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  1. 1. Journal of Marketing Management, 2006,22, 245-2660yvind Helgesen^ Are Loyal Customers Profitable? Customer Satisfaction^ Customer (Action) Loyalty and Customer Profitability at the Individual Level Customer loyalty is supposed to be positively related to profitability. The link between satisfaction, loyalty and profitability is perceived to be so self-evident that tlte relationship often is taken for granted. Nevertheless, only a fezo studies have examined this fundamental relationship. Here the focus is on the individual customer with respect to the links between customer satisfaction, customer (action) loyalty and customer profitability. Tlie following hypotheses are tested; HI: The moreAalesund University College satisfied a customer tends to be, the higher is the loyalty of the customer; H2: Tlie more loyal a customer tends to be, tlie higher customer profitability is obtained. As expected, the results provide strong support for the hypotheses. However, the relationships between the variables seem to he non-linear (increasingly dmonward sloping), and only valid beyond certain levels or thresholds. Besides, the explanatory powers of the individual variables are rather law.Keywords: customer relationship orientation, customer satisfaction,customer loyalty, customer profitability, satisfaction-profit chain .^IntroductionCustomer profitability is supposed to be positively related to customerloyalty and customer satisfaction. This link between customer satisfactionand profitability forms the cornerstone of the marketing concept. And thelesson is that firms should be striving to meet the customers needs, desiresand requests. Thus, according to this way of thinking, the companies that areable to increase the satisfaction of the customers can in the long term expect a1 Correspondence: 0yvind Helgesen, Ho^kolen i Alesimd, Institutt for IntemasjonalMarkedsf0ring (IIM), 6025 Alesund, Norway, Telephone: ++ 70 16 12 18, E-mail:oh@lnals.noISSN0267-257X/2006/3-4/00245 + 21 £8.00/0 ©Westbum Publishers Ltd.
  2. 2. 246 0yvind Helgesenpositive effect on the firms profitability (e.g. Felton 1959; Ames 1970;Bagozzi 1975; Gr0nroos 1990). The positive relationship between satisfaction and profitability isperceived to be so self-evident that it is taken for granted by many.Consequently this understanding may be called "the paradigm of customersatisfaction". In spite of the fact that this understanding has gainedpopularity, the reality is that only a few studies have been analyzing thisfundamental link. Thus evidence for this "much talked about relationship" isquestioned (Foster and Gupta 1994; Oliver 1996; Zeithaml 2000). The purpose of this article is to offer some evidence for this "satisfaction-profit chain" (Anderson and Mittal 2000). The focus is the relationshipsbetween customer satisfaction, customer loyalty and customer profitability atthe individual customer level. The context is the order-handling industry:four Norwegian exporters of fish products and their customers. This industryis suitable as context for this study, cf. the discussion below.Literature ReviewIn a market-oriented business one is concemed with the satisfaction of boththe customers and the firm. The customers are in general believed to besatisfied when the offered products meet their needs, desires and requests.The firm is satisfied when exchanges result in profitability. This duality hasbeen called attention to in many publications since the marketing conceptcame into use at the end of the 1940s. Nevertheless, the implementation ofthe marketing concept has been rather heavily focused on the customersneeds. Very few firms have knowledge of the costs incurred and theprofitability obtained by exchanges (e.g. Shapiro et al. 1987; Howell andSoucy 1990; Foster et al. 1996; SOderlund 1997). However, there has been a growing interest in market-orientedmanagerial accounting (e.g. Ratnatunga et al. 1988; Ward 1992; Foster andGupta 1994; Best 2005). But only some attention has been directed tocustomer accounting and customer profitability analysis (e.g. Anandarajanand Christopher 1987; Storbacka 1995; Ittner and Larcker 1998; Cooper andKaplan 1999). On the other hand, within the marketing literature a lot ofeffort has been made to prove the excellence of the marketing concept (Farrel2002). These studies may be perceived as originating from different kinds ofmarketing literatures that can broadly be divided into two main groups: (1)market orientation and (2) customer relationship orientation. According to the first group of approaches, customer responses areperceived as only one set of consequences of the market orientation by afirm. Two other sets of consequences are employee responses and businessperformances (Kohli and Jaworski 1990, 1993). Various models and contexts
