Factors that affect customer retention in Banking sectors of Pakistan

A Thesis Submitted to the

Superior University, Lahore

In Partial Fulfillment of the Requirements for the Degree of

M.B.A

(Masters in Business Administration)

By

Kashif RiazMBP 9138Finance

2010

To

Prof. Nadeem Iqbal

1

ACKNOWLEDGEMENT 

 

First of all I am very grateful to Allah, who is most merciful and beneficial who show me

the right path.

I am also heartily thankful to my supervisor Sir Nadeem Iqbal Prof. Superior University

Lahore, whose encouragement, guidance and support from the initial to the final level enabled

me to develop an understanding of thesis. He showed me different ways to approach a

research problem and the need to be persistent to accomplish any goal.

Lastly, I offer my regards and blessings to all of my family members specially my father

Riaz Ahamd, who supported me in every aspect during the completion of the project. I would

also like to thanks to my class fellows Munawar Saeed, Fahad Zubair, Waqas Khan and Abdul

Basit who helped me a lot for the completion of this project.

2

Dedication

I dedicated my work to my parents and respected teacher, whose efficient & magnificent

devotion to my studies encourage us to achieve this land mark. Words cannot express the

gratitude and respect I have for my parents who helped me in my journey and instilled my

values in me such as persistence and hard work. Without their boundless love, guidance,

devotion, friendship and wisdom this accomplishment would not have been possible. God

blessed me with the best parents anyone would be lucky to have. I give all my love and

dedication of this dissertation to them.

Table of Contents

Chapter 1 Introduction & Background

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1.1 Introduction & Background-------------------------------------------------------------------------------81.2 Significance of Study----------------------------------------------------------------------------------------91.3 Objective of the Study-------------------------------------------------------------------------------------101.4 Purpose of the Study---------------------------------------------------------------------------------------111.5 Hypothesis---------------------------------------------------------------------------------------------121.6 Theoretical Framework------------------------------------------------------------------------------12

1.6.1 Customer Retention----------------------------------------------------------------------------121.6.2 Service Quality---------------------------------------------------------------------------------151.6.3 Product Quality---------------------------------------------------------------------------------1516.4 Price----------------------------------------------------------------------------------------------1616.5 Customer Satisfaction--------------------------------------------------------------------------1716.6 Switching Barriers------------------------------------------------------------------------------17

1.7 Conceptual framework---------------------------------------------------------------------------------181.8 Structure of the Thesis---------------------------------------------------------------------------------19

Chapter 2 Literature Review 2.1 Introduction---------------------------------------------------------------------------------------------202.2 Literature Flow Diagram------------------------------------------------------------------------------202.3 Literature review-------------------------------------------------------------------------------------21

2.3.1 Customer Retention---------------------------------------------------------------------212.3.2 Service Quality link with customer retention----------------------------------------282.3.3Product Quality link with customer retention-----------------------------------------522.3.4 Price link with customer retention-----------------------------------------------------542.3.5 Customer Satisfaction link with customer retention---------------------------------582.3.5 Switching barriers link with customer retention--------------------------------------742.3.6 Conclusion----------------------------------------------------------------------------------77

Chapter 3 Methodology3.1 Introduction----------------------------------------------------------------------------------------------793.2Paradigm----------------------------------------------------------------------------------------------------803.3 Research Approach----------------------------------------------------------------------------------------813.4 Research Design-------------------------------------------------------------------------------------------843.5 Research Site-----------------------------------------------------------------------------------------------85 3.6 Population --------------------------------------------------------------------------------------------------853.6.1 Sample Unit-----------------------------------------------------------------------------------------------853.6.2 Sample Size -----------------------------------------------------------------------------------------------85 3.6.3 Sampling Procedure---------------------------------------------------------------------------------------853.6.4 Instruments--------------------------------------------------------------------------------------------------853.7 Strategy of inquiry--------------------------------------------------------------------------------------------863.8 Methods 3.8.1 Data collection method------------------------------------------------------------------------------------863.8.1 Contact Method---------------------------------------------------------------------------------------------863.9 Validity/Reliability--------------------------------------------------------------------------------------------863.10 Analysis-------------------------------------------------------------------------------------------------------86

Chapter 4 Analysis and Results4.1 Introduction------------------------------------------------------------------------------------------------------884.2 Analysis-----------------------------------------------------------------------------------------------------------884.3 Discussion--------------------------------------------------------------------------------------------------------964.4 Conclusion-------------------------------------------------------------------------------------------------------9745 Overall Conclusion----------------------------------------------------------------------------------------------98

4

ACROYMS

QP Quality of Product

SQ Service Quality

PS Price Stability

CS Customer Satisfaction

SB Switching Barrier

CR Customer Retention

Abstract

This study aims to examine the influence of the interaction between Service Quality, Product Quality,

Pricing, customer satisfaction and switching barriers on customer retention in banking sector of

Pakistan. The study began with an assumption that all above elements have direct impact on customer

5

retention and are essential to retain customer of banking sectors. The result reveled positive

relationship between product quality, service quality, price, customer satisfaction and switching

barriers. The sample size of this quantitative study included 100 participants related to banking sectors.

Building on the quantitative aspects questionnaire will be designed to examine the customer retention,

service quality, product quality, price, customer satisfaction and switching barriers and to generalize the

finding to the large population. There are also limitations as well as future research implications at the

end of this research study. Furthermore, the Descriptive analysis, Scatter plots, Correlation and

regression analysis is used to analyze the extent to which the factors affect customer retention.

Customer retention is an important element of banking strategy in today’s increasingly competitive

environment. Bank management must identify and improve upon factors that can limit customer

defection. These include Service Quality, Product Quality, Pricing, Customer Satisfaction and Switching

Barriers. Furthermore, customer defection can also be reduced through adjustments in a bank’s rates,

policies and customer satisfaction. (Leeds, 1992).

Clearly, there are compelling arguments for bank management to carefully consider the factors that

might increase customer retention rates. Several studies have emphasized the significance of customer

retention in the banking industry ( Dawkins and Reichheld, 1990; Marple and Zimmerman, 1999; Page et

al., 1996; Fisher, 2001). However, there has been little effort to investigate factors that might lead to

customer retention. Most of the studies has focused on the impact of individual constructs, without

attempting to link them in a model to further explore or explain retention. If retention criteria are not

well managed, customers might still leave their banks, no matter how hard bankers try to retain them.

Keywords: Customer retention, Service Quality, Product Quality, Customer Satisfaction, Switching

Barriers.

6

Chapter 1

1.1 Introduction & Background

The banking industry is highly competitive, with banks not only competing among each other; but also

with non-banks and other financial institutions (Kaynak and Kucukemiroglu, 1992; Hull, 2002). Most

bank product developments are easy to duplicate and when banks provide nearly identical services, they

can only distinguish themselves on the basis of price and quality. Therefore, customer retention is

potentially an effective tool that banks can use to gain a strategic advantage and survive in today’s ever-

increasing banking competitive environment. The majority of Pakistan’s banks has non-domestic

owners, and is not very diversified in terms of the products and services they offer (Hull, 2002). This

suggests that the Pakistan banking industry has reached the maturity phase of the product lifecycle and

has become commoditized, since banks offer nearly identical products. This carries the danger of

creating a downward spiral of perpetual price discounting -- fighting for customer share (Mendzela,

1999). One strategic focus that banks can implement to remain competitive would be to retain as many

customers as possible. The argument for customer retention is relatively straightforward. It is more

economical to keep customers than to acquire new ones. The costs of acquiring customers to “replace”

those who have been lost are high. This is because the expense of acquiring customers is incurred only

in the beginning stages of the commercial relationship (Reichheld and Kenny, 1990). In addition, longer-

term customers buy more and, if satisfied, may generate positive word-of-mouth promotion for the

company. Additionally, long-term customers also take less of the company’s time and are less sensitive

to price changes (Healy, 1999). These findings highlight the opportunity for management to acquire

referral business, as it is often of superior quality and inexpensive to obtain. Thus, it is believed that

reducing customer defections by as little as five percent can double the profits (Healy, 1999). The key

factors influencing customers’ selection of a bank include the range of services, rates, fees and prices

charged (Abratt and Russell, 1999). It is apparent that superior service, alone, is not sufficient to satisfy

customers. Prices are essential, if not more important than service and relationship quality.

Furthermore, service excellence, meeting client needs, and providing innovative products are essential

to succeed in the banking industry. Most private banks claim that creating and maintaining customer

relationships are important to them and they are aware of the positive values that relationships provide

(Colgate et al., 1996). Although many companies recognize the value and importance of customer

retention in general, relatively few understand the economics of retention in their own business. (Kotler

2003; Payne 2006) Companies can clearly benefit from increasing the life spending on customers. Most

7

Companies, however, concentrate a significant amount of resources on attracting and acquiring new

customer, instead of keeping the existing ones. It is generally thought that once a customer is acquired,

keeping the customer is simple through superior products and service. It is very easy to sell the product

to customer but to retain the customer with company four time difficult. Customer retention is an

important element of banking strategy in today’s increasingly competitive environment. Bank

management must identify and improve upon factors that can limit customer defection (Leeds, 1992).

Clearly, there are compelling arguments for bank management to carefully consider the factors that

might increase customer retention rates. Several studies have emphasized the significance of customer

retention in the banking industry ( Dawkins and Reichheld, 1990; Marple and Zimmerman, 1999; Page et

al., 1996; Fisher, 2001). However, there has been little effort to investigate factors that might lead to

customer retention. Most of the studies has focused on the impact of individual constructs, without

attempting to link them in a model to further explore or explain retention. If retention criteria are not

well managed, customers might still leave their banks, no matter how hard bankers try to retain them.

This study examines the impact of several retention-relevant constructs that influence consumers’

decisions to stay with or leave their banks in Pakistan. These constructs were rated by customers as

having strong effects on Customer retention to their banks. Product quality and Price were also assessed

for their contribution to intentions of staying with or finding alternative banks. Results suggest that the

most important constructs were customer retention, followed by product quality and Pricing. There was

also evidence that customers’ Customer service, Customer satisfaction and Switching Barriers

contributed to explaining respondents' propensity to stay with their current banks.

In today’s fast-paced and increasingly competitive market, the bottom line of a firm’s marketing

strategies and tactics is to make profits and contribute to the growth of the company. Customer

satisfaction, quality and retention are global issues that affect all organizations, be it large or small,

profit or non-profit, global or local. Many companies are interested in studying, evaluating and

implementing marketing strategies that aim at improving customer retention and maximizing share of

customers in view of the beneficial effects on the financial performance for the firm. There has been a

strong advocacy for the adoption of customer retention as one of the key performance indicators (e.g.

Kaplan and Norton, 2001). For instance, a study by Reichheld and Sasser (1990) reported a high

correlation between customer retention and profitability in a range of industries. However, the

fragmentation of media choices and the dynamic nature of the market, coupled with an increased

number of more demanding and affluent consumers, brought greater challenges to marketing

practitioners in retaining their customers.

8

1.2 Significance of study

This study is helpful for banking sector to know how much customer retention is important for

the profitability of banks and the factors which retain the customer and may make them loyal

and satisfied.

This study will give additional knowledge on customer retention and factors of customer

retention.

This study will help in decision making to know the factors of customer retention decision and

reduce cost for customer acquisition in banking sector.

The significant of this will lead to a better understanding of the influencing level of the attributes

on customer retention.

The results of this study will not only contribute to the awareness of the relationship between

the variables but it will also direct managers in areas for quality improvement to increase

customer retention.

This research help to banking sector to strategy formulation having effective customer retention

strategies and business growth and development to know, If you are able to delight your

customers, you have better chances of them coming back to you, since they now know why you

are different from the rest of competition.

This study will help the banking sector in long-term policy simply stated if you take good care of

your customer, the revenue will follow you.

The significance of study is that link customer retention with other factors such as product

quality, customer service, pricing, satisfaction and switching barrier.

It will also identify the most important dimension in service quality and product quality. The

significance of this research is intended to help Banks to improve the service offered and other

factors which retain the customer.

The significance of this study is give awareness on customer retention and up-to date

knowledge.

The present results confirm the belief of many successful organizations in the benefits of

customer retention.

9

The significance of this study is that quantitative method is used for the research and

questionnaire is conducted and sample size is 100 which is larger than previous research

conducted on FMCG, Pakistani Industries and In New Zealand.

This research help to banking sector to business growth and development to know, today’s fast-

paced and increasingly competitive market, the bottom line of a firm’s marketing strategies and

tactics is to make profits and contribute to the growth of the company through customer

retention to increase revenue through increases in sales volume and/or premium prices as well

as reducing the expenses or costs of generating those revenues.

1.3 Objective of the Study

Main objective:

To identify the factors that affect customer retention in banking sector

The sub objectives of the research are to:

To determine whether Product quality influence the customer’s retention towards their banks.

To Identify whether Service quality influence the customer’s retention towards their banks

To identify whether customer perception of value influence the customer’s retention towards

their banks.

To determined whether satisfaction influence the customer’s retention towards their banks.

To determined whether corporate image influence the customer’s retention towards their

banks.

To identify whether switching barrier influence the customer’s retention towards their bank.

1.4 Research Question and Hypotheses

What are the Factors of Customer Retention in Banking Sector in Pakistan?

Hypotheses

Hypotheses 1:

H1: There is a significant relationship between Customer Retention and Service Quality

H0: There is no relationship between customer retention and service quality

10

Hypotheses 2:

H1: There is a significant relationship between Customer Retention and Product Quality

H0: There is no relationship between Customer Retention and Product Quality

Hypotheses 3:

H1: There is a significant relationship between Customer Retention and Price

H0: There is no relationship between Customer Retention and Price

Hypotheses 4:

H1: There is a significant relationship between Customer Retention and Customer satisfaction

H0: There is no relationship between Customer Retention and Customer Satisfaction

Hypotheses 5:

H1: There is a significant relationship between Customer Retention and Switching Barriers

H0: There is no relationship between Customer Retention and Switching Barriers

1.4 Purpose of the study Primarily, this research has been of quantitative nature, as it also looked at how firms actually do. A

description of how the firms to do retain their customers and also factors they believed affected their

choice of retention strategies was performed. Furthermore, how previous research has described the

factors influencing customer retention and customer retention strategies has been viewed in order to

provide the study with the theoretical framework through which the cases has been studied. To some

extent, this research is also explorative in the sense that the purpose of this thesis has been to gain a better

understanding of how banking sectors service providers retain their targeted customers over time.

According to Saunders, Lewis and thornhill (2007), explorative research is practical when the aim is to

clarify one’s understanding of a specific problem. The phenomenon of customer retention has a degree of

“fuzziness” since it embodies a theoretical construct which cannot be observed directly (Gerpott, Rams

and Schindler, 2001). The ways in which academics and practitioners define customer retention, whether

conceptually on empirically, show substantial variance. The approaches in which customer retention is

distinguished from related constructs such as “customer loyalty”, “customer satisfaction” and “customer

commitment”, also have great differences. This study will be conducted in order to know the importance

of customer retention as well as determine the factors of customer retention in banking sector in Pakistan.

1.5 Hypothesis:

Following hypothesis is being tested by the use of correlation and regression:

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1 Customer retention and product quality

Ho: There is no association between customer retention and product quality.

H1: There is an association between customer retention and product quality.

2 Customer retention and customer service

Ho: There is no association between customer retention and customer service.

