In any marketing subject, including this one, you would have repeatedly heard the term customer satisfaction. But what exactly is it? And is it really that important? The short answer – absolutely! This topic will focus on what happens after service delivery – how customers evaluate the service against their needs and expectations, and what implications arise for creating relationships and achieving customer loyalty.
Welcome to Topic 10: Managing Relationships and Building Customer Satisfaction and Loyalty. In this topic, you will learn about:
- Customer satisfaction and quality in service industries
- The relationship between customer satisfaction and achieving a competitive advantage
- Measuring and monitoring satisfaction
- Retaining customers in service industries
- The economics of customer retention
- Strategies to develop, manage and retain customer relationships
- The foundations of successful customer retention
- Customer loyalty motives.
This topic will unveil the meaning of customer satisfaction and its importance to service organisations. We will also explore the similar but different concept of service quality and how it is measured and monitored through surveys like SERVQUAL. Finally, we discuss the ‘Holy Grail’ of any organisation – customer loyalty – and what customer retention strategies we can implement to keep customers loyal and avoid losing them to competitors.
These relate to the Subject Learning Outcomes:
- Discuss the key concepts, principles and unique challenges of services marketing in relation to the extended marketing mix.
- Outline the importance of customer retention, satisfaction and relationship development.
Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these prior to attending your scheduled seminar with your lecturer.
Click on each of the following headings to read more about what is required for each of your pre-seminar learning tasks.
Read Chapter 12 and Chapter 13 of the prescribed text - Lovelock et al. 2014, Marketing in the service economy, 6th edn., Pearson Australia.
Read the following two (2) case studies:
- 'Hotels manage customer satisfaction online using TripAdvisor' on pp. 354-355 of the prescribed text.
- 'Battle for customers’ loyalty' on pp. 399-400 of the prescribed text.
Read and watch the following content.
This topic has a discussion forum activity, which will enhance your knowledge and give you the opportunity to interact with your peers. You can access the activity by clicking on the following link. You can also navigate to the forum by clicking on 'MKT102 Subject Forum' in the navigation bar for this subject.
- Topic 10: Forum activity 1: Consumer decision-making process
Defining customer satisfaction
Customer satisfaction is a key goal of any service organisation. But what exactly does it refer to?
Satisfaction is a consumer’s post-purchase evaluation of the overall service experience (processes and outcome). It is an affective (emotion) state or feeling reaction in which the consumer’s needs, desires and expectations during the course of the service experience have been met or exceeded.(Lovelock et al. 2014, p. 331)
The emotional response to a service can be quite diverse. Therefore, the customer satisfaction definition extends beyond the literal definition of satisfaction to provide more meaning and better predict customer loyalty outcomes (Lovelock et al. 2014). Let us explore some of these differences in the context of a restaurant.
Disgust and dissatisfaction
Perhaps service staff were incredibly rude or aggressive, or the food was inedible or gave the customer food poisoning. These types of experiences would likely lead to customer disgust.
A less extreme negative experience (perhaps the food was cold or overcooked, or the customer had to wait an incredibly long time to be served) would result in customer dissatisfaction. In these circumstances, customers are likely to:
- refuse to return
- switch to a competitor
- complain about the service and spread negative word of mouth.
Satisfaction
To achieve customer satisfaction, the restaurant would need to provide a service consistent with customer expectations – the food is reasonable quality, and the service staff are prompt and friendly. However, providing marginal satisfaction is no longer enough to survive in competitive environments. Would you hurry back to a restaurant that was ‘fine’? Would you recommend your friends go there? Would you even remember the restaurant name in a few months?
Customer delight and extreme satisfaction
Extremely positive emotional states such as customer delight and extreme satisfaction occur when the service experience significantly exceeds expectations, perhaps in a novel, surprising or exciting way. Maybe service staff go above and beyond in providing a positive experience, or the food surpasses expectations of taste, quality or value. Perhaps the venue offers a unique and memorable experience. For example, Redwoods Treehouse in New Zealand aims to delight customers with their unique venue set in a wooden pod structure set 10 metres off the ground (Redwoods Treehouse 2022). In these circumstances, customers would be enthusiastic about revisiting the restaurant, sharing their positive experience with others, and recommending others visit the restaurant. Watch the following video to learn more about Redwoods Treehouse and how they work towards delighting their customers.
