Full Text Thesis

Three Dimensional Modelling of Customer Satisfaction,
Retention and Loyalty for Measuring Quality of Service
A thesis submitted for the degree of Doctor of Philosophy by
By
Vahid Pezeshki
School of Engineering and Design, Brunel University
March 2009
Vahid Pezeshki
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Abstract, Acknowledgments and Comments
PhD Abstract
The aim of this thesis is to propose a model that explains the relationship between
customer satisfaction, retention and loyalty based on service quality attributes. The three
elements of satisfaction, retention and loyalty towards products represent ongoing
challenges for the corporate financial performance. Customer behaviour analysis (known
as business intelligence or customer relationship management or customer experience
management) has become a major factor in the corporate decision making and strategic
planning processes. Prevailing logic dictates that by improving service attributes one
should expect better customer satisfaction levels. Consequently, improved satisfaction
levels should increase the probability of customer retention and degree of loyalty.
Substantial research work has been dedicated to explain the importance of customer
behaviour measurement for industry. However, there is little evidence that there has
been an overall integrating empirical research that relates the three elements of
satisfaction, retention and loyalty with respect to service quality attributes.
Empirical data collected from the UK mobile telecommunication for this research shows
that such an objective model that is capable of capturing this three dimensional
relationship will contribute towards more robust decision making and better strategic
planning. The proposed thesis extracts the data about key service attributes from a
combination of literature review, surveys, and interviews from the UK mobile
telecommunication industry. Responses were analysed using multiple regression,
regression analysis with dummy variables, logistic regression, logistic regression with
dummy variables and structural equation modelling (SEM) to test variables and their
interrelationships.
This study makes a step forward and contributes to the body of knowledge as it: (a)
highlights the role of service attribute performance towards customer satisfaction,
consequently identifies attributes that affect satisfaction and dissatisfaction of customers,
(b) maps the relationship between attribute importance and attribute performance, (c)
optimise resource allocation process using importance-performance analysis (IPA), (d)
classifies customers with respect to the role and length of relationship they have with the
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company (switching probability), and (e) describes the interrelationship between

customer satisfaction, retention and loyalty. The novelty of the research lies in: (a)
establishment of a framework that links service attribute performance to customer
satisfaction and then to customer future intentions (customer retention and customer
loyalty), and (b) provision of a model that could assist key decision makers in prudent
usage of resources for maximum profitability. This dissertation presents a novel
approach methodology and modelling construct for customer behaviour analysis. For
proof of concept it presents a case study in the mobile telecommunication industry.
It is worth noting that in this research work Customer Retention is interpreted as
probability of switching between service providers. Customer Loyalty is interpreted as
referral (word-of-mouth) activity by existing customers.
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ACKNOWLEDGEMENTS
In presenting this thesis I would like to acknowledge the assistance of several persons
for their support and influence during my own journey through this process.
Firstly, I would like to thank my supervisor Dr. Ali Mousavi for his enthusiastic support
and advice, patience and constant energy for idea sharing throughout the research effort.
His influence is inherited in both the theoretical and practical aspects of this work.
In terms of exchange of ideas, support, criticisms and intellectual stimulation, thanks are
offered to Prof Charles Dennis. Also, thanks to all my fellow PhD students and members
of academic staff in the School of Engineering and Design, Business School of Brunel
University: Ardalan Keyhan, Bander Al Sajjan, Vasiliki Mantzana, Mohammad Reza
Herfatmanesh, and Alexander Komashie. I owe special thanks to my family because of
their constant and invaluable support all along three years PhD carrier in the UK. I could
not have done it without you all!
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Declaration
This dissertation gives an account of the research undertaken by Vahid Pezeshki. Some
of the material displayed herein has already been published or is under review in the
form of the following publications:
Journal Paper
Published
[1] Pezeshki, V. and Mousavi, A. and Grant, S. (2009), Importance-performance

of service attributes and its impact on decision making in the mobile
telecommunication industry, Journal of Measuring Business Excellence, Vol.
13, No. 1, pp. 82-92..
[2] Pezeshki, V. and Mousavi, A. (2009), Measuring the importance of product
features and its implication in resource allocation, International Journal of
Advanced Manufacturing Technology (IJAMT), accepted.
Conference Papers
Published or Accepted for Publication
[1] Pezeshki, V., Mousavi, A. and Rakowski, R. (2005), Profitability through

Customer Relationship Marketing, International Computer and Industrial
Management (ICIM), Bangkok, Thailand.
[2] Pezeshki, V. and Mousavi, A. (2006), Exploring Sources of Profitability in
Customer Relationship Management (service industry), 2nd International
Conference on Business Management and Economics, Cesme, Turkey.
[3] Pezeshki, V. and Mousavi, A. (2008), Service attribute importance and
strategic planning: An empirical study, 6th International Conference on
Manufacturing Research (ICMR08), London, UK.
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Table of contents
CHAPTER 1: INTRODUCTION..................... 13
1. Research Background....
2. The Research Problem...................
3. The Context of Study.
4. Research Aim and Objectives...........
4.1 Aim..............
4.2 Objectives........
5. Research Methodology..........
6. Thesis Outline............
7. Chapter Conclusions......
Chapter References....
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CHAPTER 2: LITERATURE REVIEW... 22

1. The Evolution of Marketing......
2. The Measures Defining Customer Relationship....
2.1 The Customer Satisfaction-Retention-Loyalty Chain (SRLC)......
2.1.1 The Behavioural and Financial Consequences of Service Quality ......
2.1.2 Customer Satisfaction (CS) ..
2.1.3 Customer Retention (CR)..
2.1.4 Customer Loyalty (CL).....
3. Marketing or Business Intelligence.......
4. The Link between CRM and Database Marketing .......
5. Costumers as Decision Makers.
6. Customer Value.........
7. Customer Segmentation.............
8. Customer Activity Measurement...
9. Chapters Conclusions...
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CHAPTER 3: FOUNDATION OF MODEL DEVELOPMENT.
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1. Customer Relationship Management (CRM)....