H1: There is an association between customer retention and customer service.

3 Customer retention and pricing

Ho: There is no association between customer retention and pricing.

H1: There is an association between customer retention and pricing.

4 Customer retention and satisfaction

Ho: There is no association between customer retention and satisfaction.

H1: There is an association between customer retention and satisfaction.

5 Customer retention and switching barrier

Ho: There is no association between customer retention and switching barrier.

H1: There is an association between customer retention and switching barrier.

1.6 Theoretical Framework

The theoretical framework is the foundation on which the entire research project is based. It developed,

described and elaborated network of associations among the variables that are deemed relevant to the

problem situation that have been identified, through few process such as interviews, observations and a

literature survey (Cavanagh, 2001).

1.6.1 Customer Retention

Kang (2004) Customer retention is the activity that a selling organization undertakes in order to reduce

customer defection. Successful customer retention starts with the first contact an organization has with

a customer and continues throughout the entire lifetime of a relationship. A company’s ability to attract

and retain new customers is not only related to its product or service but strongly related to the way it

services its existing customer and the reputation it creates within an across the marketplace. Kaplan

(1995) Customer retention refers to the percentage of customer relationships that once established a

small business is able to maintain on a long-term basis. It is a major contributing factor in the bet growth

12

rate of small businesses. For example, a company that increase its number of new customers by 20

percent in a year but retains only 85 percent of its existing customers will have a net growth rate only 5

percent (20 percent increase less 15percent decrease.). But the company should triple that rate by

retaining 95 percent of its clients.

( Ennew and Binks 1993) argue that In today's challenging economy and competitive business world,

retaining their customer base is critical to organization success. If they don't give their customers some

good reasons to stay, organization’s competitors will give them a reason to leave. Companies can no

longer afford to become complacent in their in their marketing efforts directing at existing customers,

particularly with the cost of new customer acquisition increasing. An essential way to hold your ground

against the competition is by keeping existing customers happy and continuing to increase sales to this

group. (Dowling 2002; Dowling and unlces 1997) Marketing activities are directed at your existing

customers are essential keeping in the forefront of their minds. This also allow you to keep them

appraised new product offering and special events. When the marketing to existing customers is

neglected, typically you will seen an “out of sight, out of mind” result. If your customer they feel

targeted by your competition attempting to acquire their own new customers they field no sense of

loyalty to you or our company.

Customer retention is the maintenance of continuous trading relationships with customers over the long

term. Customer retention is the mirror image of customer defection or churn. High retention is

equivalent to low defection. (Berry 1999; Dwyer; Schurr and Oh 1987) Customer retention is about

keeping the customers organization has spent that money to acquire. And if you’re in an industry where

they make multiple purchases over the years, organization entire team should be very focused on

retaining those customers: Studies say it costs ten times more to generate a new customer than to

maintain an existing one. If organization has a small number of customers, losing a few could cripple

company. Even if you have a large number of customers, a small increase in retention rate should

dramatically increase profits.

1.6.1 Service Quality

Rust et al., (1999) discuss the Customer – Perceived Quality and Role of Customer Expectation

Distribution. According to them exceeding customer expectation will still be required if the company

seeks to delight customer. In the event of having low expectation of service quality and meeting it,

researchers had found, had raised preference. Given the option to general customer’s two equally

priced options, the customer will choose the one with higher expected quality, the research had

13

established. They argued that a company should always focus on its most loyal customers. Retention

point of view, less loyal customers’ tendency to defection is grater hence that sector should be

defended with force. This research further suggested greater the experience a customer with a service

provider greater the chances of meeting expectation in perceived value, hence retention. Services

Quality is considered as a major determinant in customer retention and building value relationship

(Venetis and Ghauri, 2004).

According to Ranaweera and Neely (2003), service quality is an important driver of customer retention.

However, service quality does not seem to be the only concern of the customer. High service quality, at

the expense of a reasonable price, also appeared to be unacceptable for the more price sensitive

segments of customers. Where the perception of price is low and there is potential for improving service

quality, improvements in service quality can lead to a significant increase in the retention rate. However,

if negative price perception is associated with high service quality perception, service quality alone will

be inadequate to retain customers.

1.6.3 Product quality

A prominent reason is to not retain with company for a customer is that their product is not fulfilling its

function properly. When the product is fail to perform its functions completely and properly, then the

product useless for customer, when the customer is not satisfy with product and not using it, so the

customer will reduce its retention and relationship with company. (Buzzell and Gale 1987; Buzzell et al.

1975; Rust and Zahorik 1993). Product quality play vital role in customer retention and have positive

relationship with customer retention. Customers compare the perceived performance of a product

(service, goods) with some performance standard. Customers are satisfied when the perceived

Performance is greater than the standard (positively disconfirmed), whereas dissatisfaction occurs when

the performance falls short of the standard (negatively disconfirmed). Product quality is the strategic

benefits of quality in contributing to market share and return on investment (e.g., Anderson and

Zeithaml 1984; Philips, Chang, and Buzzell 1983). For customers who value convenience most, banks

must offer the latest product such as electronic banking, touch-tone phone account access and internet

banking. The search for quality is arguably the most important consumer trend of the 1980s (Rabin

1983) as consumers are now demanding higher quality in products than ever before (Leonard and Sasser

1982, Takeuchi and Queleh 1983.

14

1.6.4 Price

Many researchers have pointed out that price perception influences customer satisfaction and customer

retention (Oliver, 1997; Peng and Wang, 2006; Cheng et al., 2008; Kim et al., 2008). Customers often

switch mainly due to some pricing issues, e.g. high price perceived, unfair or deceptive pricing practices

(Peng and Wang, 2006). Therefore, in order to increase customer satisfaction, it is essential for service

firms to actively manage their customers’ price perceptions, e.g. carrying out attractive pricing, offering

reasonable prices mix, lower prices without decreasing quality, etc.

Price may be one of the most important determinants of customer decisions (Srivastava and Lurie,

2001). Managers could utilize price matching to stimulate repeat purchase behavior (reducing price

defection), because price matching may indicate a commitment to protect customers (objective: to keep

customers happy so they would come back and buy again). (Reichheld and Sasser, 1990) suggest that

repeat (i.e., existing) customers focus less on price savings than new customers do. Understanding long-

term price matching effects on customers is important in order to determine whether price matching

has a lasting impact on customer behavior that is evaluating the effectiveness of these policies in

stimulating customer retention, in addition to customer acquisition (Kukar-Kinney, 2006).

1.6.5 Customer Satisfaction

Customer satisfaction is originated from a comparison between customer’s expectations and

experiences. Customer satisfaction means positive reaction to a service experience. If the customer’s

perceived experience matches the expectations, the customer is assumed to be satisfied. If the

preceding expectations were higher than the gain of the service, the customer is considered to be

disappointed and dissatisfied. (Ylikoski 2000, 109) At a theoretical level, satisfaction is a concept that has

many definitions which tend to differ from each other. In the most recent definitions, there is

recognition of a dual nature of satisfaction. In other words, a cognitive and an affective character, as

well as a relative nature are found to exist. (Anton et al. 2007) In this study it is considered that

satisfaction is achieved when consumer’s expectations about the performance of the service are met or

exceeded. Customer satisfaction and prior experiences of service quality have been shown to be the key

antecedents of customer retention. (Bolton 1998; Rust and Zahorik 1993; Zeithaml et al. 1996)

Satisfaction has been treated as the main element for customer retention in numerous publications, and

has therefore moved to the forefront of relational marketing approaches. (Rust and Zahorik 1993)

Consequently, customer satisfaction has developed extensively as a basic concept for monitoring and

controlling activities in the area of relationship marketing. Customer satisfaction has traditionally been

15

regarded as a fundamental determinant of long term consumer behavior. The more satisfied customers

are the greater is their retention. (Anderson and Sullivan 1993) On the other hand, there are studies and

publications where the relationship between satisfaction and retention has been noted not to be this

straightforward. (Hennig-Thurau and Klee 1997) In some industries, customer satisfaction scores tend to

correlate with retention. In other industries there is little or no correlation. (Lowenstein 1995, 11-12)

1.6.6 Switching Barriers

Switching barriers have been used as marketing strategies to make it costly for customers to switch to

another organization and create “customer lock-in” (Bonanni et al. 1998). In their article Storbacka et al.

(1994) represent reasons for a customer to stay loyal to a company. They claim that even dissatisfied

customers can be retained through switching barriers. Establishing a new relationship represents some

sort of investment or effort, for example time and/or money, which constitute a barrier for the

customer against taking action when dissatisfied. According to Fornell (1992), switching barriers include

search costs, transaction costs, learning costs, loyal customer discounts and emotional costs. These

barriers provide disincentives for the customer to leave the current organization. According to

Ranaweera and Prabhu (2003), switching barriers have both a significant positive effect on customer

retention, as well as a moderating effect on the relationship between satisfaction and retention. While

service providers may be able to retain even dissatisfied customers who perceive high switching

barriers, firms should aim at a combined strategy that makes switching barriers act as a complement to

satisfaction. Julander and Söderlund (2003) suggest a distinction between negative and positive

switching barriers. The results show that these two variables have different effects on repurchase

intentions. These two types of switching barriers also have different effects on customer satisfaction. An

example of positive switching barriers is a customer maintaining a relationship with a company because

of a perception that the supplier is superior in services and products. Examples of negative switching

barriers are expensiveness for a customer to leave the supplier, or a monopoly on the market.

16

1.7 Conceptual framework

Product Quality

Price

Service Quality

Customer Satisfaction

Switching Barriers

17

Customer Retention

Chapter 2

2.1 Introduction

This chapter reviews the literature on Product quality, Service Quality, Price, Satisfaction, and switching

barrier. The first section is concerned with the nature and Characteristic of customer retention and also

importance of customer retention in today’s businesses. The focus of this section is on how each of

these constructs influences customer retention from each customers.

2.2 Literature Flow Diagram

18

General Discussion

Relationship between Service Quality and Customer Retention

Relationship between Product Quality and Customer Retention

Relationship between price and Customer Retention

Relationship between Customer Satisfaction and Customer Retention

Relationship between Switching Barriers and Customer Retention

Summary

Customer Retention

Customer retention plays a vital role in organization’s economic portfolio. In organization’s cycle

customer retention have direct relation on the profitability ration of company as Bain & co. has shown

that a five- point improvement in customer retention can lead to increase in profit 25% to 80% (Reicheld

and Kenny 1990). Many of the research in customer retention and customer exit investigate the process

separately without linking the two processes together (Colgate and Norris, 2001). Gan et al. (2006)

further indicate that retaining customer becomes a priority for most enterprise and there are compelling

arguments for manager to carefully consider the factor that might increase customer’s retention rate.

Customer satisfaction and retention are assumed to lead towards good things such as attitude change,

repeat purchase and brand loyalty (Churchhill and Suprenant 1982), lower cost of attracting new

customer ( Fornell, 1992, Levesque and McDaugall).

In today’s fast-paced and increasingly competitive market, the bottom line of a firm’s marketing

strategies and tactics is to make profits and contribute to the growth of the company. Customer

satisfaction, quality and retention are global issues that affect all organizations, be it large or small,

profit or non-profit, global or local. Many companies are interested in studying, evaluating and

implementing marketing strategies that aim at improving customer retention and maximizing share of

customers in view of the beneficial effects on the financial performance for the firm. There has been a

strong advocacy for the adoption of customer retention as one of the key performance indicators (e.g.

Kaplan and Norton, 2001). Reichheld and Sasser (1990) argued that a high correlation between

customer retention and profitability in a range of industries. However, the fragmentation of media

choices and the dynamic nature of the market, coupled with an increased number of more demanding

and affluent consumers, brought greater challenges to marketing practitioners in retaining their

customers.

The argument for customer retention is relatively straightforward; it is more economical to keep existing

customers than to acquire new ones. According to some studies, acquiring new customers is calculated

as being five times more costly than the expenses of retaining existing customers. The costs of obtaining

customers to replace those who have been lost are high, because the expense of acquiring customers is

incurred only in the beginning stages of the commercial relationship. (Reichheld and Kenny 1990; Hurley

2004) In addition, long term customers buy more, and if satisfied, may generate positive word-of-mouth

19

promotion for the company. Finally, long term customers take less of the company’s time, and are less

sensitive to price changes (Healy 1999).

Increased customer retention has two important effects: (1) it can lead to a gradual increase in the

firm’s customer base which is vital in an era of low sales growth, and (2) the profits earned from each

individual customer grow the longer the customer remains loyal to the firm. Existing customers also

tend to purchase more than new customers (Rose, 1990). And costs to retain customers are about 80%

lower than the costs to acquire new customers.

Although many companies recognize the value and importance of customer retention in general,

relatively few understand the economics of retention in their own business. (Kotler 2003, 73; Payne

2006, 143) Companies can clearly benefit from increasing the lifetime spending of customers. Most

companies, however, concentrate a significant amount of resources on attracting and acquiring new

customers, instead of keeping the existing ones. It is generally thought that once a customer is acquired,

keeping the customer is simple through superior products and services. (Payne 2006, 2)

(Fornell, 1992; Rust and Zahorik, 1993; Patterson and Spreng, 1997). Worked on customer retention

and told that it is more expensive to win new customers than to keep existing ones. Athanassopoulos,

Gounaris and Stathakopoulos’s (2001) arguments that customer replacement costs, like advertising,

promotion and sales expenses, are high and it takes time for new customers to become profitable. And

lastly, the increase of retention rate implied greater positive word of mouth (Appiah-Adu, 1999),

decrease price sensitivity and future transaction costs (Reichheld and Sasser, 1990) and, finally, leading

to better business performance.

Retaining customers is good for a firm’s economic health. Customer retention can have a direct

influence upon profitability as Bain & Co. has shown that a five- point improvement in customer

retention can lead to an increase in profits from 25% to 80% (Reichheld and Kenny 1990) Currently,

although the concept of customer retention is applicable to all types of businesses banks and financial

firms seem to be in the forefront of studying the impact of retention on profits.

Carroll and Rose (1993) take an economic view of customer retention noting that all customers do not

generate value and suggest that financial institutions should focus retention strategies on the value

producing segment. Czepiel and Reddy (1992, 1993) use the concepts of relationship strength and

relative perceived performance as mediating variables as they attempted to predict future usage of bank

services using past usage, knowledge of the business, bank seeks the business and price. Results of the

20

model are mixed but they conclude that, “in business-to-business settings, committed long term

relationships between buyers and sellers are based on a strong , economically rational foundation”.

Customer retention has a crucial role in economical survival and success, because the costs of acquiring

new customers in highly competitive markets are increasing and long-term relationships reduce costs

(Hennig- Thurau, 2004, 464). As a result, enormous attention has been paid to customer retention in the

academic and management press since the mid- 1990s (Ang and Buttle, 2005, 83; Aspinall, Nancarrow

and Stone, 2001, 86-87).

