Professional Documents
Culture Documents
Customer Commitment.
Praveen K. Soni
California State University
David T. Wilson
The Pennsylvania State University
Michael O’Keeffe
Monash University
Praveen K. Soni
Caiifomia State University
David T. Wilson
The Pennsylvania State University
Michael OXeeffe
Monash University
The authors acknowledge the support of the Institute for the Study of Business Markets, The
Pennsylvania State University and the Agribusiness Research Unit, Monash University.
BEYOND CUSTOMER SATISF’ACTION: CUSTOMER COMMITMENT
Abstract
Using concepts drawn from the relationship literature we expand the concept that
customer satisfaction leads to customer retention. Customer commitment to remain is the
relationship is proposed as fkre oriented indicator of retention as retention is a historical
measure. The enriched model provides a better prediction of commitment than the simple
satisfaction models.
2
INTRODUCTION
Retaining customers is good for a firm’s economic health. Loyalty and customer retention can
have a direct influence upon profitability. For example, Bain & Co. has shown that a five-
point improvement in customer retention can Iead to an increase in profits from 25% to 80%
(Reichheld and Kenny 1990). The relationship between customer retention or loyalty has been
discussed by scholars for a number of years (see Cardozo 1965; Day 1977; Day and Landon
1977; Parasuraman, Zeithaml and Berry 1985; Bolton and Drew 1991 and Anderson, Forneil
and Lehmann 1994; Reichheld, 1996) as examples of this stream of research). CurrentIy,
although the concept of customer retention is applicable to alI types of businesses, banks and
tianciai firms seem to be in the forefront of studying the impact of retention on profits.
The research has mainIy focused upon the hancial impact of retention and the influence of
good things,” such as attitude change, repeat purchase, and brand loyalty.” (Churchill and
Suprenant 1982), lower costs of attracting new customers, (Fornell 1992) and lower costs of
handling returns and complaints (Crosby 1979; Garvin 1988). The central theme is that
customer satisfaction is the driver for retention. This satisfaction-retention relationship is likely
the case in many consumer markets, however, in business-to-business markets we will argue
Business-to-business transactions involve trust, investment, social bonds and structural bonds
that hold the parties together in a relationship. The overall satisfaction with the relationship
may not be high but so long as the product performance satisfaction is high the customer may
2
be retained. The goal of overall satisfaction is still important but in many business-to-business
markets the relationship between the parties is more complex than just a buying and selling
transaction.
We f&st examine the economic push for customer retention and then explore customer
We examine three models of customer commitment We begin with a simple model where
personal relationships between the firm and the customer and finally drawing upon the buyer-
seller relationship literature we develop a general model of customer retention. We test all of
these models using data from the study of a specific commitment problem of a business firm.
We conclude with a discussion of the results and implications for scholars and managers.
Economic Drivers
Payne and Richard (1993) estimate the impact of a 5% change in customer retention on
profits for a range of US businesses. They calculate and present graphical soiutions to
assumed customer retention situations which make a strong financial argument for customer
retention. Payne and Richard state, “Relationship marketing focuses on keeping customers and
buihiing a relationship with them, thus enhancing customer loyalty. It is now being
increasingly recognized that the greater the satisfaction the customer has with the firm and its
products, the more likely long term customer retention and improved profitability.”
The twin focuses of financial impact and customer satisfaction dominate the literature
(Reichheld and Kenny, 1990, DeSouza, 1992, Naumann and Shannon, 1992). Ainslie and Pitt
(1992) use demographic data in a customer data base to attempt to predict customer
retention Not surprisingly they did not do better than chance in predicting insurance policy
lapses. Rust and Zahorik (1993) develop a, “mathematical tiework for making
their model is the Iink between retention and satisfaction-dissatisfaction. They Iink the
discovery of the key loyalty factors to financial program to manage these factors. In a banking
environment this may a reasonable approach but we believe that it can be improved using
Carroll and Rose (1993) take an economic view of customer retention noting that all customers
do not generate value and suggest that fkancial institutions should focus retention strategies on
the v&e producing segment. Czepiel and Reddy (1992,1993) use the concepts of
attempted to predict future usage of bank setices using past usage, knowledge of the business,
bank seeks the business and price. Results of the model are mixed but they conclude that, “in
business-to-business settings, committed long term relationships between buyers and sellers
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
4
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 a later book (1996), Reichheld presents a number of economic examples of
the vaiue of customer retention over the customer life cycle. Profit from a customer increases
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
who defect say they were satisfied or very satisfied with their former supplier.”
