Beyond Customer Satisfaction Customer Commitment

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Beyond Customer Satisfaction:Customer Commitment.

Praveen K. SoniCalifornia State University

David T. WilsonThe Pennsylvania State University

Michael OKeeffeMonash University

ISBM Report 234996


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BEYOND CUSTOMER SATISFACTION: CUSTOMER COMMITMENT

Abstract

Using concepts drawn from the relationship literature we expand the concept thatcustomer satisfaction leads to customer retention. Customer commitment to remain is the

relationship is proposed as fkre oriented indicator of retention as retention is a historicalmeasure. The enriched model provides a better prediction of commitment than the simple

satisfaction models.


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INTRODUCTION

Retaining customers is good for a firms economic health. Loyalty and customer retention canhave a direct influence upon profitability. For example, Bain & Co. has shown that a five-point improvement in customer retention can Iead to an increase in profits from 25% to 80%

(Reichheld and Kenny 1990). The relationship between customer retention or loyalty has beendiscussed by scholars for a number of years (see Cardozo 1965; Day 1977; Day and Landon1977; Parasuraman, Zeithaml and Berry 1985; Bolton and Drew 1991 and Anderson, Forneiland Lehmann 1994; Reichheld, 1996) as examples of this stream of research). CurrentIy,although the concept of customer retention is applicable to alI types of businesses, banks andtianciai firms seem to be in the forefront of studying the impact of retention on profits.

The research has mainIy focused upon the hancial impact of retention and the influence ofsatisfaction and dissatisfaction upon retention. Customer satisfaction is assumed to lead to

good things, such as attitude change, repeat purchase, and brand loyalty. (Churchill andSuprenant 1982), lower costs of attracting new customers, (Fornell 1992) and lower costs of


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be retained. The goal of overall satisfaction is still important but in many business-to-business

markets the relationship between the parties is more complex than just a buying and selling

transaction.

We f&st examine the economic push for customer retention and then explore customersatisf&on as input to developing alternative retention models. We argue that beingcommitted to the partner in a buying-selling relationship is an important predictor of retention.

We examine three models of customer commitment We begin with a simple model where

commitment is a function of customer satisfaction. This model is expanded to in&depersonal relationships between the firm and the customer and finally drawing upon the buyer-seller relationship literature we develop a general model of customer retention. We test all ofthese models using data from the study of a specific commitment problem of a business firm.We conclude with a discussion of the results and implications for scholars and managers.

BACKGROUND TO THE STUDY


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The twin focuses of financial impact and customer satisfaction dominate the literature

(Reichheld and Kenny, 1990, DeSouza, 1992, Naumann and Shannon, 1992). Ainslie and Pitt(1992) use demographic data in a customer data base to attempt to predict customer

retention Not surprisingly they did not do better than chance in predicting insurance policy

lapses.Rust and Zahorik (1993) develop a, mathematical tiework for makingaccountable resource allocation to improve customer satisfaction. The key assumption in

their model is the Iink between retention and satisfaction-dissatisfaction. They Iink thediscovery of the key loyalty factors to financial program to manage these factors. In a banking

environment this may a reasonable approach but we believe that it can be improved using

concepts from business relationship theory.

Carroll and Rose (1993) take an economic view of customer retention noting that all customers

do not generate value and suggest that fkancial institutions should focus retention strategies on

the v&e producing segment. Czepiel and Reddy (1992,1993) use the concepts ofrelationship strength and relative perceived performance as mediating variables as they


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many industries, explain the differences in profitability among competitors. He cites the

example of MBNA where a 5% increase in retention grows the companys profits by 60% in

the fifth year. In a later book(1996), Reichheld presents a number of economicexamples ofthe vaiue of customer retention over the customer life cycle. Profit from a customer increaseseach year that the customer is retained.

In discussing retention he states, Customer satisfaction is not a surrogate for customerretention. While it may seem intuitive that increasing customer satisfaction will increaseretention and therefore profits, the facts are contrary. Between 65% and 85% of customers

who defect say they were satisfied or very satisfied with their former supplier.

We share this viewpoint that retention is far more complex than customer satisfaction

especially in business-to-business situations.

Customer Satisfaction

Customer satisfaction has been viewed both as transaction spectic satisfaction, which is thepost purchase evaluation of the match between expectations and actual performance (Oliver


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a positive attitude towards the product and rebuy it Oliver (1980) conceptualized the process

as one in which in time ti expectations expressed as a multi-attribute attitude model (Fishbienand Ajzen 1975) leads to intention to buy. Purchase leads to negative disconfirmation whenthe actual experience falls below the expected or positive d&or&nation when the actualexperience falls above the expected In period tsdisconfirmation directly influencessatisfaction, which in turn modifies attitude leading to a change in behavioral intentions.