Retention of customers can benefit companies in several ways. First of all, retaining old customers cost

less than acquiring new ones (Desai and Mahajan, 1998, 309; Hansemark and Albinsson, 2004, 41;

Ovenden, 1995, 46), only a fraction of the costs (Slater and Narver, 1994, 25). This results as lower costs

for the company (Appiah-Adu, 1999, 27; Gundlach et al., 1995, 80). Additionally, less price sensitivity

(Ang and Buttle, 2005, 85; Appiah-Adu, 1999, 29; Hansemark and Albinsson, 2004, 43), economized

learning costs and experience effects (Gundlach et al., 1995, 80), favorable word-of-mouth (Appiah-Adu,

1999, 29; Hansemark and Albinsson, 2004, 43), and grown purchase volumes (Ang and Buttle, 2005, 85)

are established consequences of customer retention. Further, retention has been found to be highly

correlated with financial performance (Ang and Buttle, 2005, 91; Johnston, 2001, 66), increased profits

(Appiah-Adu, 1999, 27; Hansemark and Albinsson, 2004, 43), and greater market share (Appiah-Adu,

1999, 29; Hansemark and Albinsson, 2004, 43; Rust and Zahorik, 1993, 212). It also has a central role in

the development of business relationships (Eriksson and Löfmarck Vaghult, 2000, 363), and in fallen

relationship maintenance costs (Ang and Buttle, 2005, 85). As a summary, retained or loyal customers

buy instead of being sold, buy more than new customers and require less money on transactions and

communications (Davidow, 1989, 33). Regarding all these possible outcomes of customer retention, its

significance for the companies can be truly understood. It is established fact that in a typical business-to-

business organization, about 80 % of business comes from about 20 % of customers. This means, that a

supplier runs the risk of losing significant turnover if one of its major customers leaves.(Stewart, 1995,

26) This shows how significant retention of the best customers is. However, the results of a study by

Aspinall et al. (2001) revealed that only 58 % of the respondents claimed to measure customer

retention. The likeliness to measure retention grew with the sizes of the company and the database.

(Aspinall et al., 2001, 83- 84) This is surprising, because of the limited resources, retention of customers

can be truly crucial for smaller businesses and yet it seems the efforts to measure customer retention

are inadequate. It is worth to mention that retention of customers is not equally important. All

21

customers are not equally profitable. Thus retention of the most profitable ones, not uneconomic

customers, should be in the centre of focus. Losing a customer can do a lot of damage. Results from a

study conducted in consumer service context showed that 75% of the customers had told at least to one

person about the service switching incident (Keaveney, 1995, 79).

Fornell and Wernerfelt (1987) emphasized that marketing resources may be better spent on keeping

existing customers than acquiring new ones. This was based on the assumption that existing customers

are profitable and they cost less to keep than to replace. Firms therefore have to be aware of the

profitability of not just their products but also their customers. Contrary to its belief, the Co-operative

Bank found that its independent financial advice and the sale of associated investment products were

not profitable and contributed to the high expense levels associated with staff time (Kaplan, 1995). The

overwhelming argument for customer retention is that it is cheaper to retain than to acquire new

customers (Rosenberg and Czepiel, 1984; Blattberg and Deighton, 1996; Fites, 1996; Murphy, 1996;

Vandermerwe, 1996, p. 24). Payne and Frow (1999) illustrated how an additional £5.5 million increase in

expenditure, when directed at increasing the number of `very satisfied’ existing customers, could result

in an £18 million increase in profitability. They computed that the additional expenditure would increase

the number of `very satisfied’ customers by 6%. This increase would in turn result in a corresponding

4.8% increase in customer retention.

(Reichheld and Sasser, 1990) worked on customer retention and told that the longer a customer stays

with an organization the more utility the customer generates. This is an outcome of a number of factors

relating to the time the customer spends with the organization. These include the higher initial costs of

introducing and attracting a new customer, increases in both the value and number of purchases, the

customer's better understanding of the organization, and positive word-of-mouth promotion.

Rust and Zahorik (1993) argued that the cost of customer retention activities are less than the cost of

acquiring new customers and the financial implications of attracting new customers may be five times as

costly as keeping existing customers. However, maintaining high levels of satisfaction will not, by itself,

ensure customer loyalty. Banks lose satisfied customers who have moved, retired, or no longer need

certain services. As a consequence, retaining customers becomes a priority. Previous research shows,

however, that longevity does not automatically leads to profitability.

According to Dawkins and Reichheld (1990) higher retention leads to higher net present value (NPV) of

customers. Reichheld (1996a, 1996b) argued that a 5% increase in customer retention results in an

22

increase in average NPV of between 35% and 95%, a statistic that is linked to significant improvements

in company profitability.

Weinstein & Johnson (1999a) recommend that at least 75% of an organization’s marketing budget be

spent on customer retention strategy and strengthening these relationships. The longer customers are

retained in an organization, the more profitable the organization becomes because of increased

customer purchasing behavior, decreased organizational operations costs, customer referrals,

willingness of customers to pay price premiums, and reduced customer acquisition costs for the

organization (Pine II, Peppers, & Rogers, 1995).

Relationship between Customer retention and Service Quality

Service quality is a critical issue in the service industry and of particular importance for financial service

providers who characteristically offer products that are homogeneous in nature (Stafford, Stafford and

Wells, 1998). Furthermore, service quality is both directly and indirectly related to bank loyalty via

satisfaction (Bloemer, De Ruyter and Peters, 1998). A telephone survey conducted throughout the state

of Victoria identified poor customer service as the most commonly given reason by consumers for

considering switching accounts (Quadrant Research Services, 1992). Therefore, banks delivering quality

of services better than their competitors would have greater possibilities of success (Tang & Zairi, 1998).

In order to understand the level of the banks service quality, a measurement should be in place.

However quantifying service quality was complicated and too subjective.

In businesses where the underlying products have become commodity-like, quality of service depends

heavily on the quality of its personnel. This is well documented in a study by Leeds (1992), who

documented that approximately 40 percent of customers switched banks because of what they

considered to be poor service. Leeds further argued that nearly three-quarters of the banking customers

mentioned teller courtesy as a prime consideration in choosing a bank. The study also showed that

increased use of service quality/sales and professional behaviors (such as formal greetings) improved

customer satisfaction and reduced customer attrition. Indeed, customer satisfaction has for many years

been perceived as key in determining why customers leave or stay with an organization. Organizations

need to know how to keep their customers, even if they appear to be satisfied.

In banking industry, banking systems provide the same types of services, but they do not provide the

same quality of services. Furthermore, customers today are more aware of alternatives and their

expectations of service have increased. Service quality can, therefore, be used as a strategic tool to build

23

a distinctive advantage over competitors. Banks are striving for zero defection and retaining every

customer that the company can profitably serve in order to achieve service excellence (Reichheld and

Sasser, 1990). The achievements of zero defections require continuous efforts to improve the quality of

the service delivery system. Although quality cannot be improved unless it is measured, it can be

defined from several perspectives, e.g., the ability to satisfy the needs and expectations of the customer

(Bergman and Klefsjo (1990), or the totality of features and characteristics of a product or service that

bears on it’s ability to satisfy given needs (Evans and Lindsay). While there is an increasing recognition of

the importance of quality in banking services, its conceptualization and empirical assessment have

remained limited. Quality is still an elusive construct for many human services organizations. This is due

to the difficulty in shifting a customer-oriented viewpoint

Ioanna (2002) argued that product differentiation is impossible in a competitive environment like the

banking industry. Banks everywhere are delivering the same products. For example, there is usually only

minimal variation in interest rates charged or the range of products available to customers. Bank prices

are fixed and driven by the marketplace. Thus, bank management tends to differentiate their firm from

competitors through service quality. Service quality is an imperative element impacting customers’

satisfaction level in the banking industry. In banking, quality is a multi-variable concept, which includes

differing types of convenience, reliability, services portfolio, and critically, the staff delivering the service.

A reason for customer to switch the company is that Company fail to provide the better and effective

customer service to their customers. These service include presale service and post sale service. (Lewis

& Mitchell, 1990; Dotchin & Oakland, 1994), If customer is not satisfy with customer service of company

it will force him to change the company. Service qualities is very important for the retention of the

customer and have positive relationship, if firm provide service according to the customer requirement

than it will also retain the customer as well as lowering manufacturing costs and improving productivity

(Garvin 1983). Service quality is consumer judgment about a product’s overall excellence or superiority

(Zeithaml 1988). The design and implementation of service delivery processes plays a key role in the

overall competitiveness of modern organizations. Roth and Jackson (1995) provide clear evidence that

process capability and execution are major drivers of performance due to their impact on customer

satisfaction and service quality in banking. For example in the service sectors, especially the food retail

industry, the high relevance of service quality for business success is recognized and examined by

periodical studies (Bion 1993; Fornell et al. 1996 and Walsh et al. 2000). In this study, we shall define

24

service quality as the customers’ satisfaction or dissatisfaction formed by their experience of purchase

and use of the service (Parasuraman, Zeithamal, & Berry, 1988).

According to Ranaweera and Neely (2003), service quality is an important driver of customer retention.

However, service quality does not seem to be the only concern of the customer. High service quality, at

the expense of a reasonable price, also appeared to be unacceptable for the more price sensitive

segments of customers. Where the perception of price is low and there is potential for improving service

quality, improvements in service quality can lead to a significant increase in the retention rate. However,

if negative price perception is associated with high service quality perception, service quality alone will

be inadequate to retain customers.

Cronin and Taylor (1992) did agree that the results did not mean that ``service quality fails to affect

purchase intentions’’. Furthermore, some past studies that attempted to link customer satisfaction (a

similar construct to service quality perceptions) to customer retention in the retail sector with little or

no switching barriers, found a significant non-linear relationship between the two constructs (e.g. Jones

and Sasser, 1995; Mittal and Kamakura, 2001). Therefore, in the absence of switching barriers, a non-

linear association between service quality perceptions and customer retention too could be a plausible

proposition. However, being consistent with past research, the current study hypothesis a linear

association between service quality perceptions and customer retention.

Gummesson (1996), similarly, proposes that fulfillment of the service promise may inspire a long-term

relationship, positively affecting long-term customer retention and sustainment, and subsequently

reduce the likelihood of customer defection. According to Gummesson, relationship marketing, in

principle, encourages retention marketing rest and attraction marketing (attracting new customers)

second. Moreover, companies that focus extensively on attracting new customers may fail to

understand the changing needs and expectations of their existing customers (Zeithaml & Bitner, 1996).

Rust et al., (1999) argued that the Customer – Perceived Quality and Role of Customer Expectation

Distribution. According to them exceeding customer expectation will still be required if the company

seeks to delight customer. In the event of having low expectation of service quality and meeting it,

researchers had found, had raised preference. Given the option to general customer’s two equally

priced options, the customer will choose the one with higher expected quality, the research had

established. They argued that a company should always focus on its most loyal customers. Retention

point of view, less loyal customers’ tendency to defection is grater hence that sector should be

defended with force. This research further suggested greater the experience a customer with a service

25

provider greater the chances of meeting expectation in perceived value, hence retention. Services

Quality is considered as a major determinant in customer retention and building value relationship

(Venetis and Ghauri, 2004).

Gronroos (1990b) argues that developing and maintaining long-term relationships is of paramount

importance to a firm’s competitiveness. Gummesson (1996), similarly, proposes that fulfillment of the

service promise may inspire a long-term relationship, positively affecting long-term customer retention

and sustainment, and subsequently reduce the likelihood of customer defection. According to

Gummesson, relationship marketing, in principle, encourages retention marketing rst and attraction

marketing (attracting new customers) second. Moreover, companies that focus extensively on attracting

new customers may fail to understand the changing needs and expectations of their existing customers

(Zeithaml & Bitner, 1996).

Bearden and Teel (1983); Buzzell and Gale found positive relationship existing between service quality

and customer satisfaction. The positive relationship between service quality and customer satisfaction

creates true customer, increase efficiency, market shares, and profits, heavy sales volume, higher

revenue, and reduces cost by economies of scales, and retain customer.(Anderson and Sullivan 1993;

Zeithaml, Parasuraman and Berry 1996.) Satisfied customer do not switch their service provider and

therefore cost of retaining existing customers are significantly lower than attracting new ones. These

customer spread their satisfaction by positive word of mouth which influences non-existent customers’

desire to engage with the organization and work as free promotional agents (Gronroos 2007, Zeithmal

and Bitner, 2000)

Service quality, or customer interaction, affects customer satisfaction (Cronin, Brady, & Hult, 2000). The

assumption is that by improving the quality of service, customers’ satisfaction is improved (Storbacka et

al., 1994). A critical component of service quality is delivering the product that the customer expects.

The cascade effect of service quality on satisfaction, and satisfaction on customer retention, and further

customer retention on profitability has been addressed by Rust and Zahorik (1993) and Storbacka et al.

(1994). Service quality is widely considered to be a key antecedent to successful customer relationships

(Ennew & Binks, 1996). The assumption found throughout service quality research is that service quality

has a positive correlation with satisfaction, which in turn leads to increased retention (Storbacka et al.,

1994).

26

The strategic planning and the application of service quality provide customer satisfaction and retention.

Its efficient application enhances the hospitality industry, activates the effects of tourism development

in socio-cultural issues and provides economic growth.

The positive effects by practising service quality models are listed below:

A competitive differentiation that favors the enterprise

Chances of potential growth

Better employee morale

Customer Loyalty and Retention

Customer satisfaction

Economic growth & profits

Employee motivation and vision

Favorable advertising

Greater productivity

Minimization of loss for the customers

To the extent that behavioral intentions of customer retention materialize in actual customer retention,

a growing body of research suggests that the statistical evidence of quality-retention link is positively

significant. It has been suggested that service quality has a direct effect on organizations' profits, since it

is positively related with customer retention and with customer loyalty.

Veneris and Ghauri (2004) argue that service quality is linked to organizational profitability through two

routes, and each of these routes involves customer retention. Management can deploy a company's

marketing assets to acquire superior service quality that differentiates the company from its

competitors, and, in turn, leverage the company's competitive advantage through greater market share

and profitability as the Profit Impact of Marketing Strategies (PIMS) studies indicate (Buzzell & Gale,

1987). In the second route, "service quality is viewed as an important means for customer retention"

(Zeithaml et al., 1996). All in all, the preceding discussion suggests the following hypotheses. Customers

'perceived service quality and customer retention will be positively linked.

27

(Berry, Parasuraman & Zeithaml, 1994) argued that superior service quality leads to favorable behavioral

intentions, which leads to retention, which leads to ongoing revenue, increased spending, payment of

price premiums, and generation of referred customers (Zeithaml et al., 1996). Excellent service is a

profit strategy because the results include new customers, increased business with existing customers,

fewer lost customers, more cushioning from price competition and fewer mistakes requiring the services

to be repeated (Berry et al., 1994). Listening to the customer is a part of providing excellent service.

Listening and responding to the customer’s needs in a quality way has a direct effect on the quality of

service provided (Berry & Parasuraman, 1997). To maximize long term customer and shareholder value,

organizations must develop customer retention strategies (Weinstein et al., 1999c). Inferior quality leads

to unfavorable behavioral intentions which lead to customer defection from the organization which

leads to decreased spending, lost customers, and increasing costs associated with attracting new

customers (Zeithaml et al., 1996). Customer switching behavior can damage market share and

profitability. Switching can cost an organization the customer’s future revenue stream (Keaveney,

1995). Evidence that customer loyalty makes an organization more profitable makes it imperative that

complaints and other unfavorable behavioral intentions are handled effectively to ensure the stability of

these relationships (Tax, Brown & Chandrashekar, 1998b). It is important for organizations to also

realize that customers may also switch because of the attraction of competitors that are providing

better service, more personable service or higher quality. In this case, the customer is not switching

because of unsatisfactory service. Managers of service firms should know that some customers would

switch services even when they are satisfied with a former provider (Keaveney, 1995).