  3. 3. Are Loyal Customers Profitable? 247have been used in an attempt to prove the superiority of the marketingconcept (e.g. Narver and Slater 1990; Jaworski and Kohli 1993; Farrel 2002).However, these empirical studies are not analyzing relationships at thecustomer level. Since this level of analysis represents the most important areaof the other main group of approaches, the rest of this article is based on thisliterature. Customer relationship orientation is based on conceptions about positivecause- and effect relationships between the following main variables: (1)antecedents of customer satisfaction, (2) customer satisfaction, (3) customerloyalty, and (4) customer profitability (e.g. Reichheld and Sasser 1990;Anderson and Mittel 2000). Some of the models that have been used, haveincluded other relationships, concepts, antecedents, intermediary variables,etc. (e.g. Zeithaml 1988; Oliver 1996). The focus of this article is on the mainconcepts.Relationship no. 1: Antecedents of Customer Satisfaction -* CustomerSatisfactionThe concept of customer satisfaction has for years formed the cornerstone ofthe marketing concept (e.g. Drucker 1954; Levitt 1960; Houston 1986;Gr(^nroos 1990). Thus, measurements and analyses of customer satisfactionand its antecedents are not new phenomena. A lot of studies have beencarried out. To explain variations in customer satisfaction several antecedentscan be taken Into consideration, for example price, quality, service,expectations, etc. (e.g. Hausknecht 1990; Myers 1991; Oliver 1996; Szymanskiand Henard 2001). However, during the last decade customer satisfaction has received a lotmore attention than earlier. The reasons are many, but some can be linked tothe increased attention concerning total quality management and nationalquality awards (e.g. Garvin 1991; Heaphy and Gruska 1995; Hayes 1997). Theimplementation of national customer satisfaction barometers may be anotherreason (e.g. Fornell 1992; Johnson et al. 2001). In addition to analysis ofcustomer satisfaction and its antecedents, these approaches are also focusingon effects of customer satisfaction.Relationship no. 2: Customer Satisfaction —*• Customer Loyalty .When judging candidates for quality awards, customer satisfaction resultsalong with activities and programs concerning customers and markets countfor a corisiderable part of the amount of points that can be obtained (about20%). Some of the criteria are related to the consequences of customersatisfaction. The main consequence is by many perceived to be customer
  4. 4. 248 0yvind Helgesenloyalty. Thus, the similarity with the national customer satisfactionbarometers is striking. An interesting example is the American CustomerSatisfaction Index (ACSI) (Fomell et al. 1996). This model consists of sixlatent variables (customer expectations, perceived quality, perceived value,overall customer satisfaction, customer complaints and customer loyalty).Concerning customer loyalty Fomel et al. writes the following: "Loyalty is the ultimate dependent variable in the model because of its value as a proxy for profitability (Reich-held and Sasser 1990)" (Fornell et al. 1996, p. 9).However, linking these important relationships to only one study is at leastdisquieting. Taking into account the large amounts of money that is spent onvarious analyses of customer satisfaction, on the various national customerindexes or barometers, and on total quality meinagement, there ought to bemore publications that are proving a positive relationship between loyaltyand profitability.Relationship no. 3: Customer Loyalty — Customer Profitability *In a comprehensive analysis of publications for the period 1921-1987 Caponet al. (1990) identified 320 empirical studies whose principal aim was to findfactors or variables that could explain variations in business performance.Customer satisfaction or behavioural effects of customer satisfaction were notutilised as explanatory variables in anyone of these studies. Later on some studies have been carried out. However, in some of thesestudies the measures of financial performances are on the business-level andnot on the customer-level (e.g. Anderson et al. 1994; Hallowell 1995; Ittnerand Larcker 1998; Yeung and Ennew 2000; Bernhardt et al. 2000; Yeung et al.2002). In other studies the focus has been mainly on customer equity (e.g.Blattberg and Deighton 1996; Berger and Nasr 1998; Anderson et al. 2004), ormainly on customer profitability and not on the other main concepts ofcustomer orientation (e.g. Shapiro et al. 1987; Howell and Soucy 1990;Storbacka 1995; Foster et al. 1996; Niraj et al. 2001; Reinartz et al. 2005).Consequently, only a few studies have been focusing on the customer-level(e.g. Reichheld and Sasser 1990; Soderlund and Vilgon 1995; Page et al. 1996).However, SOderlund and Vilgon do not find support for a positiverelationship between customer loyalty and customer profitability. On theother hand, Reichheld and Sasser and Page et al. are not preoccupied with allthe main concepts of customer relationship orientation. Besides, they do notoffer any solid (scientific) evidence for their findings. Thus most of thestudies dealing with relationship no. 3 are mainly based on the firm level or