Satisfaction is seen to influence both attitude and intention. The expectation, perceived

performance disconErmation, leading to a level of satisfaction has been the main paradigm inthe product satisfaction literature. The service quality literature shares many of the same

constructs as the satisfaction literature (see Parasuraman, Zeithaml and Berry 1988; Boulding,Kalra, Staelin and ZeithamlI993 for a discussion of these constructs). We use the servicequality notion of cumulative perceptions of multiple transactions as the measure for satisfaction

in this paper.

Anderson, Fomell and Lehmann (1994, page 54) state, Whereas transaction-specific


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and Werner-felt 1987; Forneil 1992; Anderson). We interpret this proposition by making the

assumption that loyal customers are ones who are committed to stay in the relationship and

continue to purchase the setices of the partner firm. We specify the model as:Retention = f(SATISFACTIONS)

where t indicates cumulative customer satisfaction

Figure 1 shows this simple model.

Insert Figure I here

Reicheid suggests that personal relationships between sales persons and customers contributes

to customer retention (1993). He states, empIoyees who deal directly with customers dayafter day have a powerful effect on customer loyalty (p.68) This personal interaction developsocial bonds that help hold a relationship together. Mummalanenni and Wilson (1991) foundthat sale persons who had good personal relationships with buyers were accorded second


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Customer Commitment: A M om Complex View

We believe that customer commitment in business markets is more complex than two

variables; customer satisfaction and social bonds. These two factors are important but there is

a solid literature describing buyer-seller r&tionships which indicates that mnmitment toremain is a relationship is a complex multivariable problem. Anderson, Fomell and Lehmann

(1994) include a vector of factors such as environmental trends, Errn-specificfsctors, error etc.as things that exert influence upon customer satisfaction. We believe these external factors may

modify the models of commitment, however we see commitment a function of a more complex

relationship between the parties in which satisfaction and social bonding are only part of thetotal set of variables that lead to commitment to the relationship and customer retention.Relationships are now an accepted part of the current marketing Iiterature. The early work in

relationships by such authors as the IMP Group (Hakansson,1982), Wilson andMummalaneni, (1986), Heide and John, (1988),DwyerSchurr and Oh, (1987), Anderson andNarus (1984) and others is described in Wilson and Moller (1988). We draw heavily upon thework of Han and Wilson (1993) and Wilson (19%) in building the commitment model.


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distant interaction. We will develop the rationale for the general retention model presented in

figure 3.

Insert Figure 3 here

Han and Wilson (1993) and Wilson (1995) use the concept of social and structural bonds to

describe the two main forces that hold a relationship together. Social bonds capture the

interpersonal aspects of relationships. Structural bonds capture the corporate aspects of a

relationship in that they represent variables that endure beyond the individual relationship. For

example, ifthe partners connect their computer systems to exchange electronic data (EDI)they have created a structural bond that makes terminating the relationship more difficult asthey will have to end this data interchange. Both parties have made an investment in the

system which may not be directly recoverable. Day to day operations may depend on the

system and ending the relationship may cause disruption in operations.


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The general model describes the basic elements of a relationship. There are likely unique

aspects of most relationships that need to be accounted for in modeling that relationship.Social

bonds reflect the quality of the relationship and the degree of trust that develops.

SOCIAL BONDS.

Trust

Trust or distrust has always been a part of business relationships. Trust has been measured

and described a number of ways ranging Corn a personality variable, (Rotter, 1967) to related

to relative power between the partners (Young and Wilkinson, 1989). We have taken a

sociological view that is expressed by Lewis and Weigert (1985) as, trust is conceptualized

as a reciprocal orientation and interpretive assumption that is shared, has the rektionship as theobject and is symbolized through intentional action. Trust is related to a partners perceptions

of the other partners abilities, knowledge, expertise, motives and intentions. It colors theactions that partners will take in the relationship.


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to support a business tiend versus the action she/he would take to support individualswhowere perceived to be more distant and formal business acquaintance. Both buyer and selIerwould take some risk to support fiends. Personal friendship and positive social interactionsupports trust and helps to maintain commitment to relationships.

STRUCTURALBONDSProduct/Service Performance

This is the heart of the exchange relationship as the product or service must perform well for

the relationship to continue. Customers cannot be retained if theirh does not provide equalor greater value than the competitors. Performance can be measured as customer satisfaction

or as the perception of performance.

Goal CompatibiiityGoal compatibihty is the degree to which the partners share goals that can only be


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persons knowledge and experience of performance in similar situations. The comparison level

of the alternative is the level of performance that may be obtained by changing partners.

Structural bonding may inhibit changing reiationships even when the level ofCL&-r is higherthan the partners performance because the cost of moving to a new relationship is very high.

CL&r has a negative effect on structural bonding meaning that better the alternativerelationships weaken the structuraI bonding of the partners.

