youth segment, the bank launched Gen-Next branch, a new format of branch banking for the youth and young IT professionals at Pune and Bangalore. The branches offer modern devices, pleasant ambience and customer friendly facilities to attract the younger lot of customers. Encouraged with the response, the bank plans to open more branches at other centres in the country. ® Other Initiatives: Bank of Baroda has launched several new initiatives towards superior customer satisfaction. Some of these are as follows: A. Technology Enabled Delivery Channels: Introduction of technology based delivery channels has increased the efficiency of operations and provided greater comfort to the customers along with superior customer experience. (i) Online Education Loan Application facility – To facilitate students in getting hassle-free loans for pursuing higher education, BoB has introduced an Online Education Loan Application Facility. This facility enables applicants to apply online and get in principle approval within 48 hours through the system. (ii) Baroda Easy Pay – This is an electronic bill presentment and payment service launched from June 4, 2007 to enable customers to pay their bills online. (iii) Promotion of Internet Banking – The bank aggressively promoted Baroda Connect, an e-Banking channel, during the year. The response from its retail customers has been very encouraging. (iv) Online booking of Railway Tickets – In pursuit of providing convenience to customers, the facility of online booking of Railway Tickets has been launched in collaboration with Indian Railway Catering and Tourism Corporation Limited. The bank’s customers can make online payment of their Railway Bookings through the bank’s gateway. B. Miscellaneous Business Initiatives and Strategies: The bank introduced various initiatives and strategies during 2007–08 to harness the emerging opportunities for rural/agricultural lending such as: (i) To augment the agriculture advances, the bank has conducted special campaigns, viz., Kharif campaign for crop loans and Investment Credit Campaign for disbursement of such loans.

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(ii) The bank organised 2,108 Village Level Credit Camps and disbursed Rs 1,293 crore to penetrate and capture the rural markets. BoB also conducted 30 Mega Credit Camps disbursing Rs 508.88 crore. (iii) The bank identified Thrust Branches across India to enhance agricultural lending. These Thrust Branches have achieved significant growth in their approach and objective. (iv) The bank formulated various area-specific schemes tailor made to the needs of local requirements, particularly in areas where there is a concentration of industries like Rice Mills, Cold Storages, and Poultry Units, etc. Suitable concessions in the rate of interest and other charges are allowed under these schemes to garner maximum business. (v) Towards effective use of technology in rural agricultural lending during 2007–08, biometric ATMs were installed in Gujarat and Uttar Pradesh. The bank initiated efforts to introduce IT-enabled smart card based technology. Currently, the bank has about 247 ATMs in rural/ semi-urban areas, 157 rural branches, and 452 semi-urban branches are under the Core Banking Solution. (vi) During its centenary year, the bank launched many other initiatives. Bank of Baroda adopted Dungarpur district (a district in Rajasthan, which is primarily a tribal district and one of the most backward districts in the country), for “Total Integrated Rural Development and 100% Financial Inclusion.” It must be noted that 100% Financial Inclusion in Dungarpur district has already been achieved. The bank now plans to provide financial assistance to 20,500 families with an outlay of Rs 54.50 crore under Dairy Development, High Value Crops, and Vegetable cultivation. Various other developmental activities are also being done under the project. (vii) The bank adopted 101 villages (101 “Baroda Centenary Year Villages”) for Total Integrated Development spread over three years and 100% Financial Inclusion. (viii) 42 Baroda Grameen Paramarsh Kendra (BGPK) – This was an initiative to help the rural community by providing credit counselling and other services like information on the prices of agricultural products and scientific farming. (ix) There is an exclusive institutional scheme for women entrepreneurs under the aegis of Baroda Swarojgar Vikas Sansthan. These are exclusive institutes for training the youth and imparting knowledge and skills required for self-employment ventures. (x) The bank has initiated various measures to achieve Financial Inclusion. BoB had adopted 500 villages for 100% Financial Inclusion and 100% Financial Inclusion has already been achieved in all these villages. The bank has also achieved 100% financial inclusion in Dungarpur District (Rajasthan), Nainital, Udamsinghnagar Districts (Uttarakhand). Dang, Dohad Panchmahal districts (Gujarat). Besides, the Bank of Baroda has achieved 100% Financial Inclusion in 8,160 villages in various districts identified by the State Level Bankers’ Committee (SLBC). (xi) The Business Facilitators’ Model has been implemented across the country to accelerate Financial Inclusion of the excluded segment as well as to augment the agriculture portfolio. The Business Facilitators will mainly canvass loan applications for the bank, for which the bank will pay them compensation. Individuals, NGOs, Farmers’ Clubs and SHGs are engaged as agents to improve the bank’s outreach in the rural and semi-urban areas. (xii) The bank has established a separate Microfinance Cell to exclusively deal with the Microfinance portfolio. The bank has also signed an MoU with CfMF (Centre for

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Microfinance) to focus on skill upgradation for Micro Finance activities for rural and agri business and formation of quality Farmers’ Clubs/Self Help Groups and providing special training to them through CfMF. C. Other Branch Level Management: Other branch level management is as follows: i. City Back Offices (CBOs): To relieve branches of cumbersome back office operations, 17 Service Branches and 21 Main Offices operate as per the City Back Office model and manage functions related to clearing and collection of all branches in the city. ii. Help Desks: A “24 ¥ 7 ¥ 365 Global Help Desk” functions at the Data Centre. The bank has also set up Local Help Desks (LHDs) at all zonal centres manned by trained personnel to handle day-to-day operational issues and these LHDs function from 8 am to 10 pm. All branches are connected to the Global Help Desk and Local Help Desks by VOIP phones. iii. Extended Banking Hours: The bank is the first among Public Sector Banks in India to introduce and implement extended working hours like 12-Hour Banking and 24-Hour Banking. ∑ 8 AM to 8 PM Banking: 8 a.m. to 8 p.m. services have been started in more than 510 branches in major cities in the country. ∑ 11 AM to 8 PM Banking: This flexi-timing service is introduced for the convenience of traders in branches in the market areas. ∑ 24 Hour Banking: A novel customer centric initiative, 24-hour banking has been introduced at nine metro branches in the country. ∑ Happy Hour Banking: This has been designed to encourage customers to avail certain services during lean business hours by providing them incentives, gifts as well as concessions in service charges. This facility is available from 5 p.m. to 8 p.m. at 24 hour banking branches and from 6 p.m. to 8 p.m. at 8 a.m. to 8 p.m. branches. 14.4.

FINAL THOUGHTS

The banking industry has undergone enormous changes largely characterised by increased competition and technological developments. Banks that cannot keep pace with these changes will be left behind. Irrespective of their ownership pattern, banks have realised this fact and have launched a major initiative towards customer friendly schemes, aimed at infusing customer loyalty among their customers, which is a must to counter competition. Review Questions 1. 2. 3. 4.

What is the structure of the modern banking industry in India? How and why have customers acquired centre stage in the modern economy? What is the significance of building loyalty in the banking industry? Public sector banks have picked up fast with their private sector counterparts in introducing customer services. Analyse this statement in light of the initiatives of the public sector banks. 5. State Bank of India is the market leader in the banking industry on the sheer strength of loyalty that it has been able to build with its customers. How far do you agree with this statement and why? 6. What are the factors responsible for building customer loyalty in the banking industry? 7. New private banks have been left with no choice but to gain customers by introducing customer

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friendly banking. Comment in light of customer friendly initiatives of private banks. 8. Technology has been an extremely important tool in building customer loyalty. Comment. 9. What is the role of an effective grievance handling mechanism in building customer loyalty in the banking industry? 10. What is the relationship between customer service and customer loyalty? Answer in reference to the banking industry.

Project Assignments 1. Assessing loyalty is of huge importance for the banking industry, especially in the wake of increased competition. As a manager of a new private bank, how would you assess customer loyalty of your customers? 2. Assume that you are the customer service manager of a public sector bank. In your opinion, what customer friendly schemes would be effective to counter competition from the new private banks which are extremely strong in technology and service innovation?

15

Customer Loyalty in the Life Insurance Industry

When the customer comes first, the customer will last. Robert Half This chapter is aimed at providing an insight into: v Structure of the Indian Insurance Industry v General status of Customer Loyalty Practices in the Insurance Industry v Customer Loyalty Cases of the following major players of the insurance industry ∑ LIC of India ∑ SBI Life ∑ ICICI Prudential Life Insurance

15.1.

INTRODUCTION

The insurance industry of a country holds an extremely high significance for the soundness of its financial markets as it not only contributes to the GDP but also ensures the protection of a country’s financial structure. Besides contributing to the financial performance of the country, the insurance sector is also responsible for building a social security net for its citizens as it offers social benefits to the society that makes it vital for the overall growth of the country. “Insurance creates liquidity and facilitates the process of building economies of scale in investment, thereby improving overall financial efficiency.” — Financial Development Report 2012 (WEF) The sub-standard performance of the Indian insurance industry till the 1990s led the government to launch a host of reforms. Different models with discrete strategic competencies had been adopted in order to improve the operations and profitability of the insurance sector. The hybrid model of a regulated and privatised industry worked well and the sector started to bloom. The liberalisation of the Indian economy resulted in increased competition in each constituent of its financial sector. Insurance was no exception and the sector witnessed higher competitive pressures and lower customer satisfaction. A fundamental constituent of the financial sector, it has witnessed significant shifts in business dynamics and consumer behaviour in recent years. According to Joseph and Walker (1988), the ever-increasing competition and a constant rise in customers’ expectations pose huge challenges before organisations. Customers’ level of awareness

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has increased manifold and their expectations have reached new heights. Technology has also played a role in the formation of expectations as the new age tech friendly customers have better access to information that they use for comparison amongst all available options. Consequently, the nature of demands has also changed as customers now want superior standards of services. Ettorre (1994) added that service improvement leads to further customer demands, which are again a serious challenge for organisations. As a result, most companies operating in the Indian insurance market are constantly striving to achieve greater customer satisfaction and loyalty. Realising these market developments, the insurance companies have also shifted gears and the earlier product oriented approach transformed into customer centricity, where customer satisfaction and loyalty are considered the focal points for survival and growth. Companies have realised that ensuring an efficient and prompt service delivery is one of the few key steps that can help in retaining a customer and get him to recommend the company to others as well. The quandary of insurance companies lies in the fact that most companies offer similar products, and there is hardly any source of differentiation in the market. The only way to achieve stability and growth in such a market is by attaining a customer’s unwavering devotion and loyalty towards the company so that competitive pressures can be thwarted. Customer loyalty has emerged as a significant differentiator in the light of intense competition and increased customer expectations across various service industries. Customer loyalty leads to ultimate profitability and business growth and is a vital source of competitive advantage to the service organisation. 15.2.

INSURANCE IN INDIA

“Recent empirical research has found a strong positive relationship between insurance sector development and economic growth; this relationship holds quite strongly even in developing countries. — Financial Development Report 2012 (WEF) India’s rapid rate of economic growth over the past decade has been one of the most significant developments in the global economy. This growth traces its origin in the introduction of economic liberalisation in the early 1990s, which has equipped India to exploit its economic potential and substantially raise the standard of living of its people. Together with other financial services, insurance services contributed 7% to the country’s GDP in 2009. A well developed and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development and concurrently strengthens the risk-taking ability of the country. Further, insurance has been a notable employment generator, not only for the insurance industry but has also created significant demand for a range of associated professionals such as brokers, insurance advisors, agents, underwriters, claims managers, and actuaries. By the nature of its business, insurance is closely linked to savings and investments. Life insurance, funded pension systems, and non-life insurance have accumulated a significant amount of capital over time, which can be invested productively in the economy. The mutual dependence of insurance and capital markets plays an instrumental role in channelling funds and investment capabilities to augment the development potential of the Indian economy. India’s growing consumer class, rising insurance awareness, increasing domestic savings and investments are among the most critical factors that have positively driven the market penetration of the insurance products among its consumer segments. However, there are large untapped areas, which have yet not benefited

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from the upside of insurance. Imparting financial literacy, incentivising Indian households to transfer savings from physical assets to financial assets and taking the distribution network to rural areas are expected to help bring more and more individuals within the insurance ambit. While insurance penetration in India is higher than that in countries such as China and Brazil, it still has a considerably long way to go (Table 15.1). International Comparison of Insurance Penetration* Countries