  5. 5. Are Loyal Customers Profitable? 249business-unit level data and not on data of the individual customer-level.Problems and HypothesesIn this article the attention is directed to the last two relationships treatedabove. And the problems that we are dealing with may be summarised asfollows: Does customer loyalty in-crease with increasing customersatisfaction (is there a positive relationship)? Does customer profitabilityincrease with increasing customer loyalty (is there a positive relationship)? Since the composition of the set of data is cross-sectional, only correlationanalyses are carried through, which imply that the following hypotheses aregoing to be tested: HI: The more satisfied a customer tends to be, the higher is the loyalty of the customer. H2: The more loyal a customer tends to be, the higher customer profitability is obtained.Research Design, Research Methods and MeasurementsIn order to test the formulated hypotheses there is a need for empirical data,and in this study Norwegian exporters of klipfish and frozen fish are chosenas a context. These types of products are based on groundfish as rawmaterial. This part of the Norwegian fishing industry is amongst other thingscharacterized by almost worldwide export activities orientated towardsvarious product markets (geographical areas). In each of these productmarkets a lot of actors participate both on the buyer side and the seller side.The products that are offered for sale may be perceived as generic and oftenthe Norwegian exporters are delivering products from more than oneproducer. Usually, the importers buy products from several exporters thatare often located in different countries. This industry is suitable as a contextfor the study, cf. the cost structure discussed below. The empirical data are collected from four Norwegian exporters and theircustomers. Two of the companies in the sample are exporting klipfish whilethe other two are exporting frozen fish/filets. Information has been collectedby two means: Customer accounts (order accounts) and profitability analysis based on accounting information from the four exporting companies. Market surveys (measurements of customer satisfaction, etc.) among the customers of the four Norwegian exporters.
  6. 6. 250 0yvind HelgesenCustomer Profitability Accounting — Customer Profitability r-^!Establishing reliable profitability figures of customer accounts is notstraightforward. For in-stance can descriptive images of customerprofitability be established by using different estimation methods: (1) fullcosting (the absorption method), (2) variable costing (the contribution marginmethod), or (3) activity based costing (the "hierarchy-metiiod"). Thesemethods will of course tend to result in different designs of the specifiedaccounts. However, the most important aspect to remember is that differentapproaches result in different estimates of customer profitability. Here theABC-approach is used. Costs related to Business unit Cost driver business unit Market costs Market Cost driver Customer costs Customer Cost driver Revenue (price) Order costs Cost driverFigure 1. Market Hierarchy for Order-Handling Marketing CompaniesFigure 1 shows the market hierarchy chosen and illustrates the assignment ofcosts to the different levels. It also reflects the chosen market-orientedaccounting framework. Costs are assigned to the level where they areincurred (orders, customers, markets, etc.). All the revenues are related tothe order level. The costs of the orders are subtracted from the revenues fromorders. In this way the results can be estimated for each order. Thenrevenues and costs from orders are trarsferred to the customer level. Thecustomer result for a given period is the aggregate revenues from ordersrelated to the actual customer less the aggregate costs related to the orders aswell as the costs related to the customer. Analogously the market result andthe result of the strategic business unit for a given period are estimated. This
