Page 240 - DMGT522_SERVICES MANAGEMENT

Unit 11: Customer Loyalty

The service-profit chain model has certain limitations that need to be considered before adopting Notes
it wholeheartedly. The limitations of this model are:
Relationship between satisfaction and loyalty is not always linear (see Figure 11.5)

The relationship depends on the type of industry. Where the choices for the customer are
very high, the relationship is very strong and customer migration is possible; in
monopolistic competition (utilities, public transportation, government/public service,
etc.), the relationship is weak.
Figure 11.5: Relationship between Customer Satisfaction and Loyalty

100 % Apostle
Zone of Affection
80

Zone of Indifference

Loyalty 60
(Retention)

40 Zone of Defection

20

Terrorist
1 2
3
5
Extremely Somewhat Slightly 4 Very
Dissatisfied Dissatisfied Dissatisfied Satisfied Satisfied
Source: James L. Heskett, T.O. Jones, G.W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger,
“Putting the Service-Profit Chain to Work,” Harvard Business Review (March-April 1994) pp. 164-174.
Benefits of a successful customer retention programme:
1. Customer retention is cheaper than customer acquisition (see The Leaking Bucket Theory
above).
2. Reduces communication costs for customer acquisitions like advertising and other
promotions.

3. Loyal customers tend to do repeat purchase, reducing marketing costs but increasing
revenues.
4. Loyal customers tend to avoid substitutes and other competition and perform repeat
purchases even if the price of the service is more – increasing revenue and profit.
5. Satisfied customers who metamorphose into ‘advocates’ or ‘apostles’ perform the role of
unpaid salesmen, promoting the service of their own free will.
6. Repeat customers are less expensive to serve than first time customers, as they are well
aware of the offer and do not require customer support, education, guidance and training.

The service firm tends to lose all the future stream of revenues from its banks of loyal customers
(who are a profitable segment) if such hitherto loyal customers switch to a competitor. There has
been research in the field, which has identified strong relationships between loyalty (retention)

LOVELY PROFESSIONAL UNIVERSITY 235