2010

2001

Total

Life

Non-Life

Total

Australia

5.90

3. 10

2.80

9. 15

5.7

3.45

Brazil

3. 10

1.60

1.50

2. 14

0.36

1.78

France

10.50

7.40

3.10

8.58

5.73

2.85

Germany

7.20

3.50

3.70

6.59

3

3.59

Russia

2.30

0.00

2.30

3.06

1.55

1.51

South Africa

14.80

12.00

2.80

17.97

15.19

2.78

Switzerland

9.90

5.50

4.40

12.71

7.95

4.76

12.40

9.50

2.90

14. 18

10.73

3.45

8.00

3.50

4.50

8.97

4.4

4.57

United Kingdom United States

Life

Non-Life

Asian countries Bangladesh

0.90

0.70

0.20

0.46

0.29

0. 17

Hong Kong

11.40

10.10

1.40

6.34

5.13

1.21

India

5. 10

4.40

0.70

2.71

2.15

0.56

Japan

10.10

8.00

2.10

11.07

8.85

2.22

Malaysia

4.80

3.20

1.60

5.18

3.38

1.8

Pakistan

0.70

0.30

0.30

0.68

0.3

0.38

PR China

3.80

2.50

1.30

2.2

1.34

0.86

Singapore

6.10

4.60

1.60

4.58

3.4

1.18

11.20

7.00

4.20

12.07

8.69

3.38

1.40

0.60

0.90

1.2

0.53

0.67

18.40

15.40

3.00

8.62

6.03

2.59

Thailand

4.30

2.60

1.70

2.94

1.86

1.08

World

6.90

4.00

2.90

7.83

4.68

South Korea Sri Lanka Taiwan

3.15 *

in Per cent

IRDA Handbook on Indian Insurance Statistics 2010-11 The latest report of World Economic Forum (WEF) in 2012 declared India to be world’s top ranked country in respect of life insurance density. Life insurance density is the ratio of direct domestic premiums for life insurance to per capita GDP of a country. According to the Financial Development Report (2012) of WEF, India is ahead of many larger economies like US, UK, Japan,

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and China as far as life insurance density is concerned despite being ranked 40th in terms of overall financial development of a country. India holds third position after China and US in terms of nonlife insurance density. However, India still precedes countries like Germany, France, Japan and UK in this regard. 15.2.1. Structure of the Industry In India, the Ministry of Finance is responsible for enacting and implementing legislations for the insurance sector. The Insurance Regulatory and Development Authority (IRDA) is entitled with the regulatory and developmental role. The government also owns a majority share in some major companies in both life and non-life insurance segments. Figure 15.1 depicts the structure of the insurance industry in India. Ministry of Finance (Government of India)

IRDA

Non-life insurance

Life Insurance

Public

Public

Private

Private

Figure 15.1

The Indian insurance industry structure

Both life and non-life insurance sectors in India, which were nationalised in the 1950s and 1960s respectively, were liberalised in the 1990s. Since the formation of IRDA and opening up of the insurance sector to private players in 2000, Indian insurance sector has witnessed rapid growth. Following section presents a brief account of the insurance industry’s evolution and lists the major events in the history of the Indian insurance industry (Table 15.2): Table 15.2

Growth in the number of insurance players

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Life Insurance (as on 31st December, 2011) Public

1

1

1

1

1

1

1

1

1

1

1

1

Private

3

10

12

12

13

13

15

15

21

21

22

23

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264

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Non-Life Insurance (as on 31st August, 2011) Public

4

4

5

6

6

6

6

6

6

6

6

6

Private

3

6

8

8

8

8

9

10

15

15

17

18

Reinsurer

1

1

1

1

1

1

1

1

1

1

1

1

IRDA Handbook on Indian Insurance Statistics 2010–11

15.3.

LIFE INSURANCE IN INDIA

The life insurance sector grew at an impressive CAGR of 25.8% between FY03 and FY09, and the number of policies issued increased at a CAGR of 12.3% during the same period. The Life Insurance Corporation of India (LIC) is the only public sector player, and as per the statistics issued by IRDA, it held 69.8% of the market share in FY11 (based on total premium). To address the need for highly customised products and ensure prompt service, a large number 1% 2%

3% 1% 2% 9% 1%

19%

5% 2% 0% 1%

0% 10% 8% 2% 5%

20% 3%

2%

2% 1%

Market Share of Private Life Insurance Companies in India Aegon Religare

Aviva

Bajaj Allianz

Bharti AXA

Birla Sun Life

Canara HSBC

DLF Pramerica

Future Generali

HDFC Standard

ICICI Prudental

IDBI Federal

IndiaFirst

ING Vysya

Kotak Mahindra

Max New York

MetLife

Reliance

Sahara

SBI Life

Shriram

Star Union Dai ichi

TATA AIG

Figure 15.2 Market share amongst private players – FY11 (based on first year premiums) IRDA Handbook on Indian Insurance Statistics 2010–11

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265

of private sector players have entered the market. Innovative products, aggressive marketing, and effective distribution have enabled fledgling private insurance companies to sign up Indian customers more rapidly than expected. Private sector players are expected to play an increasingly important role in the growth of the insurance sector in the near future. In a fragmented industry, new players are gnawing away the market share of larger players (Figure 15.2). The existing smaller players have aggressive plans for network expansion as their foreign partners are keen to capitalise on the enormous potential that is latent in the Indian life insurance market. To tap this opportunity, banks started entering into alliances with insurance companies to develop and underwrite insurance products rather than merely distribute them. ICICI Prudential, HDFC Standard, and SBI Life collectively account for approximately 50% of the market share in the private life insurance segment. 15.3.1. Life Insurers in India As of December 2013, there were 24 players in the sector (1 public and 23 private). The details of life insurance companies presently operating in India are provided in Table 15.3. Table15.3

Sl. No.

Details of Life Insurance Companies Operating In India*

Insurers

Foreign Partners

Regn. No.

Date of Registration

Year of Operation



512

01.09.1956

1956

1.

Life Insurance Corporation of India

2.

HDFC Standard

Standard Life Assurance, UK

101

23.10.2000

2000

3.

Max New York

New York Life, USA

104

15.11.2000

2000

4.

ICICI Prudential

Prudential Plc, UK

105

24.11.2000

2000

5.

Kotak Mahindra Old Mutual

Old Mutual, South Africa

107

10.01.2001

2001

6.

Birla Sun Life

Sun Life, Canada

109

31.01.2001

2000

7.

TATA AIG

American International Assurance Co., USA

110

12.02.2001

2001

8.

SBI Life

BNP Paribas Assurance SA, France

111

29.03.2001

2001

9.

ING Vysya

ING Insurance International B.V, Netherlands

114

02.08.2001

2001

10.

Bajaj Allianz

Allianz, Germany

116

03.08.2001

2001

11.

Metlife

Metlife International Holdings Ltd., USA

117

06.08.2001

2001

12.

Reliance

121

03.01.2002

2001

–––

266

Customer Loyalty

Sl. No.

Insurers

Foreign Partners Aviva International Holdings Ltd., UK

Regn. No.

Date of Registration

Year of Operation

122

14.05.2002

2002

127

06.02.2004

2004

13.

Aviva

14.

Sahara

15.

Shriram

Sanlam, South Africa

128

17.11.2005

2005

16.

Bharti AXA

AXA Holdings, France

130

14.07.2006

2006

17.

Future Generali

Generali, Italy

133

04.09.2007

2007

18.

IDBI Federal

Ageas, Europe

135

19.12.2007

2007

19.

Canara HSBC

OBC HSBC, UK

136

08.05.2008

2008

20.

Aegon Religare

Aegon, Netherlands

138

27.06.2008

2008

21.

DLF Pramerica

Prudential of America, USA

140

27.06.2008

2008

22.

Star Union Dai-ichi

Dai-ichi Mutual Life Insurance, Japan

142

26.12.2008

2008

23.

India First

Legal & General Middle East Limited, UK

143

05.11.2009

2009

24.

Edelweiss Tokio

Tokio Marine Holding Inc, Japan

147

12.05.2011

2011

–––

*as on 31st December, 2011. IRDA Handbook on Indian Insurance Statistics 2010–11

15.4.

CUSTOMER LOYALTY IN THE LIFE INSURANCE INDUSTRY

Durvasula et al. (2004); Tsoukatos and Rand (2006) described life insurance services as highly intangible. Crosby et al. (1990) pointed that life insurance is primarily sold by insurance agents, who are the only touch point for the customers in most cases. According to Lombardi (2005), keeping the customers is crucial for life insurers as a long-lasting association with customers results in greater instances of cross-selling and positive recommendation intentions. Zeithaml et al. (1996) pointed that the insurance provider gets to recover the selling cost of an insurance policy only when the policy is renewed for three to four years. Moore and Santomero (1999); Diacon and O’Brien (2002) posited that high retention rates are correlated with better financial performance. Slattery (1989) stated that the agent’s relationship with the customers and the quality of his service are decisive factors in selling the policy and retaining the customers. Toran (1993) believed that an agent’s integrity and advice plays a major role in customers’ decision for life insurance services. Solomon et al. (1985); GrÖnroos (1990) found that customer’s discernment of face-toface interaction with the service employee is taken as a significant determinant of customer loyalty. Gera (2011) worked to identify the key conceptual and pragmatic inter-relationships between service encounter variables of perceived agent service quality, overall customer satisfaction, and

Customer Loyalty in the Life Insurance Industry

267

perceived value and their relationships with re-purchase recommendation and complaint intentions in the life insurance services in India. He discovered empirical support for the comprehensive nature of direct and indirect effects of service quality, value perceptions, and overall satisfaction on future behavioural intentions (BI) and specified the key agent service quality attributes of product knowledge, empathy, reliability, and trust as essential antecedents of favourable behavioural outcomes. Agent service quality, satisfaction, and value perceptions exert a significant impact on recommendation intentions.

Empathy

Overall Customer Satisfaction

Complaint Intentions in case of poor service

Reliability Service performance quality of agent

Repurchase Intentions

Trustworthiness Product knowledge

Perceived value

Recommendation Intentions

Figure 15.3 Key conceptual and pragmatic inter-relationships among service encounter variables Gera (2011)

15.4.1. Customer Loyalty Practices at Select Life Insurance Companies In a dynamic economic scenario, riding on globalisation, advanced technology and communication, and IT revolution, the insurance industry is gaining new heights. As a result of tremendous increase in employment opportunities and high disposable incomes, interest in securing life of self, spouse, and children coupled with tax relief has given momentum to the flourishing insurance business. Also, the new generation customers are well informed and aware of the benefits of insurance. However, the number of available options ensures that customers are approached by several companies and are thus not loyal. The entry of private sector insurance companies such as Birla Sun Life, Tata AIG, ICICI Prudential, and HDFC Standard life has changed the landscape of the Indian insurance market. Facing tough competition, insurance companies today are engaged in the process of offering additional services to add to customer delight and make the customer relationship more fruitful. The corner stone of a well-conceived marketing orientation is developing strong bonds with customers – called Customer Relationship Management (CRM). CRM principally revolves around marketing and begins with a deep analysis of consumer behaviour and results in customer delight, loyalty, and enhancement in customers’ lifetime value with the firm. Customer Relationship Management is the process of managing detailed information about individual customers and carefully managing all customer “Touch Points” to maximise customer

268

Customer Loyalty

loyalty. CRM includes attracting, retaining, and growing customers. CRM is important for each company because a major driver of company profitability is the aggregate value of the company’s customer base. Therefore, the strategic importance of CRM is very significant. Organisations are Realising the importance of CRM analytics that help them to organise their operations and business decisions with customer orientation to optimise results. Customer-centric CRM is the need of the hour. The insurance industry is presently typified with a complex and competitive business environment coupled with low stability. The industry’s main challenge is to recruit clients. Curbing costs and garnering profits has become difficult. Moreover, acquisitions and mergers have also contributed to the industry’s challenges. 1. Life Insurance Corporation of India Life Insurance Corporation of India (LIC) is an autonomous body authorised to run the life insurance business in India with its Head Office at Mumbai. Around 154 Indian insurance companies, 16 non-Indian companies, and 75 provident fund societies were operational in India when the industry was nationalised. Nationalisation was completed in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership by means of a comprehensive bill. The Parliament of India passed the Life Insurance Corporation Act on June 19, 1956. Life Insurance Corporation of India was created on September 1, 1956, with the objective of spreading life insurance widely, especially in the rural areas so that all insurable individuals could be reached and provided with adequate financial cover at a reasonable cost. Realising the importance of customer centricity in the insurance sector, LIC focusses on providing optimal value to customers by serving them in an efficient manner. LIC has started to leverage the information and telecommunication technology for providing better services with a goal of strengthening relationships with its customers. Email and postal information has become the norm to make customers aware of their policy status, and other important information regarding lapsed policy, new policy, and any delay in processes. CRM at LIC of India is viewed as a discipline as well as a set of discreet software technologies that focus on automating and improving the business processes associated with managing relationships in the area of sales, marketing, customer service, and support. The CRM software enabled applications in LIC of India are not only intended to facilitate the coordination of multiple business functions but also supposed to coordinate multiple channels of communications with the customer as face to face, customer care services centres, customer zones, complaint redressal offices to enable the corporation to carry out customer management more efficiently. The loyalty management initiatives of LIC of India can be classified under the following heads:

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® Products: A. Insurance Plans: LIC’s insurance policies are meant to accommodate different insurance needs and requirements of individuals. 1. Bima Account Plans ∑ LIC’s Bima Account – I is a simple non-linked plan under which you can be covered without undergoing any medical examination subject to certain conditions. ∑ LIC’s Bima Account – II is a simple non-linked plan that offers simplicity, liquidity, guaranteed minimum return, transparent charges, and risk cover. 2. Endowment plan ∑ Endowment Plus is a unit linked endowment plan that offers investment cum insurance cover during the term of the policy. One can choose the level of the insurance cover within the limits, which will depend on the mode and level of premium paid. 3. Children Plans ∑ LIC’s Jeevan ANURAG is a with-profits plan specifically designed to take care of the educational needs of children. ∑ LIC Komal Jeevan is a Children’s Money Back Plan that provides financial protection against death during the term of the plan with periodic payments on survival at specified durations. This plan can be purchased by a parent or grandparent for a child aged 0 to 10 years. ∑ Children’s Deferred Endowment Assurance Plan is an endowment assurance plan designed to enable a parent or a legal guardian or any near relative of the child (called proposer) to provide insurance cover on the life of the child (called life assured). ∑ Marriage Endowment or Educational Annuity Plan is an endowment assurance plan that provides for benefits on or from the selected maturity date to meet the marriage or educational expenses of the named child. ∑ Jeevan Kishore is an endowment assurance plan available for children less than 12 years of age. The policy can be purchased by a parent or grandparent. ∑ Jeevan Chhaya is an endowment assurance plan that provides financial protection against death throughout the term of the plan. Besides payment of the sum assured immediately on death, one-fourth of the sum assured is payable at the end of each of last four years of policy term, irrespective of whether the life assured has survived the term of the policy. ∑ Child Career Plan is specially designed to meet the increasing educational and other needs of growing children. ∑ Child Future Plan is specially designed to meet the increasing educational, marriage and other needs of growing children. It provides the risk cover on the life of the child not only during the policy term but also during the extended term (i.e. seven years after the expiry of policy term). A number of survival benefits are payable on survival by the life assured at the end of the specified durations. ∑ LIC’s Jeevan Ankur is a conventional with profits plan, specially designed to meet the educational and other needs of children.

