Importance of customer loyalty

Published Date: 23 Mar 2015

The purpose of the literature review is to present background knowledge pertaining to the research constructs, loyalty as the dependent variable and relationship quality and marketing mix as the independent variables and perceived marketplace uncertainty as the moderating variable. The literature review also provides an overview of reported relationships between these constructs. The development of the theoretical framework and subsequent hypothesis are presented at the end of the literature review

Loyalty has received considerable attention in marketing literature for many years due to its importance, notably its powerful impact on a company's performance (Lam, Shankar, Erramilli and Murthy 2004, Rauyruen and Miller 2006, Duffy 2003, Zeithaml, Berry and Parasuraman 1996, Kotler and Keller 2006)

Companies gain a steady stream of revenue from loyal customers who remain with them and rejecting overtures of competitors. Considering this with the nature of large purchase and transactions in a B2B setting, there are gigantic rewards for those suppliers who succeed in creating and maintaining loyal customers. (Rauyruen and Miller, 2006)

Competitive advantage is gained due to high levels of cooperative actions beneficial to both partners in a B2B relationship, thus enhancing the competitiveness of both partners and reducing transaction costs. (Lam et al. 2004)

Companies gain measurable results in positive financial results. Obvious measures are increase in profits and increase in share of customers. (Duffy 2003)

In a similar vein, Zeithmal et al 1996 measures the financial importance of customer loyalty via defection and retention. In defection, the high cost of replacing and capturing new customers will be very expensive for it involves advertising, promotion and sales cost, as well as start up operating expenses. In retention, the longevity of the customer's relationship influences profitability in a positive manner. Customers who remain with a company for long periods are more likely than short term customers to repurchase more and spread favourable word of mouth communication.

Another benefit is the increase of customer lifetime value (CLV) to the business. CLV describes the net present value of the stream of future profits expected over the customer's lifetime purchases. (Kotler and Keller, 2006)

2.2.1 Defining customer loyalty

According to Thiele (2005) the concept of loyalty first appeared in the 1940's. In the earliest days, loyalty was proposed as a uni-dimensional construct, which was related to the measurement perspective taken by the researcher. She states that two separate loyalty concepts evolved, namely, "brand preference" by Guest (1944,1955), which was later referred to as attitudinal loyalty and "share of market" by Cunningham (1956) which was later referred to as behavioural loyalty.

Thiele (2005) state that nearly 30 years after loyalty first appeared in the academic literature, researchers like Day (1969) proposed that loyalty may be more complex and that it may comprise both attitudinal and behavioural loyalty. This bi dimensional concept has since been combined and referred to as composite loyalty earliest by Jacoby (1971)

Other researchers followed suit. In a similar vein, Rauyruen and Miller (2006) also concur. They state that there are three main streams of loyalty, namely behavioural loyalty, attitudinal loyalty and composite loyalty.

Visually, the three different streams of loyalty can be depicted as below

Figure 1: The loyalty construct (Thiele, 2005)

(i) Behavioral loyalty

The behavioral perspective of loyalty looks at repeat purchase behavior and is based on the customer's purchase history. The emphasis is on the past rather than on the future actions of the customer. These measures are easier to collect than attitudinal data and provide a clear picture based on facts and figures.

However, just concentrating on the behavioral aspects of loyalty would overestimate the share of true loyalty because some customers are forced to repurchase due to various reasons, like product availability, distribution channel, inertia. ( Dick and Basu, 1994)

Rauyruen and Miller (2007) identified behavioral loyalty as the willingness of average customers to repurchase the product or service and to maintain a relationship with the service provider or supplier. They state that in an earlier school of thought by Tucker (1964) argues that behavior (past purchases of the brand/product) completely accounts for loyalty.

Jacoby and Chestnut (1978) observed the same; they focused on interpreting patterns of repeat purchasing as a manifestation of loyalty. Three main classes of behavioral measure include proportion, sequence and probability.

(ii) Attitudinal loyalty

Attitudinal loyalty in contrast to behavioural loyalty is distinguished from repeat buying by the customer's mental and emotional states which then mediate between the stimuli and response.

