Professional Documents
Culture Documents
Dynamics of Relationship
21
Quality Received July 1994
Revised September 1994
Kaj Storbacka, Tore Strandvik and Christian Grönroos
The Swedish School of Economics and Business Administration,
Helsinki, Finland
Introduction
The chain of impact of service quality on satisfaction and satisfaction on
customer retention (customer loyalty), and further customer retention on
profitability has been addressed by, among others, Rust and Zahorik (1993).
They note that there might be some scepticism among managers about the
profitability of service improvement, i.e., increased service quality. The
dominating perspective within service quality research has been to assume that
service quality has a positive correlation with satisfaction, which in turn will
lead to increased purchase loyalty. However, most of the published academic
studies have looked only at the link between service quality and satisfaction. A
few have also included the effect on behaviour in the form of purchase
intentions. Purchase intention stated at the point of time when a service episode
has just occurred does not necessarily have a high predictive power. A stated
intention might be seen as an ideal, which can be different from the actual
behaviour, influenced by contingencies. There is a lack of studies investigating
customer relationship economics, i.e. the link between perception measures
(service quality, satisfaction, intentions) and action measures (purchase loyalty,
purchase volume, word-of-mouth behaviour and long term customer
relationship profitability). Only the actual acts by customers influence the firms’
profits and long-term profitability.
The current satisfaction paradigm is based on the assumption that
customers’ actions are based on their perception of quality and satisfaction, that
they are free to act and choose, and that a loyal customer is more profitable than
a less loyal customer. Implicitly this kind of argument contains a number of
assumptions that might be debatable. Our intention is to pinpoint some of the
assumptions which are present in the dominating line of thought.
The purpose of the article is to discuss factors affecting customer
relationship economics and customer profitability in light of the current service
quality and customer satisfaction paradigm. Our basic argument is that in the International Journal of Service
service quality literature a number of assumptions are made about how quality Industry Management, Vol. 5 No. 5,
1994, pp. 21-38, © MCB University
leads to profitability. These should be verified in empirical research. According Press, 0956-4233
IJSIM to Storbacka (1994a) quality and profitability can be studied at both an
5,5 individual level and a customer base or market level. In this article we are
focusing on the individual level but from the firm’s point of view. Examples
from the financial services sector are used as illustrations in the text but the
conceptual framework should be applicable to all kinds of services.
Such relationships are usually, but not necessarily, long term. On the basis of
the above definition, the profitability of relationships is one of the key goals of
marketing.To illustrate the relationship marketing approach we can make a
comparison with the traditional transaction marketing view (Grönroos, 1994).
In a relationship perspective the focus is not on service encounters (or
transactions) as such. The encounter is rather seen as an element in an ongoing
sequence of episodes between the customer and the service firm. Thus
marketing, service quality, and customer satisfaction have to be analysed both
on an episode level and on a relationship level. Second, relationship marketing
tends to be more focused on keeping customers and enhancing the relationship
with them.
A similar mode of thinking has been proposed by contrasting offensive
marketing strategy with defensive marketing strategy (Fornell, 1992; Fornell
and Wernerfelt, 1987). This approach does not have its roots in either industrial
or service marketing but has emerged within traditional consumer goods
marketing. Offensive marketing would focus on obtaining new customers and
increase customers’ purchase frequency while defensive marketing is
concerned with minimizing customer turnover. The basic argument is that the
cost of obtaining a new customer exceeds the cost of retaining an existing
customer. Fornell and Wernerfelt (1987) argue that in non-growth markets
competition centres on more or less dissatisfied customers. Offensive marketing
strives to attract competitors’ dissatisfied customers while defensive marketing
is geared to managing the dissatisfaction among a firm’s own customers.