We share this viewpoint that retention is far more complex than customer satisfaction
Customer Satisfaction
Customer satisfaction has been viewed both as transaction spectic satisfaction, which is the
post purchase evaluation of the match between expectations and actual performance (Oliver
1977,1980,1993), and cumulative satisfaction which reflects the overall evaluation based on
transactions over time and is the net sum of the customer experience with the seller (Fornell
1992, Anderson, Fomell and Lehmann 1994). Since business marketing generally involves
numerous transactions over time or a long complex buying process that seeks to reduce
uncertainty about expectations of performance we will use the overall measure of satisfaction
Customer satisfaction emerged from consumer studies that sought to quantify the basic
assumption implicate in the marketing concept that satisfied customers are more likely to have
5
a positive attitude towards the product and rebuy it Oliver (1980) conceptualized the process
and Ajzen 1975) leads to intention to buy. Purchase leads to negative disconfirmation when
the actual experience falls below the expected or positive d&or&nation when the actual
Satisfaction is seen to influence both attitude and intention. The expectation, perceived
performance disconErmation, leading to a level of satisfaction has been the main paradigm in
the product satisfaction literature. The service quality literature shares many of the same
constructs as the satisfaction literature (see Parasuraman, Zeithaml and Berry 1988; Boulding,
Kalra, Staelin and ZeithamlI993 for a discussion of these constructs). We use the service
quality notion of cumulative perceptions of multiple transactions as the measure for satisfaction
in this paper.
Anderson, Fomell and Lehmann (1994, page 54) state, “Whereas transaction-specific
satisfaction may provide specific diagnostic information about a particular product or service
encounter, cumulative satisfaction is a more fundamental indicator of the firm’s past, cuxrent
customer satisfaction” We share their view not only of the importance of cumulative
satisfaction but of the model being applicable to both product and service encounters.
MODELS OF RETENTION
The basic model of begins with the proposition that, “high customer satisfaction should
indicate increased loyalty for current customers” (Fomell and Lehmann 1994, page 55; Fomell
6
and Werner-felt 1987; Forneil 1992; Anderson). We interpret this proposition by making the
assumption that loyal customers are ones who are committed to stay in the relationship and
continue to purchase the setices of the partner firm. We specify the model as:
Retention = f (SATISFACTIONS)
Reicheid suggests that personal relationships between sales persons and customers contributes
to customer retention (1993). He states, “empIoyees who deal directly with customers day
after day have a powerful effect on customer loyalty” (p.68) This personal interaction develop
social bonds that help hold a relationship together. Mummalanenni and Wilson (1991) found
that sale persons who had good personal relationships with buyers were accorded second
chances whenlperformance on key items slipped We extend the basic model to incorporate
customer-seller social bonds. This extended model is depicted in figure 2 and is specified as
follows:
We believe that customer commitment in business markets is more complex than two
variables; customer satisfaction and social bonds. These two factors are important but there is
(1994) include a vector of factors such as environmental trends, Errn-specific fsctors, error etc.
as things that exert influence upon customer satisfaction. We believe these external factors may
modify the models of commitment, however we see commitment a function of a more complex
relationship between the parties in which satisfaction and social bonding are only part of the
total set of variables that lead to commitment to the relationship and customer retention.