  7. 7. Are Loyal Customers Profitable? 251approach^ is consistent with the ABC-approach and the Nordic step analysis(Bjornenak 1994). The chosen context simplifies the assignment of costs because the productcosts of the exporting companies are easily found from the invoices receivedfrom the producers^ and all the other costs of the exporters are different sortsof marketing costs. Of course, all the accounts and all the vouchers still hadto be thoroughly revised, ln this way about 98.5 % of the total costs weretraced and assigned directly to the costs objects of the various levels of themarket hierarchy. Thus, only 1.5 % of the costs (indirect costs) had to beaccumulated into cost pools and allocated to the various cost objectsaccording to the ABC-approach. Table 1 shows the lay-out of the customer account report, i.e. the mainitems (cost groups), as well as the averages of the customer accounts of thesample (n=71), and table 2 shows descriptive statistics for important items ofthe customer accounts. Items resulting in reductions of the sales revenues(quantity discounts, bonuses, etc.) are very moderate in this industry. Directproduct costs have a lot more to say, on the average representing about 91.4% of customer revenues. These costs consist of purchasing and packagingcosts, inward freights and brokers commissions. Direct marketing costsrelated to orders and customers represent about 6.5 % of customer revenues.These costs comprise sales and distribution costs (outward freights, transportassurances and agent commissions); losses and activities established in orderto reduce losses (losses on accounts receivables, costs related to creditinsurance, commercial letters of credit, etc.); post-sale service costs (training,support, complaints, etc.); the treatment of customers (travelling,representation, exhibitions, advertisements and advertising campaigns, etc.);other marketing costs (charges related to exportation, duties, taxes, etc.).Direct customer-related capital costs represent about 0.6 % and consist ofdiscounting costs, capital costs^, bank costs, etc. The remaining costs may betreated as indirect costs (fixed costs that are divisible) and allocated to thedifferent levels of the market hierarchy by way of ABC. Indirect costs related2 The approach is also consistent with propositions formulated by Kaplan, referred to inRobinson (1990). The principle abjective of Kaplans speech was related to product costs, butbe also touched on customer accounts and distribution channels: "Another way to look atoperating expenses focuses on customers and distribution channels. We can compute themargins earned by each customer or distribution channel by summing the product-levelmargins of the products sold to each customer or through each chaimel and than subtractingexpenses incurred for individual customers or chamiels. We need to find out what causesexpenses to vary and at what level of the organisation, but expenses need not and should notbe allocated below the level at which they are incurred" (Kaplan/Robinson 1990, p. 13).3 In addition to current costs one has to consider calculated costs. For instance, direct order-related capital costs often have to be estimated so that the costs are corresponding with thereal credit time. But such kinds of problems are not typical for market-oriented accounting.Analogous problems are usually met in other fields of managerial accounting.
  8. 8. 252 0yvind HelgesenTable 1. Customer Accounts - Averages (n=71) - -, • NOK % Customer revenue (CR) 1 303 890 100.00 Customer revenue reductions 247 0.02 Net customer revenue 1303 643 99.98 Direct customer product costs 1191 621 91.39 Customer product margin (CPM) 112022 8.59 Direct order-related marketing costs 83 962 6.44 Direct customer-related marketing costs 460 0.04 Customer operating margin (COM) 27 600 2.11 Direct customer-related capital costs 7 567 0.57 Customer margin (CM) 20 033 1.54 Indirect order-related costs 8196 0.63 Indirect customer-related costs 1795 0.14 Customer profit (CP) 10 042 0.77Table 2. Descriptive Statistics for Important Items of the CustomerAccounts (n=71) Arithmetic Standard 10. 90.Absolute figures: mean deviation percentile percentileCustomer revenue (CR) 1 303 890 1 758 844 47 244 3 879 355Direct customer product costs 1 191 621 1 637 546 52 046 3 730 551Customer product margin (CPM) 112 022 137977 146 302 092Direct order-related marketing 83 962 121135 649 197 804costsCustomer operating margin 27600 54 354 -12052 100 252(COM)Direct customer-related capital 7567 18440 0 31415costsCustomer margin (CM) 20 033 46 294 -12 052 82 324Indirect order-related costs 8196 8 791 1588 17109Indirect customer-related costs 1795 2181 109 4 955Customer profit (CP) 10 042 46 513 -21 282 69101Relative figures:Direct customer product costs 91.39 4.37 85.89 96.07Customer product margin (CPM) 8.59 436 3.93 13.95Direct order-related marketing 6.44 2.99 3.83 10.60costsCustomer operating margin 2.11 3.70 -2.10 5.77(COM)Direct customer-related capital 0.57 0.97 0.00 2.33costsCustomer margin (CM) 1.54 3.41 -2.10 4.51Indirect order-related costs 0.63 0.92 0.10 1.30Indirect customer-related costs 0.14 0.33 0.01 0.38Customer profit (CP) 0.77 3.32 -2.68 2.71