Rauyruen and Miller (2007) defined attitudinal loyalty as the level of customer's psychological attachments and attitudinal advocacy towards the service provider or supplier. Attitude denotes the degree to which a customer's disposition towards a service is favourable.

Zeithmal et al. (1996) states that attitudinal loyalty is demonstrated by recommending the service to others and encouraging others to use the service.

Oliver (1999) defined customer's loyalty as a "deep held commitment to rebuy or repatronize a preferred product/ service consistently in the future, thereby causing repetitive same brand or same brand set purchasing despite situational influences and marketing effort that have the potential to cause switching behaviour.

Oliver (1999) reported that in the attitudinal approach, loyalty evolves from cognitive, affective, conative action loyalty.

Cognitive loyalty. In the first loyalty phase, the brand attribute information forms the basis for cognition and is purely based on performance of the product/service. It is shallow at best.

Affective loyalty. At the second stage, a liking or attitude toward the product/service has developed on the basis of cumulatively satisfying usage occasions. Commitment at this stage is encoded in the customer's mind as cognition as well as affect.

Conative loyalty. Influenced by repeated episodes of positive affect towards the product/service, the customer develops a deep commitment to repurchase. However, this intention similar to any other good attention needs to be put into action.

Action loyalty. In this stage, the actual action of purchasing the product/service is exhibited and is accompanied by an additional desire to overcome any obstacles that may prevent the act.

(iii) Composite loyalty

Rauyruen and Miller (2006) define composite loyalty as the combination of attitudinal and behavioural measures.

Dick and Basu (1994) suggested that loyalty status can be assessed in terms of the strength of the relationship between relative attitude and repeat patronage, which could be compared with competiting offerings.

Their composite understanding of loyalty is based on their beliefs that behavioural loyalty does not make attempts to understand the factors underlying repeat purchases. According to them, high repeat purchase may reflect situational constraints, such as brand stocked by retailers, whereas low repeat purchases may simply indicate different usage situations, variety seeking or lack of brand preferences within a buying unit. The behavioural definitions are insufficient to explain how and why brand loyalty is developed and/or modified. Therefore, they opine that individual's attitudes lead to attitude congruent purchase behaviour.

Their attitude-repurchase relationship matrix identified four possible categories: true loyalty, latent loyalty, spurious loyalty and no loyalty. (Dick and Basu, 1994) Visually, it is depicted in Table 1.

Repeat patronage

High

Repeat patronage

Low

True

loyalty

Latent

loyalty

Spurious

loyalty

No loyalty

Relative attitude-

Strong

Relative attitude-

Weak

Table 1- Attitude-repurchase relationship matrix (adapted from Dick and Basu, 1994)

Based on the above relative attitude-repurchase relationship matrix from Dick and Basu (1994) the following categories of loyalty are:

No loyalty. A weak relative attitude combined with low repeat patronage signifies an absence of loyalty. For example: this usually happens with newly launched products in which the efficacy of the product has not been proven yet, or with a market in which all products as seen as homogenous

Spurious loyalty. A weak relative attitude accompanied by high repeat patronage. This scenario is based on routine behaviour and is not linked to any particular positive attitude. It is conceptually familiar to the notion of inertia. For example: a person perceives very little differentiation among brands in a low involvement category and undertakes repeat purchases on the basis of situational cues such as familiarity, shelf positioning or sales promotions.

Latent loyalty. Strong relative attitude, with low repeat patronage. This scenario could be due to external factors that keep consumers from buying or using the brand including distribution problems or high prices. For example: a person might have a very high relative attitude towards a brand, but due to the fact that their supermarket does not carry this brand, they will not be able to purchase the product.

Loyalty (true) A strong relative attitude with high repeat patronage. For example, a person with a high relative attitude would probably not accept an alternative regardless of situational/social conditions. If a visited store was out of the brand, the consumer would likely go to another store or wait until the next purchase cycle. Similarly, the price of alternatives could not be reduced low enough to alter a person's loyalty.

2.2.2 Theoretical underpinnings: The theory of cognitive-affective-conative-behavior

Despite much research into defining the concept of loyalty, there is still no universal agreement on its definitions. (Dick and Basu, 1994, Jacoby and Chestnut, 1979 and Oliver, 1999) Thus, measuring it would prove to be difficult for researchers.