Investments

Irretrievable investments derive from the concept of transaction specific investments

(Williamson, 1975,1979) that are made to support the relationship. These irretrievableinvestments tend to bond the relationship together as the cost of ending the relationship may be

so high the partners work to make the reiationship viable.

Peer Pressure

Peer pressure represents the social pressure that may be place on person by their peers to


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Commitment is the degree to which a partner is committed to the continuance of the

relationship. It reflects a long term expectation that the relationship will continue. Retention ofa customer requires the customer to be committed to the relationship. We believe that

commitment is a business marketing relationship goes beyond satisfaction. It is possible to be

dissatisfied with aspects oftie relationship but to continue to buy because there is noalternative supplier with an adequate alternative product

RETENTION, COMMXMENT, AND RELATIONSHIPS

The generaI relationship model described above is a richer model of customer retention thancustomer satisfaction or dissatisfaction particularly in business-to business situations. Retention

is a post hoc measure whereas commitment predicts the future. Structural bonds may hold

customers even when they are not fully satisfied. The richer modei provides more insight intomanaging relationships to retain customers.


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study. Appendix I provides independent and dependent variables and the corresponding

questions used to measure them.

METHODOLOGY

The data was collected via structured telephone questionnaires administered to a total of 600

grain growers. The sample include 120 growers Corn each of five regions and was randomlydrawn Corn the Grain Boards mailing list. The size of the farms ranged Corn 100 acres toover 50,000 acres. These farms are small capital intense businesses. The distribution of farmsize is shown in Table 1.

TABLE 1 Sample Distribution of Farm Size

Acres Number of Respondents

100-500 97

501-1000 159

1001-2000 172

2001-4000 119


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Commitment = a + b *SatisfactionWe used a single composite measure for Satisfaction. The results of the analysis are shown inTable 2. With an R2 of 17.4% the model is signifkant at the p=O.OOOllevei. The parameterestimate for Satisfaction is positive and sign&ant i n&&g that increasing Sdisfaction levelsresult in increasing Commitment.

TABLE 2: Basic Retention Model&near Regression ResultsParameter Standard

Variable Estimate Error t-value PSatisfaction 0.422 0.038 11.088 0.0001R2=0.174 F value = 122.945 p- 0.0001The extended model depicted in Figure 2 was tested using both linear regression analysis and

structural equation analysis so as to provide a comparison with both the previous basic model,

and our more complex model. Satisfaction and Social Bonds were the independent variables

while Commitment was the dependent variable. The model was structured as follow&: .

Commitment = a + b + satisfaction + c * Social BondsAgain, we used a single composite measure ofSatisfaction for the regression anaiysis, but used


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TABLE 3: Extended Commitment Model-Linear Regression Results

Parameter Standard

Variable Estimate Error t-value P

Satisfaction 0.369 0.043 9.85 O.ooolSocial Bonds 0.298 0.037 6.97 0.001

R2 = 0.2381 F value = 90.607 p - 0.0001

The structural equation analysis of the extended model yielded a &i-square of 0.27 with 1degree of freedom. The adjusted goodness of fit index is 0.998, the root mean square residual

is 0.003, and the associated p vaiue is 0.606, all indicating a very good fit. The coefficients ofdetermination for independent and dependent measures are high and close to 1 .O. However,

the coefficient of determination for structural equations is a low 0.287 indicating a somewhatweak structure. The weakness seems to stem from the inclusion of social bonds in the model.All t-values are significant at the 0.001 levels.


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A structural equation analysis (LISREL) of the entire sample was conducted to test the morecomplex retention model depicted in Figure 3 using the constructs and measures appearing in

Appendix 1. Aisuggested by Joreskog and Sorbom (19&I), at first a sound measurementmodel for the constructs was obtained. This measurement model was then used to test the

complex model and to obtain a best fitting structural model. The model presented in Figure 3,though theoretically sound, did not pass muster empirically. Several other theoretical models

were then analyzed through the process of elimination and selection, and the best fitting

empirical model was then selected. This complete and equally complex commitment model is

depicted in Figure 5.

The model statistics of Chi-Square = 71.89, df- 56, p = 0.075, an adjusted goodness of fit

index of 0.969, and a root mean square residual of 0.027 indicate a very good fit between the

structure and the data The coefficients of determination for the independent and dependent

measures is 0.995, and for structural equations is 0.578 indicating a strong and better structure

than the extended model. As you may recall, the corresponding coefficient for the extended


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TABLE 4: Our Model of Commitment-Total Effects

1. Between Independent and Dependent Constructs

Independent Constructs

Information

Trust communications Investments CLdtSocial Bonds 0.156 0.38 - -

Dependent StruCtWal 0.25 1 0.082 0.194 0.40constnlcts Bonds

Satisfaction 0.294

_-- .*..Commitment 0.492 0.106 0.085 0.175

2. Between Dependent Constructs

Social

Bonds

Social Bonds

StUtd

Bonds Satisfaction

0.53


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the presence of several indirect effects on Commitmentthat occur through the development ofSocial and Stnrctural Bonds. This is evident both from Figure 5 and Table 4.

