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

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Understanding Advocacy, Loyalty and Committment ............................................................... 1

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

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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.

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Commitment, agency and trust - bases for loyalty

While most researchers agree that all three concepts are interlinked and influencing each other (Singh and Sirdeshmukh, 2000, Liljander and Roos, 2002, Morgan and Hunt, 1994), about the question of which conceptcomes first in customer relatio nships, and which one is the most important to a company no agreement has been reached. Dwyer, Schurr and Oh (1987) argue that commitment presents the highest state of relational bonding. They agree with the the important role trust has to reach this state of relationship, but see commitment as a relationship stage that is reached naturally providing that a certain level of duration, income from the company side, and satisfaction on customer side, has been reached. However, the majority of researchers see loyalty as a high aspiration in a customer relationship. Nevertheless there is a difference between how loyalty is positioned in relation to committment. Some academics view committment as one specific form of loyalty. In fact, Assel (1992) defines brand lo yalty as being a committment to a certain brand. This is supported by Bloemer and Kasper (1995) who also define loyalty as committment to a brand, but notice that the strength of this committment influences the class of loyalty: less committed customers show only spurious loyalty while highly committed customers are truly loyal. Other researchers consider commitment more being a behavioural concept, while loyalty does express an attitude towards a brand (Liljander and Roos, 2002). In this sense commitment describes what some researchers name as behavioural loyalty (Baloglu, 2002). When talking about the ways loyalty can lead to profitability this will be explained more in detail.

However, the majority of researchers see commitment as an important but basic factor for achieving loyalty (Spekman, 1988). Morgan and Hunt (1994) put commitment even on the same level as trust since both are key to longterm-customer relationships. This becomes clear, comparing definitions of both terms. Mowday, Porter and Steers (1982:27, cited in Pritchard, Havitz and Howard, 1999) define commitment as “the relative strength of an individual’s identification with, and involvement in a particular organization”. This can be considered to result immediately out of “the confidence in an exchange partner’s reliability and integrity”, as Morgan and Hunt (1994:23) define the concept of trust.

Out of these definitions the question arisies, on what basis relationships start and loyalty is built, when no confidence and identification is existent. Two possible theories can be considered. Morgan and Hunt (1994) distinguish between two forms of commitment. Either commitment can be brought by another person who shares values of a customer and

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recommends this organisation, or the relationship with an organisation is evaluated by the customer, adding up gains and losses. The first one can be seen as a valid way to reach a stage stage of trust, based on commitment which has been delivered by word of mouth. Another possibility offers agency theory (Singh and Sirdeshmukh, 2000). It is based on the assumption, that between the customer and organisation there is a kind of information asymmetry at the beginning of a relationship and therefore distrust on the customer side. This has to be overcome by the organisation using symbols which can not be imitated by a lowquality provider. This provides then the basis for trust.

The authors also introduce the concept of satisfaction as mediator between trust and loyalty. This is also supported by Hoisington and Naumann (2003), stating that customer staisfaction and loyaly work together with value and are supported by good empirical evidence. In their work about loyalty the authors go so far as to state, that customer satisfaction and customer loyalty are not exactly the same, but closely related pieces of a larger concept Summing up what has been said so far, the picture which can be painted of the relationship between agency, trust and loyalty in the following:

For a new relationship either commitment by word of mouth or agency theory, leads to a stage of trust. Through satisfaction within the relationship and/or the purchasing situation trust can be enhanced towards the stage of loyalty. Netvertheless research has shown that the relationship between satisfaction and loyalty is asymmetrical: while dissatisfaction can be said