Business Psychology - Latest Findings

Article No. 199
Customer Psychology Findings, by James Larsen, Ph.D.

Customer Loyalty

Researcher discovers some new connections that impact customer loyalty.

Picture a loyal customer. It's a person who passes by other firms to do business with you. It's a person who ignores others' promotions but notices yours. It's a person who spends a lot of money at your business and then leaves pleased and satisfied. We need all the loyal customers we can get, and we can't afford to lose any, but our competitors have different plans. They'd like to capture all the loyal customers they can for themselves.

What causes a new customer to become loyal? What keeps customers loyal? Is it your prices? Is it merchandise quality or service? Business owners try emphasizing each of these and they meet with varying success, but which one(s) is (are) best?

Niren Sirohi, from Cornell University, was unaware of a massive research project being carried out by a major grocery retailer until they came to the Marketing Department at Cornell and asked for help. This retailer had conducted over 16,000 telephone interviews of regular customers, 100 for each of their 160 stores, and they were overwhelmed with an ocean of data. Sirohi saw the possibilities of testing connections concerning customer loyalty at each of the stores, and he agreed to help.

Sirohi used sophisticated computer programs to map relationships. He began with customer loyalty and then worked backwards testing different combinations until he found the strongest ones. Some of his findings confirmed connections that we already knew, but some of his findings were a surprise.

His strongest connection was between perceptions of service quality and store loyalty, and that comes as no surprise. In this study service quality included the performance of customer contact employees, but it also included other factors such as store layout and design, staffing in specialty areas like the bakery and deli, and staffing levels at checkout.

A second finding concerned pricing and customers' perceptions of value. If an attractive competitive business was located nearby which beckoned a store's loyal customers, then their perceptions of the value they received for their money were important, but only modestly so. These perceptions of value demonstrated only a weak connection to loyalty. However, when this attractive competing business was missing, then customer perceptions of value didn't influence store loyalty at all.

That's logical, but it's also a surprise. Most likely, few grocery executives will believe it. Previous research has shown a consistent bias by executives favoring pricing as crucial for forming loyalty among customers and keeping them that way.

Another surprising finding involved perceptions of merchandise quality. These perceptions were the second strongest factor leading to customer loyalty, but the surprise came in how perceptions of merchandise quality were formed. It was through service quality. Service quality caused people to form their perceptions of merchandise quality. If service was good, customers believed merchandise quality was high. If service was poor, customers believed merchandise quality was poor. And it was the same merchandise!

Imagine a jewelry store with bright lights causing the gems to twinkle. If the store is clean, the layout is good, and the salespeople treat the merchandise and the customers well, then customers would logically infer that the merchandise was of high quality. After all, what do they know about gems?! If the reverse was true, then customers would infer low quality. They merely follow the lead of the staff.

The same thing is true in other retail settings and in grocery stores in particular.

There are some lessons here, and they all harken back to service quality. Get that right, and customer loyalty will follow.

Reference: Sirohi, Niren, Edward McLaughlin, and Dick Wittink (1998) A Model of Consumer Perceptions and Store Loyalty Intentions for a Supermarket Retailer. Journal of Retailing, 74(2), 223-245.

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