Relationships are now an accepted part of the current marketing Iiterature. The early work in
relationships by such authors as the IMP Group (Hakansson, 1982), Wilson and
Mummalaneni, (1986), Heide and John, (1988), Dwyer Schurr and Oh, (1987), Anderson and
Narus (1984) and others is described in Wilson and Moller (1988). We draw heavily upon the
work of Han and Wilson (1993) and Wilson (19%) in building the commitment model.
Long term commitment of the part of the customer and the firm to maintaining the relationship
is the precursor t retention. The development of the mutual commitment is the same process as
situations where there is not intense personal component and high degree of personal
interaction that is present in many buyer-seller relationships. Such a more distant relationship
is the case in many banking relationships with the broad customer base. We believe that many
of the same relationship constructs are still important in situations where the parties have
distant interaction. We will develop the rationale for the general retention model presented in
figure 3.
Han and Wilson (1993) and Wilson (1995) use the concept of social and structural bonds to
describe the two main forces that hold a relationship together. Social bonds capture the
relationship in that they represent variables that endure beyond the individual relationship. For
example, ifthe partners connect their computer systems to exchange electronic data (EDI)
they have created a structural bond that makes terminating the relationship more difficult as
they will have to end this data interchange. Both parties have made an investment in the
system which may not be directly recoverable. Day to day operations may depend on the
It is possible to have a relationship that is based on social bonds ifmost competitors are equal
in performance and the transactions fairly simpie (Mummalaneni and Wilson, 1988, and
Czepiei and Reddy, 1993). However, most relationship have elements of the both structural
and social bonds. Social interaction is generally necessary to create the trust that precedes
9
The general model describes the basic elements of a relationship. There are likely unique
aspects of most relationships that need to be accounted for in modeling that relationship. Social
bonds reflect the quality of the relationship and the degree of trust that develops.
SOCIAL BONDS .
Trust
Trust or distrust has always been a part of business relationships. Trust has been measured
and described a number of ways ranging Corn a personality variable, (Rotter, 1967) to related
to relative power between the partners (Young and Wilkinson, 1989). We have taken a
sociological view that is expressed by Lewis and Weigert (1985) as, “trust is conceptualized
as a reciprocal orientation and interpretive assumption that is shared, has the rektionship as the
object and is symbolized through intentional action”. Trust is related to a partners perceptions
of the other partners abilities, knowledge, expertise, motives and intentions. It colors the
This variable measure the degree of the social interaction which may range from being a close
personal friend to a distant business relationship. Mummalaneni and Wilson (1991) in a study
cantrolling for the degree of structural bonding they found that there was little difference in
social bonding between individuals who saw their partner as a business fkiend or a close
personal fknd However, there was a difference in the positive actions a person would take
10
to support a business tiend versus the action she/he would take to support individuals who
were perceived to be more distant and formal business acquaintance. Both buyer and selIer
would take some risk to support fiends. Personal friendship and positive social interaction
STRUCTURALBONDS
Product/Service Performance
This is the heart of the exchange relationship as the product or service must perform well for
the relationship to continue. Customers cannot be retained if their h does not provide equal
or greater value than the competitors. Performance can be measured as customer satisfaction
Goal Compatibiiity
Goal compatibihty is the degree to which the partners share goals that can only be
accomplished through their continuing relationship. Ifthere a no shared goals it is easy for
either partner to defect from the relationship when a more am-active opportunity appears.
Many shared goals tends to hold the relationship together as the partners perceive the need for
The comparison level of the alternatives is derived from Thibaut and Keiley (1959) and
Anderson and Naurus (1984,199O) who introduce the concept of CL&r to the study of
relationships. The comparison level is the expected level of performance based upon the
11
person’s knowledge and experience of performance in similar situations. The comparison level
of the alternative is the level of performance that may be obtained by changing partners.
Structural bonding may inhibit changing reiationships even when the level of CL&-r is higher
than the partner’s performance because the cost of moving to a new relationship is very high.