  9. 9. Are Loyal Customers Profitable? 253to orders and customers represent about 0.8 % of customer revenues. Thus,on the average the customers are only marginally profitable. The direct andindirect costs related to the market level and the business level of the markethierarchy represent only about 0.5 % of the total costs. Nevertheless, theprofits of the businesses are rather modest. The rearrangement of the accounting figures was worked out in closecollaboration with the marketers, accountants and managers of the exportingcompanies. There was no disagreement concerning the results. The ordersincluded in the sample were selected at random in such a way that severalsucceeding orders were analysed in order to simplify the balancing work.The sample, representing about 2 % of the total Norwegian exports ofproducts from these lines of business, is analysed at the market level,comparing the four exporters mairket-revenue figures with the totalNorwegian export for these lines of business for the period underconsideration to each of the 36 geographical markets. The analysis shows astrong and significant correlation (r=0.804; p<0.001). In addition, the 20-25most important geographical markets for this part of the Norwegian fishingindustry are represented in the sample. Thus, it may at least be asserted thatthe sample is not non-representative of the population. Table 3 presents descriptive statistics for each of the customers for themain concepts of the customer relationship sample, i.e. customer satisfaction,customer loyalty and customer profitability for each individual customer ofthe sample. Relative customer results (customer revenues minus all directand indirect costs as a proportion of customer revenues) are used asmeasures of customer profitability. The average customer is unprofitable (-2.2 %), but the variation is rather high. It should be noted that even if theaverage customer is unprofitable, still the business unit is profitable, cf. table1. Note that the customer result of the average customer is not the same asthe average customer result. Of course, you have to take into considerationthat the customer revenues (volumes) do vary.Customer SurveyIn order to collect perceptual data to reveal the satisfaction of the customerswith the four Norwegian exporters, a questionnaire was distributed to thecustomers. The questionnaire was examined by experts, both business peopleand academicians, (face validity), pre-tested, then adjusted somewhat andsent to 244 customer. That includes all the customers* that had placed ordersduring the last year. In order to compensate for return postage a small gift (a* Cover letter and questionnaire was translated to English, French, Gennaxv Italian,Spanish and Portuguese.
  10. 10. 254 " • 0yvind HelgesenNorwegicin pin) was enclosed. Two reminders^ were sent in such a way that30 days passed between each mailing. 128 questionnaires were returned ofwhich 124 were usable. Thus the response rate was about 51 %.Customer SatisfactionThe customer satisfaction concept may be perceived and measured indifferent ways (Hausknecht 1990, Myers 1991, Ryan et al 1995, Oliver 1996).In this study customer satisfaction is measured by using two variables. Oneof these variables is used to express fulfillment and the other is used as astandard for comparison (Oliver 1996). For each statement or question in thequestiormaire a line with a length of 10 cm was presented, and therespondents were asked to simply put a mark (tick, point, etc.) on that linewhich was placed to the right of the question. The measure of customersatisfaction was found as the average of the two responses made. CronbachsAlpha has the value of 0.86. The two statements used to measure customer satisfaction are bothmeasured on an ordinal level. However, the chosen procedure ofmeasurement with a great number of response alternatives may justify thatthe analysis is carried out as if the variables are measured on an interval level(e.g. Asher 1983, Byrne 1998). Thus, customer satisfaction is perceived as acontinuous variable according to the common suppositions when doing suchan analysis. It appears that the average score of customer satisfaction is 67.9 but thevariation is high, cf. table 3. This satisfaction-level is common for foods (seee.g. Fierman 1995, various National Customer Barometers).Customer Loyalty (Action Loyalty)Customer loyalty may be related to various characterisations or phases(Oliver 1996): (1) cognitive loyalty, (2) affective loyalty, (3) conative loyalty,and (4) action loyalty. Thus, the concept may be perceived and measured indifferent ways (e.g. Hirschman 1970; Innis and La Londe 1994; Magi 1999).5 Each questionnaire was openly coded so that the reminders only were sent to thenon-respondents. But this procedure also made it possible to combine information insuch a way that the formulated hypotheses could be tested. In the cover letter theattention of the respondents were directed to the codes that were placed on the lastpage of the questionnaire. No remarks were made. Furthermore, all information hasbeen analysed and presented in such a way that answers are untraceable. It can withgood reason be asserted that questionnaires not were answered anonymously.However, in what other way should the information from the respondents then beobtained to match perceptual data with behavioural data for each customer in thesample?