270

Customer Loyalty

4. Plans for Handicapped Dependent ∑ Jeevan Adhar may be offered to a person who has a handicapped dependant, satisfying conditions as specified in Section 80DDA of Income Tax Act, 1961. ∑ Jeevan Vishwas is an Endowment Assurance plan designed for the benefit of handicapped dependants. 5. Endowment Assurance Plans ∑ The Endowment Assurance Policy not only makes provisions for the family of the Life Assured in the event of his early death but also assures a lump sum at a desired age. The lump sum amount can be reinvested to provide an annuity during the remainder of his life or in any other way considered suitable at that time. ∑ Under Endowment Assurance Policy–Limited Payment, the payment of premium can be limited either to a single payment or to a term shorter than the policy. The endowment is, however, payable only at the end of the policy term or on death of the policy holder, if it takes place earlier. ∑ Jeevan Mitra (Double/Triple Cover Endowment Plan) is an Endowment Assurance plan that provides greater financial protection against death throughout the term of the plan. It pays the maturity amount on survival at the end of the policy term. ∑ Jeevan Anand is a combination of endowment assurance and whole life plans. It provides financial protection against death throughout the lifetime of the life assured with the provision of payment of a lump sum at the end of the selected term in case of survival. ∑ New Janaraksha Plan is an endowment assurance plan that provides financial protection against death throughout the term of the plan. It pays the maturity amount on survival at the end of the term. ∑ Under Jeevan Amrit, premium payment is limited to three, four, or five years and the premium payable during the first year is higher than the premiums payable in subsequent years. ∑ LIC’s Jeevan Vaibhav is a close-ended single premium endowment assurance plan that offers guaranteed benefits on death and maturity along with Loyalty Addition, if any, payable on maturity or on death in the last policy year. 6. Plans for High Worth Individuals ∑ Jeevan Shree-I is an endowment assurance plan offering the choice of many convenient premium paying terms. It provides financial protection against death throughout the term of the plan with the payment of maturity amount on survival at the end of the policy term. ∑ Jeevan Pramukh is an endowment assurance plan offering the choice of three premium paying terms. It provides financial protection against death throughout the term of the plan with the payment of maturity amount on survival at the end of the policy term. 7. Term Assurance Plans ∑ Two Year Temporary Assurance policy is designed for the insuring public who require risk cover for a maximum of two years. ∑ The Convertible Term Assurance Policy is designed to meet the needs of those who are initially unable to pay the larger premium required for the whole life or endowment assurance policy, but hope to be able to pay for such a policy in the near future.

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∑ Anmol Jeevan–I is available to Standard and Sub-standard lives (up to Class VI EMR). This plan is also available to female lives (category I and II lives only) and to physically handicapped persons, subject to certain conditions. Standard age proof is to be submitted along with the Proposal Form. ∑ Amulya Jeevan–I In case of unfortunate death of the life assured during the term of the policy, the sum assured is payable, provided the policy is kept in force. 8. Whole Life Plans ∑ The Whole Life Policy is mainly devised to create an estate for the heirs of the policy holder as the plan basically provides for payment of sum assured plus bonuses on the death of the policy holder. ∑ The Whole Life Policy- Limited Payment and The Whole Life Policy–Single Premium is the best form of life assurance provision for the family since it enables the Life Assured to pay all the premiums during the ordinarily vigorous and most productive years of life. He need not pay any premium in the later stages of life if and when his condition might become adverse. ∑ Jeevan Anand ∑ Jeevan Tarang is a with-profits whole of life plan that provides for annual survival benefit at a rate of 5½% of the Sum Assured after the chosen accumulation period. The vested bonuses in a lump sum are payable on survival to the end of the accumulation period or on earlier death. Further, the Sum Assured, along with Loyalty Additions, if any, is payable on survival to age 100 years or on earlier death. 9. Money Back Plans ∑ Money Back with Profit (20 years/25 years) provides for periodic payments of partial survival benefits as follows during the term of the policy, of course so long as the policy holder is alive. ∑ Jeevan Surabhi (15 years/20 years/25 years) plan is similar to other money back plans. However, the main differences in regular money back plans and Jeevan Surabhi are as under: ∑ Maturity term is more than the premium paying term. ∑ Early and higher rate of survival benefit payment. ∑ Risk cover increases every five years. ∑ LIC’s Bima Bachat is a money-back policy that offers financial security and assurance to the policy holder and his family. Bima Bachat requires the policy holder to pay only one premium. The amount paid for the premium depends on the duration of the policy taken and life insurance is available till the date of maturity. 10. Special Money Back Plans for Women ∑ LIC’s Jeevan Bharati-I is a plan exclusively for women. It is with a profit plan having special features considering the needs of women. The plan also provides for Accident Benefit, Critical Illness Benefit, and Congenital Disability Benefit as optional riders.

272

Customer Loyalty

11. Joint Life Plan 1. Jeevan Saathi is an endowment assurance plan issued on the lives of husband and wife. The plan provides financial protection against death of both. It pays the maturity amount on survival of one or both the lives to the end of the policy term. A. Unit Plans: Unit link whole life plans offer the twin benefits of investment plus insurance cover throughout life. ∑ Endowment Plus is a unit linked Endowment plan which offers investment cum insurance cover during the term of the policy. One can choose the level of insurance cover within the limits, which will depend on the mode and level of premium paid. B. Pension Plans: Pension plans offer annuity for life with return of purchase price on death of the annuitant. ∑ Jeevan Akshay VI is an Immediate Annuity plan, which can be purchased by paying a lump sum amount. The plan provides for annuity payments of a stated amount throughout the lifetime of the annuitant. Various options are available for the type and mode of payment of annuities. C. Special Plans D. Group Schemes Group Insurance Scheme offers life insurance protection to groups of people. This scheme is ideal for employers, associations, and societies and allows you to enjoy group benefits at really low costs. ∑ Group (Term) Insurance Scheme offers life insurance cover to all the members of a group subject to some simple insurability conditions without insisting upon any medical evidence. The scheme offers covers only on death and there is no maturity value at the end of the term. ∑ Group Insurance Scheme in Lieu of EDLI Under the scheme as amended with effect from June 24, 2000, the insurance benefit is equal to the average balance to the credit of the deceased employee in the Provident Fund during the last 12 months, provided that where such balance exceeds Rs 35,000, insurance cover would be equal to Rs 35,000 plus 25% of the amount in excess of Rs 35,000, subject to a maximum of Rs 60,000. ∑ Group Gratuity Cash Accumulation Scheme enables employers to meet their gratuity liability in a very simple and efficient manner. The scheme is formulated in compliance with Part C of the IV schedule of Income Tax Act and tax benefits are available as provided in Income Tax rules. ∑ Group Savings Linked Insurance Scheme is for people working in metropolitan cities. Occupied in their day to-day activities with high inflation, they find it difficult to provide adequate security for their families. Individual insurance with high premium may not provide adequate insurance protection. ∑ Group Leave Encashment Scheme helps the employers in fulfilling the leave encashment liability. ∑ Group Mortgage Redemption Assurance Scheme is a group insurance scheme for the borrowers of housing/vehicle Loans from financial institutions where loan is recovered under EMI. Under the scheme, the premium is payable in a single instalment covering a decreasing life cover. Insurance cover every year will be almost equal to the loan outstanding at the anniversary date of each borrower.

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∑ Group Critical Illness Rider is basically offered as an optional rider benefit to all EmployerEmployee group policy holders (both existing and new schemes) along with Group term insurance schemes, that is, OYRGTA (One year renewal group term assurance) type schemes. ∑ Janashree Bima Yojana is aimed at providing life insurance protection to the rural and urban poor persons below poverty line and marginally above the poverty line. ∑ Shiksha Sahayog Yojana is a scholarship scheme launched on December 31, 2001 for the benefit of children of members of Janashree Bima Yojana. ∑ Aam Admi Bima Yojana is a prestigious scheme of the Central and State/Union Territory Governments and administered by LIC for rural landless households. E. Health Plans ∑ Health Protection Plus offers Hospital Cash Benefit (HCB) and Major Surgical Benefit (MSB) along with a ULIP component (investment in the form of Units) that is specifically designed to meet Domiciliary Treatment Benefit (DTB)/Out Patient Department (OPD) expenses for the insured members. ∑ Jeevan Arogya is a unique non-linked Health Insurance plan that provides health insurance cover against certain specified health risks. Customised Offering: Due to the difference in the living standard of the people in the society and the psychographical and demographical differences, LIC provides customised services to different sections of the society. In order to strengthen the CRM practices in the organisation, LIC has designed several insurance plans and schemes keeping in the mind the exclusive requirements of different categories of customers. ® Grievance -Handling Mechanism: Like many organisations, LIC’s complaints system has mandatory fields, which have checklist effect. This means that officers have to complete certain action before a complaint can be regarded as finalised. It also makes quality assurance a lot easier and allows complaint cases to be recorded separately, so they do not get swallowed up in day-to-day business. LIC looks at grievance redressal as a very important tool for customer service. LIC has made several arrangements for settlement of problems that may be regarded as the nodal centres of complaint management system. 2. Grievance Redressal Officers: The Corporation has Grievance Redressal Officers at Branch/Divisional/Zonal/Central Office to redress customer grievances. Their names and availability timings are published in newspapers of wide circulation from time to time. The spirit of customer relations and customer care have been ingrained in their complaint redressal system with emphasis on placing customer oriented personnel at all touch points. IT enabled proactive support system has been operationalised to reduce manual interventions and minimise grievances. In their endeavour to enhance customer satisfaction, stringent benchmarks as laid down in the citizens’ charter are followed scrupulously. 3. Claim Review Committee: Claimants aggrieved by the decision of repudiation have the facility of referring their cases for review to Zonal Office Claims Review Committee (CRC) or Central office CRC. A retired High Court/District Court Judge is a sitting member of the CRC. 4. Insurance Ombudsman: Insurance Ombudsmen in the country at Ahmadabad, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Kochi, Kolkata, Lucknow, and Mumbai provide low cost and speedy arbitration to customers.