Relationship between Customer Retention and Product Quality

A prominent reason is to not retain with company for a customer is that their product is not fulfilling its

function properly. When the product is fail to perform its functions completely and properly, then the

product useless for customer, when the customer is not satisfy with product and not using it, so the

customer will reduce its retention and relationship with company. (Buzzell and Gale 1987; Buzzell et al.

1975; Rust and Zahorik 1993). Product quality play vital role in customer retention and have positive

relationship with customer retention. Customers compare the perceived performance of a product

(service, goods) with some performance standard. Customers are satisfied when the perceived

Performance is greater than the standard (positively disconfirmed), whereas dissatisfaction occurs when

the performance falls short of the standard (negatively disconfirmed). Product quality is the strategic

benefits of quality in contributing to market share and return on investment (e.g., Anderson and

Zeithaml 1984; Philips, Chang, and Buzzell 1983). For customers who value convenience most, banks

28

must offer the latest product such as electronic banking, touch-tone phone account access and internet

banking. The search for quality is arguably the most important consumer trend of the 1980s (Rabin

1983) as consumers are now demanding higher quality in products than ever before (Leonard and Sasser

1982, Takeuchi and Queleh 1983.

Gundlech (1995) manufacturing companies, in searching for new approaches to retain customers, are

increasingly using service as a differentiator and as a means of integrating themselves into the

customers supply chain systems. The maintenance of product quality for customer retention who have

purchased company goods or services once and the gaining of repeat purchases. Customer retention

occurs when a customer is loyalty a company, brand, or to a specific product or service, expressing long-

term commitment and refusing to purchase from competitors. A company can adopt a number of

strategies to retain its customers. Of critical importance product quality for customer retention to such

strategies are the wider concepts of customer service, customer retention, and relationship marketing.

Companies can build loyalty and retention through the use of number of techniques, including database

marketing, the issue of loyalty cards, redeemable against a variety of goods or service, preferential

discounts, free gifts, special promotions, newsletters, of magazines, member’s clubs, or customized

products in limited editions, it has been argued that customer retention is linked to employee loyalty,

since employees build up long-term relationship with customers.

There are just two levels of quality which can be chosen by a seller, where the low-quality product is

“useless” and would not be produced if there were no inattentive consumers in the market. The reason

a firm finds it profitable to offer a low-quality product is that some consumers mistake it for the high-

quality product. The model has a unique symmetric equilibrium, in which both prices and qualities are

chosen stochastically by sellers. Cooper & Ross(1994) present a model (like ours) in which consumers

have homogenous preferences over quality, and are exogenously divided into a group which accurately

knows product quality and a group which has no direct knowledge of quality.

The level of perceived quality, defined by Zeithaml (1988, p. 3) as “the consumer’s judgment about a

product’s overall excellence or superiority”, is supposed to be based on either a single signal or a variety

of quality signals (Schiffman and Kanuk, 2004). A popular issue in marketing literature is to discover

what types of quality signals are used by consumers to infer quality, while other articles strive to assess

the average intensity with which consumers use the relevant signals. Empirical research on consumer

responses to multiple signals is prolific. However, available studies do point in different directions and

the way signals are combined by consumers to infer quality remains unclear (Rao and Monroe, 1988 ).

29

For example, classical hypotheses, according to which perceived quality would be a monotonic

increasing function of price and/or advertising expense, have been rejected in several studies. By way of

illustration,

Kirmani (1990, 1997) argue that excessive expenditure suggests to consumers that the firm is desperate.

In this case the relationship between advertising expenditure and perceived quality is not monotonic

and exhibits an inverted U-shape. As for Jones and Hudson (1996), they show that price does not act

systematically as a signal in the consumer’s mind, but has a dual role. In particular, there is a critical

price above (or below) which price is (or is not) used as a quality signal. In the case of wine, consumers

mainly rely on the label to infer quality (Gluckman, 1990). Shaked and Sutton (e.g. Shaked and Sutton

(1987) and Sutton (1991)) have sought to explain the circumstances in which markets remain

concentrated as they grow large. In particular, Shaked and Sutton show that as markets grow large in

industries where quality is produced mainly through outlays on fixed costs, at least one firm will have an

incentive to invest in quality. Because quality is produced with fixed rather than marginal costs, a higher

quality firm can undercut its rivals’ prices and attain substantial market share. As a result, product

quality in some industries will increase in market size, even as product variety need not increase

(because markets remain concentrated at the product level). The process of quality competition is

primarily of interest to industrial economists for what it reveals about how markets function when firms

compete in quality (i.e. via vertical differentiation). It also may be of interest to urban economists.

Relationship between Customer Retention and Price

Price is an important marketing tool. (Lowenstein 1995, 81; Kotler 2003, 471; Gupta and Lehmann 2006,

122) When setting the price policy, companies must follow a six step procedure. First, they select their

pricing objectives. Second, they estimate the demand curve. Third, they estimate how costs vary at

different levels of output, at different levels of accumulated production experience, and for

differentiated marketing offers. Fourth, they examine competitors’ costs, prices, and offers. Fifth, they

select the final price. (Kotler 2003, 499) Different methods of pricing products and services are: (Ylikoski

2000, 263-264; Kotler 2003, 481-485)

Markup Pricing. The most elementary way of pricing is to add a standard markup to the costs.

Going-Rate Pricing. The firm bases its prices largely on competitor’s prices. The company might

charge the less, same, or more than the main competitors.

30

Perceived Value Pricing. An increasing number of companies base their price on the customer’s

perceived value. This is not the easiest way to price services, since the value of the service can

differ with different individuals. The price, using this method, should be the consequence of the

benefits for the customer, such as for example timely and psychological costs.

Furthermore, there are additional factors that the company should consider, before selecting the final

price: (Marketing Teacher ltd)

Psychological Pricing. This approach is used when the marketer wants the consumer to respond

on an emotional, rather than rational basis.

Product/Service Line Pricing. Where there is a range of product or services, the pricing reflect

the benefits of parts of the range.

Bundle Pricing. Sellers combine several services in the same package.

Promotional Pricing. Pricing to promote a service is a very common application.

Value Pricing. This approach is used where external factors such as recession or increased

competition force companies to provide “value” products and services to retain sales.

Price is another factor for customer to be retained or not to retain with company, because due to

competition companies are playing with prices of products and services. Customer always required

product on most cheap price. For example: if “A” company has Mr. XYZ customer and company is

providing the product “S” at 15,000 but “B” is providing him same product at 13,000 so this will lead the

customer to switch the company. Pricing is the factor that retain customer. Previous research shows

that there is positive relationship between price and customer retention. The price stability will increase

the potential for customer retention. The price premium for organic food is still very high, opening

opportunities for discounters to gain market shares through low price strategies (Spiller 2001). Lowers

customers’ price sensitivity, reduces the costs of failed marketing and of new customer creation,

reduces operating costs due to customer number increases, improves the effectiveness of advertising,

and enhances business reputation (Fornell, 1992).

Varki and Colgate (2001) worked and illustrated that given the importance of price perception

surprisingly little work has been done on the impact of price in the service sector and they argue the

need for future research to focus more on this link. Based on the survey on of the banking sector they

found evidence to support a direct positive association between price perception and customer

retention. They evaluate if such a hypothesis hold true in a service shop environment such as banking it

31

is expected that the same association would be similar if not stronger in a mass service such as the fixed

line telephone sector where the importance of price has been argued to be even more.

Many researchers have pointed out that price perception influences customer satisfaction and customer

retention (Oliver, 1997; Peng and Wang, 2006; Cheng et al., 2008; Kim et al., 2008). Customer often

switch mainly due to some pricing issues, e.g. high price perceived, unfair or deceptive pricing practices

(Peng and Wang, 2006). Therefore, in order to increase customer satisfaction, it is essential for service

firms to actively manage their customers’ price perceptions, e.g. carrying out attractive pricing, offering

reasonable prices mix, lower prices without decreasing quality, etc.

Price may be one of the most important determinants of customer decisions (Srivastava and Lurie,

2001). Managers could utilize price matching to stimulate repeat purchase behavior (reducing price

defection), because price matching may indicate a commitment to protect customers (objective: to keep

customers happy so they would come back and buy again). (Reichheld and Sasser, 1990) suggest that

repeat (i.e., existing) customers focus less on price savings than new customers do. Understanding long-

term price matching effects on customers is important in order to determine whether price matching

has a lasting impact on customer behavior that is evaluating the effectiveness of these policies in

stimulating customer retention, in addition to customer acquisition (Kukar-Kinney, 2006).

Indeed, it has to be acknowledged that some of the constructs, specifically, inertia and price

perceptions, were measured using single statements. The specific statements were both derived from

initial interviews and are consistent with past literature, thus ensuring content validity. However, some

measurement error would have crept into these single item measures, whose size cannot be estimated.

However, in defense of this approach it has to be said that recent literature agrees on the difficulty of

using multiple item measures in service research due to practical reasons, and acknowledges the

adequacy and sometimes superiority of single item measures. For example, Drolet and Morrison (2001),

based on a sophisticated analysis of measurement error, concluded that ``incremental information from

each additional item is extremely small and even the second or third item contributes little to the

information obtained from the first’’. Furthermore, they also empirically proved that ``added items

actually aggravate respondent behavior, undermining respondent reliability’’. It is argued that given

these findings, a single item, when suitably worded based on rigorous respondent feedback and

consistent with extant literature (as in the current study), will result in valid measures despite the

inherent inability to calculate a reliability coefficient.

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Although in general the service quality perceptions – customer retention link has been confirmed in a

number of different settings, there is also a strong belief that in mass services the impact of service

quality on customer retention may be low. In fact, some have argued that in mass services competition

lies on price (Kellog and Nie, 1995). Although the Kellog and Nie study did not offer empirical support for

these claims, the previous section did illustrate the importance of price. However, what has not been

tested in the extant literature and is plausible is a situation where customer retention requires positive

perceptions of both price and service quality. In such a scenario, absence of one is likely to significantly

weaken the level of customer retention. For example, those who are unhappy with price despite

positive service quality perceptions are bound to be less likely to stay. Indeed, the qualitative data

collected during the first phase of the current study through interviews of 40 customers also gave strong

support for such an argument.

Perceptions of price were measured on a single item scale. As said before, the topic of price in service

settings is relatively underrepresented (Varki and Colgate, 2001). As such, extensively tested measures

of price perceptions of a service could not be found. The actual wording for the single statement used in

the survey was derived from the preliminary customer interviews. During these interviews, customers

often referred to the ``reasonableness of price’’. Reasonableness reflects the way price is perceived

relative to that of the competitors. This statement is therefore consistent with Varki and Colgate’s single

item measure of price perceptions that emphasized the relative standing of one’s service provider on

price: i.e. ``how competitive do you perceive your bank’s fees and charges are?’’ or, ``I perceive the fees

and charges of my bank to be competitive’’. Consistent with this statement, the single item measure

used in the current survey read as follows: the prices charged by my phone company are reasonable.

Oliver (1997) suggested that consumers often judge price relating to service quality, and accordingly

generate satisfaction or dissatisfaction, depending on the equity principle. If a consumer perceives price

as fairness, he or she is willing to conduct this transaction with the service provider. Cheng et al. (2008)

proposed that price perception can be measured by two dimensions: one is reasonableness of prices,

which reflects the way that price is perceived by customers comparing to that of competitors. another is

value for money, which implies the relative status of the service provider in terms of price. In general,

high-quality services are considered to cost more than low-quality equivalents and may customer

retention (Chitty et al., 2007)

33

Relationship between Customer Retention and Customer Satisfaction

Customer satisfaction is originated from a comparison between customer’s expectations and

experiences. Customer satisfaction means positive reaction to a service experience. If the customer’s

perceived experience matches the expectations, the customer is assumed to be satisfied. If the

preceding expectations were higher than the gain of the service, the customer is considered to be

disappointed and dissatisfied. (Ylikoski 2000, 109) At a theoretical level, satisfaction is a concept that has

many definitions which tend to differ from each other. In the most recent definitions, there is

recognition of a dual nature of satisfaction. In other words, a cognitive and an affective character, as

well as a relative nature are found to exist. (Anton et al. 2007) In this study it is considered that

satisfaction is achieved when consumer’s expectations about the performance of the service are met or

exceeded.

Stock, 2005, 59) argued that customer satisfaction is an important driver of organizational performance

as well as a key component of competitive strategies (Stank, Daugherty and Ellinger, 1997, 2), and

sustainable advantage (Patterson et al., 1997, 4). Consequently, in market driven economy, the

measurement of customer satisfaction is of great importance (Wu at al., 2006, 237). Customer

satisfaction is of critical importance for the firm’s survival, growth and success (Guo et al., 2004, 141).

Hence, it has been a major goal of business organizations (Dimitriades, 2006, 782; Homburg and

Rudolph, 2001, 29). According to the marketing concept, customer needs are essentially satisfied

through integrated marketing, with the intention to satisfy customer while earning profit. The basic idea

is that a satisfied customer will be more likely to repurchase, which leads to increased sales and market

share for the company. (Innis and La Londe, 1994, 2) Thus, in order to achieve long-term business

success, it is critical to keep customers happy (Stank et al., 1997, 2).

Delivery of customer satisfaction is at the heart of modern marketing theory (Yeung, Ging and Ennew,

2002, 24). Consequently, it can be considered as the core of success in today’s highly competitive world

of business (Jamal and Naser, 2002, 146). It has become a fundamental construct in marketing practice

given its important and established relationship with customer retention, customer repurchase behavior

and firm profitability (Wu, DeSarbo and Chen, 2006, 222). Additionally, it constitutes a construct of vital

importance in explaining relationship types between participants (Sanzo, Santos, Vásquez and Álvararez,

2003, 329), and an important cornerstone for customer-oriented business practices across a multitude

of companies operating in diverse industries (Szymanski and Henard, 2001, 16). Traditionally, customer

satisfaction, instead of retention, has been the focus of research and managerial efforts (Hansemark and

34

Albinsson, 2004, 40), though both of them are two of the primary goals of the marketing function (Innis

and La Londe, 1994, 21). Considering the importance and benefits of customer retention, more

emphasis should be placed also on customer retention research. Especially because satisfaction-

retention link in business-to-business context has not attained the interest of the researchers (Paulssen

and Birk, 2007, 984). According to majority of previous research, customer satisfaction leads to

customer retention (e.g., Eriksson and Löfmarck Vaghault, 2000, 370; Gustafsson, Johnson and Roos,

2005, 216; Hallowell, 1996, 31; Ranaweera and Prabhu, 2003, 388; Rust and Subramanian, 1992, 41;

Rust and Zahorik, 1993, 212; Rust, Zahorik, and Keiningham, 1995, 59). However, only few studies

exploring this relation in business settings has been carried out; almost all previous research has been

conducted in business-to-consumer context (Paulssen and Birk, 2007, 984). Also empirical research

linking satisfaction to actual repurchase behavior has been lacking (Mittal and Kamakura, 2001, 132). As

there clearly are gaps in knowledge, it is investigated whether customer satisfaction affects positively on

the retention of the customers in the underlying context.

