A critical analysis of the relationship between customer satisfaction and customer retention

28092406985

A critical analysis of the relationship between customer satisfaction and customer retention

Author: Peng Chen

Date:

Project Supervisor: Mehedi HasanCourse: BA Business Management

Module: BUS602 Business Project

Certification:

I certify that the whole of this work is the result of my individual effort and that all quotations from books, periodicals etc. have been acknowledged.

Signature _________________________ Date _________________________

Contents

TOC o “1-3” h z u Abstract PAGEREF _Toc354130349 h 4Acknowledgements PAGEREF _Toc354130350 h 51. Introduction PAGEREF _Toc354130351 h 6Terms of Reference PAGEREF _Toc354130352 h 102. Literature review PAGEREF _Toc354130353 h 112.1 Customer retention PAGEREF _Toc354130354 h 112.2 Customer retention PAGEREF _Toc354130355 h 142.3 Customer satisfaction and customer retention PAGEREF _Toc354130356 h 162.4 SWOT PAGEREF _Toc354130357 h 193. Methodology PAGEREF _Toc354130358 h 213.1 Research methods PAGEREF _Toc354130359 h 213.2 Hypothesis PAGEREF _Toc354130360 h 223.3 Data gathering methods PAGEREF _Toc354130361 h 233.4 Population PAGEREF _Toc354130362 h 243.5 Sampling PAGEREF _Toc354130363 h 253.6 Questionnaire design PAGEREF _Toc354130364 h 253.6.1 Likert scale PAGEREF _Toc354130365 h 263.7 Data collect and analysis PAGEREF _Toc354130366 h 264. Findings, Analysis and Discussion PAGEREF _Toc354130367 h 274.1 Multiple Correlation PAGEREF _Toc354130368 h 274.2 Hypotheses PAGEREF _Toc354130369 h 294.3 Data analysis PAGEREF _Toc354130370 h 294.4 Demographic Information of Survey PAGEREF _Toc354130371 h 294.5 Correlation Analysis PAGEREF _Toc354130372 h 324.6 Summary PAGEREF _Toc354130373 h 364.7 Summary of Hypotheses Testing PAGEREF _Toc354130374 h 375. Conclusion PAGEREF _Toc354130375 h 37Evaluation PAGEREF _Toc354130376 h 40Reference PAGEREF _Toc354130377 h 41Appendices PAGEREF _Toc354130378 h 51Appendix 1: Questionnaire PAGEREF _Toc354130379 h 51Appendix 2: Project Proposal PAGEREF _Toc354130380 h 54Appendix 3: Multiple Correlations with five hypotheses PAGEREF _Toc354130381 h 63Appendix 4: Database PAGEREF _Toc354130382 h 64

List of Figure

TOC h z c “Figure” Figure 1: Retailer’s market share in the UK in 2012 PAGEREF _Toc354129759 h 9Figure 2: The Kano Model of Customer satisfaction PAGEREF _Toc354129760 h 12Figure 3: The conceptual framework for Multiple Correlation PAGEREF _Toc354129761 h 27Figure 4: Gender distribution PAGEREF _Toc354129762 h 30Figure 5: Participants within each of occupation PAGEREF _Toc354129763 h 31Figure 6: Participants within each of age ranger PAGEREF _Toc354129764 h 32

List of Table

TOC h z c “Table” Table 1: Overview of the Key defined Variables PAGEREF _Toc354129765 h 28Table 2: Participants within each of Gender PAGEREF _Toc354129766 h 30Table 3: Participants within each of age ranger PAGEREF _Toc354129767 h 31Table 4: The relationship between shop frequency and staff service PAGEREF _Toc354129768 h 33Table 5: The relationship between shop frequency and waiting time PAGEREF _Toc354129769 h 33Table 6: The relationship between shop frequency and price PAGEREF _Toc354129770 h 34Table 7: The relationship between shop frequency and promotion PAGEREF _Toc354129771 h 35Table 8: The relationship between shop frequency and loyalty program PAGEREF _Toc354129772 h 35Abstract

As the completion increasing, more and more company would like to set out unique policies to keep their customers and customer satisfaction and customer retention are becoming more and more important. Those two factors have been widely used in the business. The research is attempted to find out the relationship between customer satisfaction and customer retention. The methodology used quantitative research. Questionnaire was collected from 50 participants in the Wrexham through random sampling and Multiple Correlation analysis was used to analyse collecting data. The sample consisted of respondents from a wide variety of occupations and age groups. The findings show that customer satisfaction is correlated with customer retention. Further findings from the quantitative data proved that staff service, price and loyalty program are the influencing factors to affect customer retention. Meanwhile, the research used shop frequency as customer retention which can be applied in the further study. It is recommended to further study on the extent of the influencing factors affect customer retention and Multiple Regression might be a suitable method to apply on it.