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5. Customer Portal: For ensuring quick redressal of customer grievances, the Corporation has introduced a customer friendly Complaint Management System through a Customer Portal on their website http://www.licindia.in, where a policy holder can directly register complaints or grievances and track their status. LIC has its own Customer Relationship Management centre in every Division office that connects each branch of its area for resolving the issues. The centres take a maximum of one week for redressing the problem and after resolving the issue, the CRM centre communicates with the concerned customer via email or Speed Post. For measuring customer satisfaction at the branch level, LIC has special agents who conduct regular surveys. A customer can also send his problem directly to the head office to the chairman of the organisation via email or Speed Post. ® Technology Initiatives: Customers are the most important asset for any organisation. The replacement of any other business asset may be easy compared to its customers, given the highly competitive environment. With increased competition and new business avenues in the marketplace, it is imperative for LIC to introduce and utilise technology extensively and rapidly. LIC is one of the few pioneer Indian organisations who demonstrated the utility of Information Technology in increasing the effectiveness of its business. LIC has been implementing germane and apposite technology over the years. It has got data of almost 10 crore policies stored in its computers that were introduced in 1964 to replace Unit Record Machines introduced in late 1950s. These machines were phased out in 1980s when back office computerisation of branch and divisional offices was initiated with the help of microprocessors-based computers. The 1990s saw standardisation of hardware and software. Standard Computer Packages were developed and implemented for Ordinary and Salary Savings Scheme (SSS) policies. 1. Front End Operations: LIC started a drive of online service to policy holders and agents in July 1995 in order to increase responsiveness and improve services. This online facility allowed policy holders to receive immediate policy status report, prompt acceptance of their premium, and get revival quotation and loan quotation on demand. In addition, procedures related to change of address, completion of proposals, and dispatch of policy documents became speedier. All 2,048 branches across the country are covered under front-end operations. Thus, 100% branch computerisation was achieved in all 100 divisional offices. New payment related modules pertaining to both ordinary and SSS policies have been added to the Front End Package catering to Loan, Claims and Development Officers’ Appraisal. All these modules help to reduce time lags and ensure accuracy. 2. Metro Area Network: A Metropolitan Area Network, connecting 74 branches in Mumbai was commissioned in November 1997, enabling policy holders in Mumbai to pay their premium or get their status report, surrender value quotation, or loan quotation from any branch in the city. The system has been working successfully. More than 10,000 transactions are carried out over this network on a working day. Such networks have been implemented in other cities also. 3. Wide Area Network: All seven Zonal Offices and all the MAN centres have been connected through a Wide Area Network (WAN) to enable customers to find their policy data and to

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be able to pay premium from any branch of any MAN city. As on November 2005, LIC had 91 centres in India with more than 2,035 branches networked under WAN. 4. Interactive Voice Response Systems (IVRS): IVRS is functional in 59 centres all over the country. This enables the customers to call LIC and obtain information such as due premium, policy status, loan amount, maturity payment due, accumulated bonus and so on. This information can also be faxed to the customer on demand. 5. LIC on the Internet: LIC’s website provides information about LIC and its offices. The addresses/e-mail IDs of Zonal Offices, Zonal Training Centres, Management Development Centre, Overseas Branches, Divisional Offices and all Branch Offices have been displayed to facilitate the communication process. The LIC home page, www.licindia.in, is proving to be a handy tool for customers. The website has been redesigned to give valuable and important information related to the vast range of products, customer care services, branch locator, premium calculator, NRI centre, and many other related topics. The website of LIC also offers the following features: i. It provides a common virtual space for customers, development officers, agents, and employees of the organisation for interacting on various social networking sites like Face book, Twitter, and You Tube. ii. It helps the customers in getting the information related to the corporate profile, detailed annual report, tender related information, productwise Frequently Asked Questions, and information about consultancy services. 6. Payment of Premium and Policy Status on Internet: LIC has given its policy holders a unique facility to pay premiums through Internet and also to view their policy details online. LIC has tied up with 11 service providers to provide this service. 7. Information Kiosks: LIC has set up 150 interactive touch screen-based multimedia kiosks in prime locations in metros and other cities for disseminating information to general public on their products and services. These kiosks are enabled to provide policy details and accept premium payments. 8. Info Centres: LIC has also set up eight call centres, manned by skilled employees to provide information about products, policy services, branch addresses, and other organisational information. The highly extensive use of information technology in LIC allows the corporation to forge and strengthen customer relationship. The year 2009–10 saw the consolidation of major technology initiatives such as the Corporate Active Data Warehouse (CADW), Enterprise Document Management System (EDMS), and the web portal resulting in tremendous value addition for its customers. LIC has also taken the initiative of modernising the existing Core Insurance System, the Front End Applications Package (FEAP). i. Corporate Active Data Warehouse (CADW): LIC’s CADW is one of the largest life insurance customer databases in the world with records of more than 400 million policies. The Warehouse has enabled LIC to launch many customer focussed campaigns like customer contact programmes and Gold Club customer campaigns all over the country in 2009-10. Another major achievement has been to send a single notice for due premiums in the same month for various policies of an individual customer. The project was also successfully used for generating marketing leads and running a host of targeted marketing campaigns.

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ii. Enterprise Document Management system (EDMS): LIC has implemented Enterprise Document Management System (EDMS) in its offices to digitise the customer records and to offer ‘Anytime Anywhere’ service to customers. After all the policy records are scanned, it will be possible to offer various services like loan disbursement and claims payment from any branch in the country irrespective of the branch where the policy is serviced. ® Distribution Network: LIC had five zonal offices, 33 divisional offices, and 212 branch offices, apart from its corporate office in the year 1956. Since life insurance contracts are long-term contracts and during the currency of the policy, a variety of services are required, a need was felt to expand operations and to place a branch office at each district headquarter. LIC was reorganised and a large number of new branch offices were opened. As a result of re-organisation, the servicing functions were transferred to the branches and branches were made accounting units. It worked wonders for the performance of the corporation. It must be noted that from about 200 crore of New Business in 1957, the corporation crossed 1,000 crore only in the year 1969–70, and it took another 10 years for LIC to cross the 2,000 crore mark of new business. But with reorganisation in the early eighties, by 1985–86, LIC had already crossed 7,000 crore sum assured on new policies. Today, LIC functions with 2,048 fully computerised branch offices, 109 divisional offices, eight zonal offices, 992 satellite offices and the corporate office. LIC’s Wide Area Network covers 109 divisional offices and connects all the branches through a Metro Area Network. LIC has tied up with several banks and service providers to offer online premium collection facility in select cities. LIC’s ECS and ATM premium payment facility is an addition to customer convenience. Apart from online kiosks and IVRS, Info Centres have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a vision to provide easy access to its policy holders, LIC has launched Satellite Sampark offices. The satellite offices are smaller, leaner, and closer to the customer. The digitalised records of the satellite offices will facilitate anywhere servicing and many other conveniences in the future. ® Service Delivery Mechanism: Innovation and initiation in service delivery is practised right from opening an account of a LIC policy holder to the final disbursement of money to the same. Some of the superior channels of service delivery in LIC are categorised as: 1. Channel of premium payment: Since its inception, it has been the endeavour of LIC to bring more and more services to customer doorsteps. Recently, LIC took the initiative of adding more channels for facilitating the payment of renewal premium by customers. Several Premium Points were added to the system where a policy holder could pay premium 24 ¥ 7 and get a final receipt from the offices of ‘Empowered LIC Agents’ across the country. LIC has also introduced SMS based inquiry services, where a policy holder can get information related to the next instalment of premium. The channels of premium payment are of two types and a policy holder can submit the premium either through the online channels or the offline mode. ∑ Offline Payment Channels: i. Electronic Clearance System (ECS): This facility is presently available at 60 centres. Through ECS, premium can also be collected for ULIP and Health Insurance (HI) policies. ii. Electronic Bill Presentation and Payment (EBPP): Premium can be paid through various banks like Citibank, HDFC, ICICI, Federal Bank, Corporation Bank, Axis Bank and

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through service providers such as Bill Desk and Tech Process, which cover almost all other banks in the country. Premium can also be paid through credit cards. iii. ATMs: The facility of submitting the premium through ATMs is available through two banks: Corporation Bank and Axis bank. ∑ Online Payment Channels: i. Customers’ Portal Payment Gateway: Online premium payment facility on the LIC website, www.licindia.in, is available with the help of Net Banking facility of around 40 banks. ii. Axis Bank: Premium can also be paid at any branch or extension counter of Axis Bank. iii. Senior Business Associate: Selected Development officers are authorised to collect the premium online and issue receipt instantly. Premium can be collected for conventional and ULIP (other than Health Insurance) policies. iv. Empowered Agents: In tune with the increasing customer expectation for more conveniences in servicing, the corporation has empowered select agents to collect the renewal premium. At present, there are more than 10,000 authorised agents across the country who can collect the premium (including ULIP but excluding HI Policies) in cash or cheque and issue a valid receipt instantly. v. Policy collection through Franchisees: Authorised franchisees are available for collection of premium (in cash) and policy-related documents. The receipt of premium is collected by a customer from the collection centres or it may be sent via Speed Post to the customer’s address. LIC does not levy any extra charges for this service. ® Other Customer Service Initiatives: LIC has introduced other customer service initiatives to make its offering more attractive to customers. These initiatives are: ∑ Policy information through SMS: Customers can get information on loan available, bonus accrual, revival quotation, premium position, and nomination status by sending an SMS at 56677 and typing asklic, policy number, and the information required. ∑ IVRS/Info-Centres: Using the Integrated Voice Response System, customers can get the required information at any time through a telephone. This facility allows policy holders to get the information about their account or policy status in real time without having to visit LIC offices. The IVRS facility is operational at 57 cities throughout India operating 24 ¥ 7. Out of these, 30 centres have been modified into info-centres by equipping them with staff dedicated to attend phone-in customers in two shifts. Customers can contact the IVRS/ Info-centre by simply dialling the Universal Access Number (UAN) 1251. ∑ Customer Zones: Customer zones have been conceptualised as a ‘one-stop resolution’ for all the servicing needs of a customer, with special emphasis on ‘Quality Experience’ for customers. As on March 31, 2010, 28 customer zones were operational throughout India (53rd Annual Report, LIC 2009–10). A policy holder can also inform changes in his residential address at the customer zones. These zones are also helpful in issuing the premium paid certificate, acceptance for life certificate for pension policies, and resolving any policy related issues. Information is provided regarding the premium position, bonuses, loans, and revival of lapsed policies. The customer zones work as an assistant in form

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filling and registering on LIC’s customer portal. For the convenience of policy holders, the customer zones are open from Monday to Friday (8 A.M. to 8 P.M.) and Saturday (10 A.M. to 6 P.M.). ∑ Annuity Payment through NEFT: Annuity policies best serve the purpose of a secured and guaranteed return in old age. Recently, LIC of India has introduced NEFT (National Electronic Fund Transfer System) for settlement of annuities of its annuitants on the respective due dates. Using NEFT, annuity would be directly credited to the annuitants’ bank account. ∑ Customer Feedback System: In order to strengthen the customer service, LIC has an online feedback system where customers can make suggestions to improve the customer service, file complaints, or make enquiries. LIC has managed to dominate the Indian life insurance business even after liberalisation and privatisation and is swift enough to adopt a new growth trajectory and beat its own records. In FY10-11, individuals generated new business premium worth Rs 83,174.03 crore under 4,81,06,668 policies, and the group insurance business amounted to Rs 43,159.21 crore under 8,32,32,045 lives. LIC contributed most of the business procured in this portfolio by garnering Rs 311.9 million of individual premium from 1.54 million lives and Rs 1,726.9 million of group premium under 11.1 million lives. Due to the sub-optimal performance of the life insurance industry under both the models, privatisation with minimal regulation (pre 1956) and nationalisation (1956–2000), the government resorted to a hybrid model that involved privatisation of the sector with an effective and stringent regulatory mechanism in place (post 2000). These measures were taken to increase the competitiveness of the industry by encouraging more players to enter the life insurance business and provide a better range of products to a larger segment of the population. 2. SBI Life SBI Life Insurance is a joint venture between State Bank of India (SBI) and BNP Paribas Cardif of France. SBI owns 74% of the total capital and BNP Paribas Cardif, the remaining 26%. SBI Life Insurance has an authorised capital of Rs 2,000 crore and a paid up capital of Rs 1,000 crore. Along with its seven associate Banks, SBI Group has a network of over 14,500 branches across the country, the largest in the world. Products: The products offered by SBI Life are broadly classified into the following three categories: A. Individual Plans 1. Unit Linked Plans Unit Linked Insurance Plans are long-term investment cum protection plans that club market linked returns with life insurance protection. As per one’s risk bearing capacity, one can select from a host of funds entailing different levels of risk exposure. ULIPs also offer greater transparency and flexibility that make them a smart option for long-term investment.

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∑ SBI Life – Smart Performer is a unit linked, non-participating insurance product that offers twin benefits of ’Higher than the Highest’ of the daily NAV Guarantee and the prospect of market upside. It also allows protecting one’s gains through Automatic Rebalancing facility and offers a choice of Single and Limited Premium Payment options. ∑ SBI Life – Saral Maha Anand is a unit linked non-participating life insurance plan that lets one manage investments according to his risk appetite, giving him the power to realise market-related returns on policy. ∑ SBI Life – Unit Plus® Super is a flexible non-participating unit linked insurance plan, specially designed to meet one’s changing requirements at various stages of life. ∑ SBI Life – Smart Elite gives flexibility to pay premiums for a limited term or even a single premium, with the freedom to stay invested and protected for the long-term. ∑ SBI Life – Smart Horizon is a non-participating unit linked life insurance plan that offers a hassle-free way to get market linked returns through the unique feature of Automatic Asset Allocation. ∑ SBI Life – Smart Wealth Assure is a unit linked non-participating life insurance plan that provides a minimum NAV Guarantee Plus Upside, if any. 2. Child Plans ∑ SBI Life – Smart Scholar secures a child’s future by gaining from the financial markets and more. ∑ SBI Life – Scholar II is a traditional participating plan, SBI Life - Scholar II has guaranteed benefits that are payable at regular intervals during the term of the policy. 3. Pension Plans ∑ SBI Life – Annuity Plus is a traditional, non-participating immediate annuity plan, which offers a comprehensive range of annuity options along with inbuilt flexibilities. It provides an opportunity to policy holders to maintain their standard of living. 4. Protection Plans ∑ SBI Life – Smart Shield is a traditional non-participating pure term plan. ∑ SBI Life – Saral Shield provides cover for one’s family and ensures that a proper safety net is created. ∑ SBI Life – Swadhan is an affordable traditional term insurance policy with refund of part or total basic premium paid at the end of the term to the policy holder. 5. Savings Plans ∑ SBI Life – Smart Income Protect is a savings plan with the added advantage of life cover and regular cash inflow when needed. ∑ SBI Life – Smart Money Back Insurance is a savings plan with the added advantage of life cover and cash inflow at regular intervals. It is a participating traditional money back plan to meet one’s various financial obligations at crucial junctures through its wide range of policy terms. ∑ SBI Life – Flexi Smart Insurance, an individual, non-participating traditional life insurance cum savings plan, gives one flexibility to adapt to his changing needs while assuring guaranteed benefits to take care of savings.