2. The Relationship between Service Quality Attributes and Customer Satisfaction...
3. The Relationship between Attribute Performance and Importance..
4. The Relationship Between Customer Satisfaction and Future Intention...
4.1 Switching Costs.....
5. Length of Relationship
6. Testing the Conceptual Model (Service Quality-Customer Behavior).
7. Chapter Conclusions.
Chapter References.
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CHAPTER 4: RESEARCH METHOLODGY ...
73
1. Methods for Measuring Customer Satisfaction Factors....

1.1 Analysis of Complaints and Compliments....
1.2 Critical Incident Technique (CIT).............
1.3 Kanos Questionnaire........
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1.4 Importance Grid.

1.5 Regression Analysis with Dummy Variables (RADV).
2. Techniques for Measuring Service Attribute Importance....
2.1 Customer Self-stated Importance (Direct Method)...
2.2 Statistically Inferred Importance (Indirect Method)..
3. Analytical Methods...
3.1 Importance-Performance Analysis (IPA)..
4. Statistical Methods for Measuring the Relationship between Service Attribute
Performance and Customer Behaviours
4.1 Multiple Regression Analysis with Dummy Variables.
4.2 Binary Logistic Regression Analysis
4.3 Logistic Regression with Dummy Variables.
4.4 Structural Equation Modelling (SEM)..
5. Case Study: Mobile Telecommunication Services........
6. Data Collection and Research Instrument....
7. Chapter Conclusion...
Chapter References
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CHAPTER 5: DATA VALIDITY AND RELIABILITY..
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1. Reliability Analysis...
2. Exploratory Factor Analysis..
2.1 Factor Extraction....
2.2 Collinearity Test
3. Chapter Conclusion...
Chapter References
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CHAPTER 6: DATA ANALYSIS ...
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1. Measuring the Relationship between Service Attribute Performance and Customer

Satisfaction
2. Measuring the Relationship between Attribute Importance and
Performance...
2.1 Importance-Performance Analysis (IPA) .........
2.2 Attribute Importance as a Function of Attribute Performance .
3. Structural Equation Modeling (SEM).......
4. The Impact of Customer Satisfaction on Customer Switching Intention......
5. The Impact of Customer Satisfaction on Customer Switching Intention across
Different Customer Segments...
6. The Relationship between Customer Satisfactions, Length of Relationship, and
Customer Switching Intention..... .
7. The Relationship between Customer Satisfaction, Customer Switching Intention
(Retention) and Word of Mouth (Referral)...
8. The Relationship between Overall Satisfaction, Customer Switching Intention, and
Word-of-mouth across Different Segments
9. Chapter Conclusions ...................
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CHAPTER 7: CONCLUSIONS AND RECOMMENDATION FOR