  11. 11. Are Loyal Customers Profitable? 255Table 3. Descriptive Statistics for Customer Satisfaction, Customer Loyaltyand Customer Profitability (n=71) Arithmetic Standard 10 90 mean deviation percentile percentiJe Customer satisfaction 67.9 21.4 36.5 92.9 Customer loyalty 13.4 24.5 0.1 57.7 Customer profitability - -2.2 10.4 -11.1 4.7 relative figuresOften loyalty is equated with future behavioural intentions. However, I agreewith Olivia et al. (1992, p. 85) when the argumentation is that "an intention isonly a tentative measure of behavioural loyalty". Consequently, customerloyalty is measured as the share of the total purchases a customer buys froma particular supplier (given a particular product and a given particularperiod of time) (Peppers and Rogers 1995). In the survey the customers were questioned about their total purchasesin the line of business under consideration, i.e. both with respect to the totalvalue and the total number of orders. The total sales of the exporters to eachof the customers were found in the ledger of accounts for the debtors, i.e.both the total value and the total number of orders. Customer loyalty is thenestimated as the proportion of the value of purchases, i.e. an estimation of thecustomers action loyalty. It appears that the average proportion is 13.4 butthe variation is high, cf. table 3. In addition the proportion of numbers oforders placed with the exporter of the total number of orders with respect tothis line of business was calculated. The Pearsons correlation coefficientbetween this measure and customer (action) loyalty is strongly positive andstatistical significant (r=0.558, p<0.01; n=57) which gives support to theestimates of the shares of the customers.The Relationship Sample - Some Additional CommentsTable 3 presents descriptive statistics for the relationship sample consistingof 71 customers. Each existing sub-sample had a little higher number ofanswers than the relationship sample (profitability sample: n=176,satisfaction sample: n=116, loyalty sample: n=94). Comparing therelationship sample with each of the existing rest samples by way of t-testsdoes not reveal any significant differences (p<0.05). Thus, it may at least beasserted that the relationship sample is not non-representative of the totalsample of the study.
  12. 12. 256 0yvind HelgesenFindingsRegression analyses (OLS) are used to test the two hypotheses. In order tocomply with methodical requirements, two of the variables have to betransformed* before analyses are carried out. Such transformations result innon-linear relationships between the original variables. As a starting pointone has to take into consideration that such relationships are results of thetransformations and not consequences of suppositions that the relationshipsbetween the variables are non-linear. HI: The more satisfied a customer tends to be, the higher is the loyalty of the customerTable 4 presents the estimates of the regression coefficients and the t-values,etc. The regression model is significant at the 0.01-leveI. However, variationsin customer satisfaction explain only about 10 % of the variations of customerloyalty (repeat patronage). To explain the remaining part of the variationsone has to search for other explanatory variables.Table 4. Customer Satisfaction and Customer Loyalty at the CustomerLevel - Estimates of Regression Coefficients, etc. (n=71) Arithmetic Standard- Std. coeff. mean error beta Constant -0.528 0.544 -0.971 "Customer Satisfaction" 0.00027 0.001 0.318 2.786a a p<0,01Because of the transformations of the variables, the shape of the relationshipbetween the original variables is not easily seen. Based on the estimatesabove this relationship is therefore presented in figure 2. The correlationbetween the variables seems to be positive, but declining. Thus, it seems thatthe more satisfied a customer is, the more loyal the customer is. However, thedegree of correlation is degressive (the relationship is weakening gradually).The results do support the formulated hypothesis that "the more satisfied acustomer tends to be, the higher is the loyalty of the customer" (HI).• Two new variables are established. Customer satisfaction is squared, and for*customer loyalty the natural log-function is used.
  13. 13. Are Loyal Customers Profitable? 257 1,0 I—< I o a o O ,4 .2 a o ,1 O 0.0 50 55 60 65 70 75 80 85 90 95 100 Customer Satisfaction (0-100)Figure 2. Customer Satisfaction and Customer Loyalty at the CustomerLevel (n=71)The relationship may be interpreted as if the satisfaction level has to pass acertain threshold if it is going to have any "influence" on customer loyalty.This finding is in accordance with earlier studies (Paltschik and Storbacka1992; Keiningham et al. 1999; Anderson and Mittal 2000). Furthermore itseems that the relationship is degressive, which means that increasedcustomer satisfaction beyond the "zero-point" has a diminishing effect onincreased customer loyalty. This result is also in accordance with earlierstudies and theoretical reflections (Storbacka 1995; Ittner and Larcker 1998). H2: The more loyal a customer tends to be, the higher customer profitability is obtainedTable 5 presents the estimates of the regression coefficients and the t-values,etc. The model is significant at the 0.01-Ievel. However, variations incustomer loyalty explain only about 10 % of the variations of customerprofitability.
