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Relationship Marketing: theImportance of Customer-Perceived Service Quality inRetail BankingMaria Holmlund a & SÖRen Kock aa the Swedish School of Economics andBusiness Administration , Department ofMarketing and Corporate Geography , PO Box479, Helsingfors, FIN-00101, FinlandPublished online: 28 Jul 2006.

To cite this article: Maria Holmlund & SÖRen Kock (1996) RelationshipMarketing: the Importance of Customer-Perceived Service Quality in RetailBanking, The Service Industries Journal, 16:3, 287-304

To link to this article: http://dx.doi.org/10.1080/02642069600000029

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Relationship Marketing: The Importance of Customer-Perceived Sewice Quality in

Retail Banking

MARIA HOLMLUND and SOREN KOCK

During the last couple of years relationship marketing has been introduced within services marketing since more efficient, proptable and long-term marketing can be achieved by focusing on present customers instead of concentrating on attracting new ones. Retail banks have in this respect had a unique position as they have a well-developed system of local oflces that enable them to be close to and to establish relationships to their customers. A prerequisite for a bank that wants to establish long-term customer relationships is satisfied customers who want to remain customers. In other words, the service quality as perceived by the customers must at least meet their expectations. Otherwise there is a possibility that a dissatisfied customer starts searching for another bank oflering similar services, resulting in a break in the relationship with the bank, with which he was dissatisfied.

L O N G - T E R M R E L A T I O N S H I P S

In the traditional marketing mix model [McCarthy, 19601 the focus of marketing activities is primarily directed towards attracting new customers instead of keeping present ones and the underlying assumption is that the market consists of a very large number of customers. The model is based on the assumption that the customers and their needs are more or less homogeneous and that defecting customers can be replaced with new ones. Consequently, the transactions are admitted to be short-term. The predominant marketing theory is placed within this marketing management paradigm.

Maria Holmlund is at the Swedish School of Economics and Business Administration, Department of Marketing and Corporate Geography, PO Box 479, FIN-00101 Helsingfors, Finland. Stiren Kock is at the Swedish School of Economics and Business Administration, Department of Marketing and Corporate Geography, PO Box 287, FIN-6s I01 Vasa, Finland.

The Service Industries Journal, Vo1.16, No.3 (July 1996), pp.287-304 P U B L I S H E D B Y FRANK CASS, L O N D O N

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288 THE SERVICE INDUSTRIES JOURNAL

However, a marketing paradigm based on long-term relationships has arisen as the traditional marketing mix model, i.e., product, price, place and promotion making up the 4 Ps, does not fully take into account the characteristics of services, which compared to goods are more heterogenous, abstract processes where consumption, delivery and production take place simultaneously and where there is no ordinary transfer of ownership [Gronroos, 19901. Parallel to this development within services marketing and management also industrial marketing has witnessed a shift of focus since the 1970s towards interactions, adaptations, exchanges, commitment, long-term orientation and industrial networks. [IMP Group, 1990; Morgan and Hunt, 19941. Services marketing as well as the interaction and network theory stress the important of long-term relationships between customer-service provider and industrial buyer-seller, respectively. In addition, both approaches are built on interactions taking place within long-term relationships between customers and sellers.

A firm can through long-term relationships with customers get access to detailed and useful knowledge about the customer and because of this knowledge be able to develop a core group of satisfied committed customers. Also Kotler [1991b] states that we now see a shift of paradigm emerging within marketing theory as focus in the future will be on long- term relationships instead of on short-term exchange transactions. The purpose of relationship marketing can be defined as [Gronroos, 1990: 1381: [similar definitions of relationship marketing can be found in Jackson, 1985; Gummesson, 19901. 'Marketing is to establish, maintain, and enhance ... relationships with customers and other partners, at a profit, so that the objectives of the parties involved are met. This is achieved by a mutual exchange and fulfilment of promises.'

