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 Riaz
MBP 9138
Finance
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.

3
 Table of Contents
Chapter 1 Introduction & Background
1.1 Introduction & Background-------------------------------------------------------------------------------8
1.2 Significance of Study----------------------------------------------------------------------------------------9
1.3 Objective of the Study-------------------------------------------------------------------------------------10
1.4 Purpose of the Study---------------------------------------------------------------------------------------11
1.5 Hypothesis---------------------------------------------------------------------------------------------12
1.6 Theoretical Framework------------------------------------------------------------------------------12
1.6.1 Customer Retention----------------------------------------------------------------------------12
1.6.2 Service Quality---------------------------------------------------------------------------------15
1.6.3 Product Quality---------------------------------------------------------------------------------15
16.4 Price----------------------------------------------------------------------------------------------16
16.5 Customer Satisfaction--------------------------------------------------------------------------17
16.6 Switching Barriers------------------------------------------------------------------------------17
1.7 Conceptual framework---------------------------------------------------------------------------------18
1.8 Structure of the Thesis---------------------------------------------------------------------------------19

Chapter 2 Literature Review

2.1 Introduction---------------------------------------------------------------------------------------------20
2.2 Literature Flow Diagram------------------------------------------------------------------------------20
2.3 Literature review-------------------------------------------------------------------------------------21
2.3.1 Customer Retention---------------------------------------------------------------------21
2.3.2 Service Quality link with customer retention----------------------------------------28
2.3.3Product Quality link with customer retention-----------------------------------------52
2.3.4 Price link with customer retention-----------------------------------------------------54
2.3.5 Customer Satisfaction link with customer retention---------------------------------58
2.3.5 Switching barriers link with customer retention--------------------------------------74
2.3.6 Conclusion----------------------------------------------------------------------------------77

Chapter 3 Methodology
3.1 Introduction----------------------------------------------------------------------------------------------79
3.2Paradigm----------------------------------------------------------------------------------------------------80
3.3 Research Approach----------------------------------------------------------------------------------------81
3.4 Research Design-------------------------------------------------------------------------------------------84
3.5 Research Site-----------------------------------------------------------------------------------------------85
3.6 Population --------------------------------------------------------------------------------------------------85
3.6.1 Sample Unit-----------------------------------------------------------------------------------------------85
3.6.2 Sample Size -----------------------------------------------------------------------------------------------85
3.6.3 Sampling Procedure---------------------------------------------------------------------------------------85
3.6.4 Instruments--------------------------------------------------------------------------------------------------85
3.7 Strategy of inquiry--------------------------------------------------------------------------------------------86
3.8 Methods
3.8.1 Data collection method------------------------------------------------------------------------------------86
3.8.1 Contact Method---------------------------------------------------------------------------------------------86
3.9 Validity/Reliability--------------------------------------------------------------------------------------------86
3.10 Analysis-------------------------------------------------------------------------------------------------------86

Chapter 4 Analysis and Results

4.1 Introduction------------------------------------------------------------------------------------------------------88
4.2 Analysis-----------------------------------------------------------------------------------------------------------88
4.3 Discussion--------------------------------------------------------------------------------------------------------96
4.4 Conclusion-------------------------------------------------------------------------------------------------------97
45 Overall Conclusion----------------------------------------------------------------------------------------------98

4
 ACROYMS

QP Quality of Product

SQ Service Quality

PS Price Stability

CS Customer Satisfaction

SB Switching Barrier

CR Customer Retention

5
 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 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
7
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

8
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 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.

9
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.

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

10
 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.

 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.

11
  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

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:

12
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:

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.

13
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
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

14
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

15
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 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

16
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.

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

17
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 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

18
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.

