Understanding Advocacy, Loyalty and Committment.
Loyalty - A ′Cash Cow′ by definition?

by: Judith Hoffmann

Introduction  2

Commitment, agency and trust - bases for loyalty 4

Loyalty concepts and profitability 6

Conclusion 10

References  12

Introduction

Facing an increasing competition for customers, Relationship Marketing has been acknowledged by many researchers and practitioners as “the new othodoxy” (Petrof, 1997). The belief behind it has been that increased customer retention will lead to increased customer profitability (Reichheld and Sasser, 1990). Strategies to reach this goal have been implemented widely and contain customer care, customer loyalty programs and in this context database and direct marketing techniques (O’Malley and Prothero, 2004). Accordingly the objective of relationship marketing is to identify, establish, enhance and maintain relationships with customers and other stakeholders at a profit (Liljander and Roos, 2002, Grönroos, 2000, Morgan and Hunt, 1994). As opposed to other methods of binding customers (e.g. contracts), relationship marketing is geared to human relationships (Liljander and Roos, 2002) and held together by normative methods and therefore trust, commitment, mutual benefit and loyalty.

A lot has been written about each of those terms and their relationships to each other. Basically it has to be stated that all concepts influence each other and overlap in various parts as the different fields of research show. Morgan and Hunt (1994) have developed their “committment-trust-theory”, stating that committment and trust are key to all relational exchanges and therefore have to be nurtured by every com[any with particular attention. Furthermore a lot of work has been written about the link between committment and loyalty. While some researchers label loyalty as basically being identical with committment (Day, 1969), others see committment as a precursor to loyal attitude (Dick and Basu, 1994) or even as an obligatory basis for true loyalty (Uncles, Dowling and Hammond, 2003). Another view sees the basic difference between both in behaviour versus attitude (Liljaner, Roos, 2002). Looking specifically at the relationship between service providers and customers, some researchers (Singh and Sirdeshmukh, 2000) use agency theory as a quasi- precursor of trust in young relationships while trust can lead to loyalty as soon as the relationship is fostered. This assignment focused on loyalty since, as demonstrated above, a bulk of research has been conducted around this concept and its relation with other normative concepts. Some academics go so far to call it “the new Holy Grail” (Henry, 2000) of relationship marketing because of its assumed closeness to economic benefits. Indeed a lot has been written about its possible advantages in terms of its actual financial and reputational outcomes for a company: money savings (Reichheld, 1993, Holowell, 1996); increased market share (Pritchard, Havitz and Howard, 1999), favourable word-of- mouth (Baloglu, 2002); and positive complaint behaviour (Hart, Johnson, 1999). Basically those terms and outcomes all relate to what firms can be perceived to be most intersted in, increased profit. Research has shown that there are clear linkages between customer loyalty and organisational profitability (Holowell, 1996, Rowley and Dawes, 2000) and a number of academic works deal therefore with applications of loyalty programmes (eg.Uncles, Dowling and Hammond, 2003, Mclland Barnett, 2000) However, this is not a generally accepted opinion. Even though they admit that profitability is the final target of a company’s customer relationship management, other researchers notice no direct link between customer loyalty and profitability (Bowen and Shoemaker, 1998). Instead they criticise this simple concept stating that loyalty has to be analysed as a multi-dimensional concept (Baloglu, 2002). This leads to the question what are the preconditions under which customer loyalty leads to profitability and which role does customer satisfaction play. To discuss this problem is the aim of the assignment.

It does so by examining initially the discussed concepts of agency and committment in relation to loyalty. Considering the research routes of numerous academics (Singh and Sirdeshmukh, 2000, Morgan and Hunt, 1994, Casielles,Suarez Alvarez and Diaz Martin, 2005), trust is added to this concept being an important basis for both committment and trust as discussed later. The aim of this part is to introduce satisfaction as an important influence on loyalty and explain concepts of loyalty development. The second part seeks to analyse the relation of loyalty to profitability. It examines the question as to whether loyalty can be considered ‘cash cow’ by definition, or which preconditions should be observed first.

Commitment, agency and trust - bases for loyalty

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