Customer satisfaction and prior experiences of service quality have been shown to be the key

antecedents of customer retention. (Bolton 1998; Rust and Zahorik 1993; Zeithaml et al. 1996)

Satisfaction has been treated as the main element for customer retention in numerous studies, and has

therefore moved to the forefront of relational marketing approaches. (Rust and Zahorik 1993)

Consequently, customer satisfaction has developed extensively as a basic concept for monitoring and

controlling activities in the area of relationship marketing. Customer satisfaction has traditionally been

regarded as a fundamental determinant of long term consumer behavior. The more satisfied customers

are the greater is their retention. (Anderson and Sullivan 1993) On the other hand, there are studies and

publications where the relationship between satisfaction and retention has been noted not to be this

straightforward. (Hennig-Thurau and Klee 1997) In some industries, customer satisfaction scores tend to

correlate with retention. In other industries there is little or no correlation. (Lowenstein 1995, 11-12)

Kotler (2003, 73) states that companies should measure satisfaction regularly, because the key to

customer retention is customer satisfaction. Highly satisfied customers stay loyal longer, buy more from

the company, talk favorably, pay less attention to competing brands, are less sensitive to price, offer

ideas to the company, and cost less to serve than new customers, because transactions are routine.

Customers will be lost if they are very dissatisfied, dissatisfied, or even indifferent. Thus, companies have

to regularly survey their customers’ level of satisfaction and aim to create very satisfied customers,

because they are most likely to stay loyal to the company. According to Bolton (1998), the level of

35

satisfaction explains a significant portion of explained variance in the duration of service provider –

customer relationship, comparable to the effect of price. In addition, Bolton states it to be a common

misconception that organizations which focus on satisfaction are failing to manage customer retention.

Furthermore, managers and researchers may have underestimated the importance between customer

satisfaction and retention, because of the complexity of the relationship between these factors.

In a study by Ranaweera and Prabhu (2003), it is argued that while satisfaction may be an important

driver for retention, it alone does not ensure service loyalty. Trust, switching barriers, and emotional

response such as inertia and indifference are also likely to influence retention. In their study Ranaweera

and Prabhu (2003) adopted a holistic approach to examine the combined effects of satisfaction, trust,

and switching barriers in a continuous purchasing setting. The empirical study was based on a postal

survey of telephone users in the United Kingdom. The findings implied that customer satisfaction and

trust have strong positive effects on customer retention, although the effect of trust on retention is

weaker than that of satisfaction. Results also indicated that switching barriers have a significant effect

on customer retention. According to the study, it is clear that satisfaction is the main driver of retention

as a direct determinant. However, if trust is absent, satisfaction will have less impact on retention.

The linkage between satisfaction and customer retention is not always as simple and straightforward as

stated earlier. Reichheld et al. (2000), argue that a concept called “the satisfaction trap” is represented:

“while it may seem intuitive that increasing customer satisfaction will increase retention and therefore

profits, the facts are contrary. Between 60 percent and 80 percent of customers who defect say they

were satisfied or very satisfied with their former supplier. In the auto industry, satisfaction scores

average 85 percent to 95 percent, while repurchase rates average 40 percent.” According to Storbacka

et al. (1994), customer satisfaction is only one dimension in increasing relationship strength. Strong

relationships can be dependent or perceived of contextual bonds that function as exit barriers. It is vital

to understand that contextual barriers can generate latent dissatisfaction which emerges as the

importance of the contextual bonds decreases. The article concludes arguing that the relationship varies

significantly between different individual consumers. Others may be very committed to the relationship

and for them the perceived satisfaction with the relationship is very important. Others may find the

relationship unimportant, and for these customers the satisfaction component is not as significant.

Hennig-Thurau and Klee (1997), it is argued that satisfaction with a company’s products or services is

often seen as the key to a company’s success and long term competitiveness. However, the few

empirical investigations in this area indicate that a direct relationship between these constructs is weak

36

or even nonexistent. The link between satisfaction and the long term retention of customers is typically

generated by marketing practitioners and scholars in a rather categorical way, and is therefore treated

as the starting point, rather than the core question of the analysis.

Customer satisfaction is a key and valued outcome of good marketing practice. According to Drucker

(1954), the principle purpose of a business is to create satisfied customers. Increasing customer

satisfaction has been found to lead to higher future profitability (Anderson, Fornell, and Lehmann 1994),

lower costs related to defective goods and services (Anderson, Fornell, and Rust 1997), increased buyer

willingness to pay price premiums, provide referrals, and use more of the product (Reichheld 1996;

Anderson and Mittal 2000), and higher levels of customer retention and loyalty (Fornell 1992; Anderson

and Sullivan 1993; Bolton 1998).

A firm’s future profitability depends on satisfying customers in the present – retained customers should

be viewed as revenue producing assets for the firm (Anderson and Sullivan 1993; Reichheld 1996;

Anderson and Mittal 2000). Empirical studies have found evidence that improved customer satisfaction

need not entail higher costs, in fact, improved customer satisfaction may lower costs due to a reduction

in defective goods, product re-work, etc. (Fornell 1992; Anderson, Fornell, and Rust 1997). However, the

key to building long-term customer satisfaction and retention and reaping the benefits these efforts can

offer is to focus on the development of high quality products and services. Customer satisfaction and

retention that are bought through price promotions, rebates, switching barriers, and other such means

are unlikely to have the same long-run impact on profitability as when such attitudes and behaviors are

won through superior products and services (Anderson and Mittal 2000). Thus, squeezing additional

reliability out of a manufacturing or service delivery process may not increase perceived quality and

customer satisfaction as much as tailoring goods and services to meet customer needs (Fornell, Johnson,

Anderson, Cha, and Everitt 1996).

Current work in retention is skewed towards the services area and financial services in particular. The

focus has been upon the economics and the influence of satisfaction and dissatisfaction upon customer

retention. Fredrick Reichheld (1993) citing studies by Bain & Co. states that, “The economic benefits of

high customer loyalty are considerable and, in many industries, explain the differences in profitability

among competitors.” He cites the example of MBNA where a 5% increase in retention grows the

company’s profits by 60% in the fifth year. In discussing retention he states, “Customer satisfaction is

not a surrogate for customer retention. While it may seem intuitive that increasing customer satisfaction

will increase retention and therefore profits, the facts are contrary. Between 65% and 85% of customers

37

who defect says they were satisfied or very satisfied with their former supplier.” We share this

viewpoint that retention is far more complex than customer satisfaction especially in business-to-

business situations.

(Jones et al. 2000), argued that customers tend to keep using current service as the level of the

customer satisfaction is high. In other word, the customer satisfaction is the first factor for the customer

retention. however, the customer retention and the churning rate of them were identified to be

different in the same level of the customer satisfaction according to the level of the switching barrier,

which affects the customer retention as well as adjustments the relationship between the customer

satisfaction and the customer retention.

Existing studies on the customer retention in the service are mainly focusing on the customer

satisfaction and the switching barrier (Dick & Basu, 1994; Gerportt, et al., 2001; Lee & Cunningham,

2001). Generally speaking, the customer with higher satisfaction tends to use that service continuously.

However, the necessity for the analysis on the other factors as other studies shows that the customer

satisfaction is not always significant to explain the customer retention even it is an important factor

having positive effect on the customer retention (Anderson, 1994; Jones et al. 2002). Recent studies

identify that the switching cost, the interpersonal relationship, the attractiveness of the alternatives and

the recovery of the service are establishing the switching barrier and have a large effect on the customer

retention (Gwinner et al., 1998; Maute & Forrester, 1993; Smith & Bolton, 1998). As the switching

barrier gets higher and higher, the possibility of sustaining the current service provider gets higher and

higher, and the switching barrier acts the adjustment variable between the customer satisfaction and

the customer retention. Namely, the customer retention rate can be different in the same level of the

customer satisfaction when the switching barriers are different. Whereas accumulated result of the

studies on the main effect and the adjustment effect of the switching barrier are not sufficient (Colgate

&Lang, 2001; Jones et al., 2000; Lee & Cunningham, 2001.)

There are many studies on the relationship between the customer satisfaction and the customer

retention (Bolton, 1998) argued that the customer satisfaction is the factor affecting the customer

retention in some different level (Anderson & Sullivan, 1993; Dick & Basu, 1994; Oliva et al., 1996; Oliver

& Swan, 1989). Based on those studies, this study establish hypothesis like the following.

Hypothesis1.The customer satisfaction has positive effect (+) on the customer retention. The customer

satisfaction is an important factor for the customer retention but not a sufficient (Anderson& Sullivan,

1993; Jones & Saaer, 1995; Jones et al., 2000).

38

Multiple studies conclude that customer satisfaction affects customer retention (Bolton, 1998; Bolton,

Kannan, & Bramlett, 2000). The more satisfied customers are, the greater is their retention (Anderson &

Sullivan, 1993; Fornell, 1992; Payne & Rickard, 1993). Satisfied customers are more positive towards the

organization and therefore are more likely to be the loyal customers (Datta et al., 2007). A satisfied

customer develops a strong relationship with the firm, and this often leads to relationship longevity

(Storbacka, Strandvik, & Grönroos, 1994). Dissatisfied customers defect; the relationship ends

(Storbacka et al., 1994).

Satisfaction has become a central concept in modern marketing thought and practice (Yi 1990). Many

studies have made significant contributions to better understanding this complex phenomenon

(Bearden and Teel 1983; Oliver 1980, 1989; Spreng et al. 1996; Williams 1990). Achieving visitor

satisfaction is one of important goals for most tourism service businesses and organizations today (Jones

and Sasser 1995). Increasing customer satisfaction and customer retention generates more profits,

positive word-of-mouth, and lower marketing expenditures (Reichheld 1996; Heskett et al. 1990).

Satisfaction is a visitor’s affective and evaluative response to the overall product or service experience

(Oliver 1997). What visitors received from the investment money, time and other resources on a trip or

a visit) are psychological benefits. Thus, it is an experience that tourists receive from a visit with tangible

goods (Mathieson and Wall 1982). It is also more likely that satisfied visitors will return and say positive

things about a service (Tian-Cole et al. 2002). Improving the quality of service attributes as well as

improving the emotional and psychological reactions that visitors obtain from service experiences are

considered important to commercial and public tourism businesses and organizations. As Otto and

Ritchie (1996) stated: the intimate, hands-on nature of the service encounter itself affords many

opportunities for affective response… it has long been acknowledged that human interaction itself is an

emotionally-charged process.

Considerable evidence suggests the positive influence of customer satisfaction on loyalty (Bolton, 1998;

Fornell et al., 1996; Musa, 2004) and further it has been established that satisfaction may be a means to

strategic ends; such as customer loyalty and customer retention, that directly affects company’s profits

(De Wulf, 1999; Jones and Sasser, 1995). In fact many researchers advocates that in the effort to

improve business performance; customer satisfaction should be measured and managed and its

importance has led marketing scholars to recommend firms to improve their customers’ satisfaction

judgments because satisfaction is a key to customer loyalty and retention (Fornell et al., Customer

satisfaction with a company’s products or services is often seen as the key to a company’s success and

39

long-term competitiveness. In the context of relationship marketing, customer satisfaction is often

viewed as a central determinant of customer retention. However, the few empirical investigations in this

area indicate that a direct relationship between these constructs is weak or even nonexistent.

Stauss & Neuhaus (1996) In this study the authors will propose a conceptual model that extends the

widespread view of a direct and linear relationship between customer satisfaction and customer

retention in two ways. First, a more complex understanding of the relationship between both constructs

is presented, which focuses particularly on different aspects of the customer’s quality perception as a

mediating variable. Second, the relationship is extended for two dimensions of nonlinearity. Based on an

introductory presentation of the conceptual model of the relationship between customer satisfaction

and customer retention, the different elements of the model will be discussed in detail. At the end of

the article the authors will summarize their considerations and highlight some implications for future

research activities on the satisfaction–retention link.

The Ambiguous Relationship between Satisfaction and Retention Kotler (2003, 73) states that companies

should measure satisfaction regularly, because the key to customer retention is customer satisfaction.

Highly satisfied customers stay loyal longer, buy more from the company, talk favorably, pay less

attention to competing brands, are less sensitive to price, offer ideas to the company, and cost less to

serve than new customers, because transactions are routine. Customers will be lost if they are very

dissatisfied, dissatisfied, or even indifferent. Thus, companies have to regularly survey their customers’

level of satisfaction and aim to create very satisfied customers, because they are most likely to stay loyal

to the company. According to Bolton (1998), the level of satisfaction explains a significant portion of

explained variance in the duration of service provider – customer relationship, comparable to the effect

of price. In addition, Bolton states it to be a common misconception that organizations which focus on

satisfaction are failing to manage customer retention. Furthermore, managers and researchers may

have underestimated the importance between customer satisfaction and retention, because of the

complexity of the relationship between these factors.

Rust (2002) argued that customer satisfaction and delight have a tremendous impact on customer

retention and customer loyalty. A complete customer satisfaction is the key to securing customer loyalty

and generating superior long-term financial performance (Anderson & Sullivan, 1993; Fornell, 1992;

Payne & Rickard, 1993). The significance of customer satisfaction, and its use for evaluating the quality

from the customer’s perspective, have been emphasized by many authors in construction. (Datta et al.,

2007). Customer satisfaction is a mental state which results from the customer’s comparison of

40

expectations prior to a purchase with, performance perceptions after a purchase. Customer satisfaction

generally means customer reaction to the state of fulfillment, and customer judgment of the fulfilled

state (Anderson & Sullivan, 1993; Fornell, 1992; Payne & Rickard, 1993). There are many benefits for a

company from a high customer satisfaction level. It heightens customer loyalty and prevents customer

churn, lowers customers’ price sensitivity, reduces the costs of failed marketing and of new customer

creation, reduces operating costs due to customer number increases, improves the effectiveness of

advertising, and enhances business reputation (Bansal and Gupta (2001). Customer satisfaction has

become one of the key issues for companies in their efforts to improve quality in the competitive

marketplace. Customer satisfaction is considered to affect customer retention and, therefore,

profitability and competitiveness.

Hennig-Thurau (2004) found customer satisfaction to have a positive direct influence on customer

retention in consumer service context. The results showed that, in the case of high-interaction services,

the direct impact of customer satisfaction on retention was clearly stronger than in the case of less

individualized and personal services (Hennig-Thurau, 2004, 473). Cronin and Taylor (1992) investigated

the relation between the concepts also in consumer environment. The result showed that consumer

satisfaction had a significant effect on purchase intention in all the four samples used in the research.

(Cronin and Taylor, 1992, 63) Eriksson and Löfmarck Vaghault (2000) tested their model with the sample

consisting of business relationships in professional services. The results indicated that relationship

satisfaction increased customer retention greatly (Eriksson and Löfmarck Vaghault, 2000, 369). The

research by Ulaga and Eggert (2006) was conducted in business-to-business context, investigating buyer-

seller relationships. The results indicated satisfaction to have a direct impact on the researched

behavioral intentions; intentions to expand business with the suppliers and propensity to leave. (Ulaga

and Eggert, 2006, 321) Also Ping (1995) got a similar result in channel context, when investigating the

effect of satisfaction on exit intentions; retailer satisfaction was negatively associated with their

intentions to leave (Ping, 1995, 176). The study by Patterson et al. (1997), conducted also in business-to-

business environment, was among the first researches demonstrating empirically the very strong link

between satisfaction and repurchase intentions. The results suggested that customer satisfaction is a

crucial link in establishing longer-term client relationships and thus strategic well-being of the

organization. (Patterson et al., 1997, 14) Lam et al. (2004) investigated relationship between customer

satisfaction and two loyalty dimensions, patronage and recommendation. The results showed that

customer satisfaction has a positive effect on both dimensions. (Lam et al., 2004, 305) The two items of

patronage loyalty measure used in their study (Lam et al., 2004, 299) are similar to retention items used

41

in the present study, and thus support the positive link between satisfaction and retention. Szymanski

and Henard (2001) conducted a meta-analysis of the reported findings on customer satisfaction. The

results showed that among the outcomes of customer satisfaction, the data supported most strongly a

positive relationship between customer satisfaction and repeat purchasing, indicating that customer

satisfaction is a major antecedent of customer retention (Szymanski and Henard, 2001, 24). However,

also contradictory results have been established concerning the satisfaction-retention link. The relation

has been found to be weak (Paulssen and Birk, 2007, 983), and dependent on moderating variables

(Gerpott et al., 2001, 263; Paulssen and Birk, 2007, 983), such as loyalty (Gerpott et al., 2001, 263).