Insert Figure 4 here

Tnrst has a direct effect on Commitment(Gamma=O.222) and indirectly impacts Commitmentthrough its effects on Satisfaction (Gamma=O.294), and the development ofSticm& Bondsbetween businesses (Gamma=O.217). In fact, the total effect ofTnrst on Commitment (0.492)is second only to the total effect ofSatisjhion on Commitment (0.596). And Tnrst issignificantly correlated with Investment at 0.345. It seems reasonable to expect that customers

and suppliers are likely not to invest resources in a relationship and create structural bonds for

the long term unless an element of trust exists between them. The impact ofT&t onSatisfaction may likely be through the modification of expectations, in that, presence of trust

might reduce expectation, or at the very least color it by explaining low performance away by

some unavoidable circumstance. (I trust Company A is not likely to act in this manner without


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expectations resulting in an encouragement of repeat purchase behavior over time. But alsorepeat purchase behavior is made easier by companies investments in

Stru~t~ralBmd~between ti so as to reduce both the time and cost associated with transacting business. This

is more likely to occur ifboth an element ofTnrst and satisfaction exists between businesses.The development ofTnrst, satisfaction, and Social Bonds leads to a cementing of the

relationship between companies through the creation of transaction specific investments inStrwctural Bonds. The directand toti effect ofStnxtural Bonds on Commhent is prettyhigh at a Beta of 0.438. Investments, Tnrst, and Social Bonds significantly determine theformation ofStructural Bonds. CLAltalso has an impact on the formation ofShvctural Bondsbut the relationship in this model is not significant. Peer Pressure also had no significant

impact on either Social or Stnrctural Bonds. We willdeal with these results in the discussionsection. One would expect Information Communication to reduce misunderstandings andenhance confidence between business partners resulting in the development of deep Social

Bonds. And that is what we find in our model with a Gamma of 0.380. But Satisfaction withthe business partner is another significant determinant of Social Bonds a Beta of 0 530


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facilitates the development of the transaction specific investments in both assets and knowledgethat creates the structural bonds that hold the relationship together

Structural bonds hold the relationship together by creating aninertia that must be overcome if

one is to leave the relationship. It is a glue that bonds the Gnns together as it is usually easierto solve problems between the buyer and seiler than to leave the relationship and give up theinvestments already made in the relationship.

It is obvious that the simple models where commitment is a function of satisfaction, which are

quite adequate for many consumer situations, do not provide the insights that modeling the

commitment process as a relationship process provides in business market situations. Trust is

important in both consumer and business markets but trust may not be operational in many

consumer markets. Consumers have long experience with many brands and trust is latent (see

Wilson, 1995) and does not enter the decision process. We take trust for granted in many

consumer situations. There are consumer markets that have strong business markets overtones

such as buying a car, new or used, that would fit modeling commitment as a relationship


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LIh RIATION S AND EXTENSIONSThe study is constrained by the measurement of satisfaction as an summary concept. Although

a number of other studies use summary measure we believe a broader measure of satisfaction

will be useM. We have tried to address this weakness in a study which is now in the field. Amore comprehensive measure of satisfaction has been developed which will allow us to test

the relationship between the overall measure of satisfaction and a more complex measure.

We were severely limited by the number of questions that we could place on the questionnaire.

We made the choice to participate as having some data is better than none and the issue we

raise is an interesting one which requires Mer work.

The research subjects are not typical business although they have the same problems as most

businesses. We believe that our conceptualization of commitment and retention as a

relationship process will be support in more traditional businesses. We expect to test this in the

fiture.


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mre 1: Basic Commitment Model

Q9=19A+Q9C 4

Retention = a + b * Satisfaction

Fimrre 2: Extended Commitment Model


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Eipure 3: Extended Commitment Model USREL RwW

(6.56)0.208

* Q9A

(8.47)0.2734 Q9C 4

Chi-Square with 1 degree of freedom = 0.27, p = 0.606Adjusted gooduess of fit index = 0.998Root mean square residual = 0.003Coeffkient of determination for Social Bonds and Retention is 0.977Coefficient of determination for Satisfaction is 0.719Coefficient of determination for structura1 equations = 0.287

Note: Numbers in parentheses are t-values, and are all significanth 0 001 l l


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Young Louise and Ian Wilkinson (1989), The Role ofTrust andCoopedonin AhketingChannels: A P~iimhary Study, European JoumalofMarkzting, 23 (2), 109422.


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Beyond Customer Satisfaction Customer Commitment