  14. 14. 258 0yvind HelgesenTable 5. Customer Loyalty and Customer Profitability at the CustomerLevel - Estimates of Regression Coefficients, etc. (n=71) Arithmetic Standard- Std. coeff. mean error beta t Constant -3.426 1.255 -2.730a "Customer loyalty" 1.540 0.539 0.325 2.856a a p<0,01Because of transformations the shape of the relationship between the originalvariables is not easily seen. Based on the estimates above this relationship ispresented in figure 3. The correlation between the variables seems to bepositive, but declining. This result provides support for the formulatedhypothesis that "the more loyal a customer tends to be, the higher is theobtained customer profitability" (H2). Customer Loyalty (Customer Share) (0-1,0)Figure 3. Customer Loyalty and Customer Profitability at the CustomerLevel (n=71)The relationship seems to be degressive, which indicates that increasedcustomer loyalty has a positive "effect" on customer profitability, but at adecreasing rate. Several arguments can be used to explain such a relationshipbetween the variables (e.g. Paltschik and Storbacka 1992; Rust and Zahodk1993; Anderson and al. 1994; Anderson and Mitte! 2000). According to the
  15. 15. Are Loyal Customers Profitable? 259estimates, customer loyalty has to be above a certain level in order to haveany "influence" on customer profitability.Discussion and Managerial ImplicationsThe findings above are in accordance with the marketing concept and thecustomer relation-ship orientation. There seems to be a positive relationshipbetween customer satisfaction and customer loyalty, and there also seems tobe a positive relationship between customer loyalty and customerprofitability. Thus, support is provided for the formulated hypotheses whichboth are in accordance with the basic theories of marketing (the marketingconcept). The two relationships under consideration are both found to be non-linear. Both the relationship between customer satisfaction and customerloyalty and the relationship between customer loyalty and customerprofitability seem to be positive at a declining rate. In addition, it seems thatthe anticipated independent variables have to pass a certain level in order tohave an impact on the anticipated dependent variables. It is probably of greatinterest for the managers to get further insight into these relationshipsincluding thresholds for the variables under consideration. According to the marketing concept, managers should be preoccupiedwith meeting the needs, desires and requests of customers in order toincrease their satisfaction. Consequently it is very important to reveal whichones of the antecedents of customer satisfaction that have the strongestimpact on customer satisfaction. Therefore questions related to variousantecedents are included in questionnaires when doing customer satisfactionsurveys. This link of the "satisfaction-profit chain" is not treated here.However the point to note is that the activities related to the achievement ofthe satisfaction of customers are not without costs. Therefore all the links ofthe relationship should be thoroughly analyzed, aiming at both highercustomer satisfaction (customer value) and higher customer profitability (customer equity) (see McNair et al. 2001).Limitations and Implications for Future ResearchThe sample of this study only consists of 71 respondents. Still, the number ofrespondents is satisfying in relation to the statistical methods used. Besides,the other respondents of the total sample are used to validate the resultspresented. Nevertheless, if the number of respondents had been higher, amore comprehensive analysis could have been carried out, that is an analysisthat simultaneously takes into consideration all levels and all variables of thefour links of the model of customer relationships. Even though this particular
  16. 16. 260 0yvind Helgesenlimitation does not have any effects concerning the statistical conclusivevalidity of the findings, it has an impact on the overall understanding of therelationships under consideration. Thus, more respondents could haveincreased the insight gained by the models, i.e. the relationships betweenantecedents of customer satisfaction, customer satisfaction, customer loyaltyand customer profitability. Besides, it should be emphasised that only one analysis with a contexttaken from order-handling industry which in this study is Norwegianexporters of fish products and their customers, may not be perceived assufficient for the documentation of this "much talked about relationship".Therefore more analyses should be carried out and published. With respect to profitability the marketing concept is founded on a long-term perspective. Thus, the analyses should