Relationship between Customer Retention and Switching Barriers

Switching barriers have been used as marketing strategies to make it costly for customers to switch to

another organization. Such barriers include search costs, transaction costs, learning costs, loyal

customer discounts and emotional costs (Fornell, 1992). These barriers provide disincentives for the

customer to leave the current organization. Curasi and Kennedy (2002) have shown that customer

satisfaction does not predict the continuation of the relationship. High switching costs are an important

factor binding the customer to the service organization. Even with relatively low levels of satisfaction,

the customer continues to patronize the service provider because repurchasing is easier and more cost

effective than searching for a new provider or sampling the services of an unknown provider (Curasi and

Kennedy, 2002). Other than switching costs, cross-selling is another critical variable driving customer

retention. Cross-selling is the bank’s effort to sell as many different products and services as they can to

a particular customer (Daniell, 2000). One aspect of loyalty is the impact of cross-selling, which forms a

critical element in increasing revenue. Profitability could, as a consequence, be threatened not only by

loss of market share but also by diminished opportunities for cross-selling (Jones and Farquhar, 2003).

Furthermore, the more products or services you sell to a customer, the less likely it is that they will sever

the relationship (Daniell, 2000).

Switching cost means the cost incurred when switching, including time, money and psychological cost

(Dick & Basu, 1994), and is defined as perceived risk, insofar as there are potential losses perceived by

customers when switching barriers, such as losses of a financial, performance-related, social,

psychological, and safety-related nature (Murray, 1991). For the purpose of this study, taking into

account both findings from earlier studies, and specificities pertaining to mobile telecommunication

services, we have defined switching cost as loss cost, adaptation cost, and move-in cost. Loss cost refers

42

to the perception of loss in social status or performance, when cancelling a service contract with an

existing carrier; adaptation cost refers to the perceived cost of adaptation, such as search cost and

learning cost; and move-in cost refers to the economic cost involved in switching to a new carrier, such

as the purchase of a new device and the subscriber fee. Attractiveness of alternatives means the

reputation, image and service quality of the replacing carrier, which are expected to be superior or more

suitable than those of the existing carrier. Attractiveness of alternative carriers is intimately linked to

service differentiation and industrial organization. If a company offers differentiated services that are

difficult for a competitor to match or to provide with equivalents, or if few alternative competitors exist

in the market, customers tend to remain with the existing company (Bendapudi & Berry, 1997).

Interpersonal relationship means a psychological and social relationship that manifests itself as care,

trust, intimacy and communication (Gremler, 1995). The interpersonal relationship built through

recurrent interactions between a carrier and a customer can strengthen the bond between them and

finally lead to a long-term relationship. Companies are not alone in desiring a sustained relationship.

Many customers wish to establish, develop and continue with a company.

Switching barriers have been used as marketing strategies to make it costly for customers to switch to

another organization and create “customer lock-in” (Bonanni et al. 1998). Storbacka et al. (1994) argue

that represent reasons for a customer to stay loyal to a company. They claim that even dissatisfied

customers can be retained through switching barriers. Establishing a new relationship represents some

sort of investment or effort, for example time and/or money, which constitute a barrier for the

customer against taking action when dissatisfied. According to Fornell (1992), switching barriers include

search costs, transaction costs, learning costs, loyal customer discounts and emotional costs. These

barriers provide disincentives for the customer to leave the current organization.

(Anderson, 1994; Jones et al. 2002) argued that the switching cost, the interpersonal relationship, the

attractiveness of the alternatives and the recovery of the service are establishing the switching barrier

and have a large effect on the customer retention (Gwinner et al., 1998; Maute & Forrester, 1993; Smith

& Bolton, 1998). As the switching barrier gets higher and higher, the possibility of sustaining the current

service provider gets higher and higher, and the switching barrier acts the adjustment variable between

the customer satisfaction and the customer retention. Namely, the customer retention rate can be

different in the same level of the customer satisfaction when the switching barriers are different.

Whereas accumulated result of the studies on the main effect and the adjustment effect of the

switching barrier are not sufficient (Colgate &Lang, 2001; Jones et al., 2000; Lee & Cunningham, 2001).

43

(1) Switching cost

The switching cost is a main factor having effect on the customer retention. As the switching cost

increases, risk and burden on consumers are increased in the customer side and dependency on the

service provider gets increased as a result (Jones et al., 2000; Morgan & Hunt, 1994). In other words, the

more consumers recognize the switching cost, the higher retention rate even though customers have

dissatisfaction on the service.

(2) The interpersonal relationship

The long term interpersonal relationship between the company and customers offers a lot of benefits to

the customers: social benefits such as fellowship and personal recognition, psychological benefits such

as reducing anxiety and credit, economic benefits such as discount and time-saving, and finally

customization benefits such as customer management and etc(Berry, 1995; Peterson 1995). Therefore

the interpersonal relationship between the company and the customers can be an important factor as a

switching barrier. The continuous interpersonal relationship becomes a relationship-specific asset which

acquires customer to pay cost to be out of the relationship and therefore protects customer from being

apart from the relationship with the company.

(3) The attractiveness of alternatives

When consumers does not think that they have various alternatives or the service level, distinguished

image of the alternatives is better than the current service provider, the possibility the customers switch

the service provider is very low(Anderson & Narus, 1990; Jones et al., 2000). Therefore, the

attractiveness of the alternatives would be a component building the switching barrier.

(4) The service recovery

The service recovery means the ability of the service provider to solve the problem such as the customer

dissatisfaction and the service failure (Gronoss, 1988). The active effort of the company to solve the

problem helps customer have credit on the service provider (Zemke, 1993; Smith & Bolton, 1998). And

appropriate effort for the service recovery can protect customers from switching the service provider

(Colgate & Lang, 2001). The service recovery at the service encounter is a foundation to develop the

customer relationship into a long-term friendship. Therefore the service recovery can be a component

for the switching barrier.

The switching barrier has a direct effect on the customer retention and performs to adjustment the

relationship between the customer satisfaction and the customer retention (Lee et al., 2001; Ruyter et

44

al., 1998; Jones et al., 2001). Therefore the switching barrier can have an influence on the customer

retention with the interaction with the customer satisfaction. The level of the customer retention can be

different according to the level of the switching barrier in the same level of the customer satisfaction.

Ranaweera and parbhu (2003) argue that switching barriers have both a significant positive effect on

customer retention as well as a moderating effect on the relationship between satisfaction and

retention. While service providers may be able to retain even dissatisfied customers who perceive high

switching barriers, argues that ideally, firms should aim at a combined strategy that makes switching

barriers act as a complement to satisfaction.

Further, it has been demonstrated that the switching barrier plays the role of an adjustment variable in

the interrelationship between customer satisfaction and customer loyalty. In other words, when the

level of customer satisfaction is identical, the level of customer loyalty can vary depending on the

magnitude of the switching barrier (e.g., Colgate & Lang, 2001; Jones et al., 2002; Lee & Cunningham,

2001). The switching barrier refers to the difficulty of switching to another provider that is encountered

by a customer who is dissatisfied with the existing service, or to the financial, social and psychological

burden felt by a customer when switching to a new carrier (Fornell, 1992). Therefore, the higher the

switching barrier, the more a customer is forced to remain with his or her existing carrier. According to a

previous study, the switching barrier is made up of switching cost, the attractiveness of alternatives, and

interpersonal relationships.

Julander and Söderlund (2003) suggest a distinction between negative and positive switching barriers.

The results show that these two variables have different effects on repurchase intentions. These two

types of switching barriers also have different effects on customer satisfaction. An example of positive

switching barriers is a customer maintaining a relationship with a company because of a perception that

the supplier is superior in services and products. Examples of negative switching barriers are

expensiveness for a customer to leave the supplier, or a monopoly on the market. Based on in-depth

interviews, Gremler and Brown (1996) suggested a model that included switching costs as an

antecedent of customer loyalty. They defined switching costs as investment of time, money and effort

perceived by customers as factors that make it difficult to switch companies and gave the examples of

habit, inertia, set up costs, search costs, learning costs, contractual costs, and continuity costs.

Huang and Yu (2004) claimed that since there is no underlying commitment among customers displaying

switching barriers towards the product, such promotional tools as point of purchase displays, extensive

compounding, or noticeable price reductions would be adequate to unfreeze a customer’s habitual

45

pattern. The above discussion illustrated the possibility of customers continuing to repurchase out of

switching despite lack of positive perceptions of the service. However, it also illustrated how a condition

such as inertia could be unstable. Although this discussion is inadequate to build a firm hypothesis

linking inertia to customer retention, it is expected that switching barrier will strengthen the level of

customer retention.

Huang and Yu (1999) defined switching barriers as a non-conscious form of human emotion, and it has

been conceptualized as a single dimensional construct consisting of’ passive service patronage without

true loyalty’’. Huang and Yu (1999) operationalized the construct as: not ready to put forth effort

required for switching’’. Feedback from the preliminary interviews that were partly aimed at gaining

some insights on the wording of the constructs was consistent. The statement almost uniformly

identified by the 40 respondents to reflect switching barrier was ``I can’t be bothered to change my

phone company’’. It is argued that this statement agrees with both the conceptual definition of passive

patronage and the operationalization by Huang and Yu of being unwilling to put forth effort.

2.3.6 Conclusion

In literature I have concluded that customer retention plays a vital role in organization’s economic

portfolio. Gupta et al., (2004) indicate that a 1% improvement in the customer retention rate improves

firm value by 5%. Similarly, Reichheld and Sasser (1990) show that a 5% increase in customer retention

increases a firm's profits at a range between 25% and 85%. To begin with, to acquire a customer a

company incurs promotional costs like advertising, sales promotion etc. It is said that it costs five times

more to attract a new customer than retaining one. The operating cost decreases when a customer

stays. In organization’s cycle customer retention have direct relation on the profitability ration of

company. Overall, the empirical evidence suggests that service quality is linked positively to customer

retention as hypothesized. In addition, we found that there appears to be a permanent (long-term)

Granger-type causality between customer retention and quality. By Granger-type causality mean

temporal causality. Overall, evidence suggest that product quality is linked positively with customer

retention, if the quality of the product is not well then customer switch to another brand. In literature I

am concluded that price is another marketing tool to retain the customer because due to competition

companies are playing with prices of products and services. Managers could utilize price matching to

stimulate repeat purchase behavior (reducing price defection), because price matching may indicate a

commitment to protect customers (objective: to keep customers happy so they would come back and

buy again). In addition, Customer satisfaction is positively linked with the customer retention.

46

Satisfaction has been treated as the main element for customer retention in numerous studies, and has

therefore moved to the forefront of relational marketing approaches. I have concluded that switching

barriers have both a significant positive effect on customer retention as well as a moderating effect on

the relationship between satisfaction and retention. Switching barriers have been used as marketing

strategies to make it costly for customers to switch to another organization.

47

Chapter 3 Methodology

3.1 Introduction

This research is conducted in order to determine factors that affect customer retention in baking sector

of Pakistan. The quantitative method design used in this research because we fill the questionnaire from

the participant and know about the different consequences that influence in Customer retention in

banking of sector. We also used the deductive method of research in this study. We also use Cross-

sectional Approach. In order to answer these research goals, the researcher opted to obtain the view of

banks customers in line with this topic. Specifically, a total of 100 respondents were randomly selected

to make up the sample. Selected participants answered a survey questionnaire structure in Likert

format. Data gathered from this research instrument were then computed for interpretation. Along with

primary data, we also made use of secondary resources in the form of published articles and literatures

to support the survey results. Questionnaire is developed to collect the data from the consumers.

Questionnaire contains about all variables (dependent, independent) in this we study the relationship

between these variables. In the questionnaire five like scale (1= Strongly Disagree 2= Disagree 3=

Neutral 4= Agree 5= Strongly Agree) used to measure almost every question. For this study we use the

SPSS software to check relationship between these variables. In this study all the variables which are

scale so, to check the relationship between scales variables we use the method scatter plots,

Correlation, Regression and Descriptive statistics in SPSS. In descriptive statistics see the five things that

are minimum values, standard deviation and means of the variables. Maximum and minimum value

shows how much minimum and maximum respondent response in heir questionnaires, means show the

average answer of the respondents and standard deviation show how much deviation between these

variables so, firstly we apply the descriptive statistics in this study. In scatter plot method we check the

positive or negative relationship between variables. Correlation method is applied to check the relation

between the variables either there is positive relation, or negative or no relation. Correlation value is

“1”, “-1” or “0”. The “+1” shows that there is strong positive relation between the variables, “-1” show

there the strongly negative relation among the variables and “0” shows no relationship. The last method

in uses in this study is regression it shows the joint effect of independent variables on dependent

variables.

48

3.2Paradigm

The term paradigm described as essentially a collection of beliefs shared by scientists, a set of

agreements about how problems are to be understood, how we view the world and thus go about

conducting research. In this study positivism paradigm is used because positivist assumes that true

knowledge is based on experience of senses and can be obtained by observation and experiment.

Positivistic thinkers adopt his scientific method as a means of knowledge generation. In positivism

research makes claim for knowledge based on:

Determination or caused-and-effect thinking.

Reductionism: The intent to reduce the ideas into small, discrete set of ideas to test, such as

variables that constitutes hypothesis and research questions.

Detailed observations and measurements of objective reality (variables) that exist out there in

the world.

The testing of theories that is continually refined (Slife & Williams, 1995).

Positivism which emphasizes objectivist approach to studying social phenomena gives importance to

research methods focusing on quantitative analysis, surveys, experiments and the like. Positivistic

concerns to uncover truths and facts using experimental or survey methods have been challenged by

interpretivists who assert that these methods impose a view of the world on subjects rather than

capturing, describing and understanding these world views. Critical postmodernists argue that these

imposed views or measures also implicitly support forms of scientific knowledge that explicitly

reproduce capitalist structures and associated hierarchies of inequality. Positivism assumes an objective

world hence it often searches for facts conceived in terms of specified correlations and associations

among variables. Thus the positivist focus on experimental and quantitative methods used to test and

verify hypotheses have been superseded or complemented to some extent by an interest in using

qualitative methods to gather broader information outside of readily measured variables. Logically, (i.e.

in principle if not in practice) there is a focus on falsification rather than verification given the complexity

of real world phenomena – only one counter-example or feature is needed to falsify a proposed

relationship but one must assess all possible variables to verify a relationship is consistent across all such

conditions. Further, increasing effort is devoted to establishing the domain of generalizability of findings

based on the features of the sample and sampling context.