Unfaithful customers cause firms considerably losses every year [Treutiger, 19931. Furthermore, the number of unfaithful customers is increasing because of the present recession and price activities. In other words companies have tried to buy customers from their competitors by offering discounts. The consequence is that the customers have not been faithful to a specific produc,t or firm. They have switched whenever they have got lower prices or charges. There has not been any encouragement or advantage for the customers to stay with a product or a firm. To put a stop to this switching behaviour the companies are now implementing activities to retain their customers. The strategies can be to build databases for direct marketing, to issue membership cards, to give discounts when exceeding a certain amount, to decrease the general price level, to have the same commission for a seller instead prolonging an old contract as for acquiring a new customer.

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C U S T O M E R - P E R C E I V E D SERVICE Q U A L I T Y I N B A N K I N G 289

Relationships in Service Firms

Service firms have started to identify their customers, which enables them to be more focussed in their marketing. They have membership cards, or cards for regular customers. In the USA the insurance company USAA has achieved a 98 per cent retention rate [Reichheld, 19931 in the auto insurance field. The base consists of a stabile, but very mobile segment of military officers. USAA created a centralised database and telephone sales force. The customers have access to the sales force anywhere in the world. When a customer moves he does not have to get in contact with a new local sales representative, and USAA does not have to transfer information about the customer from one local office to another.

Airline companies are another category that has been using cards for frequent flyers for a long time. By using the same airline a customer can collect points accumulate. When (s)he has a certain amount of points he can exchange them for a flight or a stay at a hotel, or for renting a car.

The shift towards keeping existing customers is associated with three oft- cited rules of thumb from service management [Barnes and Cumby, 1993; Liswood, 19891: '[I] it costs five times more to attract a new customer than to keep an existing one, [2] it takes 12 positive service experiences to overcome a negative one, and [3] 25 to 50 per cent of the operating expense of a company can be attributed to poor service quality - to the cost of not doing it right the first time.' These rules are not yet empirically tested, but they are, of course, illustrative rules of thumb when setting quality goals in service firms.

Gummesson [I9951 has developed 30 Rs to replace the 4 P mix in service firms. The 30 Rs are different firm internal and external relationships derived from the purpose with the relationship. He stresses the importance of choosing which customers to have relationships with and the importance of examining costs and revenues associated with every relationship. Barnes and Cumby [I9931 suggest that 3 Rs, i.e., Relationships, Retention and Recovery, should be the guidelines for creating and maintaining long-term relationships for service firms.

Relationships in Industriul Firms

The interaction and network theory illustrates how stability of relationships between buyers and sellers arises by introducing the construct bond, which ties the firms together in ways that both create opportunities and constraints. The bonds are outcomes of adaptations and investments made by the interacting partners aiming at higher efficiency and more cost effective exchanges. The bonds are. usually divided into five categories [Hammarkvist, Hikansson and Mattsson, 19821 :

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290 T H E S E R V I C E I N D U S T R I E S J O U R N A L

1. Technical bonds implying that the products have been adapted for specific uses, for example credit cards, that only can be used in one bank's teller, and thereby bind the customer to that specific bank.

2. Planning bond indicates, e.g., that the customers are restricted by the bank's opening hours.

3. Knowledge bonds arise when interactions take place, as information is exchanged and the bank and it's customers learn about each other and each other's capabilities.

4. Social bonds emerge among individuals as they become acquainted with each other, e.g., during playing golf in their leisure time.

5 . Legal and Economic bonds emerge when contracts and other agreements are signed and when payments are made.

Relationships in Retail Banking

In retail banking legal and economic bonds between the bank and its customers are very strong as customers usually have to sign a contract when lending money or making other financial agreements with the bank. The contracts determine in detail many of the commitments that that parties have to fulfil. Social bonds between the customer and the management or other employees in the bank can also be strong, because of the trust, and knowledge developed during both formal and informal face-to-face contacts. Finally, technical bonds and planning bonds are present if the customer has no option regarding bank or geographical location but has to become and stay customer in the one and only bank available. If the customer is dissatisfied a shift of bank can be impossible if: there are no perceived or real alternatives available; or the bonds, particularly the economic and legal bonds, function as high exit barriers. In these situations the relationship between the customer and the bank can be long-term, not because the customer is satisfied with bank but because he is forced to stay with the bank. Many times when the customer is dissatisfied he can not even use voice [Hirschman 19701, because the bank dominates the relationship and dictates the conditions. If for instance a new bank enters the market or if a contract expires, the customer will probably immediately change to the new bank or behave differently next time a contract is negotiated.