Acknowledgements

I would like to express my gratitude to all those who helped me during the writing of project.

My deepest gratitude goes first and foremost to Mr. Mehedi Hasan, my supervisor, who gave a precious advice, feedback and experience to help me to improve the project and finish the project. Meanwhile, I would like to Mrs. Sandra King, my course leader, who give me the guidance on the project to complete the project. Additionally, I would like to thank IT services to help me to analyse the data to gain the result of the finding chapter. Without out their consistent and illuminating instruction, I cannot finish my project on time.

I would also like to thank the participants who were willing to accept my request to help me finishing the questionnaire with the valuable experience, which is very important for my project.

I would also like to thank my friends, who took a lot of time to discuss with me and gave me some useful ideas. It is so lucky to have such friends.

Last but not the best; I would like to take opportunity to thank my family. Their patience support and motivate me to keep on studying. No words are enough to utter their contribution in my life. Thank them in every moment of my life.

Peng Chen

May, 2013

1. Introduction

In the current economic environment, a company cannot afford to lose their customers. The rule can be applied to all of the companies. No matter which country they live or how long they have been in business. A customer who is dissatisfied with your product may never come back to your company again because many options may be available to him. Nowadays, buyers have power to select their sellers but sellers have to use various methods for trying to attract their customers to buy their products. It is easy to bring a customer to your door, but it is difficult to retain them. Therefore, this is the reason why customer satisfaction appears.

Customer satisfaction has a positive influence on a corporation’s profitability which has shown by many researchers (Carù and Cugini, 1999). Customer satisfaction can increase loyalty and current customers continue to purchase from the same supplier (Anderson et.al, 1994). Customer satisfaction can improve customer loyalty to firms, which can establish a good relationship between each other. When customers are loyal to a firm, they are likely to continue to purchase products or services from the same supplier. No matter the impact of the price changes, they are still sticking to the same company. The more loyal customers become, the more money would be spent on the company. Meanwhile, satisfied customers who will refer their friends and family members to businesses where they have a good customer service. Survey has shown that 4 in 10 customers are committed to recommend the provider to their friends (Casey and Warlin, 2001). Therefore, sellers should consider the consequences of customer satisfaction and dissatisfaction.

There are various factors that influence the company’s profit. Customer satisfaction is one of the major factors, so as customer retention. Customer retention can be defined as sales organization in order to reduce the loss of users using means to retain them. Successful customer retention always starts with the first good impression of an organization and continues the relationship throughout the entire lifetime. In some cases customer satisfaction and customer retention have a certain similarity. Kotler states:“The key to customer retention is customer satisfaction” (Kotler, 1997, pp. 20). Kotler has declared that customer satisfaction has a link to associate with customer retention. Therefore, customer satisfaction and customer retention are two key factors for the success of an organisation.

Customer retention is a strategic process to keep the existing customers and prevent them to defect to other organizations for business. Customers are company’s potential asset and competitiveness (Ahmad and Buttle, 2001). They are the base for the company. Without them, it is very difficult to be successful in the long term. Nobody wants to lose an existing customer. The goal of customer retention is trying to maintain and establish a positive relationship between the customer and the company.

Customer retention is a current topic to all of the companies, so the majority of them take an active part in setting their own policies to retain customers. Even though sample strategies, such as cash back, sending automatic emails on birthdays and solving problem, they both can hold customers. It is much cheaper to spend money on customer retention than on acquiring new customers. Loyal clients, who have a positive relationship between customer and company, will often buy additional products from the company. Additionally, they can share their experience with their friends and recommend them to join in the company.