49

3.3 Research Approach

The quantitative method design used in this research because we fill the questionnaire from the

participant and know about the different consequences that influence in Customer retention in banking

sector. We also used the deductive method of research in this study.With the use of the survey

questionnaire and published literatures, this study took on the quantitative approach of research.

Quantitative data collection methods are centred on the quantification of relationships between

variables. Quantitative data-gathering instruments establish relationship between measured variables.

When these methods are used, the researcher is usually detached from the study and the final output is

context free. Measurement, numerical data and statistics are the main substance of quantitative

instruments. With these instruments, an explicit description of data collection and analysis of

procedures are necessary. An approach that is primarily deductive reasoning, it prefers the least

complicated explanation and gives a statement of statistical probability. The quantitative approach is

more on the detailed description of a phenomenon. It basically gives a generalization of the gathered

data with tentative synthesized interpretations. Quantitative approach is useful as it helps the

researcher to prevent bias in gathering and presenting research data. Quantitative data collection

procedures create epistemological postulations that reality is objective and unitary, which can only be

realized by means of transcending individual perspective. This phenomenon in turn should be discussed

or explained by means of data analysis gathered through objective forms of measurement. The

quantitative data gathering methods are useful especially when a study needs to measure the cause and

effect relationships evident between pre-selected and discrete variables. The purpose of the

quantitative approach is to avoid subjectivity by means of collecting and exploring information which

describes the experience being studied. Quantitative methods establish very specific research problem

and terms. The controlled observations, mass surveys, laboratory experiments and other means of

research manipulation in qualitative method makes gathered data more reliable. In other words,

subjectivity of judgment, which is not needed in a thesis discussion, can be avoided through quantitative

methods. Thus, conclusions, discussion and experimentation involved in the process are more objective.

Variables, both dependent and independent, that are needed in the study are clearly and precisely

specified in a quantitative study. In addition, quantitative method enables longitudinal measures of

subsequent performance of the respondents. Fryer (1991) noted that qualitative researchers aim to

decode, describe, analyze and interpret accurately the meaning of a certain phenomena happening in

their customary social contexts. The focus of the researchers utilizing the framework of the

interpretative paradigm is on the investigation of authenticity, complexity, contextualization, mutual

50

subjectivity of the researcher and the respondent as well as the reduction of illusion. Contrary to the

quantitative method, qualitative approach generates verbal information rather than numerical values

(Polgar & Thomas, 1995). Instead of using statistical analysis, the qualitative approach utilizes content or

holistic analysis; to explain and comprehend the research findings, inductive and not deductive

reasoning is used. The main point of the quantitative research method is that measurement is valid,

reliable and can be generalized with its clear anticipation of cause and effect (Cassell & Symon, 1994).

Being particularistic and deductive in nature, quantitative method is dependent on the formulation of a

research hypothesis and confirming them empirically using a specific data set (Frankfort-Nachmias &

Nachmias, 1992). The scientific hypothesis of a quantitative method holds no value. This means that the

researcher’s personal thoughts, subjective preferences and biases are not applicable to this type of

research method.

3.4 Research Design

The cross-sectional design of research is used for this study. Creswell (1994) stated Cross-sectional

studies are carried out at one time point or over a short period. They are usually conducted to estimate

the prevalence of the outcome of interest for a given population, commonly for the purposes of public

health planning. Data can also be collected on individual characteristics, including exposure to risk

factors, alongside information about the outcome. In this way cross-sectional studies provide a

'snapshot' of the outcome and the characteristics associated with it, at a specific point in time. The

benefit of a cross-sectional study design is that it allows researchers to compare many different

variables at the same time. Cross-sectional studies are sometimes carried out to investigate associations

between risk factors and the outcome of interest. They are limited, however, by the fact that they are

carried out at one time point and give no indication of the sequence of events — whether exposure

occurred before, after or during the onset of the disease outcome. This being so, it is impossible to infer

causality. The major advantage of cross-sectional research is that data can be collected on many

different kinds of people in a relatively short period of time. The cross-sectional design of research

method is advantageous for the researcher due to its relatively inexpensive and takes up little time to

conduct; Can estimate prevalence of outcome of interest because sample is usually taken from the

whole population; There is no loss to follow-up.

In this study, Explanatory research approach is employed so as to identify the Factors that affect

customer retention in banking sector of Pakistan. Exploratory research provides insights into and

comprehension of an issue or situation. It should draw definitive conclusions only with extreme caution.

51

Exploratory research is a type of research conducted because a problem has not been clearly defined.

Exploratory research helps determine the best research design, data collection method and selection of

subjects. Given its fundamental nature, exploratory research often concludes that a perceived problem

does not actually exist. Exploratory research often relies on secondary research such as reviewing

available literature and/or data, or qualitative approaches such as informal discussions with consumers,

employees, management or competitors, and more formal approaches through in-depth interviews,

focus groups, projective methods, case studies or pilot studies. The results of exploratory research are

not usually useful for decision-making by themselves, but they can provide significant insight into a

given situation. Although the results of qualitative research can give some indication as to the "why",

"how" and "when" something occurs, it cannot tell us "how often" or "how many."

3.5 Research SiteWe have conducted survey in Lahore city of Pakistan

3.6 Population

Businessman, Salaried person, and students served as the respondents and provided the data for study,

who are actually bank customers and who have bank account.

3.6.1 Sample Unit

I actually collect the data from the Businessman, salaried person, Students who are actually bank

customer and who have bank account.

3.6.2 Sample Size

The Data will be collected from the 100 people.

3.6.3 Sampling Procedure

The data are quantitative so Probability will use because there are equal chances the respondent are

man and woman. I have used the random sampling and choose 100 respondents.

3.6.4 Instruments

The survey questionnaire was used as the main data-gathering instrument for this study (See Appendix

A). The questionnaire was divided into two main sections: a profile and the survey proper. The profile

contains socio-demographic characteristics of the respondents such as name, age, gender, occupation,

educational status. The survey proper explored the perceptions of customers on customer retention

questionnaire, particularly on its usability and reliability as an Customer selection and PHD qualified

person. The questionnaire proper section also contains questions about Customer Retention, Service

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Quality, Product Quality, Customer Satisfaction and Switching Barriers that indentify the affect on

customer retention . The questions were structure using the Likert format. In this survey type, five choices

are provided for every question or statement. The choices represent the degree of agreement each

respondent has on the given question. The scale below was used to interpret the total responses of all the

respondents for every survey question by computing the different test Scatter plots, Descriptive Statistics,

Correlation and Regression.

3.7 Strategy of inquiry

I have personally visited to Offices, Universities, and conducted the survey to different Banks Customers.

3.8 Methods

3.8.1 Data collection method

The data are collected thorough survey method.

3.8.1 Contact Method

We contact our respondent through E-mail, and Telephone.

3.9 Validity/Reliability

SPSS 10.0 was used for basic statistical analysis, factor analysis and reliability analysis, The data are

reliable because we use the various test like Descriptive Statistics, Scatter plots, Regression and

Correlation. The data are valid because the result shows the positive relationship between the variables.

53

3.10 Analysis

After gathering all the completed questionnaires from the respondents, total responses for each item

were obtained and tabulated. In order to use the Likert-scale for interpretation. We have quantitative

data so we analyzed through SPSS Software. Applying different test like Descriptive Statistics, Scatter

plots, T-test, Regression and Correlation. All the collected data about our six variables has analyzed

through software named as SPSS (Statistical Package for Social Sciences). This software has specially

designed for this kind of research. First of all we have used descriptive statistics to present the overall

picture of the variables. Descriptive statistics provide the necessary information like mean, minimum

value, maximum value and variation that can appear in mean value about the variables. Then we have

used scatter plot matrix to get a quick idea about relationship between variables. This matrix tells that

whether there is any relationship between variables or not. After it we have used Correlation tests to

find out positive or negative association between variables. This test also checks that the relationship is

significant or not. Dependent variable (customer retention) is predicted from independent variable

(service quality, product quality, price, customer satisfaction and switching barriers) with the help of

simple regression. For prediction we have used the following regression equations:

C.R = C + B1(SQ) + B2(PQ) + B3(P) + B4(CS) + B4(SB) +

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Chapter 4 Analysis and Results

4.1 Introduction

This chapter is presents the data analysis and results of the research. A summary of the demographic

data is then displayed followed by listing of descriptive statistics for each variable. The sample size was

banking consumer sector. A sample of 100 participants was selected. The data received from

participants were analyzed from summaries of the demographic information, for descriptive, statistics,

Regression, Scatter Plots, and for correlation. This was accomplished through the use of statistical

package for the social science (SPSS version 16.0).

4.2 Analysis:-

I have conducing a survey on factors that affect customer retention in banking sector of Pakistan and for

this survey we suggested the sample size of 100 customer and our survey is based on questionnaire

filled by our sample customer who work as a participants for us. For getting output I have work on

descriptive analysis, Scatter Plots, Bar Charts, correlation and regression.

Descriptive StatisticsTable 4.1

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Customer Retention 100 3.00 5.00 4.1467 .47924

Service Quality 100 2.75 4.75 3.9325 .40021

Product Quality 100 2.33 4.67 3.8300 .47731

Price 100 2.50 4.75 3.4750 .54876

Customer Satisfaction 100 1.67 5.00 3.8200 .52847

Switching Barriers 100 2.00 5.00 3.4650 .55621

Valid N (listwise) 100

Interpretation:

Table 5.1 of descriptive statistics provides necessary information about the selected five variables i.e.

mean values, minimum values, maximum values and standard deviation. In the above table minimum

represents the lowest values and maximum represents the highest values of variables. Mean is the

55

average value of these variables; whereas standard deviation tells that up to this amount mean value

can deviate up or down. Numbers of cases used in this study are 100.The above table presents the

descriptive statistics that show the overall picture of all the five independent and one is dependent

variable. All variables are scale with 5 options 1 is strongly disagree, 2 Disagree, 3 is neutral, 4 is Agree

and 5 is strongly agree. In the above table the mean values and the values of standard deviation of all

the 6 variables have been shown. Mean value provides the idea about the central tendency of the values

of a variable. For example if we observe the above output to assess the average response rate or the

respondent then we come to know the mean of different variables like Customer retention(4.146),

service quality (.3.932), Product Quality(3.830), Price(4.75), Customer Satisfaction (3.820), Switching

Barriers(3.4650). Standard deviation gives the idea about the dispersion of the values of a variable from

its mean value. So, if we observe then in the response rate for the variable Product Quality value of

standard deviation is (0.400) which is the lowest value as compare to other variables value. but if we

observe the value of Switching Barriers is (0.556.) which is quite high as compare to other five

independent variables which clearly shows that the response regarding Customer Retention of mostly

respondents were not the same. Since the different units of measure have been applied for different

variables, but the dispersion of a variable using standard deviation is not enough because standard

deviation can’t be compared to that of other variable unless both the variables have the same unit of

measure. These statistics are helpful to have an idea about the central tendency and the dispersion of a

variable in absolute terms rather than relative terms.

56

HistogramPrice

Interpretation:

From the above graph which is showing the response of the respondents regarding price. Most of the

participant’s lies in 3 to 5. This graph is showing the normal Distribution on the graph. The statistics on

the histogram tell us that the standard deviation is 3.47 with a mean of 0.54 for a total N of 100.most of

the respondents mark on neutral, strongly agree, and agree.

57

Service Quality

Interpretation:

From the above graph which is showing the response of the respondents regarding service quality. Most

of the participant’s lies in 3 to 5. This graph is showing the normal Distribution on the graph. We have

mean 3.93 standard deviation 0.40 most of the respondents mark on neutral, strongly agree, and agree.

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Product Quality

Interpretation:

From the above graph which is showing the response of the respondents regarding product

quality. Most of the participant’s lies in 3 to 5. This graph is showing the normal Distribution on

the graph. We have mean 3.83 standard deviation 0.47 most of the respondents mark on neutral,

strongly agree, and agree.

59

Customer Satisfaction

Interpretation:

From the above graph which is showing the response of the respondents regarding service quality. Most

of the participant’s lies in 3 to 5. This graph is showing the normal Distribution on the graph. We have

mean 3.82 standard deviation 0.52 most of the respondents mark on neutral, strongly agree, and agree.

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Switching Barriers

Interpretation:

From the above graph which is showing the response of the respondents regarding service quality. Most

of the participant’s lies in 3 to 5. This graph is showing the normal Distribution on the graph. We have

mean 3.46 standard deviation 0.55 most of the respondents mark on neutral, strongly agree, and agree.

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Scatter Plots Analysis:Scatter plot shows how the scores one variable associates with other variable. The explanation of each

plot or graph one by one is as under.

Relationship between Quality of Service and Customer Retention Fig 4.1

Interpretation:

To find the relationship between Service Quality and Customer retention Scatter plots has been applied

as shown in the above fig 4.1 In this scatter plot we check the positive or negative relationship between

the variables. If we observe then the flow of line is from left to right which shows the positive

relationship between dependent variable customer retention and the customer satisfaction

(Independent variables). The above graph show’s that if service quality is well it will increase the

potential for customer retention.

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Relationship between Quality of Product and Customer RetentionFig 4.2

Interpretation:

To find the relationship between Product Quality and Customer retention Scatter plots has been applied

as shown in the above Fig 4.2 In this scatter plot we check the positive or negative relationship between

the variables. If we observe then the flow of line is from left to right which shows the positive

relationship between dependent variable customer retention and the Product quality (Independent

variables). The above graph show’s that product quality will increase the potential for customer

retention.

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Relationship between Price and Customer Retention

Fig 4.3

Interpretation:

To find the relationship between Price and Customer retention Scatter plots has been applied as shown

in the above fig 4.3. In this scatter plot we check the positive or negative relationship between the

variables. If we observe the flow of line is from left to right which shows the positive relationship

between dependent variable customer retention and the price (Independent variables). The above

graph show’s that price will increase the potential for customer retention.

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Relationship between Customer Satisfaction and Customer Retention Fig 4.4

Interpretation:

To find the relationship between Customer Satisfaction and Customer retention Scatter plots has been

applied as shown in the above fig 3.4. In this scatter plot we check the positive or negative relationship

between the variables. If we observe then the flow of line is from left to right which shows the positive

relationship between dependent variable customer retention and the customer satisfaction

(Independent variables). The above graph show’s that if customer is satisfied will increase the potential

for customer retention.

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Relationship between Switching Barriers and Customer Retention

Fig 4.5

Interpretation:-

To find the relationship between switching barriers and Customer retention Scatter plots has been

applied as shown in the above fig 4.5. In this scatter plot we check the positive or negative relationship

between the variables. If we observe then the flow of line is from left to right which shows the positive

relationship between dependent variable customer retention and the switching barriers (Independent

variables). The above graph show’s that switching barriers will increase the potential for customer

retention.

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Correlation:

Correlation is used to check the mutual relationship among variables. “The link or relationship exists

between two or more variables. Where there is a positive correlation between two variables, an

increase or decrease in one is matched by a similar change in the other. Conversely, a negative

correlation sees one variable increase while the other declines. Several statistical methods are used to

determine the strength of the correlation, that is, the correlation coefficient.”