19
 1.7 Conceptual framework

Product Quality

Price

Customer Retention

Service Quality

Customer Satisfaction

Switching Barriers

20
 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

General
Discussion

Relationshi Relationshi Relationship

Relationship Relationship
p between p between between
between between
Product Customer Switching
Service price and
Quality and Satisfaction Barriers
Quality and Customer
Customer and and
Customer Retention
Retention Customer Customer
Retention
Retention Retention

Summary

21
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.

22
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 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.

23
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 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),

24
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 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;

25
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 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

26
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 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

27
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

28
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 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).

29
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 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’

30
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).

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

31
 • 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.

(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

32
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 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

33
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 ). 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,

34
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.

35
 • 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.

• 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

36
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 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).

37
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.

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

38
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)

39
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).

40
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 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

41
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
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.

42
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 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

43
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 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.

44
(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

45
customer satisfaction is an important factor for the customer retention but not a
sufficient (Anderson& Sullivan, 1993; Jones & Saaer, 1995; Jones et al., 2000).

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

46
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 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

47
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 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

48
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 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

49
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 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

50
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).

51
(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

52
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 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

53
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 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

54
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. 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.

55
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

56
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.

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

57
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.

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

58
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 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

59
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. 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 Site

We have conducted survey in Lahore city of Pakistan

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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 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

61
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.

62
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) +

63
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 Statistics
Table 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

64
deviation. In the above table minimum represents the lowest values and maximum
represents the highest values of variables. Mean is the 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.

65
Histogram
Price

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.

66
 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.

67
 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.

68
 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.

69
 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.

70
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.

71
 Relationship between Quality of Product and Customer Retention
Fig 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.

72
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.

73
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.

74
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.

75
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 Service Product Price Customer Switching

Retention Quality Quality Satisfaction Barriers

Customer Pearson 1 .039 .100 .113 .150 .354**

Retention Correlation

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

76
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 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:

77
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

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 R2 – Test
Model Summary

Adjusted R Std. Error of the

Model R R Square Square Estimate

1 .380a .144 .099 .45497

a. Predictors: (Constant), Switching Barriers, Customer

Satisfaction, Service Quality, Price, Product Quality

Interpretation:-

78
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).

79
F-test
ANOVAb

Sum of Mean
Model Squares Df 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.

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 Coefficientsa

Standardize
Unstandardized d
Coefficients Coefficients

Model B Std. Error Beta T Sig.

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
.111 .087 .122 1.271 .207
Satisfaction

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

81
the value of the value of switching barriers is .296 that show the average affects of
switching barriers on the customer 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

82
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 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.

83
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.

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

84
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 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”.

85
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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 statements

Strongly Agree =5, Agree=4, Neutral=3, Disagree=2, Strongly
Disagree=1

S.# Statement SA AG N DA SD
5 4 3 2 A
1

Customer Retention
Customer retention is important today’s
1.
business.
Decreasing customer defection leads to
2.
organizational profitability.
Retaining current customers is more cost
3.
effective than attracting new ones.
Service Quality
4. Service quality will retain the customer.

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 Higher levels of service quality are
5. associated with higher levels of customer
retention.
Better the customer service will be then
6.
better will be the customer retention
If the organization deliver excellent
7. customer service it affects the customer
retention.
Product Quality
8. Product quality will retain the customer.
Higher levels of product quality are
9. associated with higher levels of customer
retention.
If the quality of the product is not good it
10.
may affects the customer retention.
Price
Price is the factor which retain the
11.
customer.
Is this fact that price factor affect your
12.
choice.

Price changing is the reason to change the

13.
bank.

If price is stable and you will retain with the

14.
bank.
Customer Satisfaction
If customer is satisfied than retain with the
15.
bank.
High satisfaction with product performance
16.
and customer service.
Higher levels of customer satisfaction are
17. associated with higher level of customer
retention.
Switching Barriers
18. Switching barriers retain the Customers.
Higher levels of each switching cost are
19. associated with higher levels of the
switching barrier.

Contact information (optional)

Cell: ____________________________ Email: ______________________________

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