A few businesses fail not because they do not have enough customers but they fail to retain and win new customers. Okun indicates the leaky bucket effect (1975 cited by Browning, 2008) is related to efficiency. The bucket with limiting capacity is leaky. Although you put things in it while others would leak out from the hole. Similarly, company tries to win some of new customers while old customers leave from the company at the same time. The scale of the company stays the same. It is impossible to expand your company and make a profit. The best strategy is keeping existing customers and winning new customers at the same time.

Customers can only be retained if they are satisfied with your business and are loyal enough to resist a competitor’s offer. However, satisfied customers can also walk away upon finding more attractive offers. Therefore, retention strategy must be formulated based on customers’s satisfaction.

The research will use a questionnaire to analyze customer service relates to Sainsbury’s supermarket to find out the relationship between customer satisfaction and customer retention, and investigate the key influencing factors of customer satisfaction. Sainsbury’s, built in 1869, which runs more than 1,000 stores, including 440 convenience stores and hires around 150,000 colleagues. Sainsbury’s supermarket was the largest supermarket chains in the UK. However, Sainsbury’s has been lost its market leader position. Recently, Sainsbury’s has fallen to number three in the market behind Tesco and ASDA. Sainsbury’s strategy is to put customers in the first position and tries to provide the best shopping experience to them and aims to help their customers Live Well For Less. In order to make all customers’ lives easier, sainsbury’s promises to offer great quality and service at fair prices. The sale (including VAT) got a 6.8% increase to £24,511m in 2012 (£21,102m on 2011). During 2012, Sainsbury’s market share got a slightly increase from 16.5 per cent to 16.6 per cent (The size of the UK grocery market £138.2 Billion).

(J Sainsbury plc, 2013)

Figure SEQ Figure * ARABIC 1: Retailer’s market share in the UK in 2012

The structure of UK supermarket is oligopoly market structure which has four big supermarkets dominate the whole market, Tesco, Sainsbury, Asda and Morrison’s, with almost 75% of the whole market share in the UK (Research and Markets, 2007).

Therefore, there are full of competition in the UK supermarket. In the field to the supermarket, product homogenization is so significant that a customer is easy to lure by their competitors. In order to keep the customer to continuous shop on their supermarkets, price war is the most commonly mean used by both supermarkets to be exhibited in front of people (Harvey, 2000). In coder to increase shopping experience and convenience for customers, currently Sainsbury’s attempt to trail a new creative technology called Mobile Scan & Go, which allow customers to scan items by mobile phone and pay the bill without unloading their trolley or bags. Meanwhile, this technology can allow customers to track how much they are spending and view savings instantly (Caines, 2012).

Terms of Reference1. This study purpose to assess the relationship between customer satisfaction and customer retention, why customer satisfaction influences customer retention and how it influences customer retention. It will also investigate the key influencing factors of customer satisfaction.

2. The research relates to the relationship between customer satisfaction and customer retention. By using Correlation Hypothesis, the hypothesis would be set that whether customer satisfaction is relating to customer retention. In order to prove the hypothesis, primary data could be collected via questionnaire. And the data would be collected from Sainsbury’s customer in Wrexham.3. The data will prove the result of the customer satisfaction influences the customer retention, draw conclusions and recommendations.

The rest of the report will be as follows:The next chapter is Literature Review. The chapter will critically analyse the existing research which divides into three parts, customer satisfaction, customer retention, customer satisfaction and customer retention. The following chapter is Methodology. It is aimed to talk about how to decide the questionnaire and how to analyse the data. And then is Finding. This will discuss the result of the questionnaire. Finally, it will give the recommendation and evaluates the project.

2. Literature review

The literature review will criticise relevant theory about customer satisfaction and customer retention, and critical discusses recent articles on the topic.

2.1 Customer retentionCustomer satisfaction has become an important strategy for companies. Fornell et al. say that customer satisfaction is high return and low risk strategy (2006). Higher satisfaction means the higher performance. If you can keep your customer, it means that more sales would occur at the same time. In other words, it’s the profit to the company. Research supports that customer satisfaction is linking with a company’s performance (Morgan et al., 2005). In the opinion of Homburg et al. (2005), satisfied customers who receive higher quality service or experience are willing to pay more. Therefore, the majority of companies have implemented the strategy of customer satisfaction for improvement. They spend a massive amount of time and money on the satisfaction survey to sum up customer behavior to deeper study what customers really want. Setting up relevant policies and training employees, they can improve service quality and customer satisfaction. Grönroos states that value can be delivered with satisfaction from the products and services (2009). Customer considers it as an additional value and benefit for them and they can accept it easily. The higher quality they provide, the better performance is. New technologies have helped Sainsbury’s to improve its performance and there are three technologies such as faster supply chains to speed up the time for products to deliver it to the shelves; self-checkout system to reduce queuing time; and coupon-at-till technology that help customer buy what they want economically (Caines, 2012).