According to Sawmong and Omar, 2004, the most significant measurement model of customer loyalty is put forth by Oliver (1999) His model follows the cognitive-affective-conation pattern and suggests a four stage loyalty model. Visually, it is depicted in Table 2.

Stage

Identifying marker

Stage 1-

Cognitive loyalty

Stage 2-

Affective loyalty

Stage 3-

Conative loyalty

Stage 4-

Action loyalty

Loyalty to information such as price, features and so forth. Purely cost and benefit

Loyalty to a liking, "I buy it because I like it"

Satisfaction is derived

Loyalty to an intention, "I am committed to buying it"

Recommend and repurchase

Loyalty to action inertia coupled with the overcoming of obstacles

Number of visits

Table 2: Loyalty phases with identifying markers (adapted from Oliver, 1999)

Stage 1: Cognitive loyalty. At this stage, customer loyalty is determined by information or knowledge regarding the product, such as price, quality, etc. It is the weakest form of loyalty because it is directed to the cost and benefits of the product only. Consumers are making purchasing decision based on pricing and will readily switch once they find another retailer that is offering the same product at a cheaper price. (Oliver, 1999, Sawmong and Omar, 2004)

Stage 2: Affective loyalty. At this stage, loyalty is related to a favourable attitude towards a specific brand, and is built on affect. It is built over time by the basis of cumulatively satisfying usage occasion. Commitment at this stage is encoded in the consumer's mind as cognition and affect. Whereas cognition is subject to counter argument, affect is not so easily dislodged (Sawmong and Omar, 2004)

Stage 3: Conative loyalty. At this stage, loyalty must be accompanied by the desire to an intended action. Conation, by definition, implies a product- specific commitment to repurchase. Customers at this stage make a commitment to rebuy a product consistently in the foreseeable future. In effect, the consumer desires to repurchase, but similar to any good intention, this desire may be anticipated but unrealised action. (Sawmong and Omar, 2004)

Stage 4: Action loyalty. At this final stage, all intentions are transformed into action. In the earlier three stages, loyalty states may result in the readiness to act/buy, but in this final stage, this readiness is accompanied by the customer's willingness to search for that particular product despite considerable effort or obstacles. Competitive products are not considered as alternatives. (Oliver, 1999)

Despite the many research conducted in the past, most research focus on the non action underpinnings of loyalty, meaning until stage 3 only. There is no empirical research conducted on testing the total four stage loyalty model, reason being action loyalty is not easy to monitor as well as measure.

Our study will try to test Oliver's (1999) loyalty model, in which the product will be replaced by the supplier. The marketing mix represents the cognition variables (cost and benefit) and relationship quality (satisfaction) represents the affective variables. The perceived market place uncertainty moderates the afore mentioned two variables with the customer's loyalty and serves as a good platform to test action loyalty, for at this stage, the customer's must overcome considerable effort or obstacles to stick with their existing supplier even through a difficult shortage situation.

2.2.3 Loyalty dimensions

Academic literature identified a number of dimension and measures of loyalty. Generally agreed upon is positive word of mouth, a resistance to switch and repurchase intentions

Tucker (1964) argues that behaviour (past purchases of the brand/product) completely accounts for loyalty. Jacoby and Chestnut (1978) observe behavioural loyalty studies have focused on interpreting patterns of repeat purchasing in primarily panel data as a manifestation of loyalty.

According to Zeithmal, Berry and Parasuraman (1996) when customer praise a firm, express preference for the company over others, increase the volume of their purchases or agreeably pay a price premium, they are indicating behaviourally that they bonding with the company.

In a similar vein, Hess and Story (2005) state that traditional dimensions of loyalty include frequency and monetary value of purchases, share of wallet and purchase sequence.

Based on the above discussion, we can conclude that customer loyalty can be exhibited through various ways through the customer's behaviour, most commonly cited are repeat patronage (behavioural loyalty) and positive word of mouth (attitudinal loyalty)

Adding on it , for this study we will offer another two dimensions of customer loyalty, refusal to switch and increase in repurchase volume. This is in line with Oliver's definition of action loyalty in which customers will overcome "obstacles" which is analogous to refusal to switch suppliers. Even when offered a price cut or promotion, the buyer still refuses to switch to another supplier, and continues to purchase from the same supplier.