The purpose of this article is to discuss the concept of relationship marketing within bank services marketing and how it is affected by customer-perceived service quality. Empirically a mail survey was carried out in a specific small town area, where two retail banks dominate in market share. The aim of the survey was to obtain information related to the relationships between the banks and their customers as well as to find out how satisfied the customers were with the bank services and what problems the customers experienced with the banks and their services.

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CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 29 1

CUSTOMER ORIENTATION

Relationship marketing differs from the traditional marketing mix model as the main emphasis is on maintaining long-term relationships to customers. Furthermore, it is more advantageous and profitable to develop new products for present customers instead of trying to find new customers for present products. This is illustrated by Entenrnam's bakery [Reichheld, 19931, which sought to find reasons for declining sales. The primary reason was a change in consumer preferences: as they grew older and became more aware of their health, customers began to to prefer non-fat and non- cholesterol bakery products. Entenrnann's consequently decided to develop bakery products which met these new needs and were thus able to maintain their customer relationships and probably create new ones.

Firms generally consider themselves producers of goods whereas the customers acquire means to satisfy their needs and wants [Kanter, 19921. To the buyer a good is simply a resource that enables him to satisfy a need; for instance, Nike sells shoes whereas the shoe buyer buys tools for carrying out sport activities, and a bank handles financial transfers and a bank customer fulfils hislher 'dreams'. Correspondingly, a washing machine represents [Gummesson in Edvardsson and Thomasson, 199 1 ] a 1 0-year package of washing services.

Customer-oriented service processes and a service-minded personnel must function as bases for the firm's marketing activities in order for the firm to succeed with a marketing-oriented approach focusing on customer needs. In the 'Core Concepts of Marketing' the starting point for marketing is the customers' needs, wants and demands [Kotler, 1991bl. However, often the marketing-oriented approach extends only to a slogan and in its business the firm continues to focus on itself and its internal efficiency. The firms believe that they are marketing-oriented when seeking customer opinion of current products, whereas the customer believes that a firm is market-oriented when their opinions guide the design of products. In other words, it is essential for a market-oriented firm to focus on the customer's needs in the first phase of the developing process. Japanese car manufacturers surpass their competitors in introducing products such as small-sized cars, and technical solutions affecting security and comfort which car buyers world-wide appreciate and are prepared to pay for.

Also within retail banking the customer's needs have not always been uppermost, although the banks like to say so. Quite often banks, especially in the Nordic countries, have introduced credit cards, which have made cheques more or less obsolete. This kind of change was not requested, or even desired by the customers, it was the need for the banks' internal efficiency which shaped the way people are paying for their purchases.

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292 THE SERVICE INDUSTRIES J O U R N A L

Retail banks do most of their product development centrally at the headquarters, which is situated far away from most of the regional offices. The headquarters generate, analyse, develop and test new services, which later will be offered by all offices belonging to a banking group. Despite the fact that some banks are locally owned, they offer the same bank services as every office belonging to the particular banking group.

C U S T O M E R - O R I E N T E D S E R V I C E P R O C E S S E S

An important issue for service firms is how to standardise the services and how to produce them efficiently, i.e., how to industrialise service production. There are a large variety of internal programmes which assist in developing efficient production processes. Unfortunately, these programmes tend to stress internal processes and internal efficiency and largely ignore elements like customer-perceived service quality or external quality. For example, computer systems are too often designed to support the internal efficiency, which means that external customers have difficulties in reading and understanding invoices and documents that have to be filled out, as well as time-consuming and complicated procedures.

The production system of service firms consists of two parts: a supportive and an interactive part [Gronroos, 19901. The supportive part comprises systems support, management support and physical support, enabling the employees to produce the services. Although this part is invisible to the customers it does not mean that it cannot be designed with the customer in mind. The customer encounters the interactive part of the production system, i.e., personnel, systems, operational resources, physical resources and, of course, other customers when he buys, orders, uses and consumes the services.