Meanwhile, research has shown that customer satisfaction is the key to driving profits and competitiveness. Customer satisfaction is represented company’s competitiveness. If customer satisfaction is high, your company has good competitiveness. On the contrary, if customer satisfaction is low, your company lacks of competitiveness. During the implementation, plenty of information can be analysed to identify company’s own strengths and weaknesses and prospect the strategies for future progress. What is more, it can improve work practices. (Liswood, 1990)

Customer satisfaction has been described by Oliver (1997) as ‘the customer’s fulfilment response to a consumption experience, or some part of it’ (cited by Buttle, 2004. pp. 21). Customer satisfaction depends on customer’s expectations. Expectations-confirmation theory is the foundation of customer satisfaction (Oliver, 1980). The theory hypothesises that the customer is dissatisfied if the product’s performance is lower than expectations. The customer is satisfied if product’s performance matches expectations. And the customer is highly satisfied if product’s exceeds expectations. Kotler and Armstrong (1999) agree with the theory and suggest that expectation is related to past buying experience. Marketer should formulate the right level of expectation for customer. If the expectation is too high, buyers are hard to satisfy. Conversely, if the expectation is too low, it may fail to attract buyers.

Figure SEQ Figure * ARABIC 2: The Kano Model of Customer satisfactionThere is another theory relevant to expectation. Kano points out Kano model that further explain the expectation with three elements of the customer need which are Must-be element, One-dimension quality element and Attractive quality element

(2001, cited by Nilsson-Witell). Must-be quality element is regarded as the basic element which should be fulfilled. If not fulfilled, it would cause dissatisfaction. One-dimension quality element is the additional feature. Customers are satisfied if the element is provided. If elements do not provide, it would not cause dissatisfaction. Attractive quality element is the feature which is unexpected and matches their need. It would not cause dissatisfaction if elements do not provide and customers are highly satisfied with the element. With deeper research of customer behavior, company can get better understanding about customer’s need and expectation, which can increase sales and acquire new customer (García-Murillo and Annabi, 2002). Customers expect to gain good services, and the essential factor is the service exceeds their expectation. If you can offer exceeding expectation service, customers will satisfy and remember it. Memorable service every time can keep your customers stay with you. Interestingly, survey has found that a high level of satisfaction is not equal to the high level of loyalty (Bennett and Rundle-Thiele, 2004). Generally, customers look forward to good service which can bring convenience and match their need. However, if the price is too high which they cannot afford it, they would never buy it or only try once and never do it again.

However, some of the researchers are against about customer satisfaction. According to survey, they found that many CEO, the manager or the investors are no longer care about customer satisfaction though they have never mentioned it (Williams and Visser, 2002). Customer satisfaction no longer holds any relevance for the customer. Most of them care about their tenure and career. They would try their best to make a better performance in the short time. From then on, they have to give up the long-term strategy of customer satisfaction and focus on the short time investment, such as merger and acquisition. Also they still pay attention on customer satisfaction, such as customer compliant. Customer compliant is the fast way to reflect the shortage of company. What’s more, even customer satisfaction is also relatively unimportant for customers. Customers can get more reward for being dissatisfied. Another research agrees with Williams and Visser. In the eyes of a manager, customers are merely potential assents that need to keep it (Strategic Direction, 2003). Those contributions are better than nothing and the kinds of relationship do not mean tangible yield.

