Business Psychology - Latest Findings

Article No. 204
Customer Psychology Findings, by James Larsen, Ph.D.

Loyal Customers

Research reveals a vulnerability and an opportunity.

Would you rather have satisfied customers or loyal customers? Satisfied customers are likely to recommend you to others. Loyal customers are likely to return.

Or maybe you'd like to have both.

Most managers would guess that the same practices that result in customer satisfaction also result in customer loyalty, but that isn't necessarily so. That's one of the conclusions of a study conducted by Laurette Dube, from McGill University.

Ms. Dube explored satisfaction and loyalty, but she drew from a theory developed for a very different environment to formulate her ideas: interpersonal relationships.

The theory is titled the "investment model," and it explains satisfaction and loyalty in marital relationships. She tried applying its ideas to customer-business relationships.

The investment theory explains deteriorating marital relationships in terms of costs and benefits, emotional investments, and replacement costs, but Ms. Dube recognized that some strategies offered in the theory are already in use in business.

For example, businesses may employ value-added strategies to increase the long-term value of their relationships with customers by offering greater benefits to repeat customers than to occasional customers. Frequent flyer promotions of airlines are an example.

Businesses may also employ value-recovery strategies to respond to unhappy customers who have experienced breakdowns in service. Guarantees, complaint-management programs, and compensation for inconvenience are examples.

Ms. Dube explored value-adding and value-recovery practices in business experiments she conducted at her school. She exposed her subjects to a critical breakdown in service delivery, and then she examined how various value-added and value-recovery strategies affected satisfaction and loyalty.

One of her more interesting findings was to demonstrate how people could be loyal, but not satisfied.

Dissatisfied, loyal customers are those who have large investments in the relationship with the business, but repeatedly experience breakdowns in service. As with battered wives, they would lose too much to end the relationship, but they aren't happy.

For example, airline customers can be loyal because frequent flyer programs allow them to gain a benefit without incurring additional costs, but when an air carrier experiences frequent service breakdowns and makes no value-recovery efforts to compensate affected customers, then these loyal customers can become very unhappy.

Some businesses choose value-added strategies, like frequent flyer programs, and intentionally neglect value-recovery strategies. They rationalize the unhappiness these policies create, explaining to themselves that the benefit of one should balance the penalty of the other. Unfortunately, Ms. Dube's research revealed a different pattern.

In her experiments, customers experiencing a service breakdown with a company that provided both value-recovery and value-added strategies were so much more satisfied and loyal, that Ms. Dube recognized this as a genuine business opportunity for anyone wishing to follow both of these practices.

In plain language, if your business offers only value-added strategies to benefit loyal customers, then you're very vulnerable. And if you offer only value-recovery strategies, like guarantees, then you're vulnerable, too. The best approach is to offer both strategies, but if you must choose between the two, it is far safer to offer value-recovery strategies.

Reference: Dube, Laurette and Manfred Maute (1998) Defensive Strategies for Managing Satisfaction and Loyalty in the Service Industry. Psychology and Marketing, 15(8), 775-791.

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