The increase of repurchase volume dimension will answer the question of inertia brought up by Dick and Basu in spurious loyalty, in which customer's repurchase based on habit. By repurchasing at a higher volume, this signals the customer's conscious effort to increase the volume due to their 'true" loyalty as opposed to their "spurious" loyalty.

We feel these four dimensions will offer a more complete definition of customer loyalty and give us a better understanding of this complex construct.

2.3 Defining Relationship quality

Creating a loyal B2B customer based is not only about maintaining the numbers of customer over time, but it is also about nurturing the relationship with business customers to encourage their future purchases and level of advocacy. Equipped with the knowledge of their business and their business customer's loyalty levels, a supplier will be able to figure how their endeavours to maintain a good relationship can contribute to their profit levels. (Rauyruen and Miller, 2006)

The development of successful long term mutually beneficial relationships has attracted the attention of researchers. Within this stream, relationship quality has emerged as very important. The rational is that when the quality is good, the relationship is successful, thus, leading to customer loyalty and increase in profitability.

This idea is supported by a research done by Hewett, Money and Sharma (2002) in which the buyer's perception of their relationship quality with their supplier is important because it will have a positive effect on the buyer's repurchase intentions.

In the case of our study, in which the supplier's offerings are similar in terms of product, quality, price and service, then from the buyer's perspective, high quality relationship with a specific supplier will set it apart from other suppliers, making them a preferred supplier in which they will choose to repurchase from. (Dorsch, Swanson and Kelley, 1998)

Thus, a supplier seeking to achieve preferred supplier status with their buyers must know which relationship quality constructs are most critical to achieve a superior relationship quality with their buyers. (Dorsch et al, 1998)

Consequently, insightful knowledge of the factors that determine the quality of relationships is important to any business as the controllable factors play an important part in establishing, maintaining and enhancing customer relationships.

Athanassopoulou 2009 state that the study of relationship quality began with Dwyer and Oh in 1987 and is established by Crosby et al (1990)

Dwyer and Oh (1987) in their research of auto dealers propose that relationship quality is defined as reflected in satisfaction with and trust of one's exchange partner and minimal opportunism.

In a study of insurance service industry, Crosby et al (1990) propose that the quality of the relationship between the salesperson and the customer is what determines the probability of continued interchange between the two parties in the future. They found that relationship quality contributes to a lasting bond by offering assurances that the salesperson will continue to meet the customer's expectations (satisfaction) and not knowingly distort information or subvert the customer's interest (trust)

In the context of business purchasing, Smith (1998b) defines relationship quality as the overall assessment of the strength of a relationship and the extent to which it meets the needs and expectations of the parties based on a history of successful or unsuccessful encounters or events.

According to Johnson (1999) he defines relationship quality as the overall depth and climate of the interfirm relationships.

Hennig-Thurau, Gwinner and Gremier (2002) opines the relationship quality approach, which represents the overall nature of the relationship, views the fulfilment of customer needs as central for relationship success. Because of this, it is important to identify the factors that contribute towards it.

These various definitions point to a lack of consensus among most researchers about the precise definition of relationship quality. Most of the definitions tend to suggest that the nature of the construct may be context specific and will vary from industry to industry, however, all agree and recognise the importance of relationship quality as an important element that can contribute to customer loyalty.

2.3.1 Relationship quality dimensions

There is as yet, no clear consensus in the literature on the set of dimension that comprises the construct relationship quality. The dimensions of relationship quality include most of the time trust, commitment and satisfaction. These three are established as measures of relationship quality. (Athanasaopoulou, 2009)

According to Rauyruen and Miller (2006), previous research into relationship quality has discussed and tested the concept of relationship quality in various contexts; the definition and operationalization of relationship quality differ from research project to research project. Nevertheless, most researchers agree that the concept of relationship quality is a higher order construct consisting of several distinct but related components or dimensions.

Review of literature related to relationship quality revealed several main dimensions. Below is a presentation of a summary of the main dimensions of relationship quality within the literature.