FURTHER RESEARCH
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1. Summary of Thesis...
2. Meeting the Objectives of This Dissertation.....
3. Main Findings....
4. Statement of Contribution and Research Novelty.....
5. Research Limitations....
6. Further Research...................
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APPENDICES
APPENDIX A: Questionnaire Agenda .
180
ADDENDUM PUBLISHED PAPERS
185
Paper one
Paper Two
Paper Three
Paper Four
Paper Five
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List of Figures
Chapter One
Figure 1.1: A typical customer behaviour model.....
Figure 1.2: The behavioural consequences of service quality..
Figure 1.3: Dissertation outline.....
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Chapter Two
Figure 2.1: Marketing changes during the last decades....
Figure 2.2: The service quality-customer behaviours chain..
Figure 2.3: Service attributes performance customer satisfaction link......
Figure 2.4: S-shaped value function in prospect theory ...
Figure 2.5: The satisfaction-profit chain ..
Figure 2.6: From service quality to customer relationship profitability ...
Figure 2.7: Evolution of BI tools...
Figure 2.8: Use of database marketing..
Figure 2.9: Timeline of CRM evolution
Figure 2.10: Principals of LTV Calculation..
Figure 2.11: Costs and revenue relationship.
Figure 2.12: A customer pyramid with four revenue tiers....
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Chapter Three
Figure 3.1: CRM process...
Figure 3.2: Three factor theory of customer satisfaction..
Figure 3.3: Customer satisfaction retention link....
Figure 3.4: Service quality-customer behaviour model ...
Figure 3.5: Customer segmentation...
Figure 3.5: Conceptual model to study service quality-customer behaviour the in
mobile telecommunication industry..
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Chapter Four
Figure 4.1: An application of critical incident technique..
Figure 4.2: Kanos questionnaire..
Figure 4.3: The importance grid
Figure 4.4: Service quality attributes-customer satisfaction.
Figure 4.5: The three dimensions of attribute importance....
Figure 4.6: Traditional importance-performance analysis (IPA) grid...
Figure 4.7: Logistic regression and linear regression
Figure 4.8: Lengths of new mobile contract connections .
Figure 4.9: UK total outbound call volumes ........
Figure 4.10: Household spends on telecommunication services...
Figure 4.11: Real costs of a basket of residential telecoms services.....
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Chapter Five
Chapter Six
Figure 6.1: The asymmetric impact of attribute-level performance on overall
satisfaction.
Figure 6.2: The factor structure of customer satisfaction using regression analysis with
dummy variables...
Figure 6.3: Importance-performance analysis (IPA) matrix.....
Figure 6.4: Relationship between importance and performance...
Figure 6.5: IPA for dissatisfied customers
Figure 6.6: IPA for satisfied customers.
Figure 6.7: Structural equation modelling (SEM) analysis...
Figure 6.8: Predicted Probabilities of a customer switching.
Figure 6.9: Customer retention management....
Figure 6.10: Customer switching behaviour.....
Figure 6.11: The behavioural and financial consequences of service quality attributes...
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Chapter Seven
List of Tables
Chapter Two
Table 2.1: RM definitions..
Table 2.2: CRM definitions...
Table 2.3: Transaction approach and relationship approach.
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Chapter Three
Table 3.1: Empirical studies on the factor structure of customer satisfaction...
Table 3.2: Proposed Issues for further investigation.
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Chapter Four
Table 4.1: Distribution of answers for variables customer satisfaction, customer
loyalty, and customer retention.....
Table 4.2: Analytical and statistical methods........
Table 4.3: Summary of the research design......
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Chapter Five
Table 5.1: Reliability statistics......
Table 5.2: Item-total statistics...
Table 5.3: Item statistics
Table 5.4: Correlation matrix
Table 5.5: KMO and Bartletts test...
Table 5.6: Anti-image metrics..
Table 5.7: Total variance explained..
Table 5.8: communalities before and after extraction..
Table 5.9: Coefficients..
Table 5.10: Collinearity diagnostics......
Table 5.11: Correlations
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Chapter Six
Table 6.1: The customer satisfaction model statistics using regression with dummy
variables.
Table 6.2: An analysis of variance (ANOVA)..
Table 6.3: The model summary of service attributes classification using regression
analysis with dummy variables....
Table 6.4: The asymmetric impact of attribute performance on overall customer
satisfaction in negative and positive performance domains.
Table 6.5: Explicit importance ratings per each attribute and performance.
Table 6.6: Aggregate importance and performance scores of each attribute
Table 6.7: An analysis of variance (ANOVA)..
Table 6.8: linear estimates of the impact of attribute-level performance on overall
customer satisfaction.
Table 6.9: Proposed model fit statistics (SEM)...
Table 6.10: SEM regression results...
Table 6.11 (a): logistic regression estimates of the impact of overall customer
satisfaction on customer switching behaviour.......
Table 6.11 (b): Hosmer and Lemeshow Test........
Table 6.11 (c): Model summary....
Table 6.12: The impact of satisfaction-level on customer switching behaviour...
Table 6.13: Model Summary of customer satisfaction vs. customer switching
intention........
Table 6.14: Logistic regression estimates of customer switching behaviour across
different customer segments..
Table 6.15: Spending behaviour across different segments..
Table 6.16: The relationship between customer satisfaction and switching intention
across different segments......
Table 6.17: The impact of overall satisfaction and length of relationship on switching
intention (non-contractual customers) using logistic regression..........
intention (contractual customers) using logistic regression.
Table 6.19 (a): Descriptive Statistics of customer word of mouth behaviour model
Table 6.19 (b): word of mouth model...
Table 6.19: Model summary of customer word of mouth behaviour
Table 6.20: An analysis of variance (ANOVA)
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Table 6.21: The impact of overall satisfaction and switching intention on customer
referral (loyalty) using multiple regression analysis.....
Table 6.22: The impact of customer satisfaction, switching intention, length of
relationship on switching intention using multiple regression..
Table 6.23: Main findings.
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Chapter Seven
Table 7.1: Meeting the objectives of this dissertation...
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ABBREVIATIONS
Notation
Explanation
B2B
CEM
CFA
CIT
CL
CLV
CR
Business-to-Business
Customer experience management
Confirmatory Factor Analysis
Critical Incident Technique
Customer Loyalty
Customer Lifetime Value
Customer Retention
CRM
CS
IPA
KPIs
LNP
LTV
MI
ML
MR
NPV
RADV
ROI
SEM
SOW
SPSS
VIF
WOM
Customer Relationship Management