Service- Minded Personnel

The personnel of a service firm is responsible for delivering a service that meets the needs and the expectations of the customers. Many of the contact personnel are not titled marketers but can rather be called part-time marketers [Gummesson, 19901 as they are highly responsible for creating and developing relationships with the customers but are not employed in the firm's marketing department. If, for example, a customer calls to ask about an invoice, it is crucial that the person who takes the call treats the customer in a market-oriented way, regardless of in which department this person is located. A satisfied customer will further act as a firm's part-time marketer when (s)he tells friends about the good service of the firm.

For employees acting as part-time marketers it is not enough to smile, but rather to be fair and to take responsibility for their actions. An essential

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CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 293

prerequisite for this is that the management gives the personnel power to cany out their duties and to make the customers satisfied. In retail banking personnel empowerment has been implemented and the employees are constantly trained to become team workers, customer oriented and to learn about the bank services. The banking groups regularly'arrange internal competitions among the bank offices and the prize sum is granted the office, not a single person.

CUSTOMER PERCEIVED SERVICE QUALITY

Too often there is no or little congruence between the image of the service communicated by the service firm and the service actually delivered. This leads to unmet customer expectations and probably to dissatisfied lost customers, who have lost their faith in the firm and its ability to keep their promises. Within the service sector this is quite common. For example, travel agencies often promise more than they can deliver, which damages their reputation and results in complaints, dissatisfied and lost customers and bad word-of-mouth publicity affecting their bottom line since resources are spent on correcting mistakes and trying to develop new promises and ways to attract customers.

The importance of measuring service quality was recognised in the beginning of the 1980s and thereafter much attention has been devoted to the issue. Quality measurement in manufacturing firms has a long tradition but the focus has mainly been on internal quality and statistical quality [Juran, 1982; Deming, 119861 Measuring quality in service firms can not be done using the same methods since services substantially differ from goods. Service quality has to focus primarily on external quality, i.e., on total perceived service quality by customers.

Customers have expectations of services they are going to consume based on earlier experiences, communication, image, word-of-mouth and the customer's need. In the consumption phase the customer compares hisher experiences to their expectations regarding a technical and a functional dimension of the service. The technical dimension refers to 'What' the customer receives, or what he has left after the interaction is over. The hnctional dimension refers to 'How' the service is received, or social fit, systems, atmosphere and so on. The image of the service firm acts as a filter between the experienced services and the two service quality dimensions. If the customer is dissatisfied he can to some extent overlook the dissatisfaction and regard it a temporary failure that will not repeat itself [Gronroos, 19901. Within industrial marketing one additional dimension has been found equally important to the consumer, namely an economic dimension [Holmlund and Kock, 1993, 19951. The economic and quality

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2 94 THE SERVICE I N D U S T R I E S J O U R N A L

dimension refers to the value that a customer receives in a relationship, and comprises elements like profitability and productivity. The consumer has to feel that he 'gets' something from the relationship if the relationship is to be continued. Perceived value can be defined as the ratio of perceived benefits relative to perceived sacrifice [Monroe, 19911.

T H E M A I L S U R V E Y

The survey was carried out in autumn 1991. The population consisted of residents living in a certain area of a smaller town in western Finland. Beside two local retail banks' head offices, three additional banks are located in the area. The situation corresponds to the rest of the country, which has five major banking groups. A sample of 200 respondents was randomly drawn from a register and they received a letter of introduction and the questionnaire by mail. A week later a letter reminding them of the survey was sent out and the respondents could also take part in a lottery if they filled out a coupon. The prize sum was a US$100 cheque. The response rate was 56.5 per cent, which is satisfactory in this kind of survey dealing with a subject that is relatively sensitive to the respondents.

We used a Problem Detection Study [PDS] to measure service quality, which is particularly suitable for quality surveys. The questions are stated in a negative form because the assumption is that it is easier for customers to criticise and that it highlights issues not found in questionnaires with a Likert or Osgood scale. A PDS questionnaire consists of two columns, in the first the respondent is asked to note 'How large is the problem' and in the second 'Is it important for you to get an improvement.' A five-point scale was used, ranging from 4 to 1 and 0 as does not know, a higher number implies a larger problem and more important for the customer to get an improvement, i.e., a more acute problem for the management to solve.