be based on a time series desig^i£ind not on a cross-sectional design as presented in this paper. By collectingnecessary data over time various analyses of causes and effects may becarried out. And such analyses are prerequisites for maintaining the positivelinks between customer satisfaction and long-term profitability. The results show that variations in customer satisfaction only can explainabout 10 % of the variations of customer loyalty. Analogously, variations ofcustomer loyalty only can explain about 10 % of the variations of customerprofitability. Concerning the relationship between customer satisfaction andcustomer loyalty the degree of explication is rather low. However, it shouldbe noted that loyalty has been measured as action loyalty. Concerning therelationship between customer loyalty and customer profitability,comparisons are much more difficult to carry out for the reason that only afew studies exist and these studies are not based on customer accounts at theindividual customer level. However, the same degree of explication is foundin studies based on variables on the business-level (see e.g. Ittner and Larcker1998; Yeung et al. 2000). Thus other variables also should be included in theresearch models.ConclusionCustomer relationship orientation is based on conceptions about positivecause- and effect relationships between the following main variables: (1)antecedents of customer satisfaction, (2) customer satisfaction, (3) customerloyalty, and (4) customer profitability. Even if the number of customerrelationship oriented studies has increased enormously during the lastdecade, the attention has for the most part been devoted to concepts andrelationships which may explain variations in customer loyalty. Only a fewstudies are considering consequences of customer satisfaction and customerloyalty on profitability. Furthermore, the few publications that exist are for
  17. 17. Are Loyal Customers Profitable? 261the most part preoccupied with analyses of customer bases and are usingmeasures of average costs related to the customers when estimatingcustomer profitability. In this paper the last two relationships have been analyzed at theindividual customer level. Positive links have been found between thevariables, but in such a way that the relationships seem to have degressiveshapes. Thus, there seems to be a positive relationship between customersatisfaction and customer loyalty, and there also seems to be a positiverelationship between customer loyalty and customer profitability. Takinginto consideration the statistical conclusive validity of the findings, it may bemaintained that the study has put forward evidence for the "much talkedabout relationship", i.e. "the customer satisfaction paradigm" which formsthe cornerstone of the marketing concept. But, as underlined earlier, morestudies are highly recommended.ReferencesAmes, B. Charles (1970), "Trappings vs. Substance in industrial marketing". Harvard Business Review, July/August, pp.93-102Anandarajan, Asokan and Christopher, Martin (1987), "A Mission Approach to Customer Profitability Analysis", International journal of Physical Distribution & Materials Management, Vol. 17, (7), pp.55-68Anderson, Eugene W., Fomell, Claes and Lehmann, Donald R. (1994), "Customer Satisfaction, Market Share, and Profitability: Findings From Sweden", journal of Marketing, Vol. 58, pp.53~66Anderson, Eugene W., Fomell, Claes and Mazvancheryl, Sanal K. (2004), "Customer Satisfaction and Shareholder Value", journal of Marketing, Vol. 68, October, pp.172-185Anderson, Eugene W. and Mittal, Vikas (2000), "Strengthening the Satisfaction-Profit Chain", journal of Service Research, Vol. 3, (2), pp.107-120Asher, Herbert B. (1983), Causal Modeling, 2"^ Ed., Sage PublicationsBagozzi, Richard P. (1975), "Marketing as Exchange", journal of Marketing, Vol. 39, October, pp.32-39Berger, Paul D. and Nasr, Nada I. (1998), "Customer Lifetime Value: Marketing Models and Applications", journal of Interactive Marketing, Vol. 12, (1), pp.17-30Bemhardt, Kenneth L., Donthu, Naveen and Kennett, Pamela A. (2000), "A Longitudinal Analysis of Satisfaction and Profitability", journal of Business Research, Vol. 47, (2), pp.161-171Best, Roger J. (2005), Market-Based Management. Strategies for Growing Customer Value and Profitability, 4*^ (Internatioiwl) Ed., Pearson Prentice Hall
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  22. 22. 266 • 0yvind Helgesenrelated to customer issues. His teaching, working and research activities arerelated to marketing and management accounting (corporate strategy,international marketing, market research, CRM, etc.). He likes to have onefoot in the economic life and the other in the academic life. . i I