CL&r has a negative effect on structural bonding meaning that better the alternative
Investments
(Williamson, 1975,1979) that are made to support the relationship. These irretrievable
investments tend to bond the relationship together as the cost of ending the relationship may be
Peer Pressure
Peer pressure represents the social pressure that may be place on person by their peers to
maintain the relationship even ifit is not meeting the individual’s needs because it may be
individuals who may experience dEerent levels of satisfaction with the relationship partner and
peer pressure tend to influence changes in the relationship. Peer pressure can have a positive
Commitment
12
Commitment is the degree to which a partner is committed to the continuance of the
relationship. It reflects a long term expectation that the relationship will continue. Retention of
dissatisfied with aspects of tie relationship but to continue to buy because there is no
The generaI relationship model described above is a richer model of customer retention than
is a post hoc measure whereas commitment predicts the future. Structural bonds may hold
customers even when they are not fully satisfied. The richer modei provides more insight into
The Grain Board until recently was the legislated outlet for aiI wheat grown in a large
agricuhu&y based country. The domestic market for grain has been deregulated which
means the Grain Board must now compete to retain growers as their customers. We had the
opportunity to test the model as part of a research study that Board conducted. The down side
of this opportunity is that we were limited in the number of questions we were allowed to add
to the Board’s questionnaire. This impacted our ability to measure some of the constructs at a
level that we would desire. ‘Ihe operationahzation of the variables reflects the nature of the
13
study. Appendix I provides independent and dependent variables and the corresponding
METHODOLOGY
The data was collected via structured telephone questionnaires administered to a total of 600
grain growers. The sample include 120 growers Corn each of five regions and was randomly
drawn Corn the Grain Board’s mailing list. The size of the farms ranged Corn 100 acres to
over 50,000 acres. These farms are small capital intense businesses. The distribution of farm
100-500 97
501-1000 159
1001-2000 172
2001-4000 119
400 l-6000 29
6000-50000 24
Total 600
The basic model (Figure 1) was tested using linear regression analysis with Satisfaction as the
independent variable, and Commitment as the dependent variable. The model was structured
aS:
14
Commitment = a + b * Satisfaction
We used a single composite measure for Satisfaction. The results of the analysis are shown in
Table 2. With an R2 of 17.4% the model is signifkant at the p=O.OOOl levei. The parameter
estimate for Satisfaction is positive and sign&ant in&&g that increasing Sdisfaction levels
The extended model depicted in Figure 2 was tested using both linear regression analysis and
structural equation analysis so as to provide a comparison with both the previous basic model,
and our more complex model. Satisfaction and Social Bonds were the independent variables
while Commitment was the dependent variable. The model was structured as follow&: .
Again, we used a single composite measure of Satisfaction for the regression anaiysis, but used
two separate measures of Satisfaction for the structural equation anaiysis. The results of the
regression analysis are shown in Table 3, whereas those of the structural equation analysis are
shown in Figure 4. With an R’ of 23.8%, the extended model is significant at the p=O.OOOl
level, and shows a gain of 6.4% over the basic model suggesting a better explanation and fit.
The parameter estimates for both Satisfaction and Social Bonds are positive and also
significant at the p=O.OOOl level. This means that increasing commitment rates are likely to
occur with an increase in Satisfaction levels and development of Social Bonds between buyers
and sellers. Satisfaction seems to be the stronger variable due to its higher parameter estimate,
but the positive correlation between Satisfaction and Social Bonds detracts from the results.
15
TABLE 3: Extended Commitment Model-Linear Regression Results
Parameter Standard
The structural equation analysis of the extended model yielded a &i-square of 0.27 with 1
degree of freedom. The adjusted goodness of fit index is 0.998, the root mean square residual
is 0.003, and the associated p vaiue is 0.606, all indicating a very good fit. The coefficients of
determination for independent and dependent measures are high and close to 1 .O. However,
the coefficient of determination for structural equations is a low 0.287 indicating a somewhat
weak structure. The weakness seems to stem from the inclusion of social bonds in the model.