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∑ SBI Life – Sanjeevan Supreme is a traditional saving plan with the added advantage of life cover and guaranteed cash inflow at regular intervals tailored to suit an individual’s requirements. ∑ SBI Life – Shubh Nivesh is an endowment product with an option of whole life coverage. ∑ SBI Life – Saral Life is a traditional, participating endowment plan. B. Group Plans SBI Life offers a broad array of employee benefit solutions that enable the corporate houses to preserve, prize, and promote the best talent in their respective industries. It also provides a host of corporate solutions to meet both statutory as well as voluntary needs of the employers and hence ensures to strengthen the employer-employee relationship in the long run. 1. SBI Life’s Group Retirement Insurance Plans are aimed at offering financial stability and protection to employees and their families to help in converting them to a loyal and motivated workforce. These plans offer guaranteed availability of funds for timely discharge of a company’s obligations related to gratuity, superannuation, pension/annuity and leave encashment. Both traditional as well as unit linked products are available. ∑ SBI Life – Kalyan ULIP Plus is a non-participating, unit linked group insurance scheme. ∑ SBI Life – CapAssure Gratuity Scheme is a non-participating yearly renewable traditional group gratuity scheme. Under this scheme, the contributions paid continue to accumulate on traditional platform of investments and at the end of the financial year, an investment income earned on one’s contributions is credited to his gratuity fund account. ∑ SBI Life – CapAssure Leave Encashment Scheme (CA-LE) is a non-participating yearly renewable traditional group leave encashment scheme. Under this scheme, the contributions paid continue to accumulate on traditional platform of investments and at the end of the financial year, an investment income earned on one’s contributions is credited to his CA-LE fund account. ∑ SBI Life – Swarna Jeevan is a group immediate annuity plan for corporate clients (i.e. Employer-Employee groups) and other group administrators, who wish to purchase annuity to provide for their annuity liability (existing or emerging or both) totally or partially from SBI Life. ∑ SBI Life – Dhanrashi is a traditional non-participating group savings linked insurance scheme. This scheme is applicable for both employer-employee and non-employeremployee groups. ∑ SBI Life – Swarna Ganga is a non-linked group saving cum insurance product. The product is designed as a saving vehicle and to offer insurance cover to groups of persons who share common identity or affinity such as groups of professionals, farmers, and employed/selfemployed individuals, agricultural and industrial workers, teachers, members of Self Help Groups and beneficiaries of priority sector advances. ∑ SBI Life – Gaurav Jeevan is meant for Central Government/State Governments/ Government Enterprises and their agencies who wish to purchase their annuity liability (existing or emerging or both) in respect of the annuity payments for compensation to the land owners whose lands are being acquired. ∑ SBI Life – CapAssure is a traditional non-linked, non-participating plan featuring stable growth with capital protection. This plan can be offered to employer-employee groups or

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3. ∑ 4. ∑

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non-employer-employee groups or any group formed as per IRDA’s Group Guidelines, 2005. Group Term with ROP SBI Life – Swadhan (Group) is a non-participating group term insurance plan with return of premium. It is a simple and easy solution that offers dual benefits of life cover protection in the event of death and refund of premium in case of survival up to the end of the cover term. Group Loan Protection Plans SBI Life – RiNn Raksha is a group credit life insurance plan. Group Savings Protection Products SBI Life – Nidhi Raksha RP is a unique plan aimed to help, protect, and grow a customer’s savings.

5. Group Micro Insurance Plans ∑ SBI Life – Grameen Shakti is aimed at providing life insurance protection to the weaker sections of the society, like people who are funded by Micro Financial Institutions or NGOs or avail loan from Bank/ Financial institutions through SHG. ∑ SBI Life – Grameen Super Suraksha is a low cost group term assurance plan for rural people who can seek life insurance protection without maturity benefits. C. Health Plans Financial planning is incomplete without planning for health insurance. Due to today’s hectic lifestyle, improper diet, lack of exercise, we are at a higher risk of contracting serious illnesses. Sudden health problems can burn a deep hole in our pockets. Therefore, there is a definite need to seek cover for health insurance to reduce the financial burden. ∑ SBI Life – Group Criti9 is a traditional non-participating Group Health Plan. This plan provides protection against nine critical illnesses where Sum Assured is paid in lump sum on diagnosis of any one of the covered critical illnesses. ∑ SBI Life – Hospital Cash is a comprehensive plan that covers not only hospitalisation expenses but also other incidental costs. SBI Life has launched an SMS-based customer care initiative for prompt grievance redressal. Distribution Network: SBI Life banks upon an exclusive multi-distribution model comprising Agency, Group Corporate and Bancassurance. Equipped with the strength of the SBI Group, SBI Life leverages the opportunity of cross selling insurance policies along with numerous banking products as a package deal such as housing loans and personal loans. India’s largest public sector bank, SBI enjoys access to over 100 million accounts across the country that acts as a solid base for enacting insurance penetration in each region and economic strata of the country. SBI Life’s agency channel consists of over 80,000 insurance advisors who bring door to door insurance solutions to the customers. Technology SBI Life Insurance introduced an initiative called ‘SMS SOLVE.” A first-of-its kind in the life insurance industry, the service allows customers to get their grievances resolved in a simpler, paperless, and fast manner. The service has been rolled out nationally.

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SMS SOLVE provides customers the ease of accessing SBI Life 24 ¥ 7. Customers are able to register their grievances about SBI Life’s service by merely sending SMS ‘SOLVE’ to 56161. The message along with the customers’ mobile number, date and time of message is automatically registered at the central server of SBI Life’s central processing centre. A special customer service team from the V Care cell, exclusively trained and dedicated for the SMS SOLVE service, calls the customer, takes note of his grievances and addresses it. After the complaint is resolved, the service personnel updates the status on a specially designed internal portal. A closure to the complaint is made only after confirming with the customer through a follow up call. Sufficient built-in security features have been incorporated in the system to ensure that only authorised people can modify or delete the complaints. Finally, an SMS intimating the grievance redressal and closure is sent to the customer. SBI Life also offers unique online services such as: 1. Tools and Planners ∑ ∑ ∑ ∑ ∑ ∑ ∑

Premium calculator Insurance calculator Tax calculator Child education planner HLV calculator Retirement calculator Easy plan finder

2. Electronic Clearing Service (ECS) is an easy premium payment option that minimises time and effort and maximises peace of mind and convenience. No queues, no wastage of time, and minimal chance of wasted effort. Corporate Social Responsibility: Gift Drishti One of its corporate ethos, enhancing SBI Life brand value, is about giving back to the society. In line with its Corporate Social Responsibility (CSR) initiatives, the cause of supporting elderly citizens was initiated. Incidence of cataract blindness, annually at 3.28 million, is one of the most prevalent health ailments suffered by old people, particularly in rural pockets of our country. On the occasion of World Elder’s Day on October 1, CSR initiative – “Gift Drishti” (Restoring vision) was launched in partnership with HelpAge India, a registered national level voluntary body, working for the cause of disadvantaged aged persons. Vision is restored through Intra Ocular Surgery (IOL). SBI Life employees made monetary contributions to the cause. SBI Life donated twice the sum contributed by its employees. Eye sight of thousands of elderly citizens was restored in the rural parts of the country. Read India Pledge SBI Life undertook the CSR initiative, aimed at driving the cause to make children read and write. The campaign, “Read India Pledge” sensitised general public towards the cause and urged them to pledge and support the cause monetarily or by devoting time. The campaign was partnered by Pratham, one of the leading child-cause related NGOs and Radio Mirchi, a leading radio station.

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To help other bank systems function as SBI Life’s customer touch points, the insurer has created a service layer that connects to the bank system, which sits in all their branches as well as other customer touch points such as the ATMs. It integrates with the front end of the bank systems, such that when it is queried, it traverses to the SBI Life insurance’s IT systems to give away relevant information. SBI had an in-house CRM system that would serve as a complaint and lead management system, but was soon found to be wanting by Parameswar Menon, vice president and head – Customer and Partner Channel Systems, SBI Life Insurance. The existing system captured customer interaction recorded only at the branch level. The existing CRM at SBI Life had reached an inflection point. Around the same time as the company was debating upgrading its CRM, came the IRDA regulation that specifies the timeframe in which insurance companies must resolve complaints and also its process. To enable this, insurance companies must have a complaint tracking model that can be integrated with the regulator, such that they can have a clear and transparent view of the status of customer service in the country. That sealed the decision for the company. The only other thing they had to consider was whether to build on their existing solution or buy a new one. SBI Life chose CDC Software’s Pivotal CRM as their solution. One of the biggest challenges was to integrate the data from the existing systems with the new solution. This was made relatively easy by the solution’s plug and play modules. The same module also allows integration with the IRDA portal so that the regulator can query the system to track complains. With the new solution, SBI Life can efficiently service any query/complaint because they have a consolidated view of all the past payments and history of customer interaction at their fingertips, allowing faster resolution and immediate escalation of problems that require deeper investigation. For example, the regulator allows for three days from the complaints being generated to the acknowledgement received by the customer from the bank. This is available for both the regulator and SBI Life to see online. Similarly, IRDA has defined the complaint lifecycle of different types of complaints. With the new system, the company can record not just the queries of existing customers but also the initial interactions with potential customers. Benefits: With a central monitoring team, the management can decide which complaints can be handled by the service agent and which need to be escalated to the next level. SBI Life now has a new CRM system that has improved transparency, lowered the complaint resolution time, and cuts across all customer touch points. Moreover, it is one of the first insurers that is compliant with the new IRDA regulation, allowing for seamless transfer of information and transparency. With the new solution SBI life is ready to take the next step of servicing customers through new and emerging touch points such as mobile and social media, giving it a definite competitive edge. 3.

ICICI Prudential

ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, a premier financial powerhouse and Prudential plc, a leading international financial services group headquartered in the United Kingdom. ICICI was established in 1955 to lend

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money for industrial development. Today, it has diversified into retail banking and is the largest private bank in the country. Prudential plc was established in 1848 and is presently the largest life insurance company. ICICI Prudential was amongst the first private sector insurance companies to begin operations in December 2000 after receiving approval from Insurance Regulatory Development Authority (IRDA). ICICI Prudential Life’s capital stands at Rs. 4,793 crore (as of June 30, 2012) with ICICI Bank and Prudential plc holding 74% and 26% stake respectively. For the period April 1, 2012 to June 30, 2012, the company has garnered total premium of Rs 2,385 crore and has underwritten over 13 million policies since inception. The company has assets worth over Rs 70,000 crore as on June 30, 2012. Today, their nation-wide team comprises over 1,000 offices, over 263,000 advisors; and 22 bancassurance partners. ICICI Prudential was the first life insurer in India to receive a National Insurer Financial Strength rating of AAA from Fitch ratings. For three years in a row, ICICI Prudential has been voted as India’s Most Trusted Private Life Insurer, by The Economic Times – AC Nielsen ORG Marg survey of ‘Most Trusted Brands.’ Products: The ideal insurance plan is one that addresses the exact insurance needs of the individual that depend on the age and life stage of the individual apart from a host of other factors. For over a decade, ICICI Prudential Life Insurance has been focussed on providing a wide assortment of flexible insurance products that can address Indian customers’ needs at every stage in life. This has ensured that the various products offered by the company strategically fit into the financial plan of the customers and help them achieve their various long-term financial goals. ICICI Prudential Life offers plans under the following major need categories: A. Insurance Solutions for Individuals ICICI Prudential Life Insurance presents a wide array of modern and customer-centric insurance policies to fulfil the needs of customers at every life stage. Its products can be enhanced with up to four riders to create a customised solution for each policy holder. 1. Savings & Wealth Creation Solutions ∑ ICICI Pru LifeStage Wealth II is a unit linked insurance plan that offers multiple choices to decide the way savings would be invested on the basis of risk appetite. ∑ ICICI Pru LifeTime Premier is a comprehensive savings plan that offers the policy holder a choice of portfolio strategies for savings and at the same time secures him against uncertainties of life. ∑ ICICI Pru Pinnacle Super is a unit linked insurance plan that gives the policy holder an advantage of varying exposure to equities with downside protection, so that his investments are protected in financially volatile times. ∑ ICICI Pru Elite Life is a unit linked insurance plan that offers the policy holder multiple choices on how to invest savings along with an insurance cover. ∑ ICICI Pru Elite Wealth is a unit linked insurance plan that offers the policy holder greatest value for his hard earned savings. Also, it offers rewards with loyalty additions from the sixth year onwards to maximise the return on investments. ∑ ICICI Pru iAssure Single Premium a conventional non-participating single premium product that provides the policy holder guaranteed maturity benefit and also offers a life cover to take care of his loved ones in his absence.