The pivotal role of satisfaction
Customer satisfaction is not the endgame for service organisations, however. The main motivation lies in the flow-on effects of customer satisfaction. Customer satisfaction is important because it links to various outcomes of benefit to service organisations. As alluded to in the previous section, satisfied customers will be more likely to repeat the service (for example, make return visits to the restaurant) again in the future, providing a monetary benefit to service organisations immediately and in terms of future revenue. In addition, satisfied customers are likely to share their experience with others through positive word of mouth. This action, in turn, attracts new customers to the service. How many times have you gone to a restaurant, watched a movie or a play or even visited a healthcare specialist or consulted with an accountant based on the recommendations of friends or family (or even strangers on the internet)?
Customer satisfaction results in various other outcomes, as highlighted in the following figure:
Service quality and productivity
Service quality and productivity are two sides of the same coin. Quality refers to the benefits derived from a service, and productivity refers to the costs (Lovelock et al. 2014). However, if considered in isolation, they can work against each other. In trying to improve productivity, a service organisation might remove or reduce key service quality elements of importance to customers, leading to customer dissatisfaction. Likewise, customer service improvements without consideration of productivity could lead to costly and unfeasible changes. Therefore, all service quality or productivity strategies should consider how these two elements interact. Productive capacity and effectively balancing supply and demand were discussed in detail in Topic 8. So, we will focus on the quality side of the equation in this topic.
Definition and dimensions of service quality
There are various perspectives of quality as well as context- or domain-specific definitions. However, scholars in service quality generally agree that it refers to service performance, excellence or superiority (Lovelock et al. 2014).
A key distinguishing feature between service quality and customer satisfaction is that satisfaction is experience dependent – it is a post-purchase evaluation and requires the customer to experience the service to evaluate it. However, a customer can form perceptions of service quality through various second-hand sources. Thus, service quality is not experience dependent – you can have an idea of service quality based on marketing efforts or word of mouth/recommendations from others (Lovelock et al. 2014).
SERVQUAL
Given the unique traits of services (for example, intangibility and inseparability), it is helpful to consider service quality as comprising various dimensions. One of the most influential and widely used evaluation methods of service quality is the SERVQUAL scale (Parasuraman, Zeithaml & Berry 1988), which considers five (5) dimensions:
- Tangibles
- Reliability
- Responsiveness
- Assurance
- Empathy.
Lovelock et al. (2014, p. 348) demonstrate the use of the SERVQUAL scale in a ‘hypothetical’ sense, measuring the customer’s perceived importance of the SERVQUAL dimensions for a particular sector or context. In the following table, survey questions worded for an actual service experience have been used. Survey respondents are asked to indicate the extent to which they agree or disagree with each statement. Take some time to consider the differences in wording here versus the Lovelock et al. (2014) text and think about the contexts in which you might use each version of the survey (or even both!).
| SERVQUAL dimension | Survey questions for measuring SERVQUAL dimension (measured on a 7-point Likert scale; 7: strongly agree – 1: strongly disagree) |
|---|---|
|
Tangibles (appearance of physical elements) |
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Reliability (dependable, accurate performance) |
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Responsiveness (promptness and helpfulness) |
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Assurance (competence, courtesy, credibility, and security) |
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Empathy (easy access, good communications, and customer understanding). |
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Managing relationships and building loyalty
Service quality and customer satisfaction both contribute to customer loyalty, which is the ultimate aim of service organisations. In fact, when we think about the main methods through which service organisations can grow (as shown in the following list), four out of six of these pathways relate to customer retention.
The six (6) pathways for service growth (Lovelock et al. 2014, p. 373) include:
- Attract new customers
- Encourage existing customers to purchase more units of service
- Encourage existing customers to purchase higher-value services
- Reduce the extent of turnover – or ‘churn’ – resulting from desirable customers that defect to a competing service supplier
- Regain lost customers
- Terminate unprofitable, stagnant or otherwise unsatisfactory relationships, and replace them with new customers who more closely match the firm’s profit, growth and positioning goals.