Satisfaction has both a direct effect on Retention (Gamma - 1.017) and an indirect effect on
Commitment through its impact on Social Bonds (Gamma = 0.5). Social Bonds have a direct
effect on Commitment (Beta - 0.309). All parameter estimates are positive indicating increases
becomes obvious that Satisfaction has a greater impact on Commitment than does Social
bonds, but the signifkance of Social bonds should not be discounted as its presence serves to
16
A structural equation analysis (LISREL) of the entire sample was conducted to test the more
complex retention model depicted in Figure 3 using the constructs and measures appearing in
model for the constructs was obtained. This measurement model was then used to test the
complex model and to obtain a best fitting structural model. ‘The model presented in Figure 3,
though theoretically sound, did not pass muster empirically. Several other theoretical models
were then analyzed through the process of elimination and selection, and the best fitting
empirical model was then selected. This complete and equally complex commitment model is
depicted in Figure 5.
The model statistics of Chi-Square = 71.89, df- 56, p = 0.075, an adjusted goodness of fit
index of 0.969, and a root mean square residual of 0.027 indicate a very good fit between the
structure and the data The coefficients of determination for the independent and dependent
measures is 0.995, and for structural equations is 0.578 indicating a strong and better structure
than the extended model. As you may recall, the corresponding coefficient for the extended
model was 0.287. Other relevant model statistics such as error variances and squared multiple
correlations are all well behaved and signify a very good model. The parameter estimates and
the t-values are shown in the model itself. All relationships depicted in the model are
significant at the p < 0.01 level as indicated by their respective T-values, except for the
relationship between CLAlt and Structural bonds. The direct ef%cts between the constructs
are shown in the model itself (Figure 5), and their total effects are tabulated in Table 4.
17
TABLE 4: Our Model of Commitment-Total Effects
Independent Constructs
Information
constnlcts Bonds
Satisfaction 0.294
_-- .*..
Commitment 0.492 0.106 0.085 0.175
Social StUtd
FINDINGS
Four variables - Stnztural Bonds (Beta-0143 8), Social Bonds (Beta=O. 185), Satisfaction
(Beta-0.530) and Tnrst (Gamma~O.222) have a direct effect on Commitment, our ultimate
dependent construct. Trust and Satisfaction do have a dominant impact on Commitment due to
18
the presence of several indirect effects on Commitment that occur through the development of
Social and Stnrctural Bonds. This is evident both from Figure 5 and Table 4.
Tnrst has a direct effect on Commitment (Gamma=O.222) and indirectly impacts Commitment
through its effects on Satisfaction (Gamma=O.294), and the development of Sticm& Bonds
between businesses (Gamma=O.217). In fact, the total effect of Tnrst on Commitment (0.492)
is second only to the total effect of Satisjhion on Commitment (0.596). And Tnrst is
significantly correlated with Investment at 0.345. It seems reasonable to expect that customers
and suppliers are likely not to invest resources in a relationship and create structural bonds for
the long term unless an element of trust exists between them. The impact of T&t on
Satisfaction may likely be through the modification of expectations, in that, presence of trust
might reduce expectation, or at the very least color it by explaining low performance away by
some unavoidable circumstance. (I trust Company A is not likely to act in this manner without
good reason). An absence of trust might give far less leeway to a party than the presence of
Satisfaction has a direct impact on Commitment (Beta=O.448), and an indirect effect through
the creation of Social Bonds between business partners (Beta-0.530). It has the highest total
effect on Commitment (0.596). Since Social Bon& are the precursor to Stnrctuml Bonds
which then effects Commitment, the overall effect of satisfaction on Commibnent is greatly
amplified due to its role in the creation and development of both Social and Strtrchrral Bonds.
One can see how Satisfaction leads to Commitment through continuous meeting of customer
19
expectations resulting in an encouragement of repeat purchase behavior over time. But also
between ti so as to reduce both the time and cost associated with transacting business. This
is more likely to occur ifboth an element of Tnrst and satisfaction exists between businesses.