Customer Satisfaction
Importance-Performance Analysis
Key Performance Indicators
Local Number Probability
Lifetime Value
Marketing Intelligence
Maximum Likelihood
Multiple Regression
Net Present Value
Regression Analysis with Dummy Variables
Return on Investment
Structural Equation Modeling
Share-of-wallet
Statistical Package for the Social Sciences
Variance Influence Factor
Word-of-mouth
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Chapter 1: Introduction
1
CHAPTER 1
INTRODUCTION
1. Research Background
The aim of this thesis is to propose a mathematical model that explains the relationship
between customer satisfaction, retention and loyalty based on service attribute
performance in service industry. A case study in the UK mobile telecommunication is
presented for proof of concept. Having a good understanding of the three elements of
customer satisfaction, retention and loyalty towards service/product performance
represent ongoing challenges for the corporate financial gains and losses. Firms consider
enhanced customer relationships as a valuable asset to their core operation.
There has been considerable discussion about the impact of customer behaviour on
business performance in the marketing literature (Heskett et al., 1994; Nelson et al.,
1992; Rust and Zahorik, 1991; Storbacka et al., 1994), however, there has been little
empirical work that relates the three elements of customer satisfaction, retention and
loyalty based on service quality attributes. Reichheld and Sasser (1990) propose the
concept of service profit chain (SPC) which links service quality, customer behaviours
and profitability. The SPC concept argues that customer satisfaction is influenced by the
value of service quality, which in turn influences customer retention (repurchase and
cross-selling) and customer loyalty (word-of-mouth or referral). Consequently,
profitability is stimulated by customer retention and loyalty. The concept of service
quality would be well established in the marketing literature and several frameworks
have been developed (Parasuraman et al., 1988).
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Previous research found that there is a strong and positive relationship between service
quality attributes and customer satisfaction (Rust and Oliver, 1994; Fornel et al. 1996).
However, there is also little consensus among experts to explain the relationship
between service quality attributes and customer satisfaction.
Finding the critical service attributes that determine customer satisfaction and customer
dissatisfaction can lead firms to seek comprehensive strategies for achieving lasting
competitive advantage (Matzler et al., 2004). Moreover, customer satisfaction plays as
mediating attitude between service quality attributes and customer behaviours (retention
and loyalty). A typical customer behaviour model is shown in Figure 1.1. Customer
satisfaction may increase the retention of customers through repeated and increased
purchase (long-term relationship). Customer satisfaction may also positively affect
customer loyalty (word-of-mouth). The combination of improved customer retention and
loyalty may in turn increase profitability (Manrodt and Davis, 1993; Emerson and
Grimm, 1998).
Figure 1.1: A typical customer behaviour model
Service quality
attributes
Customer
satisfaction
Customer
retention
Customer
loyalty
The marketing literature on customer relationship or behaviour outlines potential

benefits available to customers and suppliers for their strategic management and
business performance. The literature calls for establishing relationships in order to build
trust and loyalty, develop long-term strategies, and to be pro-active to customer needs
(Fornell and Lehman, 1994; Anderson et al., 1999). Some of the existing empirical
studies seem to lack the necessary theoretical and analytical rigour, and this is seen as a
pressing requirement for future customer behaviour analysis (Matzler and Sauerwein,
2002).
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2. The Research Problem

There are four research questions that this thesis tries to answer.
1. How service quality attributes influence customer satisfaction?
2. What is the relationship between service attribute importance and service attribute
performance?
3. What role does customer satisfaction play between service quality attributes and
customer behaviours (retention and loyalty)?
4. How does the length of relationship affect customer future intentions such as retention
(switching probability) and loyalty (word-of-mouth)?
3. The Context of the Study

The framework of this research work is based on two elements; service quality attributes
(SQA) and customer behaviour (CB). The conceptualise model is shown in Figure 1.2.
The model evaluates service quality attributes from two perspectives: attribute
performance and attribute importance. Thus, it suggests that there is a dynamic
(asymmetric and non-linear) relationship between attribute performance and attribute
Figure 1.2: The behavioural consequences of service quality
Service Attribute
Classification
Service
Quality
Attributes
Basic
Overall Customer Satisfaction
Customer
retention
Customer
Dissatisfaction
Profitability
Performance
Exciting
Customer
Satisfaction
Customer
loyalty
importance. In other words, attribute importance is the function of attribute performance.

In the next step, a measure of the relationship between service quality attributes and
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customer satisfaction is proposed. The study also suggests a mechanism to clarify

service attributes based on their impact on customer satisfaction.
The research work attempts to prove that the relationship between service quality
attributes and overall customer satisfaction is non-linear and asymmetric. Finally, the
study estimates the relationship between customer satisfaction, retention and loyalty.
Such an approach to customer behaviour may help service providers to maximise
profitability more effectively and efficiently.
4. Research Aim and Objectives

4.1 Aim
To create a framework that estimates the relationship between service quality attributes,
customer satisfaction, retention and loyalty. To conduct customer segmentation in order
to identify the role and length of relationship in customer future intentions (word-ofmouth and switching probability).
4.2 Objectives
In order to meet the aim of this research work, the following objectives are pursued:
Objective 1:
To understand the notion of quality of service (QOS) and customer

satisfaction.
Objective 2:
To understand the relationship between service attribute importance

and performance and their impact on resource allocation.
Objective 3:
To establish a framework that links service attribute performance to

customer satisfaction and then to customer future intentions
(customer retention and customer loyalty).
Objective 4:
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To understand the impact of length of relationship on customer future

intention.
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5. Research Methodology
The research is descriptive and explanatory regarding the variables and constructs of
service quality, customer satisfaction, retention and loyalty. In order to achieve objective
1, the thesis reviews the marketing and management literature to understand the role of
customer behaviour in business environment. To achieve objective 2, the study focuses
on the growing body of theoretical and empirical knowledge of the relationships among
customer satisfaction, customer retention, customer loyalty and profitability. Objective 3
is achieved by extracting the data about key service attributes from a combination of
literature review, surveys and interviews through a case study. Questionnaires are
administered for data collection. Respondent data was analysed using different statistical
methods: multiple regression, regression analysis with dummy variables, logistic
regression, logistic regression with dummy variables and structural equation modelling
(SEM) to test variables and constructs. The study investigates these factors using mobile
telecommunication industry as an example. Finally, to achieve objective 4, provedisapproves analysis on the conceptual model is conducted through hypothesis testing.
6. Thesis Outline
The thesis is divided into two parts. In the first part an appraisal of existing literature is
conducted (Chapters 2 and 3). In the second part the proposed models are presented
(Chapters 4 to 6). In Chapter 7 conclusions of the thesis and its contributions are
discussed.
Chapter 2: Literature Review
In Chapter 2 the reviewed literature of analytical customer relationship management
(CRM) is discussed for the following purposes:
1. Decision making relating service quality attributes (business development)
2. Decision making relating customer future intentions based on service quality
attributes (switching intention and word-of-mouth)
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Chapter 3: Foundation of Model Development