Loyal customers are a strong financial asset for a service organisation. It is cheaper to maintain an existing relationship than to develop a new one – you do not need to make repeat customers aware of your offering. Their repeat purchases provide steady income over time and incur fewer operating costs as they are familiar with the service process – they generally do not ask as many questions or need as much assistance.
Over time, customer loyalty and trust also mean they are more open to related services the company may offer and are more inclined to expand their service needs with your company as their circumstances change. For example, a customer who has had a savings account with a bank for a long time is more likely to get a credit card, personal loan or mortgage with the same bank. Finally, loyal customers become ‘walking, talking billboards’ for a service organisation by sharing positive word of mouth about their experience with others (Lovelock et al. 2014).
A framework for customer retention
There are three (3) broad strategies for retaining customers:
- Create loyalty bonds
- Build in switching barriers
- Reduce churn drivers.
This section provides an overview of the three (3) strategies, which can be used simultaneously. The Lovelock et al. (2014) text provides more detail on the strategies.
1. Create loyalty bonds
This strategy involves building loyalty by building and maintaining good customer relationships. Some common drivers of successful customer relationships are (Lovelock et al. 2014):
- Customer satisfaction - the relationship between high customer satisfaction/delight and loyalty was discussed in detail previously in this topic and in Chapter 12.
- Value – when the collective benefits derived from repeat service outweigh the financial and non-financial costs of switching.
- Loyalty motives – customers are loyal to services because there are:
- confidence benefits – customers trust and have confidence in the service, reducing anxiety. For example, I go back to my accountant because I know what to expect, and I trust them.
- social benefits – social rapport and connection with service staff. For example, I always go to the same café because I really like the barrister, they are friendly and funny and always remember my order.
- special-treatment benefits – including preferential treatment, special deals or even being given the benefit of the doubt. For example, I always go to the same hairdresser because if I need an appointment at the last minute, they will usually squeeze me in, and if I drop past for a quick fringe trim they do not charge me.
- Reward-based bonds – incentives based on the frequency and/or the value of purchases. Airlines (Virgin or Qantas Frequent Flyer programs) and supermarkets (Woolworths Everyday Rewards or Coles Flybuys) are popular examples of reward-based programs, incentivising customers to return to the same service while collating customer information to tailor subsequent offers and communications.
2. Build in switching barriers
This retention strategy involves employing economic or psychological barriers to dissuade customers from switching to another service provider (Lovelock et al. 2014).
- Economic switching barriers include lock-in contracts with financial penalties for early termination (for example, gym memberships and mobile phone plans).
- Psychological switching barriers are created when customers build a strong personal rapport and friendship with a service provider, making the action of switching seem almost like a betrayal. It also makes the premise of switching seem like an even greater undertaking, with more uncertainty because the customer is unsure whether the same personal connection could be created elsewhere.
3. Reduce churn drivers
This strategy involves understanding why customers leave, typically referred to as customer defection or churn (Lovelock et al. 2014). To do this, service organisations can:
- Analyse customer defections and monitor declining accounts; invite prior customers to give feedback about why they left and provide incentives to return
- Address key churn drivers – explore whether common churn drivers such as low service quality, high inconvenience and non-monetary costs, or pricing transparency issues are at play. Other churn drivers may be more company or industry specific, requiring research and insights to identify and address these issues.
- Implement effective complaint-handling and service-recovery processes to keep unhappy customers from switching to a competitor.
In summary, customer satisfaction and service quality are both crucial to achieving the service organisation’s ultimate goal of customer loyalty. Loyal customers provide repeat purchases in the long term and bring in new customers through positive word of mouth recommendations. In competitive service environments, there could be customer apprehension or uncertainty about trying a new service. Word of mouth recommendations from real people (not marketing communications) who have tried the service for themselves and are willing to advocate for your service brand, provide a crucial advantage.
Knowledge check
Complete the following two (2) tasks. Click the arrows to navigate between the tasks.
