1. Impact of Service Quality on Customer Loyalty
A careful assessment of relevant literature reveals plenty of empirical evidence in support of the proposition that service quality is a significant determinant of customer loyalty (Akbar et al., 2010). For example, in a recent study of the impact of service quality on customer loyalty in the context of retail outlets, Sainy (2010) demonstrated that the former has a strong, positive effect on the latter. Oliver (1981) contends that customer loyalty develops gradually and is not a result of a single experience. More specifically, Oliver (1981) asserts that consumers first become loyal in a cognitive sense, i.e., when they perceive the quality of a service delivered to them by an organisation as superior compared to its competitors, they consider the firm as a ‘wise’ choice over other alternatives. At the second stage is affective loyalty when the consumer develops a liking for the firm based on cumulatively satisfying service experiences. The third stage is conative loyalty whereby the consumer is committed to buying services from the same firm. This leads to the fourth stage, known as action loyalty, whereby the consumer exhibits consistent repurchase behaviour and engages in positive word – of – mouth communication about the firm.
It is evident from the above that consistency in the quality of services delivered by the firm is critical for developing customer loyalty. At any stage, if the degree of discrepancy between customer’s normative expectations for the service and their perceptions of the service that they have received is high, the psychological bond that the customer had developed towards the firm until then will be negatively affected (Lorenzo et al., 2010). In other words, inferior service quality can be expected to impact customer loyalty negatively. Based on the above discussions, it can be drawn that the low customer retention rates at the firm is clear evidence of the poor service quality currently offered at Jakey Travel. Just as high service quality enhances customer loyalty, poor service quality is likely to reduce the chance of customers developing loyalty behaviour as it lowers customer trust and satisfaction with the firm (Lorenzo et al., 2010). Thus, unless Jakey Travel is able to provide superior, distinct service quality to its customers, that too on a consistent basis, they are highly unlikely to come back to use the firm’s services. This is especially true since the firm operates in a highly competitive sector.
2. Impact of Service Quality on Revenue Growth and Profitability
There are strong conceptual arguments for the existence of the relationship between service quality and an organisation’s financial performance (Rust and Zahorik, 1993; Heskett et al., 1997; Zeithamil, 2000). For one, the relationship can be explained by the simple cost – benefit equation. The moderating factor in this theory is customer loyalty. It is generally assumed that the cost of acquiring new customers is higher than the cost of retaining existing customers and that this is particularly true in the case of the service sector. In fact, industry experts are of the opinion that the cost of customer acquisition is five times greater than that of customer retention (Zeithamil, 2000). Consequently, small reductions in customer defection rates can produce significant improvements in profitability. Reichfield and Sasser (1990) estimate that a 5 per cent increase in customer loyalty can produce profit increases from 25% to 85%. A more sophisticated model explaining the link between service quality and firm profitability was developed by Heskett et al (1997), called as the service – profit chain model. The service – profit chain model clarifies the mediating role of customer loyalty in the linkage between service quality and financial performance. According to the model, customer satisfaction is largely influenced by the value of the services provided to customers and loyalty is a direct result of customer satisfaction. Further, profit and growth are stimulated primarily by customer loyalty. Heskett et al (1997) provided empirical evidence from multiple companies such as Sears, Intuit and Taco Bell in support of these relationships. These improvements in profitability as a result of increased customer loyalty arise from cost savings, additional revenue generation and higher market share (Reichfield and Sasser, 1990).
Cost savings are achieved when the organisation can meet customer needs more cost effectively as a consequence of being more knowledgeable about these customers (Reichfield and Sasser, 1990). More specifically, in businesses such as Jakey Travel which depend on personal relationships with clients, costs will significantly reduce as the company gains experience with its customers since customers know what to expect from the consultant and have fewer questions and problems. In addition, the consultants can serve these customers more efficiently because they are familiar with the customers’ needs and preferences. Another theoretical explanation for cost savings as a result of increased customer retention is that selling costs for existing customers are much lower than selling to new ones. According to a much quoted study for the US department of Consumer Affairs, the cost of selling to existing customers is on average 20% lower than selling to new ones (Zeithamil, 2000). A logical reasoning for this assumption is that lesser resources need to be invested in advertising, promotions etc in case of the former, compared to the latter.
Besides lower selling costs, customer loyalty also contributes to firm profitability through increase in revenue generation. Additional revenue is generated partly because of repeat purchases. Existing customers who perceive quality of the services of the company to be high is likely to increase their purchases, gradually in the beginning and more frequently later on as they continue to be satisfied with the service quality (Reichfield and Sasser, 1990). This increase in the volume of purchases will turn profits up sharply. Furthermore, increased revenue generation as a result of increase in customer retention can also be attributed to the firm’s ability to charge a price premium for the customer’s confidence in the business (Zeithamil, 2000). Loyal customers are thought to be less price sensitive and more willing to pay higher prices for a service that they are confident in rather than take chance with a less expensive competitor (Reichfield and Sasser, 1990). Another financial boon of delivering high service quality and consequently increasing the levels of customer loyalty is the ability of the firm to attract new customers through positive word – of – mouth advertising. Satisfied and loyal customers tend to tell other people about their positive experiences with the company, generating favourable word of mouth that subsequently reduces the marketing costs the company must expend to get additional customers (Zeithamil, 2000). For a medium sized company such as Jakey Travel with relatively small online and offline presence, and many big players in the market, word of mouth referrals is crucial for building sales. The increased costs from customer acquisition combined with the decreased costs of marketing, will lead to greater profitability.
In addition, increase in firm profitability as a result of high service quality and consequent increase in customer loyalty can also be explained using the assumptions of the resource – based model of competitive advantage. According to the resource – based view, an organisation can achieve competitive advantage by possessing valuable, rare, inimitable resources which are exploited to their full potential (Barney, 2001). In the service sector, quality is difficult to imitate and as such as potentially provide the basis for a sustainable competitive advantage. Offering superior service which the competition cannot match provides consumers reason for choosing and remaining with a firm over other firms which in turn can increase the market share of the firm (Rust and Zahorik, 1993). Conversely, a service offer which is inferior in quality or one that was of an acceptable level but no longer meets customer expectations owing to improved standards of competitors or changing consumer tastes may increase the likelihood of defection thereby resulting in loss in market share which negatively impacts bottom line profits (Rust and Zahorik, 1993).
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- Joseph Katie (Author), 2012, Impact of Service Quality in Organisations: Case Study of Jakey Travel, Munich, GRIN Verlag, https://www.grin.com/document/211421