The quality problems in the questionnaire were generated from: earlier empirical studies concerning service quality in retail banking; discussion with customers; and discussions with the management and employees in one of the local banks. Discussions with customers, employees and the management helped in finding and generating existing quality problems to be studied. Employees in daily contact with the customers are particularly well acquainted with the quality problems a customer may perceive. Finally, open-ended questions were used in order to find out additional quality problems as perceived by the customers not included in the study. Very few respondents answered the open-ended questions, but a few had some comments and clarifications regarding the quality problems in the questionnaire.

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CUSTOMER-PERCEIVED SERVICE Q U A L I T Y IN BANKING 295

Empirical Results

The results are shown in three columns containing the average importance- of-problem score, the average need-to-improve score, and the average of the previous score called 'Quality Problem Score'. The results are ranked so the highest quality problem score comes first.

TABLE I QUALITY PROBLEMS IN RETAIL BANKING

I . The bank does not have an ATM 2. The bank charges too much For changing cumncy 3. The bank should be open longer one evening every week 4 The bank does not arrange evenings for information 5. The bank should Focus more on the customer 6. It is diflicult to change bank when all my loans are in my

present bank 7. The bank ties the customer to him and then starts charging

different fees 8. The bank charges too much when I pay bills 9. The bank does not inform about different services 10. The bank does not hand out enough marketing g i h

How large is the problem

IS it important Ibr you to get an improvement? 2.7 2.6 2.5 2.6 2.7

Quality Problem SCOK (3.0) (2.6) (2.5) (2.4) (2.4)

The result from the PDS survey (Table 1) show that no quality problem score exceeds 3.0, the maximal quality problem score amounts to 4.0. The highest quality problem score is 3.0, which can not be regarded a highly acute problem. We have chosen to account for the highest ranked 10 quality problems that received a quality problem score of over 2.0. The questionnaire included a total of 41 quality problems, divided into five different categories named access, charges, information, barriers and customer orientation.

The first category, access, consists of quality problems indicating that it difficult for the respondents to get access to bank services. The problems are: lack of ATM, early closing hours (quality problems Nos.] and 3). The lack of an ATM causes many problems for the customers because they cannot obtain cash 24 hours a day. Bank customers are used to a very widespread net of ATMs and that they are open around the clock. Furthermore, the banks' opening hours are from 9 a.m. to 4 p.m., making it difficult to get cash or to take care of banking business for those who work between 8 a.m. and 4 p.m.

In the second category, the common problem is that the banks charge too much for their bank services (quality problems Nos.2, 8, and partly 7). In

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296 T H E S E R V I C E I N D U S T R I E S J O U R N A L

the mid-1980s the banks began to charge for services. The customers have not been very happy about this and have not fully accepted this new system. Obviously they do not feel that they receive value for money. From the bank's point of view the motive for charges is that it is difficult to become profitable without charging for bank services and that those who use the services should also pay for them.

The third category, lack of information, refers to the fact that customers feel that the banks should provide more information about their services (quality problems Nos.4 and 9). Another way for banks to raise their profile is to sponsor children's cultural and sporting events. In our survey we asked the respondents what they knew about different banking services and on average they were familiar with what services the banks provided. They did not, however, know that the banks provided insurance and that it is possible to have accounts in foreign currencies.

The fourth category, exit barriers built by banks (quality problems Nos.6 and partly 7), were accepted to some extent because there is a power-dependence side of the relationship. Some of the respondents felt that they were trapped by their bank because of the barriers, which made it more or less impossible to switch to a different bank. A customer who has loans from a bank generally finds it difficult to move to another bank, because the loan contract binds not only the loan accounts but also other accounts held by the customer. In other words, a customer is forced to continue the relationship because of high exit barriers, not necessarily because of satisfaction with the bank. Many customers feel that banks create these exit barriers and when the customer is looked up then the bank starts charging for bank services.

The last category is that the banks are not sufficiently customer-oriented (quality problems Nos.5 and 10). Accordingly, the respondents feel that banks too often focus on their own profits and internal processes instead of the customer's needs, and that internal systems are not built with the customer in mind.