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∑ ICICI Pru Guaranteed Savings Insurance Plan is a limited pay endowment product that allows the policy holder to enjoy the benefits of a long-term savings plan ensuring that he and his family are free of any financial worries. ∑ ICICI Pru Future Secure is a participating endowment life insurance plan that helps the policy holder save for specific goals in the future, while providing protection for his family from financial distress in case of his untimely demise. Through the dual benefit of savings and protection, it helps in ensuring a secure future for loved ones. ∑ ICICI Pru Whole Life provides the policy holder with a unique double advantage of savings and protection that not only allows him to meet his goals but also seeks to ensure that his dear ones will continue to live in comfort without financial worries in case of unforeseen eventuality. ∑ ICICI Pru Save ‘n’ Protect is plan for those who want to accumulate funds on a regular basis while enjoying insurance protection. ∑ ICICI Pru CashBak is a single policy that combines the triple benefit of protection, savings, and periodic liquidity. 2. Protection Solutions ∑ ICICI Pru iCare is a term insurance plan that the policy holder can buy online at his convenience in a simple manner. ∑ ICICI Pru Pure Protect is a flexible and affordable term product, with which the policy holder can insure his life and provide total security for his family in case of an unfortunate event. ∑ ICICI Pru LifeGuard is a protection plan that offers life cover at low cost. It is available in two options: level term assurance with return of premium and single premium. 3. Child Plans ∑ ICICI Pru SmartKid Regular Premium is an endowment regular premium life insurance plan that comes with a unique Payer Waiver Benefit (PWB). This benefit ensures that in case of death of the parent, the company pays all future premiums on behalf of the parent. Therefore, the child gets money at important stages of his student life and his education does not suffer due to lack of funds. ∑ ICICI Pru SmartKid Premier is a ULIP plan that ensures your child’s education continues even if you are not around. In this plan, investors need to invest premiums regularly over a period of time and the returns that you get will depend on the performance of the underlying fund performance. 4. Retirement Solutions ∑ ICICI Pru Immediate Annuity is a single premium annuity product that guarantees income for life at the time of retirement. It offers the benefit of five pay-out options. 5. Health Solutions ∑ ICICI Pru Hospital Care II is a family floater plan covering your spouse and children. This fixed benefit hospitalisation and surgical plan complements your existing coverage by offering pay-outs over and above any health plan you have, thus availing best possible medical treatment, without having to bother about the cost of the treatment or quality of care.

286

Customer Loyalty

∑ ICICI Pru Crisis Cover is a product that will provide long-term coverage against 35 critical illnesses, total and permanent disability, and death. ∑ ICICI Pru Health Saver is a whole-life comprehensive health insurance policy that provides a hospitalisation cover for you and your family and reimburses all other medical expenses not covered in the hospitalisation benefit by building a health fund for you and your family. B. Group Insurance Solutions ICICI Prudential also offers Group Insurance Solutions for companies seeking to enhance benefits to their employees. ∑ Group Gratuity Plan: ICICI Prudential Life’s group gratuity plan helps employers fund their statutory gratuity obligations in a planned manner and also avail of tax benefits as applicable to approved gratuity funds. ∑ Group Leave encashment Plan: ICICI Prudential Life’s Group offers a market linked and traditional leave encashment plan designed to aid the employers to build a fund to meet their future leave encashment liability. The contributions made will be invested as per the chosen investment plans and will be available for payment of the benefit when due. Additionally, the product also provides for term cover for all employees covered under the policy. ∑ Group Term Insurance Plan: ICICI Prudential Life’s flexible group term is a one-year renewable life insurance policy that enables you to provide every member of your team with an affordable life cover. ∑ Group Term in lieu of EDLI Scheme: ICICI Prudential’s Group Insurance Scheme in lieu of EDLI has been certified by the Employees Provident Fund Organisation (EPFO) as a superior product that provides greater insurance benefits than the cover offered by EPFO. ∑ Credit Assure: With Credit Assure, ICICI Prudential Life offers an innovative and affordable term life insurance plan that covers loans against the unfortunate event of death, with complete convenience in application. The scheme is simple and hassle-free. C. Flexible Rider Options ICICI Prudential Life offers flexible riders, which can be added to the basic policy at a marginal cost, depending on the specific needs of the customer. ∑ Accident and disability benefit: If death occurs as the result of an accident during the term of the policy, the beneficiary receives an additional amount equal to the rider sum assured under the policy. If an accident results in total and permanent disability, 10% of rider sum assured will be paid each year, from the end of the first year after the disability date for the remainder of the base policy term or 10 years, whichever is lesser. ∑ Critical illness benefit: Critical Illness Benefit Rider provides protection against nine critical illnesses to the policy holder when attached to the basic plan. ∑ Income Benefit Rider: In case the life assured passes away during the policy term, 10% of the rider sum assured is paid annually to the beneficiary on each policy anniversary till the maturity of the rider. Income Benefit rider is available with SmartKid Child Plans. Premiums paid under this rider are eligible for tax benefits under Section 80C. ∑ Waiver of Premium Rider (WOP): In the event of full and permanent disability caused due to an accident, all future premiums for both the base policy and riders will be waived till the rider’s term ends or passing away of the life assured, if earlier.

Customer Loyalty in the Life Insurance Industry

287

∑ Waiver of Premium Rider on Critical Illness Rider: This rider waives all your future premiums of your base policy on occurrence of specified 20 Critical illnesses. This ensures that your policy benefits continue as planned. D. Rural Plans ICICI Prudential’s rural business initiative is an attempt to reach the underserved segment through its rural insurance plans. ICICI Prudential claims to have covered more than 2.5 million lives across as many as 16 states in India. Both rural plans ‘Sarva Jana Suraksha’ and ‘Anmol Nivesh’ are tailored to meet the unique requirements of rural investors. The plans offer life cover, low and affordable premiums, and hassle-free procedure. Distribution Network: ICICI Prudential Life has a comprehensive multichannel distribution network spanning various geographic and income segments to ensure that its products and services are accessible to customers. Technology ICICI Prudential Life offers various online services such as online payment facility, e-statements, fund value on SMS, and e-switch. 15.5

FINAL THOUGHTS

According to the McKinsey & Company, amid increasing household incomes and higher premiums (as a percentage of the GDP), an exponential growth can be expected in the Indian insurance sector in 2012. This global consultancy giant’s report on Indian insurance industry (2011) stated that the industry registered a decline of 13% in APE (32% for the private sector) from September 2010 to March 2011. However, this slowdown has not marred the desirability of the Indian insurance industry. The global research conducted by McKinsey across 60 countries that account for 99% of world’s premiums concluded that the Indian life insurance industry’s GWP can be predicted to grow at 13–14% between 2010 and 2015. With this rate, the industry will obtain a total GWP of about US$ 110 billion by 2015. India is expected to contribute 10% of the total global premium growth during this period achieving a double digit growth rate. Delloite (2011) reported that post-liberalisation, the Indian insurance industry has witnessed a speedy growth rate, which is evident from the fact that total premium has increased at a CAGR of 25% amounting to $67 billion in the year 2010. The Indian life insurance industry has been ranked ninth largest market in the list of life insurance markets across the world. Although it accounts for 88% of total life and general insurance premiums, yet insurance penetration reached merely 5.2% in the year 2010, which is much lower in comparison to the insurance density in other Asian countries such as South Korea, Taiwan, and Japan. Here, insurance penetration is gauged in the form of the ratio of premium underwritten to GDP. Such low penetration indicates myriad opportunities for growth and profitability. However, the dynamics of Indian life insurance industry are changing fast with growing population resulting in potential demand, increased purchasing power, and higher customer awareness. Identical offerings and stiff regulations leave little scope for differentiation in the insurance industry making it dependent upon the customer evaluative judgements for business growth. Customer loyalty can be a significant tool in the hands of life insurers aiming to create differentiation. Given the fact that a customer’s loyalty is largely dependent on the company advisor’s loyalty towards the company in the life insurance business, most of the life insurers offer loyalty rewards to their agents to ensure their continued allegiance to the company.

Customer Loyalty

288

Review Questions 1. What is the peculiarity of the nature of customer loyalty in the insurance industry? 2. Are the benefits of customer loyalty different in the insurance industry as compared to other service industries? Compare. 3. The significance of customers has changed with the growth of the Indian insurance industry. Comment. 4. Insurance is a passive product and hence does not require very strong customer friendly initiatives. How far do you agree with the statement and why? 5. The biggest strength of LIC lies in its ownership and customer friendliness. Analyse the statement. 6. The customer friendliness requirements are different for life and non-life insurance companies. Comment. 7. Explain the position of a customer in the overall business structure of a life insurance company. 8. How do you assess the customer loyalty building initiatives of ICICI Prudential Life? Compare these with the initiatives of SBI Life. 9. What are the parameters based on which the effectiveness of customer loyalty building shall be assessed in special reference to life insurance companies. 10. What is the significance of training in effective implementation of customer loyalty in the insurance industry?

Project Assignments 1. LIC was supposed to be biggest loser of opening up of the industry because it was a monopoly player. What customer-friendly initiatives would you undertake so that there is consistent business growth even if the market share slides? 2. Given the nature of life insurance products, the customer loyalty assessment and loyalty building parameters would be different from that of regular products. Assume that you are manager, customer relations, of a new entrant in the life insurance sector in the country. Design a set of programme for building loyalty for its customers. Also, explain the procedure based on which you would design this programme.

References 1. Crosby L, Evans K.R. and Cowles D. (1990). Relationship quality in services selling: an interpersonal influence perspective. Journal of Marketing, 54 (July), 68–81. 2. Diacon, S. and O’Brien, C. (2002). ‘Persistency in UK long-term insurance: customer satisfaction and service quality’. CRIS Discussion Papers, III, University of Nottingham, Nottingham. 3. Durvasula S., Lysonski S., Mehta S.C. and Tang B. P. (2004). Forging relationships with services: The antecedents that have an impact on behavioural outcomes in the life insurance industry. Journal of Financial Services Marketing, 8 (4), 314–326. 4. Ettorre, B. (1994). Phenomenal promises that mean business. Management Review, 83, 18–23. 5. Gera, R (2011). Modelling the service antecedents of favourable and unfavourable behaviour intentions in life insurance services in India: An SEM study. International Journal of Quality and Service Sciences, 3 (2),225–242. 6. Joseph, J. and Walker, C.E. (1988). Measurement and Integration of Customer Perception into Company Performance and Quality. In: Bitner, M.J. and L.A. Crosby, (Eds.), Designing a Winning Service Strategy (New York, AMA). 7. Lombardi, L. J. (2005). The importance of client retention. LIMRA’s Market Facts Quarterly, 24 (2), 31–32.

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8. Moore, J. and Santomero, A. (1999). The Industry Speaks: Results of the WFIC Insurance Survey, in: Changes in the Life Insurance Industry: Efficiency, Technology, and Risk Management, D. Cummins and A. Santomero (Eds.), Kluwer Academic Publishers. 9. Slattery, T. (1989). Special report: Nichols: we’ve forgotten the consumer. National Underwriter, 48 (November), 11. 10. Solomon, M.R., Surprenant, C., Czepiel, J.A. and Gutman, E.G. (1985). A role theory perspective on dyadic interactions: the service encounter. Journal of Marketing, 49 (1), 99–111. 11. Toran, D. (1993). Quality service (quality everything!). LIMRA’S Market Facts, 12 (2), 10–11. 12. Tsoukatos, E and Rand, G. K. (2006). Path analysis of perceived service quality, satisfaction and loyalty in Greek insurance. Managing Service Quality, 16 (5), 501–519. 13. Zeithaml, Valarie A., Leonard L. Berry, and A. Parasuraman (1996). The Behavioural Consequences of Service Quality. Journal of Marketing, 60 (2), 31–46.