In Chapter 3 the concept of customer behaviour modelling is introduced. This chapter
highlights the fact that there is no universal consensus about the relationship between
service quality attributes and customer behaviour.
Chapter 4: Research Methodology
Chapter 4 discusses the research approach and methods undertaken in this thesis. In this
chapter the details of main study that compromise the primary research components of
this thesis including research instruments, analytical tools, research samples and data
collection are discussed. As a result, various modelling techniques are proposed such as
multiple regression analysis, regression with dummy variables, logistic regression and
structural equation modelling (SEM) are selected to present the cause-effect
interrelationship between the factors of customer behaviour model.
Chapter 5: Data Validity and Reliability
Chapter 5 examines the empirical studies conducted to extract the key service quality
attributes, customer satisfaction, retention and loyalty in the UK telecommunication
industry. The study provides the framework and the evidence that relates service quality
attributes to customer satisfaction, customer retention and customer loyalty.
Chapter 6: Data Analysis
Chapter 6 provides data validation for the statistical methods employed in Chapter 5.
This chapter contains factors analysis and reliability analysis. Findings confirm the
validity and reliability of the proposed conceptualised model, and provide set of results.
Chapter 7: Conclusions and Recommendations for Further Research
This chapter presents a summary of the research conducted in this Thesis. The novel
contribution, as well as the conclusions derived from the findings will also be reported in
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this chapter. It highlights the limitations of this work, and discusses the potential for
further investigation.
7. Chapter Conclusion
This chapter provided a background to the outline of this thesis. It presented the research
context and set out the research questions. The outline of the thesis is presented in Figure
1.3.
Figure 1.3: Dissertation Outline
Introduction
Literature Review
Chapter 1
Identification of
Research Issues
Conceptual Model
Chapter 2
Chapter 3
Introduction to Research Problem

Research Aim
Research Objectives
Dissertation Outline
Customer Relationship Management
The Factors Driving the Customer
Relationship
The Satisfaction-Profit Chain (Figure
2.2)
Limitation of Customer Behavior
Model
Part A: Proposition of the Service
Attribute Classification (Figure 3.2)
Part B: Proposition of the Conceptual
Model for Behavioural Factors (Figure
3.10)
Identification of
Suitable Research
Strategy and Research
Methodology
Critical Analysis
Chapter 4
Research Approach
Philosophical Perspective
Research Strategy
Empirical Research Methodology
Research Protocol
Data Validity
Chapter 5
Empirical Research Data Collection

Empirical Research Data Analysis
Analysis of Empirical
Data
Chapter 6
Lessons Learnt
Revised Conceptual Model for
customer behaviour in the Mobile
Telecommunication
Chapter 7
Research Overview
Main Findings
Novel Contribution
Limitations
Further Research
Conclusions and Further

Research
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Chapter References
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Eklof, J.A., Hackle, P. and Westlund, A. (1999), On measuring interactions between customer
satisfaction and financial results, Total Quality Management, Vol. 10, pp. 514-522.
Emerson, C.J. and Grimm, C.M. (1998), The relative importance of logistics and marketing
customer service: A strategic perspective, Journal of business Logistics, Vol. 19, No. 1, pp. 1732.
Fornel, C., Johnson, M.D., Anderson, E.W., Cha, J. and Bryant, B.E. (1996), The American
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Loehlin, J.C. (1998), Latent variable models: an introduction to factor, path, and structural
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Manrodt, K.B. and Davis, F.W. (1993), The evolution to service response logistics,
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56-64.
Matzler, K., Bailom, F., Hinterhuber, H.H., Renzl, B. and Pichler, J. (2004), The asymmetric
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reconsideration of the importance-performance analysis, Industrial Marketing Management,
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Matzler, K. and Sauerwein, S. (2002), The factor structure of customer satisfaction: an
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Palmer, A. (1998), Principles of services marketing, Second Edition, McGraw-Hill, New
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Palmer, A. (1999), The role of selfishness in buyer-seller relationships, in Saren, M. and
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November, Glasgow, UK: University of Strathclyde, pp. 64-73.
Parasureman, A., Zeithaml, V.A. and Berry, L.L. (1998), SERVQUAL: a multiple item scale
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Reichheld, F.F. and Sasser, W.E (1990), Zero defections: quality comes to services, Harvard
Business Review, No. 68, pp. 105-111.
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Storbacka, K., Strandvic, T. and Gronroos, C. (1994), Managing customer relationships for
profit: the dynamics of relationship quality, International Journal of Service Industry
Management, Vol. 5, No. 5, pp. 21-38.
Rust, R.T. and Oliver, R.L. (1994), Service quality: new directions in theory and practice,
SAGE Publications, Inc, New York, pp. 1-19.
Rust, R.T. and Zahorik, A.J. (1991), The value of customer satisfaction, Working paper,
Vanderbilt University.
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2
CHAPTER 2
LITERATURE REVIEW
This chapter is a review and appraisal of the literature supporting the research objectives.
It examines the search dedicated to service quality and customer behaviours as a major
factor in the corporate decision making and strategic planning processes. The material in
this chapter focuses on relationship marketing and management science.
This chapter is organised into two sections. The first section deals with the history and
development of the concept of customer relationship. In the second section the customer
behavioral factors are discussed. Lastly, conclusions to this chapter are drawn.
1. The Evolution of Marketing