Customer

Retention

Service

Quality

Product

Quality

Price Customer

Satisfaction

Switching

Barriers

Customer

Retention

Pearson

Correlation

1 .039 .100 .113 .150 .354**

Sig. (2-tailed) .700 .321 .262 .137 .000

N 100 100 100 100 100 100

**. Correlation is significant at the 0.01 level (2-

tailed).

*. Correlation is significant at the 0.05 level (2-

tailed).

Interpretation:-

To find the relationship between customer retention and service quality, product quality, price,

customer satisfaction, and switching barriers Pearson correlation has been applied as shown in the

above table, we selected Pearson correlation because the relationship between the said variables is

linear as shown by the scatter plots. The above correlation table has been used to check the relationship

among the variables. The value of correlation (coefficient) for product quality and customer retention,

is 0.700 which is less than the 0.1 that shows here we will reject the null hypothesis( H1) that’s mean

there is positive relationship between the customer retention and service quality, but if we see the

significance level of customer retention and product quality the value is .321 which is less than 0.1 and it

shows that we will reject the null hypothesis(H1) that’s mean there is positive relationship between

customer retention and product quality. The significance level between the customer retention and

price the value is 0.262 that is also less than 0.1 which mean we will reject the null hypothesis( H1) and it

shows that there positive is relationship between customer retention and Price. The sign level between

customer retention and customer satisfaction is 0.137 which is less than 0.1 so we will reject null

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hypothesis(H1) which shows that there is positive relationship between customer retention and

customer satisfaction. In the last the significance level among the customer retention and switching

barriers is 0.000 which is less than 0.1 so we will reject the null hypotheses (H1) that’s mean the

customer retention are not affected by the switching barriers. Now we see that the relationship

between the variables is strong weak, moderate or strong. For this purpose we take the value of

Pearson correlation. The Pearson correlation value of customer retention and service quality is 0.039

which is more than 0.3 and less than 0.7 that mean there is moderate relationship between customer

retention and service quality. Same this now we check the Pearson value of customer retention and

product quality that is 0.100 which is less than 0.3 and less than 0.7 so it mean there is weak relationship

between the customer retention and product quality. The Pearson correlation value of customer

retention and P is 0.113 which is less than 0.3 and less than 0.7 that’s mean there is weak relationship

between customer retention and Price. In the relation between customer retention and customer

satisfaction the value of these two variables is 0.150 that is less than 0.3 which shows that there is weak

relation between these two variables. In the last the value between customer retention and switching

barriers is 0.354 which is more than 0.3 and it shows the Moderate relationship between these two

variables.

Regression:

Regression is used to check the effect size of independent variable to dependent variable. Let’s discuss

the results of regression. The two basic types of regression are linear regression and multiple

regressions. Linear regression uses one independent variable to explain and/or predict the outcome of

Y, while multiple regressions uses two or more independent variables to predict the outcome. The

Regression matrix is used to check the affect of different variables (Dependent Vs Independent). The

hypotheses which are developed in this study are given below:

Hypothesis 1:

H1: There is a significant relationship between Customer Retention and Service Quality

H0: There is no relationship between customer retention and service quality

Hypothesis 2:

H1: There is a significant relationship between Customer Retention and Product Quality

H0: There is no relationship between Customer Retention and Product Quality

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Hypothesis 3:

H1: There is a significant relationship between Customer Retention and Price

H0: There is no relationship between Customer Retention and Price

Hypothesis 4:

H1: There is a significant relationship between Customer Retention and Customer satisfaction

H0: There is no relationship between Customer Retention and Customer Satisfaction

Hypothesis 5:

H1: There is a significant relationship between Customer Retention and Switching Barriers

H0: There is no relationship between Customer Retention and Switching Barriers

Adjusted R 2 – Test Model Summary

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate

1 .380a .144 .099 .45497

a. Predictors: (Constant), Switching Barriers, Customer

Satisfaction, Service Quality, Price, Product Quality

Interpretation:-

In the above table of model summary the Adjusted R square value is .144 that is 14.4% . It shows that

the 14.4% change in Customer Retention (CR) is made by these five independent variables (Service

Quality, Product Quality, Price, Customer Satisfaction and switching Barriers).

69

F-test

ANOVAb

Model

Sum of

Squares Df

Mean

Square F Sig.

1 Regression 3.280 5 .656 3.169 .011a

Residual 19.458 94 .207

Total 22.738 99

a. Predictors: (Constant), Switching Barriers, Customer Satisfaction, Service

Quality, Price, Product Quality

b. Dependent Variable: Customer

Retention

Interpretation:-

The value of the F test is 3.169 at the significant level 0.011 which is less than 0.1 and gives evidence

against Null hypothesis (H0) which states that:

HO: Independent variables jointly do not affect the dependent variable.

H1 : Independent variables jointly significantly affect the dependent

variable.

The rejection of null hypothesis (H0) shows that the model which we have used to estimate the effect of

Independent variables on the Dependent variable is a good fit. The independent variables jointly affect

the dependent variables.

70

Coefficientsa

Model

Unstandardized

Coefficients

Standardize

d

Coefficients

T Sig.B Std. Error Beta

1 (Constant) 2.568 .625 4.111 .000

Service Quality -.030 .125 -.025 -.239 .812

Product Quality .055 .106 .055 .516 .607

Price .016 .089 .019 .185 .853

Customer

Satisfaction.111 .087 .122 1.271 .207

Switching Barriers .290 .085 .337 3.425 .001

a. Dependent Variable: Customer Retention

Interpretation:-

The coefficient table presents the results of the regression analysis. The objective of the regression in

this study is to find such an equation that could be used to find the impact of Service Quality, Product

Quality, Price, Customer Satisfaction and Switching Barriers on the Customer Retention. The specified

regression equation takes the following form:

C.R = C + B1(SQ) + B2(PQ) + B3(P) + B4(CS) + B4(SB) + E1

C.R = 2.568 – 0.030(S.Q) +0.055(P.Q) + 0.016(P) + 0.111(C.S) + 0.290(SB) + E1

In the above regression equation the value of t service quality is 0.-030 that shows the average affect of

service quality on the customer retention which means that if the one unit of service quality decrease, it

will lead to decrease the customer retention 0.-030. The factor Product Quality value is 0.055 that also

the average affects of product quality on customer retention, also tells us that if the one unit of product

quality increases, it will lead to increase the customer retention 0.055. Like this the value of price is

0.016 that shows the average affect of price on the customer retention which mean that if the one unit

of price increases, it will lead to increase the 0.016. The customer satisfaction value is 0.111 that show

the average affect of the customer satisfaction on the customer retention. In the last the value of the

value of switching barriers is .296 that show the average affects of switching barriers on the customer

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retention which means that if the one unit of switching barriers increases, it will lead to increase the

customer retention .296.

The values of the T ratio of service quality is.-239 at the significance level of .812 which is greater than

0.1 so we will accept the null hypothesis (Ho :) that’s mean the service quality has no affect on the

customer retention. The value of T ration of product quality is .516 at the significance level of .607 which

is also more than 0.1 so we will accept the null hypothesis that’s mean the product quality has no affect

on the customer retention. Like this the value of T ratio of price is .185 at the significance level of .853

which is more than 0.1 which give an evidence to accept the Null Hypothesis. The value of T ratio of

customer satisfaction is 1.271 at the significance level of .207 which gives evidence against the Null

Hypothesis. Furthermore, the value of T ratio of switching barriers 3.425 at the significance level of .001

which gives evidence against the Null Hypothesis.

4.3 Discussion

This study showed that factors that affect customer retention we have conducted a questionnaire

survey method to study the impact of (Service Quality, Product Quality, Price, Customer Satisfaction,

Switching Barriers) on customer retention. To study the impact of above variables on customer

retention we use various statistical techniques. We use descriptive statistics and here we found the

minimum and maximum range of data and also found the means and standard deviation of variables.

To check the relationship between dependent and independent variable a scatter plot were drawn, the

line goes bottom to right upward in all variables which shows that all independent and dependent

variable have positive relationship, its means that independent variable influence Customer retention.

To check the relationship we also applied correlation. In correlation we have found a positive

relationship between independent and dependent variables, because correlation vale is lies in the range

of moderate positive (0.30-0.70) and strongly positive its means the relationship between independent

variables and dependent variable is positive. In independent variable the most strongly positive

relationship is between switching barrier and customer retention that is .354 which lies above the

moderate positive, its means switching barriers retain the customer. In all the correlation that result

shows the moderate relationship customer are most likely agree that which variables that we use in

study so that the (Service Quality, Product Quality, Price, Customer Satisfaction, Switching Barriers) are

very important for customer retention. In correlation all the independent and dependent variables have

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significance level that lies in less than 0.50 which mean all the independent and dependent variable

have positive relationship.

Regression analysis showed that In the above table of model summary the R square value is .099 that is

9.9%. It shows that the 9.9%% change in Customer Retention (CR) is made by these five independent

variables (Service Quality, Product Quality, Price, Customer Satisfaction and Switching Barriers). The

value of the F test is 3.169 at the significant level 0.011 which is less than 0.1 which shows positive

relationship between variables. Coefficient table presents the results of the regression analysis is service

quality -030 that shows the average affect of service quality on customer retention. The product quality

value is .055 which also shows the average affect of service quality on customer retention. The value of

Price is 0.016 which shows the average affect of price on customer retention. Like this the value of

customer satisfaction is .207 which shows average affect on customer retention. In the last switching

barriers value is .296 which shows average affect of switching barriers on customer retention. In the

above coefficient table the sign value of service quality is 0.812 which is greater than 0.1 so we will

accept the null hypothesis that’s mean the service quality has no affect the customer retention. Same

this, the sign value of product quality is .607 that is also more than 0.1 so we will reject the null

hypothesis that’s mean there is no affect of product quality on the customer retention. The sign value of

price is .853 which is more than 0.1, here we will also accept the null hypothesis that’s mean there is no

affect of P on the customer retention and the customer satisfaction sign value is 0.207 which is also less

than 0.1 which shows that the customer satisfaction also has affect the customer retention. In the last

the sign value of switching barriers is 0.001 which is less than 0.1, Here we will reject the null hypothesis

that’s mean there is significant affect of switching barriers on the customer retention.

4.4 Conclusion

Customer retention plays a vital role in organization’s economic portfolio .Today’s customer is becoming

harder to please. They are smarter, more price conscious, more demanding, less forgiving and they are

approached by many more competitors with equal or better offers. The challenging is not to produce

satisfied customers; several competitors do this. The challenge is to produce delighted and retain

customers. If these customers are retained with the organization, they become really profitable by way

of increase in purchasing, reduced operating costs, price premiums and through referrals. Too many

customers suffer from customer churn i.e. high customer defection. It is like adding water to a leaking

bucket. Various strategies such as measuring customer life time value, efficient complaint management

system and service recovery strategies can be helpful in retaining customers.

73

Furthermore, the constructs investigated in this study all received positive marks by the respondents as

factors that would influence their decision to stay with or leave their current banks. The most important

construct (by mean score) was Service Quality, followed by Product Quality and Customer Satisfaction.

These results lead to suggestions for bank managers to consider as to how they might improve customer

retention in today’s competitive banking environment.

Since the results of this study are based on consumers’ perceptions only, future research should

investigate the congruence between consumers’ and service providers’ perceptions. This will help the

industry to better understand whether both consumers and banks have the same perceptions regarding

issues relevant to retention. While this study found that customer all the factors is not effective in

building customer retention, future research may attempt to explore the “unexplored” constructs that

consumers would value most. For example, are consumers more concerned about the convenience

issue such as location of branches, or the use of technology? Or are consumers more focused on how

bank staff delivers services? Given the importance of employee competence, future research should also

examine the impact of employees’ behavior that could affect customer retention. Although this study

has include many important determinants in the analysis on the basis of theoretical narrations, yet in

future studies it would be useful to include some other variables in the analysis as well. Inclusion of

other variables e.g. location of branches and corporate image, employee behavior etc may improve the

customer retention.

5. Overall Conclusion

The overall conclusion shows that the variables (Service Quality, Product Quality, Price, Customer

Satisfaction, and Switching Barriers) have positive effect on customer retention. We concluded that

service quality have positive effect on customer retention. Service quality is a critical issue in the service

industry and of particular importance for financial service providers who characteristically offer products

that are homogeneous in nature. Service Quality is the important driver of customer retention.

However, service quality does not seem to be the only concern of the customer. High service quality, at

the expense of a reasonable price, also appeared to be unacceptable for the more price sensitive

segments of customers. Where the perception of price is low and there is potential for improving service

quality, improvements in service quality can lead to a significant increase in the retention rate. Product

quality is another variable which shows positive effect on customer retention. Product quality play vital

role in customer retention and have positive relationship with customer retention. Product quality is the

strategic benefits of quality in contributing to market share and return on investment. Price is another

74

factor which has positive relationship with customer retention. Based on a survey of the banking sector,

we found evidence to support a direct positive association between price perceptions. The price stability

will increase the potential for customer retention. Furthermore, customer satisfaction has positive

relationship with retention. Customer satisfaction with a company’s products or services is often seen as

the key to a company’s success and long-term competitiveness. According to the study, it is clear that

satisfaction is the main driver of retention as a direct determinant. In the last switching barriers have

both a significant positive effect on customer retention. Switching barriers have been used as marketing

strategies to make it costly for customers to switch to another organization and create “customer lock-

in”.

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A survey on Factors that affect Customer Retention in banking sector of Pakistan

Dear Participant, This survey is aimed at analyzing to know the factors that affect customer retention in banking sectors of Pakistan. It is conducted by student of MBA program superior university Lahore. Along with this letter is a short questionnaire that asks a variety of questions about the mentioned study. It would not take more than 05 minutes to fill out this survey. It is ensured that all the information provided in this survey will be kept confidential and anonymous and will be used only for the quality of such survey . Your cooperation in this regard will be highly appreciated.

Thank you for your participation.

1. Name (Optional)__________________2. Gender:

Male Female

3. Educational Status: Intermediate Graduation Masters above Masters

4. Occupation Businessman Salaried Person Student Others (specify)_______________

5. Age: Less than 25 years. 25-35 years. 35 – 45 years. 45 years plus.

Please Rate the following statementsStrongly Agree =5, Agree=4, Neutral=3, Disagree=2, Strongly Disagree=1

S.# Statement SA5

AG4

N3

DA2

SDA1

Customer Retention

1. Customer retention is important today’s business.

2. Decreasing customer defection leads to organizational profitability.

3. Retaining current customers is more cost effective than attracting new ones.

Service Quality4. Service quality will retain the customer.

5.Higher levels of service quality are associated with higher levels of customer retention.

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6.Better the customer service will be then better will be the customer retention

7.If the organization deliver excellent customer service it affects the customer retention.

Product Quality8. Product quality will retain the customer.

9. Higher levels of product quality are associated with higher levels of customer retention.

10.If the quality of the product is not good it may affects the customer retention.

Price

11. Price is the factor which retain the customer.

12. Is this fact that price factor affect your choice.

13. Price changing is the reason to change the bank.

14. If price is stable and you will retain with the bank.

Customer Satisfaction15. If customer is satisfied than retain with the bank.

16.High satisfaction with product performance and customer service.

17. Higher levels of customer satisfaction are associated with higher level of customer retention.

Switching Barriers18. Switching barriers retain the Customers.

19. Higher levels of each switching cost are associated with higher levels of the switching barrier.

Contact information (optional)Cell: ____________________________ Email: ______________________________

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