The market studied is more or less divided between the two banks. Bank A has 47 per cent of the market share, measured in terms of number of customers, and bank B 43 per cent. Market share according to loans is equally even, bank A has 49 per cent and bank B has 49 per cent. Finally, market shares according to which bank the respondents regard their main bank, bank A has 47 per cent and bank B has 5 1 per cent.

Customer-bank relationships are long-term, the majority of the customers having been with the same bank for more than 20 years, in some cases more than 60 years. Table 2 shows the relation between the respondents' age and the length of the customer-bank relationships. In the first group, respondents born in the 1920s, the average length of the relationship is 36.5

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years. The variance is between 11 and 60 years. Among those born in the 1930s the interval ranges from 16 years to 50 years. The difference between respondents born in the 1920s and 1930s is small. Respondents born in the 1940s have remained with the same bank from between 1 and 30 years, the average is 19.4 years. This group is close to those which follow: namely those born in the 1950s and 1960s. The averages in these groups are 18.8 years and 18.7 years, respectively. In all the three groups only a few customer-bank relationships have been shorter than 10 years. The average in the last group, children of the 1970s, is 15.3 years. In other words, the relationships seem to be stable and long-term as the customers continue to use the same bank year after year.

T A B L E 2 THE LENGTH OF CUSTOMER-BANK RELATIONSHIPS

The length of the relationship < 5 years 5- 10 years 1 1-20 years 2 1-30 years 3 1-40 years 41-50 years 5 1-60 years Respondents

Customer born in 1920s 1930s 1940s 1950s 1960s 1970s Total

2 2 2 6 8 2 10

8 6 . 5 5 30 5 . 4 14 13 5

3 14 6 2

15 21 23 8 103

Table 3 shows that almost 50 per cent of the respondents have been customers in many banks simuitaneously, meaning that it is common among the customers to use two or more banks, having parallel bank relationships. Primary bank refers to the main bank of the respondent, i.e., where hisher major loans are and the bank (s)he has regular contacts with, for instance when paying bills. Secondary bank refers to a bank where the respondent has an account that is occasionally activated or a bank office (s)he occasionally visits.

Bank A is a dominating bank in the area, which the respondents consider either their primary or secondary bank. Many of the respondents considered bank B their secondary bank, because many opened.an account with it in kindergarten or at school, in connection with events arranged by the bank, and have not closed it even if they are no longer active customers. Bank C had been the only financial institution handling state tax refunds. The high ratings won by bank B and bank C as a secondary bank show a general reluctance to close accounts that are no longer used, and this leads to a great deal of passive customers, and idle relationships for the bank.

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T H E SERVICE I N D U S T R I E S J O U R N A L

T A B L E 3 SECONDARY BANKS OF THE RESPONDENTS

Secondary Customer bank born in

1920s 1930s 1940s 1950s 1960s 1970s Total Bank A 6 4 0 2 3 1 16 Bank B 5 3 4 3 8 0 23 Bank C 4 4 3 5 4 I 21 Respondents 15 I I 7 10 15 2 60

In a follow-up question the respondents who have changed bank were asked to state their reason for doing so. The reasons for the change were mainly the concentrating of banking business to one bank, high rates of interest, or low rates on deposits.

M A I N T A I N I N G RELATIONSHIPS

It is more or less impossible for a service firm to maintain relationships to all potential customers. Instead the service firm must be selective and establish and maintain relationships in accordance with costs and revenues attached to customer relationships. Consequently, the service provider must know the customers' buying behaviour and buying pattern. Appropriate combinations of qualitative and quantitative research methods can be used for this purpose.,Methods that purely measure market shares are not very helpful. because they cover historic data, do not tell much about the underlying reasons for the situation and can contain a large amount of unprofitable customers.