During the industrialisation era of the 1920s, the marketing theory pointed particularly to
mass marketing because of the nature of mass manufacturing and inception of mass
marketing use (radio). The concept continued to expand through the 40s and 50s. It gave
corporations an opportunity to approach a wide customer with different needs into
buying the same product. Mass manufacturing created a gap between firms and
customers. From the firms perspective, customisation was not economically viable and
did not promise greater profits. In addition, individual customer data was not available
and there was often very little to almost no interaction between the customer and the
firm. Moreover, firms were not open to customer-feedback. Therefore, there was a lack
of understanding about the customer service or their needs from the product apart from
functionality and durability.
Services marketing pioneers proposed the concept of relationship marketing as means to
narrow the gap between companies and their customers. Leonard Berry was the first
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scholar in services marketing who coined the phrase relationship marketing (Berry,
1983). However, the concept had been oriented towards how to acquire customers
(Storbacka et al., 1994). As a result, such relationships are not necessarily long term
relationships where profitability is the main goal of the relationship. The phrase became
popular in the late 1980s and early 1990s due to the shift of focus from customer
acquisition to customer retention (Morgan and Hunt, 1994; Sheth and Kellstadt, 2002).
By comparing relationship marketing (RM) with the traditional transaction marketing,
the following can be derived:
In RM the focus is not on service encounters or transactions.
RM is focused on retaining customers and enhancing the relationship with the

customers.
Figure 2.1 shows a historical timeline of the marketing evolution. There are also other
accounts for the emergence of RM, such as the economics of customer retention, the
ineffectiveness of the mass media, and higher expectations from customers (Reichheld
and Sesser, 1990; Shani and Chalasni; 1992). Furthermore, Sheth and Kellstadt (2002)
categorise the main reasons for the emergence of RM:
1. The energy crises of the 1970s and economic inflation
2. Emerging of service marketing
3. Supplier partnering
Later, they also mentioned three other factors that influenced the course and definition of
RM, as:
1. Impact of internet and information technology (IT)
2. Selective and targeted relationship (customer segmentation and customisation)
In the past thirty years, there has been a significant number of research and practices in
the marketing that have focused on the importance of relationships, networks and
interactions. As a result, theories have emerged that contribute to the traditional
marketing management. Service marketing and the network approach to business-tobusiness (B2B) had relatively more than impact on marketing development rather other
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theories. There were also influences from non-marketing areas such as total quality
management (TQM), lean production, customer value chain, balanced scorecard,
intellectual capital and organisation theory that further enriched RM.
Figure 2.1: Marketing changes through the last decades
1970s
Energy crisis
Excess
capacity
High raw
material
costs
1980s
Emergence
of services
marketing
1990s
Supplier
partnering
Outsourcing
customers
Segmentation
Customer
purchasing
behavior
Total quality
management (TQM)
Relationship
Marketing (RM)
Customer
acquisition
Internet & IT
Enterprise
resource planning
(ERP)
Customer
retention
Customer relationship
management (CRM)
Customer loyalty
(Source: Sheth and Kellstadt, 2002)
Initially, the concept of the relationship marketing (RM) emerged within the fields of
services marketing and industrial marketing (Ford, 1980; Christopher et al., 1991;
Gummesson, 1991; Lindgreen et al., 2004). The concept emphasises on customer
satisfaction and customer retention as the long-term value for the firm (defensive
marketing) rather than customer transactions (offensive marketing) (Kotler, 1991;
Varva, 1992). In other words, defensive marketing focuses on reducing customer
defection (churning) and increase customer loyalty, whereas offensive marketing focuses
on obtaining new customers and increase customers purchase frequency (Fornell and
Wernerfelt, 1987). Nowadays, relationship marketing (RM) is considered as a strategy
(Berry, 1983; Gummesson, 1993) in which it aims to enhance customer relationship
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and profitability (Grnroos, 1994; Storbacka et al., 1994; Rap and Collins, 1990;
Blomqvist et al., 1993). Saren (2007) defines customer relationship (CR) as the
creation, maintenance and reproduction of tastes, dreams, aspirations, needs, identities,
desires, morality and hedonism. The concept of RM received considerable criticism, at
the beginning, but it is acknowledged that it has made a shift in marketing. According to
Gruen (1997):
the introduction of the relation marketing concept focused business on seeing
customers as the centre of the universe and the organisation around them RM
reorients the positions of suppliers and customers through a business strategy of
bringing them together in co-operative, trusting and mutually beneficial relationships.
Furthermore a selection of RM definitions is listed in Table 2.1.
Table 2.1: RM definitions
Source
Definition
Berry (1983)
Attracting, maintaining and in multi-service organizations