The development of Tnrst, satisfaction, and Social Bonds leads to a cementing of the
Strwctural Bonds. The direct and toti effect of Stnxtural Bonds on Commhent is pretty
high at a Beta of 0.438. Investments, Tnrst, and Social Bonds significantly determine the
formation of Structural Bonds. CLAlt also has an impact on the formation of Shvctural Bonds
but the relationship in this model is not significant. Peer Pressure also had no significant
impact on either Social or Stnrctural Bonds. We will deal with these results in the discussion
enhance confidence between business partners resulting in the development of deep Social
Bonds. And that is what we find in our model with a Gamma of 0.380. But Satisfaction with
the business partner is another significant determinant of Social Bonds at a Beta of 0.530.
DISCUSSION
The extended model provides the best description of how commitment is achieved. At it’s core
t
is customer satisfaction but in business markets just satisfying the customer is not enough to
retain the business. As one would predict from the literature, customer satisfaction had the
largest impact on commitment, however, trust also has a major impact on commitment. Trust
20
facilitates the development of the transaction specific investments in both assets and knowledge
that creates the structural bonds that hold the relationship together
Structural bonds hold the relationship together by creating aninertia that must be overcome if
one is to leave the relationship. It is a glue that bonds the Gnns together as it is usually easier
to solve problems between the buyer and seiler than to leave the relationship and give up the
It is obvious that the simple models where commitment is a function of satisfaction, which are
quite adequate for many consumer situations, do not provide the insights that modeling the
important in both consumer and business markets but trust may not be operational in many
consumer markets. Consumers have long experience with many brands and trust is latent (see
Wilson, 1995) and does not enter the decision process. We take trust for granted in many
consumer situations. There are consumer markets that have strong business markets overtones
such as buying a car, new or used, that would fit modeling commitment as a relationship
process. It is said that the sales person sells the first car to the customer and the service
department determines future sales. Trust and personal reIationships are important in
developing committed customers in markets where individual action can impact the outcome of
a purchase.
We believe that commitment leads to retention. One can only measure retention historically
complex process which goes way beyond satisfaction as it is generally measured This study
21
LIhRI’ATIONS AND EXTENSIONS
a number of other studies use summary measure we believe a broader measure of satisfaction
will be useM. We have tried to address this weakness in a study which is now in the field. A
more comprehensive measure of satisfaction has been developed which will allow us to test
the relationship between the overall measure of satisfaction and a more complex measure.
We were severely limited by the number of questions that we could place on the questionnaire.
We made the choice to participate as having some data is better than none and the issue we
The research subjects are not typical business although they have the same problems as most
relationship process will be support in more traditional businesses. We expect to test this in the
fiture.
22
mre 1: Basic Commitment Model
Q9=19A+Q9C 4
Retention = a + b * Satisfaction
Q9=19A+Q9C 4 b 41%
.
Eipure 3: Extended Commitment Model USREL RwW
(6.56)
0.208
* Q9A
(8.47)
0.273
4 Q9C
4
‘x 'X
mm V6Cb
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Appendix 1
constnlct
1. Commitment 413-4
point scale
2. Social Bonds 4136 I would like to strengthen my relationship with the Board. 5
point scale
3. Trust 413-3 The Boardhaseamedmytrust-IfeelthatIcantnrstthe
Board completely. 5 point scale
4. stluctural Bonds 416-l ~wouldbesomt~costsformetostopusingthe
Board as a marketing option. 5 point scale
Ql6-2 Switchingfiom using the Board to not using the Board
would be easy. 5 point scale
Qga Considering eve@@, how satisfied art you with the
overall performance ofthe Board? 4 point scale
Inthedomesticmarket,howsatisfieciareyouthatthe Board
Qgc is doing its best for the &mers? 4 point Scale
6. Information Communication Qll-1 Provides information on long term market trends. 4 point
scale
Ql l-2 Provides information on grain price movements. 4 point
scale
7. Investment Q19a Approximately what proportion of your grain production can
you store on your f&n? 5 point scale
What proportion can you store in seaIed storage? 5 point
Q19b scale
Q3b What is your main method of marketing grain? Check
alternatives
Q3c What is your preferred way of marketing grain? Check
alteInatives