Key takeouts
And that is it for Topic 10! Here are some key takeouts:
- Customer satisfaction is the post-purchase evaluation of a service experience. Customer satisfaction depends on how the service experience meets their needs, desires, and expectations. It can include various emotional responses ranging from disgust to delight.
- Service organisations do not aim to satisfy and delight customers simply out of the kindness of their heart; they do so because it results in various positive organisational outcomes including repeat patronage and positive word of mouth, which can also lead to new customers.
- Service quality is similar to customer satisfaction. However, it is not experience dependent – in other words, perceptions of service quality can be formed without experiencing the service first-hand. SERVQUAL is a common survey tool for evaluating service quality, comprising questions around tangibles, reliability, responsiveness, assurance, and empathy dimensions.
- Customer loyalty is the ‘Holy Grail’ for service organisations. Loyal customers are cheaper to maintain and manage, they are more open to cross-selling and upselling, and they are walking, talking billboards who will share positive word of mouth with others. The three (3) main strategies for customer retention include:
- Creating loyalty bonds
- Building in switching barriers
- Reducing churn drivers.
Welcome to your seminar for this topic. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your seminar.
The following learning tasks will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
In-seminar learning tasks
The in-seminar learning tasks identified below will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.
In a breakout room assigned by your lecturer, you will be given one (1) of the following questions to discuss. At the end of the discussion, you will share your responses with the class:
- Why should an organisation be vitally interested in maintaining high levels of satisfaction among its customer base? Give five (5) reasons to explain your answer.
- Describe motives for loyalty that determine whether a customer becomes committed or loyal to a service provider. Are there any other factors not described in the chapter that you believe should be included?
In your pre-seminar learning tasks, you read the following two (2) case studies. In a breakout room assigned by your lecturer, you will be given one (1) of them to discuss. Use the provided questions to guide your discussion. At the end of the discussion, you will share your responses with the class:
- Hotels manage customer satisfaction online using TripAdvisor (pp. 354-355).
- What should hoteliers do to make use of customer reviews on TripAdvisor and the new customer satisfaction dashboard?
- How does online information affect customers’ expectations and perceived quality at their arrival?
- Battle for customers’ loyalty (pp. 399-400).
- If Coles decided to pursue its low-prices strategy, how would you recommend the supermarket implement its marketing strategy? Would it still be able to have a relationship with customers without a loyalty reward card?
- Do you think customers are genuinely loyal to either supermarket or simply ‘hostage’ to the loyalty card and petrol discounts?
In a breakout room assigned by your lecturer, discuss the following question. At the end of the discussion, you will share your responses with the class.
Explain the trade-off many service firms face in managing productivity (efficiency) and service quality simultaneously. Use a specific service organisation to explain your answer and discuss whether they seem to place more emphasis on one or the other.
Welcome to your post-seminar learning task for this week. Please ensure you complete this after attending your scheduled seminar with your lecturer. Your lecturer will advise you if any of this is to be completed during your consultation session. Click on the following heading to read more about the requirements for your post-seminar learning task.
Your services marketing audit is due for submission this week. Make your final edits and prepare for submission. When you are ready, submit your audit online.
Each week you will have a consultation session, which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your consultation session.
Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
For those who want to go the extra mile, here are some additional useful resources:
- Parasuraman, A, Zeithaml, VA & Berry, L 1988, SERVQUAL: A multiple-item scale for measuring consumer perceptions of service quality, 64(1):12-40.
- Solis, B 2021, Customer Loyalty is Up for Grabs: Why Your Strategy Is Critical, Salesforce blog.
References
- Lovelock, C, Patterson, P & Wirtz, J 2014, Services marketing, 6th edn., Pearson Australia.
- Parasuraman, A, Zeithaml, VA & Berry, L 1988, SERVQUAL: A multiple-item scale for measuring consumer perceptions of service quality, 64(1):12-40.
- Redwoods Treehouse, 2022, Redwoods Treehouse, https://www.redwoodstreehouse.co.nz/
- Redwoods Treehouse 2021, Redwoods Treehouse, streaming video, YouTube, https://www.youtube.com/watch?v=FWyg8EbcQLk