Since the 1980s the traditional cost accounting systems have been questioned. They do not provide the management with an accurate picture of costs associated with relationships. Service firms with large overhead costs especially suffer from this kind of problem [Hussain and Kock, 19951. Activity-Based Cost [ABC] [Cooper and Kaplan, 19911 systems have been developed and implemented as ways of measuring the costs for different activities. Service firms,in particular can benefit from ABC because of the extensive amount of indirect costs. A firm that wants to achieve long-term profitability has to remember that it can only do so with the help of satisfied customers, not by achievilig a large market share alone. Furthermore, a cost- oriented firm will often focus on high-marginal products and cut out low marginal products. The obvious problem is that hereby the customers' needs are forgotten. Johnson [Edenhammer, 19931 points out that it is important to measure continually how satisfied the customers are. It is better to have

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fewer customers who buy more at a profit than many customers who buy a little, with high associated handling costs. Within industrial marketing this assumption has been shown to'be important, and, in fact, usually 80 per cent of the sales come from 20 per cent of the customers. Some researchers make the assumption that 20 per cent of the customers generate 225 of the profits. Particulqrly manufacturing ,firms implementing ABC have come to this amazing conclusion. Manufacturi,ng cqmpanies implementing ABC instead of a traditional cost accounting system have profits from individual orders varying from between minus 179 per cent to plus 65 per cent, 40 per cent of the customers are profitable, generating together 250 per cent of the profit [Cooper and Kaplan 19911. ,

Activities to Retain Customers Must Be Implemented

The service firm has to develop different programmes in order to retain the customer relationships, to know how satisfied the customers are, and to build customer databases. The banking sector in the Nordic countries has become deregulated and consequently the banks must ask themselves if they have any unique competencies or competitive advantages compared to other firms, mainly foreign banks, supplying substitutes [Urwitz, 19931. The answer may be that over a long period of time the banks have built long-term relationships with their customers. The well-developed system of local ofices has facilitated the closeness, individual service, good contacts and flow of information between the banks and their customers.

Banks as well as other firms have started to notice that a customer-seller relationship must be maintained several years before it becomes profitable. Reichheld [I9931 states that in the United States it takes up to four years before break-even can be reached owing to high initial costs, e.g., costs for advertising and personal selling.

An important issue regarding relationship marketing is the importance of relationships built between individuals, the service firm's employee and the customer. If the turnover among the employees is high then it is difficult to build long-term relationships because generated knowledge about customers will disappear as the employee leaves. The process of establishing relationships .,will have to start practically all over again. Generally, in retail banking each office has a database of customers and what kind of bank service they have consumed. Consequently, a bank can send out information to a certain category of customer, for example farmers, informing them about new services targeted at this segment or inviting them to various events. Furthermore, different bank charging conditions are valid depending on the customer's amount of deposits in the bank, as are different programmes according to the life-cycle of the customer.

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Recovery of Qualily Failures

When a quality failure emerges it is very important that it is dealt with in a proper way so that the customer feels satisfied, accepts the mistake and stays with the firm. For the firm is essential that the focus is not on the extra costs of correcting single quality failures. Instead the focus must be on the total costs caused and revenues generated from maintaining the customer relationship. That is, the focus has to be on consequences for the relationship from a long-term perspective and on preventing the problems from occurring again.

Fomell [I9921 uses the term defensive marketing when stressing the importance of maintaining existing relationships instead of aggressively chasing new customers. Customer satisfaction is the key to success and the maintenance of long-term relationships. With the help of long-term relationships marketing can be cheaper and more selective. Kordupleski, Rust and Zahorik [I9931 state that quality can have both an offensive and a defensive effect. The offensive effect is achieved when satisfied customers communicate a positive image by word-of-mouth and thereby attract new customers. They define the defensive effect in the same way as Fornell.

The difficulty in standardising services lies in their heterogeneity and intangibility, which require different quality systems to reach a specific, necessary and acceptable level of quality. Another important aspect is how the employees are trained, and how able and willing they are to correct quality failures experienced by the customer. When correcting a failure an interesting issue is whether the customer should receive more than just a correction of the service. The Scandinavian airline company SAS has, for example, implemented a guarantee that applies to passengers who have confirmed a flight but cannot be offered a seat. Between Scandinavia and America the guarantee is US$200 or a SAS cheque for US$300 if the delay is up to four hours. When the delay is more than four hours the cash guarantee is US400 or a SAS cheque for US$500. The aim is, of course, to have a satisfied customer although something in the service production process has failed.

In retail banking, service recovery is limited to the value of the failure. If the bank forgets to pay an invoice and the customer is billed interest for late payment, the bank pays the interest because the fault was theirs. The bank does not pay or give the customer anything more.

