AGSM 2008 - The Satisfaction-Loyalty Conundrum

Empirical evidence on the drivers for customer loyalty is often undermined by real-life anecdotes. Although loyalty would seem to be logically linked to customer satisfaction, in practice many satisfied customers often defect.

In a major research paper, published in the US Journal of Marketing Research (JMR), Marketing Professor Murali Chandrashekaran has delved deep into the subtleties of customer loyalty and its link to customer satisfaction.

As a result of the new research, it will be possible to better understand which customers are more likely to be loyal.

Illustration: Gregory Baldwin

The paper, authored with three other academics including Dr Kristin Rotte, is an extension of Profession Chandrashekaran’s earlier research on customer service which won the Best Paper in Services Marketing award from the American Marketing Association, publishers of the JMR.

The new paper analyses the results of two studies, the first set in a business-to-business context using data from more than 25,000 customers, and the second a “conceptual replication” which examined decision making following a failed service encounter and a follow up response from the service provider.

The result is new insight on customer perceptions of service recovery, and its impact on the level of customer satisfaction and how that might translate into loyalty.

“These two studies strongly demonstrate that covert satisfaction strength plays a central role in translating satisfaction into loyalty. As a result of this research, it is possible to better understand which customers are more likely to be loyal,” Professor Chandrashekaran said.

A key finding from the studies is that while satisfaction does translate into loyalty where the satisfaction judgement is “strongly held” – or has a low level of uncertainty – that translation is significantly lowered where the judgement is weaker or more uncertain.

“Situations of weaker satisfaction judgement, where the customer satisfaction was fraught with uncertainty, translated to an average 60 per cent lower level of loyalty,” said Professor Chandrashekaran.

“This result meant that if we were confronted by two customers with an identical level of revealed satisfaction, we could differentiate between a customer who was likely to stay loyal, and one who might be vulnerable to defection.”

The authors also found that previous relationship factors – such as the length of the relationship and the volume of business – did not mitigate weak satisfaction levels.

Rather, the more vulnerable customers were those with long relationships with the service provider, who did a large volume of business and who, although they had positive customer experiences in the past had weak satisfaction levels.

“These results indicate that a practitioner focussing on only average satisfaction is likely to be ‘blindsided’ because many of these customers were the ones which switched when the opportunity arose,” Professor Chandrashekaran said.

“This is the essence of customer vulnerability, and it illuminates the satisfaction-loyalty conundrum.”

The thinking in this paper is now being applied to more problems which are central to the marketing-finance interface.

Satisfaction uncertainty, according to the paper’s authors, is similar to uncovering termites flourishing within the walls of a house which otherwise appears solid.

Professor Chandrashekaran's research strongly demonstrate that covert satisfaction strength plays a central role in translating satisfaction into loyalty.

Photo: Professor Murali Chandrashekaran

The termites’ presence shows the house is actually vulnerable, and when “push comes to shove” the house can come tumbling down.

In the context of customer satisfaction, organisations should understand that uncertainty and weakly held judgements make them vulnerable to customer churn, and they should simultaneously assess the level and strength of customer judgements.

As a result, the abandonment of customer satisfaction programs may well be premature, because they provide a mechanism for a comprehensive analysis of satisfaction and can help to classify satisfaction scores – an analysis which is at the core of the paper.

“The thinking in this paper is now being applied to more problems which are central to the marketing-finance interface,” said Professor Chandrashekaran.

“We are now modelling the link between customer service, satisfaction, brand equity and long term shareholder value, and have tested the model using data from the US airline industry.

“A paper reporting these results is currently under review at JMR.”

This most recent paper is the seventh time Professor Chandrashekaran has been published in the JMR over the last fifteen years, and is a first for Kristin Rotte, who is the first junior faculty member at UNSW to publish in the journal, where rejection rates are around 90 per cent.