2.2 Customer retention

Customer retention is defined as repurchase intentions and is obtained by good service and good relationships (Hansemark and Albinsson, 2004). When the customer is satisfied with the product or services, he might buy it again initiatively. Even sometimes they do not realise what they have done. Long-term consumer behaviour would be repeated as routine. This is the process how customer retention appears. Based on Sainsbury’s gift vouchers and cards, the more customers spend on the supermarket, the more reward they would gain. And loyalty scheme assist Sainsbury’s to remain customer loyalty to the brand and get repeat business (J Sainsbury plc, 2013). Satisfied customers prefer to continue their relationship with the firm, and there is a less costly approach than find a new customer. Customer retention is the solid evidence that customers continue to keep a business relationship with the company. Keiningham et al. support the idea from several examples. Customers prefer to continue to use the same provider with Internet service providers, sustain an account relationship with the same bank and repeat shopping with the retailer (2007). When company understands exactly what the customer needs and the customer understands what the company attempts to deliver exactly what he needs. It is an efficient way to save time and money both. Since they have already known what is different between you and your competitors, satisfied customer would have more chances to choose your company. Tesco’ Clubcard, one of the most successful retail loyalty schemes in the world precisely, which provides cost effective goods to the customer (Stone et al., 2004). Many retailers are trying to imitate the loyalty scheme, so as Sainsbury’s. Nectar card, the largest and most popular loyalty scheme in the UK, has 11.5 million active card users. With data from Nectar, Sainsbury’s can reward customers with points, and sent relevant rewards and promotions to customers (Caines, 2012). Sainsbury’s sets up ‘NECTAR’ card scheme to allow customers to collect points in several non-competing store groups, such as Debenhams, BP, McDonalds, Argos, Amazon, Easyjet and many other places (Nectar, 2013). The approach attempts to seek other larger retailers in a different segment to form a relationship.

Payne claims that company can gain competitive advantage and survive in the increasing competitive environment because customer retention is one of the most powerful weapons (1995). Customer retention keeps customer repurchasing product and service. It cost up to five times more to get a new customer as to keep an existing one. It’s easier and more profitable to spend time and energy holding on to the customers you have (Canning,1999). To find a new customer, you have to take a lot of gifts or benefit to attract them once, and you have to keep arousing their interests. Sometimes they can be lured to your competitors and it gains nothing and costs quite a lot of money. Compare with it, keeping current customer is very easy, you just need to keep in touch with them and support something benefit to them. You possibly get lifetime value in reward. Meanwhile, long-term customers have less sensitiveness on price increases (Dawes, 2009). The loyal customer who can accept price fluctuation, maybe regards your company as a part of their life and what they do is a kind of habit nature. Customers enjoy doing business with a company because they found that the company concerns themselves.

There are many customers who the company cannot serve or are unprofitable, are less important for the company. Haenlein et al. states that company should abandon unprofitable customers because it would cost a lot of money and not profitable (2006). In the past customers are used to being treat as king. However, some of the companies maybe abandon unprofitable customer relationships. Obviously, company is an organization for the purpose of making profits. Its goal is to earn money as much as it can. If you cannot provide profits to them, they would not survive in the full of competitive society. Abandoning unprofitable customers is one of method to cut down cost. Thought it might bring risks, it is worthwhile to use it occasionally. Niraj et al. further researches that topic and declared that a small part of customers contribute to a significant proportion of total profits and a large percentage of customers are unprofitable (2001). The result accords with the Pareto principle (The 80/20 rule) which has become a popular creed of business people in the customer-oriented business strategy era. It points out that, for most companies, 80% of the profit income come from only 20% of customers (Juran, 2001 cited by Craft and Leake, 2002).

20% of these clients are always called Key account who can or have great potential to bring high value to company, which the company has to pay high attention on them. Key account management has evolved as a means to enable suppliers to prosper when confronted by when confronted by these kinds of difficult customers, conditions and fierce competition. Key account management approach adopted by most successful companies is not merely a sales and marketing activity, rather is involved to build up sustain long-term relationship with the common objective with their customers.