CONCLUSION

The purpose of this study has been to offer a general background to relationship marketing which during the last years has developed as an

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C U S T O M E R - P E R C E I V E D S E R V I C E Q U A L I T Y I N B A N K I N G 30 1

alternative way of handling marketing in service firms [see for example Christopher, Payne and Ballantyne, 199 1 ; McKenna, 199 1 ; and Gronroos, 19941. The traditional marketing paradigm has not been able to provide us with an understanding of and tools for handling and developing customer relationships. However, service marketing and management as well as the interaction and network approach within marketing are based on the assumption that long-term relationships are the basis for firms wanting to satisfy their customers and thereby do profitable and productive business. Consequently, a service firm has to act in a market-oriented fashion, start from what the customers need and be able to deliver the service quality expected. A satisfied customer is the prerequisite for a long-term relationship.

Our survey shows that the relationships have a long-term character and that the oldest, exceeding 60 years, are found among respondents born in the 1920s. The average length of the studied customer-bank relationships was 24 years. No major quality problems occurred in the study, only minor ones related to the access of bank services.

T A B L E 4 TYPE OF QUALITY PROBLEM

Type of Quality Problem Quality Dimension Technical/FunctionallEconomic

I . The bank does not have an ATM 2. The bank charges too much for changing currency 3. The bank should be open longer one evening every week 4. The bank does not arrange evenings for information 5. The bank should focus more on the customer 6. It is difficult to change bank when all my loans are in one

bank 7. The bank ties the customer to him and then starts charging

different fees 8. The bank charges too much when I pay bills 9. The bank does not inform about different services 10. The bank does not hand out enough marketing gifts

Functional Economic Functional Functional Functional

Functional

Economic Economic Functional Functional

In Table 4 we have applied each specific perceived quality problem to the three dimensions of quality discussed earlier.'We can see that the quality problems in this study can be divided into two dimensions: functional and economic. None of the quality problems belonged to the technical quality dimension. The economic dimension is new in the quality models and has previously been dealt with mainly within industrial services. The economic quality problems have to do with how much the banks charge for different

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302 T H E SERVICE I N D U S T R I E S J O U R N A L

services and the customer's feeling of being trapped by exit barriers and therefore forced to pay the fees which the bank charges. An interesting issue is how much these economic quality problems affect the customer's total perceived service quality. It is, however, not a good sign for the bank and its quality programme if customers are dissatisfied with the value they receive in the relationship with the bank. Despite the perceived dissatisfaction the customers seem to stay with the bank and do not disrupt the relationship. The customers seem to become used over time to issues that caused dissatisfaction previously, for instance the recently introduced fees caused much anger at the beginning but the customers seem to have accepted them now.

The functional quality problems consisted of a lack of an ATM in the area, short opening hours, lack of information and the banks' inability to focus on the customers and their needs. The vast majority of these quality problems concern access to bank services. Without access to an ATM or the banking personnel the customers can hardly use the bank's services, particularly if they are informed about other bank services. The functional quality problems, however, again seem to be a minor part in the customers' total perceived service quality. Further studies are needed in order to detect how important different quality problems are in the customers' total perceived service quality model before we know more about the level of dissatisfaction that causes the customers to disrupt a relationship. Some of the quality problems are very difficult to solve because costs, particularly in connection with an ATM, and the extended opening hours are higher than expected revenue.

It is difficult to generalise the results because the sample is small. Some implications, however, can be drawn. According to our study we can conclude that long-term customer-bank relationships seem to be common in rural areas where the banks are local. A major reason for the long-term relationship is the exit barriers in the form of loans and other financial arrangements between customers and bank. In order for the customer to disrupt a relationship some rather critical negative incident has to occur, e.g., a refusal to grant a loan, or extreme dissatisfaction with the services. Relationship marketing is more than just sending out letters using the customer's first name and introducing cards for frequent users. Relationship marketing has to be seen as a management philosophy starting with customer orientation, continuing with creating satisfied customers and, finally, activities to maintain profitable long-term relationships.

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CUSTOMER-PERCEIVED SERVICE QUALITY IN BANKING 303

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