enhancing customer relationships (p. 25)
Marketing is the process in society and organizations that
facilitates country exchange through collaborative
relationships that create reciprocal value through the
application of complementary resources.
Marketing is to establish, maintain, and enhance
relationships with customers and other partners, at a profit, so
that the objectives of the parties are met. This is achieved by a
mutual exchange and fulfillment of promises.
marketing is to identify and establish, maintain and
enhance, and when necessary terminate relationships with
customers (and other parties) so that the objectives regarding
economic and other variables of all parties are met. This is
achieved through a mutual exchange and fulfillment of
promises.
Relationship marketing refers to all marketing activities
directed to establishing, developing and maintaining
successful relational exchanges.
Relationship marketing is the process whereby both parties
the buyer and provider establish an effective, efficient,
enjoyable, enthusiastic and ethical relationship: one that is
personally, professionally and profitability rewarding to both
parties.
Lusch and Vargo (2006)
Grnroos (1990, 1994)
Grnroos (2007)
Morgan and Hunt (1994)
Porter (1993)
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As a result, companies were expecting to gain more market share by shifting to customer
orientation from the traditional practices (Bose, 2002; Ahn et al., 2003). More
importantly, emergence of the One-to-One and the Customer Relationship Management
(CRM) concept highlighted the difference between customers, hence attention needs to
be paid to how they perceive added value service attributes (Weitz et al., 1995). RM
relies upon the acquisition of customer needs and desires with particular relevance to
customer satisfaction which, in turn, leads to long-term relationship. According to
Gummeson (2008) RM is the overriding concept for a new marketing type of marketing
and CRM as techniques to handle customer relationships in practice. Moreover, He
defines CRM as:
CRM is the values and strategies of RM with special emphasis on the
relationship between a customer and a supplier turned into practical
application and dependent on both human action and information
technology.
Following, Table 2.2 lists a selection of CRM definitions as follows:

Table 2.2: CRM definitions
Source
Definition
Payne and Frow (2005)
CRM is a strategic approach that is concerned with creating

improved shareholder value through the development of
appropriate relationships with key customers and customer
segments. CRM unites the potential relationship marketing
strategies and IT to create profitable, long-term relationships
with customers and other key stakeholders. CRM provides
enhanced opportunities to use data and information to both
understand customers and co-create value with them. This
requires a cross-functional integration of processes, people,
operations, and marketing capabilities that is enabled through
information, technology and application.
e-CRM embraces the analysis, planning and management of
customer relationships with the aid of electronic media,
especially the internet, with the goal of the enterprise to focus
on select customers.
Eggert and Fassot (2001)
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Despite the advantages that RM offers, practitioners and academics have yet to propose
a roadmap to create sustainability and competitive advantages that RM promises to offer
(Ganesan, 1994; Morgan and Hunt, 1994). Therefore, it is important to recognise how
the competitive advantages can be built through relationship marketing.
2. The Measures Defining Customer Relationship

2.1 The Customer Satisfaction-Retention-Loyalty Chain (SRLC)
The satisfaction-retention-loyalty-chain (SRLC) is a key concept that needs to be
understood due to its link to customer relationship management (CRM) and, in turn,
profitability (Figure 2.2). The concept has been popular since the early 1990s, when
measuring and managing customer satisfaction became important to companies (Heskett
et al., 1994). The key point is that improving the performance of service attributes will
generate satisfaction (Mousavi et al., 2001). Increased customer satisfaction levels will
lead to greater customer retention rate, which is a key determinant for customer loyalty,
which may increase the expected profit (Rust and Zahorik, 1993; Anderson and Mittal,
2000). Despite the self-evident nature of these positive links, the empirical evidence of
research shows only mixed support (Zeithmal, 2000). There is a lack of research
investigating the relationship between perception measures (service attribute quality,
customer satisfaction) and action measures (word-of-mouth behaviour, purchase loyalty
and long term customer relationship profitability).
Figure 2.2: The service quality-customer behaviours chain

Service
performance
Customer
satisfaction
Customer
retention
Customer
loyalty
Profit
(Source: Heskett et al. 1994)
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2.1.1 The Behavioural and Financial Consequences of Service Quality

Provision of a good quality of service is considered as a key to success in todays
competitive business environment (Reichheld and Sasser, 1990; Parasuraman et al.,
1985; Dawkins and Reichheld, 1990). During the 1980s, the primary emphasis of
organisations was focused on improving service quality towards customer expectations
(Parasuraman et al., 1985). As a result, several methodologies and management
framework were proposed (Zeithaml et al., 1996) such as: total quality management
(TQM); quality function deployment (QFD); failure modes and effects analysis
(FMEA); six sigma (zero defect); PDCA (plan-do-check-act) or Deming cycle.
However, there is no consensus on the way to estimate the impact of service quality on
financial performance (Zeithaml et al., 1996; Rust et al., 1995). The relationship
between these two variables is neither straightforward nor simple (Zahorik and Rust,
1992). Research on the direct relationship between customer satisfaction and
profitability has revealed mixed results ranging from positive to no effect (Christopher et
al., 1998; Zeithaml, 2000; Jones and Sasser, 1995). The findings lack in depth analysis
and fail to answer questions like: How will service quality attribute be paid off (return
on investment)? Or, how much should the company invest in service quality to maximise
profitability?
There are two approaches for addressing these questions: offensive marketing and
defensive marketing (Fornell and Wernerfelt, 1988; Rust and Zahorik, 1993; Zahorik
and Rust, 1992). Such approaches do not have their roots in either industrial or service
marketing but have emerged from the traditional consumer goods marketing (Storbacka
et al., 1994). Offensive marketing focuses on acquiring new customers and increase
customers transactions (purchase frequency), whereas defensive marketing is focused
on minimising customer switching behaviour. This thesis evaluates the defensive impact
of service quality through customer retention in order to measure the financial impact of
service quality for the firm.
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The basic assumption is that there is a direct and strong relationship between service
quality attributes and customer behaviours, for instance; repurchase intention (Fornell
and Wernerfelt 1987, 1988; Reichheld and Sasser 1990; Anderson and Sullivan 1990;
Grnroos, 1990). The assumption is based on the idea that customer satisfaction can be
predicted and assessed as the difference between perception and expectation. Therefore,
if the service is performed poorly, then the difference between customer perception and
expectation will be negative or the customer will be dissatisfied. If the difference is
positive, a customer will be satisfied or desired. Moreover, this relationship is relied
upon the assumption that the relationship between service quality attributes and
customer satisfaction is linear and asymmetric.
In reality, what is vital to understand for a manager is whether service quality attributes
have different or same impact on customer satisfaction? There is not consensus about the
nature of this relationship. Figure 2.3 presents three commonly found relationships
between service attributes performance and customer satisfaction.
Performance
Linear and symmetric
Figure 2.3: Service attributes performance customer satisfaction link
Performance
Performance
Non-linear and asymmetric
Non-linear and asymmetric
(Source: Anderson and Mittal, 2000)
In most customer satisfaction programs, the relationship between service attributes