Fornell (1992) has further developed the argument of how satisfaction is related
to market share and profitability. He notes that customer satisfaction is a future-
oriented indicator of the profits of a company. Customer satisfaction can
therefore be seen as an important complement to traditional measures of
performance such as return on investment, market share and profit. A defensive
strategy has two components, customer satisfaction and switching barriers. Managing
Switching barriers make it costly for a customer to switch to another supplier. Customer
Different types of costs (search costs, learning costs, emotional costs), cognitive Relationships
effort and risk factors (financial, psychological, social) constitute switching
barriers from the customer’s point of view. The basic argument is, in other
words, that profitability is enhanced by focusing on existing customers because
satisfaction leads to lower costs, higher customer retention and higher revenue. 23
Service
quality
Service too
expensive for the
High customer or does Expected
not fit the customer’s outcome
Figure 2. preferences
The Link between
Service Quality and Source: Liljander and Strandvik (1994)
Customer Satisfaction
what was given (price) is not perceived to correspond to the received quality.
This clearly has to do with the budget of different customers and their
preferences for different attributes and alternative ways of spending their
money and time. Satisfaction is thus related to perceived value.
Contextual or
28 Low Expected perceptual bonds
outcome outweigh the lack
of satisfaction
Customer
satisfaction
Low customer commit-
ment. The relationship
Figure 3. High is not perceived Expected
The Link between as important outcome
Customer Satisfaction by the customer
and Relationship
Strength
the parties’ intentions to act and their attitude towards interacting with each
other. Loyalty can occur with three different types of commitment, positive,
negative or no commitment. A negatively committed customer shows a negative
attitude but might still buy repeatedly because of bonds. This also means that
customer loyalty is not always based on a positive attitude, and long-term
relationships do not necessarily require positive commitment from the
customers. This distinction is important as it challenges the idea that customer
satisfaction (the attitude) leads to long-lasting relationships (the behaviour).
We can conclude that customer satisfaction is only one dimension in
increasing relationship strength (see Figure 3). Strong relationships can be
dependent of perceived or contextual bonds that function as exit barriers. It is,
however, important to note that the use of contextual barriers can generate
latent dissatisfaction which emerges as the importance of the contextual bonds
(for instance the legal bonds) decreases. In a retail banking context, for instance,
a typical example of this is the defection of customers who have paid off their
loans, by which the banks have tied the customer.
Another important aspect that we have to consider is that the importance of
the relationship for customers varies significantly. Some customers may be very
committed to the relationship and for these customers the perceived satisfaction
with the relationship is very important. Others may find the relationship
basically unimportant and for these customers the satisfaction component is
not as important.
Relationship
continues due to 31
Expected
Weak bonds, and/or objective
outcome
or perceived lack of
alternatives
Relationship
strength
Poorly managed
critical episode or
Expected
Strong insufficient Figure 4.
outcome
service recovery The Link between
ends relationship Relationship Strength
and Relationship
Longevity
relationship longevity may be a result of the fact that the episodes in the
relationships have all been routine episodes. Thus the customer may feel that
the relationship is not very important – or at least not important enough to
motivate the investment of time required to end the relationship. As soon as
there is a poorly managed critical episode in the relationship the customer may
become involved enough to take the time to choose another provider.
The importance of critical episodes is evident. Even strong relationships may
end because of poorly managed critical episodes. This way of arguing can be
related to the ideas about the importance of “service recoveries” (Albrecht and
Zemke, 1985; Hart et al., 1990; Johnston, 1994).
Finally, we would like to conclude that obviously there are interdependencies
between the constructs suggested above. An excellently managed critical
episode naturally influences relationship strength, deepens the bonds and
influences the customer’s commitment to the provider.
Customer
Service
provider RR TIV CTV
Figure 5.
Relationship Revenue RR = Relationship revenue; TIV = Total industry volume; CTV = Customer's total volume
as a Portion of the Source: Storbacka and Luukinen (1994)
Customer’s Total
Volume
housing, food, clothes, hospitality services, etc. Money spent in one sector is, of Managing
course, not available in another. The above logic is depicted in Figure 5. Customer
As shown by Storbacka it would – in a relationship marketing approach – Relationships
seem interesting to measure the provider’s share of the total industry volume,
TIV (or CTV, customer’s total volume). We will call the RR/TIV ratio patronage
concentration as it measures the actual patronage behaviour of the customer.