2.3 Customer satisfaction and customer retentionThere are few papers mention about the relationship between customer satisfaction and retention. Customer satisfaction and customer retention are two important factors in marketing. Firstly, as a driver of customer retention, customer satisfaction has a positive impact on the on retention, which can increase customer retention (Ranaweera and Prabhu, 2003 and Gustafsson et al, 2005). Customer satisfaction follows the lifecycle of customer retention. Before customer retention appears, as an important factor, customer satisfaction leads customers to start to establish the relationship with the company. When customer retention is operating, customer satisfaction leads a foundation to keep customers. When customer retention disappears, because of the bad customer satisfaction, customer starts to lose. Secondly, customer satisfaction is one of the organization’s abilities to attract and keep customers, increase customer relationships over time Ahmad, 2010). Customer satisfaction is not disposable evaluation, which is the sum up of overall performance. Customers who have long term experience have higher cumulative satisfaction (Bolton, 1998). Customer satisfaction can be increased in every purchasing. Obviously, the long term experience would get the higher satisfaction. With the collection data which can analyse customer behavior, organization uses the mean to increase customer satisfaction and keep customers. Finally, one of the advantages of customer satisfaction and retention is that Competitor’s product would not be recognized by the buyer because customer maintaining is so strong (Rese, 2003). Nowadays, many customers have many products to choose, it is not the only one option for them, therefore, these kinds of customers have a relationship with different companies in the congeneric product. It is extraordinary hard keep loyal to one company. Every company wants to establish relationships with customers and maintain them. In the meantime, they attempt to break their competitor relationship with the customer, which can increase customer loyalty with them. As a result, the competitor realised that they have lost this customer. Sainsbury’s set out Brand Match with reward over 14,000 branded goods against with Tesco and Asda. If the same brand Sainsbury’s set up Brand Match plan to fight against with other supermarkets. If the same brand you have been bought from Sainsbury’s is higher than at ASDA or Tesco on the same day you will get a coupon for the difference, the plan includes offers and promotions. Since Brand Match launched over a year ago, Sainsbury’s has given nearly 250 million coupons (Caines, 2012 and J Sainsbury plc, 2013). Similarly, Tesco and ASAD also implement the same kinds of planning.

Andreassen (1999) points out that satisfied customers are more likely to keep the relationship with the same organization than those are dissatisfied customers who would choose another one easily. The results suggested that customer dissatisfaction which caused by the initial service failure, has a negative impact on customer satisfaction and retention. When a new customer feels dissatisfaction with your company for the first time, it will take you more time get a better understand of your company. However, customer dissatisfaction does make a contribution to customer satisfaction and retention. When customer dissatisfies with products or services, they would start to complain it. If you ignore or do nothing, it would be easy to lose customers. If you take action to solve it, people think you pay attention to him and will improve customer satisfaction and retention significantly. Therefore, many companies keep eyes on customer complaint.

Customer satisfaction and customer retention are not appearing absolutely linear correlation, though they both can drive profits and increase customer’s consumption.

In some cases, you may find that some customers are satisfied, but are still not retained. Similarly, some customers are not satisfied, but are still retained. There are some reasons to explain why satisfied customers abandon your product. First of all, satisfied customers may get bored with your product and get the better price from the competitor, so they change the brand. Secondly, you provide a good product but do not match their needs; therefore, they have to give up your company. Besides, dissatisfied customers are not good at administrating expectation and they choose it optionally. What is more, because the exit cost is so high that they don’t want to take risk (Executionmih, 2012).

2.4 SWOTIn order to perform Sainsbury’s situation, a SWOT analysis has been presented below. SWOT Analysis is a useful tool to focus on aspects of the company and business sector, and evaluate the current situation of the business (Pahl and Richter, 2009).

Strength

1. Sainsbury’s as a brand: Sainsbury has been built over 140 years which has represented its brand which can get several benefits like customer loyalty and brand familiarisation. Compare with other new competitors, it has a competitive advantage.

2. Comprehensive service: Sainsbury’s not only is the food retailer, it also consists of Sainsbury’s online, Sainsbury’s property, Sainsbury’s Bank, Sainsbury’s Energy, and Sainsbury’s Entertainment, which can increase the range of services (J Sainsbury plc, 2013).

3. Reliability and trust: Because Sainsbury’s has built more than a hundred years, it has a sense of reliability and trust among customers. Customers confirm that Sainsbury’s would support the high quality product. They also trust Sainsbury’s would provide relatively competitive prices for the products if not the cheapest.4. IT infrastructure: Sainsbury’s set up many new technologies to improve customer shopping experience, such as Brand Match, self-checkout system, and Mobile Scan & Go.Weaknesses

1. Lack of international expansion: Sainsbury’s market is in England. It lacks of expansion in the international market. Compared with Sainsbury’s, its main competitor Tesco is more successful in this aspect.

2. As one of the oldest supermarkets, Sainsbury’s did not seize the great opportunity t