Author Index A Alexandris et al. (2002)  168 Al-Hawari et al. (2009)  166 Allen (2010)  139, 153, 154 Allen et al. (1992)  126 Anderson (1996)  58, 140 Anderson (1998)  139 Anderson and Mittal (2000)  125 Anderson and Norus (1990)  121 Anderson and Sullivan (1993)  125, 169 Anderson and Weitz (1989)  114 Anderson, Sullivan and Lehmann (1994)  125 Arnesen and Fleanor (1997)  231 Athanassopoulos (2000)  125 Aydin and Ozer (2005)  126 B Bagozzi et al. (1999)  60 Baker and Crompton (2000)  168 Baldinger and Ruben (1996)  81 Ball et al. (2004)  114, 160 Barich and Kotler (1991)  118 Baron and Kenny (1986)  161, 164, 171 Barroso and Picón (2012)  177 Barsky (1992)  118, 125 Baumann et al. (2009)  142 Beatty et al. (1988)  81 Beatty et al. (1998)  125 Beerli et al. (2002)  109 Bendapudi and Berry (1997)  125 Bennett and Harrell (1975)  171 Berry (2007)  125 Berry et al. (2002)  176 Bhote (1996)  80 Birgelen, Ghijsen and Semeijn (2005)  170

Bitner (1990)  166 Bloemer and Kasper (1995)  118 Bloemer et al. (1998)  110, 167 Blomer et al. (1999)  139, 178 Blut et al. (2007)  177 Boles et al. (1997)  139 Bolton and Lemon (1999)  140 Boshoff (1997)  121 Boulding et al. (1993)  88 Bowen and Chen (2001)  150 Bowen and Shoemaker (1998)  137 Brady et al. (2005)  167 Brandt (1996)  157 Bryan Eisenberg  34 Buchanan and Giles (1990)  86 Burnham et al. (2003)  115 Butcher et al. (2001)  133, 137

C Caceres and Paparoidamis (2007)  169 Cahill (2007)  116 Caruana (2002)  58 Caruana (2004)  177 Caruana et al. (2000)  174 Cassel (2001)  118 Chaudhuri and Holbrook (2001)  139 Chen et al. (2012)  113, 114, 166 Cheng et al. (2011)  96 Chow et al. (2007)  168 Christopher et al. (1993)  81 Clottey et al. (2008)  112 Coelho and Henseler (2012)  97 Cohen and Cohen (1975)  171 Colgate and Norris (2001)  122 Collier and Beinstock (2006)  170

Author Index

Coyne (1989)  118 Cristobal, Flavian and Guinaliu (2007)  170 Cronin and Bei and Chiao (2006)  167 Cronin and Taylor (1992)  80, 125, 166, 167, 169 Cronin et al. (2000)  60 Cronin, Brady and Hult (2000)  125, 168 Crosby et al. (1990)  114 Cunningham (1956)  58

D Dabholkar and Overby (2005)  169 Dabholkar et al. (2000)  168 Dabholkar, Shepherd and Thorpe (2000)  169 Day (1969)  140 de Ruyter et al. (1998)  139, 140 Diacon and O’Brien (2002)  266 Dick and Basu (1994)  57, 80, 91 Dimitriades (2006)  55 Doganis (2006)  231 Doney and Cannon (1997)  120, 125 Duffy et al. (2006)  121 Durvasula et al. (2004)  266 Dwyer et al. (1987)  140 E East et al. (2005)   49 Ehrenberg and Goodhardt (2000)  66 Eriksson and Vaghult (2000)  118 Espejel et al. (2008)  95 Ettorre (1994)  261 F Fishbein and Ajzen (1975)  119 Fornell (1992)  118, 122, 125, 126, 169 Fornell et al. (1996)  125 Foster and Cadogan (2000)  120 Fournier (1998)  137 Fox and Poje (2002)  125 Fraenkel (2009)  59 Fred Reichheld (2003)  154 Fredericks (2001)  118 G Ganesan (1994)  114 Ganesh et al. (2000)  80, 114, 140 Garbarino and Johnson (1999)  120, 121 Garbing and Anderson (1988)  150

291

Garbing and Anderson (1988)  150 Gembl (2002)  58 Gera (2011)  266 Getty and Thompson (1994)  137 Giese and Cote (2000)  117 Gomez et al. (2005)  66 Grayson and Ambler (1999)  66 Gremler and Brown (1996)  110, 140 Gremler and Brown (1999)  55, 80, 81 GrÖnroos (1990)  266 GrÖnroos (2000)  117, 125 Gundlach et al. (1985)  114 Gundlach et al. (1995)  121

H Hallowell (1996)  81 Hauser et al. (1994)  122 Hayes (2009)  162 Heskett et al. (1994)  109 Heskett et al. (1997)  117 Heskett, J. L., Sasser, W. E. and Schlesinger, L. A. (1997)  59 Ho (2007)  170 Hoisington and Naumann (2003)  67 Howard and Sheth (1969)  60 Howat et al. (1999)  167 Hozier and Stern (1985)  140 Hume and Mort (2010)  112 Hurley and Estelami (1998)  166 I Iacobucci (1992)  140 Ibrahim and Najjar (2008)  96 Ishak et al. (2006)  168 Izard (1977)  61 J Jacoby and Chestnut (1978)  48, 75, 80 Jacoby and Kyner (1973)  58, 121 Jan Hofmeyr and Butch Rice  79 Jarvis et al. (2003)  150 Javalgi and Moberg (1997)  56, 57 John Stacey Adams (1963)  147 Johnston (2005)  121 Jones and Sasser (1995)  109, 118 Jones and Taylor (2007)  134 Jones and Taylor (2012)  59, 90, 97

292

Customer Loyalty

Jones et al. (2000)  81, 114, 140 Josiah Royce (1908)  4, 12 Juga et al. (2010)  169

K Kandampully and Suhartanto (2000)  56, 135, 137 Kassim and Abdullah (2010)  112, 166 Kearney (1989, 1990)  231 Keiningham et al. (2006)  88 Kiran, K. and Diljit, S. (2011)  168 Kivetz and Simonson (2003)  228 Klemperer (1987)  122 Knox and Walker (2001)  81, 87 Kon (2004)  126 Kotler (1997)  66 Kraemer et al. (2008)  162, 163 Kristensen et al. (2000)  118 L Ladhari (2009)  170 Lado (2003)  66 Landrum and Prybutok (2004)  169 Laverie, Kleine, and Kleine (1993)  126 Lee et al. (2000)  166 Lee, Lee and Feick (2001)  66 Levitt (1972)  194 Lewis (1999)  57 Liang and Wang (2007)  125 Lichtenstein et al. (1995)  114 Liljander and Strandvik (1995)  59 Lin and Chen (2009)  96 Lindestad and Andreassen (1997)  119 Liu & Yang (2009)  230 Lombardi (2005)  266 M Majumdar (2005)  95 Mano and Oliver (1993)  126 Martenson (2008)  96 Marthensen and Gronholdt (2003)  169 McAlexander et al. (1994)  125 McCollough et al. (2000)  122 McCollough, Berry, and Yadav (2000)  126 McConnell and Huba (2003)  141 McDougall and Levesque (2000)  167 McMullan (2005)  80, 81 Miller et al. (2000)  122

Mitra and Lynch (1995)  137, 139 Moore and Santomero (1999)  266 Moorman et al. (1993)  120 Morgan and Hunt (1994)  114, 125, 160 Morgan and Hunt (2004)  125 Murray and Howat (2002)  167

N N’Goala (2003)  59 Narayandas (1999)  140 Naumann et al. (2001)  66 Naylor (1999)  139 Ndubiri and Chan (2005)  121, 126 Newman and Werbel (1973)  59 Nguyen and Leblanc (2001)  110, 119, 126 O O’Malley (1998)  81 Oderkerken-Schroder et al. (2003)  67 Ogba and Tan (2009)  96 Oliver (1980)  60 Oliver (1993)  166 Oliver (1997)  49, 114, 137 Oliver (1999)  59, 60, 81, 87, 110 Oliver and Swan (1989)  114 Oliver et al. (1992)  118 Olorunniwo et al. (2006)  169 Olsen and Jacoby (1971)  49 Olsen et al. (2012)  97 Ostrowski et al. (1993)  58, 140, 144 P Palmatier et al. (2007)  90 Palmer et al. (2000)   87 Panda (2003)  33 Parasuraman and Grewal (2000)  114 Parasuraman et al. (1988)  166, 169 Parasuraman et al. (2005)  170 Parasuraman, Berry and Zeithaml (1991)  88 Parasuraman, Zeithaml, and Berry (1994)  125 Patterson and Ward (2000)  137 Pavlou (2003)  120 Peter Clark  75 Petrick (2004)  67 Philip Kotler  23 Ping (1993, 1999)  167 Plutchik (1980)  61

Author Index

Porter (1998)  122 Pratt (1998)  142 Preacher and Hayes (2004)  162 Price et al. (1995)  114, 139 Pritchard et al. (1999)  81 Pritchard, Havitz and Howard (1999)  125 Prus & Brandt (1995)  59

R Rai (2012)  32, 42, Rai (2013)  32, 33, 140, 160 Rai and Srivastava (2012)  126, 144, 166 Rai and Srivastava (2014)  158 Raju (1980)  81 Raman (1999)  55 Ranaweera and Neely (2003)  117 Ranaweera and Prabhu (2003)  120, 125 Reichheld (1994)  134 Reichheld (1996)  45, 49, 60, 71, 90 Reichheld and Sasser (1990)  33, 47, 66, 169 Reichheld et al. (2000)  120 Reinartz et al. (2005)  71 Reynolds and Arnold (2000)  140 Reynolds and Beatty (1999)  140 Richard P. Mullin  12 Rogers and Peppers  34 Rosenberg et al. (1984)  66, 124 Rowe and Barnes (1998)  46 Rowley (2005)  87 Rowley and Dawes (1999)  119 Roy et al. (2009)  87 Rucker et al. (2011)  163 Rundle – Thiele (2005)  59 Rust and Oliver (1994)  117 Rust and Zahorik (1993)  88, 139 Ruyter and Bloemer (1999)  118 Ruyter et al. (1998)  133 S Sahu and Vyas (2007)  88 Sasser, Olsen and Wyckoff (1978)  194 Saunders (1956)  171 Schlesinger and Heskett (1991)  89 Selnes (1993)  58, 80 Selnes (1998)  120 Sharma (2003)  177

Sharma and Patterson (2000)  177 Sharma et al. (1981)  171, 172 Shaver (2005)  164 Sheth and Parvatiyar (1995)  84 Shoemaker and Lewis (1999)  55 Singh and Sirdeshmukh (2000)  66 Sirgy (1982), (1985)  126 Slattery (1989)  266 Smith and Bolton (2002)  122 Smith and Wright (2004)  110 Sobel (1982)  164 Sodurlund (2006)  150 Solomon et al. (1985)  266 Spreng and MacKoy (1996)  166 Stewart (1996)  47 Storbacka et al. (1994)  85, 168 Sudhahar et al. (2006)  155 Swanson and Kelley (2001)  126

T Taylor (1992)  80 Taylor, Hunter and Longfellow (2006)  95 Tellis (1998)  135 Tepeci (1999)  126, 135   Terblanche and Boshoff (2006)  109 Toran (1993)  266 Tsaur et al. (2002)  85 Tsoukatos and Rand (2006)   169 Tsoukatos and Rand (2006)  266 U Uncles et al. (2003)  57, 59 V Verhoef et al. (2003)  116 Verhoef et al. (2007)  115 Voss, Parasuraman, and Grewal (1998)  175 W Walker and Knox (1997)  140 Walsh et al. (2008)  96 Wang (2010)  119 Wang and Sohal (2003)  168 Wang and Wu (2012)  97 Wan-Jin (2009)  117 Weiner (2000)  120

293

294

Customer Loyalty

Westbrook (1987)  126 Whisman and McClelland (2005)  173 White and Schneider (2000)  140 Wolfinbarger and Gilly (2003)  169 Wong et al. (1998)  168 Woodside et al. (1989)  166 Wu (2011)  96

Z Zeithaml et al. (1996)  47, 125, 133 Zeithaml et al. (2000)  125 Zeithaml et al. (2006)  169 Zemke and Bell (1990)  121 Zhang and Prybutok (2005)  170 Zhao et al. (2010)  164 Zinkham and Hong (1991)  126

Company/ Brand Index Aadhar  211 Accenture  45 Aegon Religare  266 Aegon  266 Ageas  266 Air Sahara  231 Aircel  138 Airtel  122, 138, 195 AkshayaPatra Foundation  36 Alaska Airlines  37 Allahabad Bank  242 Allianz  265 Amazon  50, 58 American Airlines (AA)  231 American Express  232 American International Assurance Co.  265 Amul   136 Apple  36, 50, 58 Archies Gallery  47, 202 Aviva   266 Aviva International Holdings Ltd.  266 AXA Holdings  266

B Axis Bank  244 Bajaj Allianz   265 Balaji Telefilms  191 Bank of Baroda  251, 245, 255 Bank of India  242 BARE  210 Bata  106 Bharat Petroleum Corporation (BPCL)  196, 238 Bharti AXA   266 Big Bazaar  136, 211, 212 Big TV  122

Birla Sun Life  265 BMW  176 BNP Paribas Assurance SA  265, 278 Bombay Dyeing  235 BookMyShow.com   212 Brand Factory  212 Britannia   235 British Airways  231 BSNL  138 Bullet  73

C Cadbury  124 Call of Duty   58 Canara HSBC  266 Central  210, 212 Citibank  196, 235 Club HP  237 Coke  72 Colgate  106, 124, 142 Crest Whitestrips  50 Crossword  205 D Dai-ichi Mutual Life Insurance  266 Delta Airlines  231 Diebold  43 Diners Club   232 Dish TV  122 DLF Pramerica   266 Dunkin’ Donuts (coffee)  50

Limited

E Edelweiss Tokio  266 Emirates  231 Escorts Group  73

296

Customer Loyalty

Ezone  211, 212

F Facebook  37, 50, 98 FedEx   98 Food Bazaar  136, 210, 212 Ford  106 Furniture Bazaar  211 Future Bazaar  212 Future Generali  266 Future Group  136, 202 G Galaxy Entertainment  210 Generali  211 Globus  214 Go Airlines (India) Ltd.  235 Godrej  211 GoldPlus  208 Google Nexus  25 Google  50 Grey Goose  50 H Halo   58 Harley Davidson  36 HDFC Bank  244 HDFC Standard  265 Hero Honda CD 100  73 Home Town  136, 211, 212 HPCL  195 HUL  142 Hyundai  50 I ICICI Bank  195, 244 ICICI Prudential  265, 283 IDBI Federal   266 Idea  138 India First   266 Indian Airlines  195, 231, 234 Indian Oil Corporation (IOC)  196 Indian Railways  123 Indus League Clothing  210 Infosys  63 ING Insurance International B.V  265 ING Vysya  265