The bigger the quota the stronger the provider’s position is and the stronger the 33
relationship can be argued to be. It is important to note that when RR<TIV, the
customer has relationships with other providers in the same industry; the
customer is only a partial customer. Partial customers obviously constitute a
key potential when trying to increase relationship volume and thus relationship
revenue.
Based on the above logic there are basically two ways to increase relationship
revenue: to raise prices or to increase the patronage concentration of the
customer under consideration, i.e. to increase RR/TIV. Usually the customers
use several providers in the same industry – they are partial customers. Getting
customers to concentrate their businesses on one provider increases the
relationship revenue provided that the volume is acquired at a reasonable price.
Additionally, the provider may want to increase the RR/CTV ratio, i.e., also try
to cross-sell products outside its industry to the customer.
The key question is, however, how does a provider influence its customers to
concentrate their patronage? Increasing relationship strength is obviously one
dimension but certainly there are others to consider, relationship pricing being
one of the more important ones.
The difficulty in calculating customer relationship profitability stems from
the problems in allocating costs to specific relationships. Analysing
relationship costs brings forth the need to identify cost drivers in relationships.
Storbacka (1994b) argues that the best cost drivers are the episodes in a
relationship. All relationships have a number of different types of episode that
differ as to content, frequency, duration, etc. A long-term relationship with one
provider can thus be described as a string of episodes. This is especially valid
for services that are of a continuous nature and that contain many different
types of episode, such as retail banking. In order to analyse relationship costs
we have to understand the relationship’s configuration of episodes. Different
customers generate different types of episode, they use different variations of
each episode type, and they use different amounts of them. Each and every
relationship is thus configured differently. Provided that we can create a
typology of possible episodes and episode variants we can depict relationships
with an episode configuration matrix, as shown in Figure 6 (inspired by
Gummesson’s (1993) notion of contextual matrices).
The horizontal axis describes the customer relationship and shows what
kinds of episode the provider has had with the customer (not the number of
episodes). The matrix can be analysed from the provider’s perspective and from
the customer’s perspective. From the provider’s point of view, we need to add
the number of episodes. The total number of episodes is the sum of the demand
IJSIM
5,5 Episode types
E1 E2 E3 E4 E5 E6 E... Em
CR1
34
CR2
CR3
Customer
relationships
CR4
CR...
CRn
Figure 6.
Episode Configuration
Matrix
of all customers who have chosen the specific type and variation of a discrete
episode.
The intensity of episodes will be different for all customer relationships,
independent of their relationship volume. This may relate to the fact that their
main relationship rests with another provider. Customers who generate the
same relationship revenue may, however, have different episode configurations.
Thus the relationship costs and the profitability of the relationships will be
different.
We can, based on the above way of arguing, conclude that long-term
relationships are not a sufficient prerequisite for customer relationship
profitability. We have to understand two other dimensions of the relationship:
relationship revenue and relationship costs (see Figure 7). An important aspect
of relationship revenue is the customer’s patronage concentration. Another
aspect which has received far too little attention (also in this article) is pricing.
In contexts where continuous customer relationships dominate, the episode
configuration of different customer relationships is a key explanatory factor
that drives relationship costs and thus affects customer relationship
profitability.
What is needed is a systematic analysis of relationship configurations: the
services used by the customer, the episode configuration, and the delivery
channels used by the customer (Storbacka, 1994b). Based on this information
the providers can start a process of relationship enhancement, the key objective
being to find ways to improve the profitability of customer relationships. One of
the ways of doing this may be quality improvements but there are evidently
many other issues to consider.
Managing
Customer relationship profitability Customer
Low/negative High
Relationships
High revenues based
on pricing and patron-
Short Expected age concentration OR 35
outcome low relationship based on
the episode configuration
Relationship
longevity
High relationship costs
due to unfavourable
Figure 7.
Long episode configuration OR Expected
The Link between
low relationship revenue outcome
Relationship Longevity
due to poor pricing or low
and Customer
patronage concentration
Relationship
Profitability