Author(s), year

Dimensions/key construct

Dwyer and Oh, 1987

Satisfaction, trust and minimal opportunism

Crosby, Evans and Cowles, 1990

Satisfaction and trust in the salesperson

Lagace, Dahlstrom and Gassenheimer, 1991

Trust in the salesperson

Storbacka, Strandvik and Groonroos, 1994

Service quality and satisfaction, trust and commitment

Hennig-Thurau and Klee, 1997

Perceived product or service quality

Dorsch, Swanson and Kelley, 1998

Customer orientation, opportunism, trust, commitment

Smith, 1998

Trust, satisfaction and commitment

Johnson, 1999

Trust, fairness, absence of opportunism

Hennig-Thurau, Gwinner and Gremler, 2002

Satisfaction and commitment

Auh and Shih, 2005

Exchange satisfaction and customer orientation

Rauyruen and Miller, 2006

Service quality, trust, satisfaction and commitment

Caceres and Paparoidamis, 2007

Relationship satisfaction, trust and commitment

Table 3: Summary of dimensions from selected empirical research on relationship quality

One of the earliest research on relationship quality was conducted by Dwyer and Oh (1987) in the auto dealer industry in which they found that relationship quality as reflected in satisfaction with and trust of one's exchange partner. Trust and satisfaction, singularly or together was also cited by Smith 1998, Johnson, 1999, Smith, 1999, Hennig-Thurau et al, 2002, Rauyruen and Miller, 2006 and Caceres and Paparoidamis, 2007.

Trust in the salesperson is another dimension presented. Crosby et al (1990) research conducted in the insurance industry found that the salesperson characteristics (e.g. integrity and honesty) and relational selling behaviour have positive effects on relationship quality which in turn affects future interaction between the buyer and seller. Similarly, Lagace et al (1991) conducted in the pharmaceutical industry found that trust in the salesperson was of utmost importance. Ethical selling behaviour and expertise exhibited by the salesperson would have a positive effect on the relationship quality.

Other researchers on relationship quality have come up with different dimensions in different contexts/industries. These dimensions are commitment ( Dorsch et al, 1998, Smith, 1998, Hennig-Thurau et al, 2002, Rauyruen and Miller, 2006 and Caceres and Paparoidamis, 2007), customer orientation (Dorsch et al, 1998, Auh and Shih, 2005), absence/minimal opportunism (Dwyer and Oh, 1987, Johnson, 1999) and service quality ( Storbacka et al, 1994, Hennig-Thurau and Klee, 1997 and Rauyruen and Miller, 2006)

Basing on past research, this study proposes that relationship quality consist of four different but related dimensions. They are perceived service quality, trust, commitment and satisfaction. These four dimensions were chosen based on past literature as well as their suitability to the context of our research, the B2B market and the construction industry.

Athanasaopoulou, 2009 state past research have proposed the dimensions of trust, satisfaction and commitment to a good degree and these dimension have been empirically tested and found to comprise relationship quality. Thus, the inclusion of these three dimensions for this study is not to be disputed.

Other researchers have proposed a great number of other relationship quality dimensions, and for this study we have decided on service quality. Crosby et al (1990) point out that service quality can be considered to be necessary, but not a sufficient condition for building good relationship quality. Broadly they have conceived that service quality should influence relationship quality. Storbacka et al (1994) also suggest that service quality and customer satisfaction will have a positive effect on relationship quality.

In a similar vein, Gummesson (1987) suggest that the skilled handling of relations between buyer and seller is part of customer's perceived quality. High relational quality will contribute to positive customer perceived quality and thus enhances the chances for a long term business relationship.

Hennig-Thurau and Klee (1997) also state that service quality should be included as a dimension of relationship quality because the exchange of products/services is the fundamental feature of any buyer-seller relationship. Thus, the perceived service quality received by the buyer from the seller will influence their relationship quality and subsequently their repurchase intentions.

Rauyruen and Miller (2006) research in the B2B market positively confirmed service quality as an inclusion in the relationship quality dimension. They found besides trust, satisfaction and commitment, a high perception of service quality by the buyer is the most important factor leading to future business as well as encouraging existing customers to provide positive word of mouth and to appreciate having a good buyer-seller relationship with the supplier. They recommend that organization's pay attention to the delivery of service and the quality of service systems to ensure continued high levels of buyer-seller relationships.