International Holdings Ltd.  265 iPhone  25

J Jet Airways  230, 232, 233, 234 JetBlue  154 John Miller  210 K Kellog’s  32 Ketel One  50 Kindle  50 Kingfisher Airlines Ltd.  237, 238 Kotak Mahindra Old Mutual  265 Kroger  143 L L’Oreal  50 Landmark  202 Legal & General Middle East Limited  266 LG  50 Li & Fung Group  211 Life Insurance Corporation of India (LIC)    264, 268 Lifestyle  195 LoyaltyOne  143 Lufthansa Technik   238 Lululemon Athletica  117 M MakeMyTrip.com  195 Maruti  147 Mary Kay  50 Max New York  265 Maybelline  50 McDonald’s  54, 75 Mercedes  176 Metlife Metlife  265 Mothercare Plc  205 MTNL  138 N New York Life  265 Nexus 4  72 NOKIA  136

Company/ Brand Index

O OBC HSBC  266 Old Mutual  265 Oriental Bank of Commerce  244 P Pantaloons  136, 195 Patron  50 PAYBACK India  36 PepsiCo  95 Pizza Hut  39, 64, 200 Planet Retail  210 Prudential of America  266 Prudential Plc  265, 283 Pulsar  136 Punjab National Bank  242, 245, 246 Pyramid Group     202 Radixx International  236 R Raheja Group  202 Rajdoot  73 Reliance Fresh  202 Reliance  138, 203, 265 Ritz-Carlton  28 Rolls Royce  176 Royal Enfield  73 S Sach  211 Safeway  143 Sahara  266 Samsung  50, 58, 148 Sanlam  266 SBI Life  265, 278 Shopper’s Stop  196, 204 Shriram   266 Singapore Airlines  231 SKODA  147 Sri Lankan Airways  231 Standard & Poor’s  245 Standard Life Assurance  265 Staples  211

Star Union Dai-ichi   266 Starbucks  196 State Bank of India  242 Subhiksha  202 Sun Life  265 SuperVal  143

T T24  211 Taj Group  231 Tanishq  204 TATA AIG  265 TATA Docomo  136 Tata Sky  122 Tata Teleservices Ltd.  213 Tata  207 Tesco  203 Titan  202 Tokio Marine Holding Inc  266 Truemart  202 Twitter  37, 50, 58, 98 U Uninor  138 Univercell  212 V Virgin-Atlantic  231 Vishal Mega Mart  220 VLCC  195 Vodafone  138 Volkswagen Polo  136 W Wadia Group  235 Walmart  50, 143 Westside  202 Y YouTube  58 Z Zappos  50

297

Customer Loyalty Programmes Index A Ananta  209 Anuttara  209 Archies Club  202 C Club West  202 F First Citizen Shoppers Stop Loyalty Programme  207 First Citizen  196, 202 Ford CarGainz  106 G Globus Privilege Club  215 I i-mint     195 J Jet Privilege  234

K King Club  238 M Maha meetha  225 My Starbucks Rewards™  196 P Pantaloons’ Green Card Program  195 PetroBonus  196 T The Inner Circle  202 V Vishal Reward Plus  223 VLCC Way of Life  195 X Xtrapower  196 Xtrarewards  196

Model Index A Apostle Model  92 C Causal model  168 Conversion Model  79 Customer Loyalty Development Model  87 Customer Loyalty Quadrate Model  60 Customer value model  33 E ECSI model  118 Emotional model of relationship  147 F Formative measurement model  150 Four-stage loyalty model  177 I Integrated model  96 L Loyalty business model  90 Loyalty Business Model  85 Loyalty models  86 M Mediation model  161 Model of Customer Loyalty Categorisation  91

Model of Customer Relationship Management implementation process  32 Multi-item measurement model  150

O Ordered logistic regression model  112 P Path model  161 R Rai–Srivastava’s Satisfaction – Emotion Quadrate Model of Customer Loyalty  60 Reflective measurement model  150 Relationship marketing model  32 Righteous Circle Model of Customer Loyalty  89 S Service convenience model  176 Service quality model  85 Structural equation model  110 T The Satisfaction – Dissatisfaction Paradigm  42 Traditional model  97 Transactional marketing model  31, 32 Two dimensional loyalty model  57

Subject Index A Actions  21 Active loyalty  80 Advertisement  28 Advocacy  64 Age  3, 26 Allegiance  21 Alternative attractiveness  96 Altruism  64 Altruistic behaviour  137 Ambassadors  141 ANOVA  173 Antecedents  110 Apathy  86 Association  21 Attachment  21, 120 Attitudes  26, 56 Attitudinal brand loyalty  49 Attitudinal loyalty  136 Aviation industry  228 Awareness  37 B Bank loyalty  110 Banking   241 Behaviour  21 Behavioural brand loyalty  49 Behavioural Intentions Battery  151 Behavioural intentions  80, 152 Behavioural loyalty  134 Behavioural outcomes  136 Behaviouristic  27 Blue chip companies  245 Brand allegiance  155 Brand differentiation  68 Brand equity  89

Brand image  96 Brand loyalty  41, 122 Brand preference  134 Brand value  143 Brand  36, 37, 76, 79 Bretton Woods system  241 Business environment  33, 71, 74 Business models  37 Business to business relationships  160 Business  23 Buying basket analysis  207

C Case studies  37 Channel intermediary  24 Character  4 Coalition loyalty programme  196 Co-branded credit card  204 Co-creation  64 Coefficient  162, 164, 166 Cognitive evaluations  61, 62 Cognitive judgement  43 Cognitive loyalty   58 Cognitive loyalty  138 Cognitive processes  155 Cognitive response  42 Cold calling  40, 51 Commitment  4, 21, 75 Communication  31, 93 Competition  74 Competitive advantage  161 Competitive edge  158 Competitive mediation  164 Complaining behaviour  152 Complaint management  121 Complementary mediation  164

Subject Index

Confidence  119 Consumer behaviour  174 Consumers  25 Consumption experiences  43, 45, 141 Convenience  51, 96 Corporate failures  53 Corporate image  80 Corporate Social Responsibility  35, 63 Correlation  152 Credence goods  119 Criterion  161 Critical episodes  86 Cross selling  74 Culture  11 Customer acquisition  86 Customer affinity  36 Customer centricity  68, 161 Customer communities  27 Customer defection   73, 75 Customer delight  62 Customer empowerment  27 Customer engagement  37, 84, 95 Customer evangelists  141 Customer expectations     53, 60, 77, 93 Customer experience  72, 94 Customer life cycle  29 Customer Lifetime Value (CLV)  31, 89 Customer loyalty formation  123 Customer loyalty initiatives  158 Customer loyalty measurement scales  149 Customer loyalty migration  149 Customer loyalty  23, 71 Customer orientation  33 Customer profiling  149 Customer Profitability Analysis (CPA)  221 Customer Relationship Management  32, 160 Customer relationships  33, 53, 65 Customer retention  37, 45, 72 Customer satisfaction  38, 71 Customer security  157 Customer segmentation  79 Customer service  27, 37, 60, 249 Customer surveys  37, 51 Customer  23, 24, 25, 72 Customisation  24, 76

301

D Delight  80 Demand  24, 72 Demographic variables  3, 26 Dependent variable  162 Design  112 Detractors  154 Differentiation  78 Digital media  46 Direct effect  162 Dissatisfaction  62 Distribution network  262, 276, 281, 287 E Economic environment  105 Education  21 Emotion  10, 60 Emotional attachment  21, 65 Empathy  7, 9, Employee loyalty  89 Entertainment  188 Entry barriers  38 Environment  11, 21 Equity theory  147 Estimation  164 Ethics  20 Exclusive consideration  138 Exclusive intentions  144 Experience  26 Expertise  175 F Factor analysis  150 FAIRSERV  113 Familiarity  175 Family life cycle  26 Family size  26 Feedback  64 Financial cost  115 Foreign Direct Investment  244 Frequent flyer programmes  229, 230, 231, 232 Full mediation  163 G Gender  3 Geographic  26

302

Customer Loyalty

Globalisation  267 Gross Domestic Product  185, 187

H Habit   3   Hierarchical Multiple Regression  173 Homologizer  173 I Identification  64 Image congruence  126 Income  26 Independent variable  162 In-depth interviews  110 Indirect effect  162 Inertia  61, 78 Information channels  55 Information technology  98 Innovation  95 Innovativeness  26 Insurance  177 Interaction effects  172 Interests  26 Internal marketing  192, 193 Interpersonal relationships  177 IT-enabled services  188 K Knowledge and expertise  43, 53 L Latent loyalty  57 Law of demand  149 Learning costs  177 Learning  4 Legal cost  115 Liberalisation  260, 261, 278, 287 Life insurance  62 Lifestyles  26 Linguistics  27 Location  3 Logistic regression model  112 Logistics  209, 211 Low cost carriers  232 Loyalist  63 Loyalty outcomes  133 Loyalty points  143

Loyalty profiles  149 Loyalty programmes    68, 98, 229, 230, 231, 232, 244 Loyalty  148

M Manufacturing  76 Marital status  26 Market segments  106 Market  38, 72, 105 Marketing communication  51 Marketing environment  215, 221 Marketing mix  46 Marketing research  71 Marketing  115 Marketing  23 Measurement instrument  158 Measurement models  158 Mediating variable  162 Mediation model  161 Mediators  121, 161 Misplaced loyalty  19 Mistaken loyalty  19 Moderated regression analysis  172 Moderating effects  172 Moderating variables  161 Moderator  118 Monopoly  93 Motivation  100 Multiple regression  173 N Needs and wants  25, 41 Net present value  134 Net Promoter Score  154 Novelty seeking behaviour  62 O Oblique rotation  152 Occupation  3 Oligopoly  93 Operations  112 Opinion  26 Opportunity cost  134 Optimisation  37 Organisations  24 Outcome variable  162

Subject Index

P Partial mediation  163 Passive loyalty  80 Patronage  63, 120 People  42 Perceived alternatives  86 Perceived quality  97 Perceived risk  26, 96 Perceived switching costs  61 Perceived value  97 Perception  46 Performance measurement  33 Personality  4, 25 Phantom loyalty  91 Physical evidence  42 Place  42 Predictor  161 Preference loyalty  140 Preference  63 Premium  63 Prestige sensitivity  176 Price elasticity  155 Price perceptions  179 Price premium  56 Price sensitivity  86, 152 Price tolerance  138 Price  42 Primary customers  24 Privatisation  189, 278 Procedural cost  115 Process  42 Product design  36 Product quality  60, 110 Product  42, 49, 74 Profitability  74 Promoters  154 Promotion management  207 Promotion  42 Propensity to switch  153 Proxy loyalty  17 Psychographic variables  179 Psychographics  26 Psychological cost  115 Psychological states  61 Publicity  55, 120 Purchase decision  25, 49, 58

Purchase intentions  96, 152 Pure Moderator  173

Q Quasi Moderator  173 R Recession  228, 241 Recognition  112 Recommendation  41 Referrals  30 Regression error terms  164 Regression  164 Relational cost  115 Relationship   4, 21, 106, 142 Relationship equity  89 Relationship length  96 Relationship marketing  32, 137, 160 Relationship strength  86 Relative attitude  30, 59, 97 Religion  21 Repeat buying  30 Repeat patronage  56, 59, 91 Repeat purchase  91 Repurchase intention  56, 57, 97 Repurchase  120 Retention  39 Return on investment  149 Revisit  41 Reward programmes  112 Rewards  143 S Sales cycle  124 Satisfaction trap  60 Satisfaction  9 Search engine marketing  37 Secondary customers  24 Secure customer index  157 Segmentation  26, 30, 32, 33 Self-concept  26 Self-definitional needs  142 Self-image  126 Service ambience  64 Service convenience  176 Service delivery  71, 90 Service encounter  121, 141

303

304

Customer Loyalty

Service failure  61, 75, 121 Service industry  33, 109 Service loyalty  109 Service marketing  157 Service quality evaluations  61 Service quality  80, 85, 161 Service recovery paradox  75 Service  49, 74 Service-profit chain  109 SERVLOYAL  155 SERVQUAL  168 Share of category  155 Share of wallet  27, 36, 74, 79, 98 Social class  26 Social media  40, 46, 98 Social networking   46 Spurious loyalty  57 Standard error  164 Standardisation  71 Strategic alliances  235 Strategic management  85 Strength of preference  137 Structural equation modelling  164 Subgroup analysis  172 Switching barriers  142 Switching costs  17, 78, 110 Switching intentions  53, 86

T Target variable  162 Targeting  46 Technology  24, 71 Telecom   44 Tolerance zone  26 Top of mind  138 Training  60 Trend analysis  207 True loyalty  57 Trust  53, 74 U Usage rate  26 V Value chain  37, 72 Value dimension  149 Value equity  89 Value for money  220 Value  23 Variety seeking attitude  79 W Willingness to pay more  137 Willingness to recommend  137, 144 Word of mouth (WOM)  28, 74