performance and customer satisfaction is assumed linear and symmetric (Goodman and
associates 1995). However, there are some other studies that explain the non-linear and
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asymmetric relationships, For example, Mitall and Baldasare (1996) in health care;
Danaher (1998) in airline industry; Mittal, Ross and Baldasare (1998) in automotive
industry; Bolton and Lemon (1999) in entertainment, and Kumar (1998) in business-tobusiness marketing that explain the relationship between performance of service
attributes and customer satisfaction.
Research reveals that there is a significant difference between the key drivers of
customer satisfaction and dissatisfaction (Shiba et al., 1993; Dutka, 1993; Gale, 1994;
Oliver, 1997). According to two-factor theory of Herzberg (1959), job satisfaction
factors can be classified into two groups: motivators (increase job satisfaction) and
hygiene factors (prevent dissatisfaction). Two-factor theory has also been adopted in
marketing theory, where multi-attribute models are used to understand the construct of
customer satisfaction. These models imply that service attributes do not have the same
importance from customer perspective. In the context of customer satisfaction, the
impact of low attribute-level performance on overall satisfaction is greater than
attributes with high performance (Mittal et al., 1998). This relationship has explained
through prospect theory (Kahneman and Tversky, 1979) which describes how
individuals form decisions and react to losses and gains, shown in Figure 2.4. However,
later studies developed the three-factor theory (e.g., Anderson and Mittal, 2000; Matzler
Figure 2.4: S-shaped value function in prospect theory
Overall customer
satisfaction
Low
Performance
High
Performance
(Source: Matzler and Renzl, 2006)
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and Sauerwein, 2002). As a result, service and product attributes fall into three groups:
basic, performance and exciting attributes (the three-factor theory). The theory originally
developed by Kano (1984) based on Herzbergs two-factor theory.
2.1.2 Customer Satisfaction (CS)

According to the service management literature, customer satisfaction is the result of a
customers perception of the service quality (Blanchard and Galloway, 1994; Heskett et
al., 1990) relative to the expectation (Zeithaml et al., 1990). Moreover, Looy et al.
(2003) defines customer satisfaction as:
The customers feeling regarding the gap between his or her expectations
towards a company, product or service and the perceived performance of
the company, product or service.
Both the service management and marketing literature suggest that there is a strong
relationship between customer satisfaction, customer behavioural intentions (e.g.,
switching and word-of-mouth) and, in turn, profitability (Yi, 1990), shown in Figure 2.5.
By improving product and service attributes performance, customer satisfaction level
should increase (Mittal et al., 1998; Wittink and Bayer, 1994) which, in turn, lead to
greater customer retention (Zeithaml et al., 1996; Anderson 1994). Accordingly,
improved customer retention generates more profit (Anderson and Mittal, 2000).
Despites it importance, there seems to be little experimental research that quantifies the
complex relationships.
Figure 2.5: The satisfaction-profit chain
Attribute
performance
Customer
satisfaction
Customer
retention
Profit
(Adopted from Anderson and Mittal 2000)
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Customer satisfaction can be interpreted as an overall evaluation of service quality

attributes or service attribute performance (Fornell et al., 1996; Johnson and Fornell,
1991; Boulding et al., 1993). Several studies discussed the relationship between two
constructs of service attribute performance and overall customer satisfaction (Anderson
and Sullivan, 1993; Oliva et al., 1995; Oliver, 1993; Mittal et al., 1998). It is argued that
the relationship in most cases is nonlinear and asymmetric. More importantly, there is a
strong relationship between customer satisfaction and customer future intentions (e.g.
retention) and profitability (Anderson and Sullivan, 1993; Bearden and Teel, 1983;
Boulding et al., 1993; Oliver, 1980; Yi, 1990; Rust et al., 1994). Figure 2.6 illustrates
the link between service quality attributes and customer attitude and behaviour
(Storbacka et al., 1994). Such comprehensive approaches to model the customer
relationship profitability are lacking, as most studies have only focused on discrete
aspects of the conceptual framework.
Figure 2.6: From service quality to customer relationship profitability
Service
quality
Customer
commitment
Perceived
concentratio
n
Patronage
concentration
Relationship
revenue
Perceived
value
Customer
satisfaction
Relationship
strength
Relationship
longevity
Customer
relationship
profitability
Perceived
sacrifice
Bonds
Critical
episodes
Episode
configuration
Relationship
costs
(Adopted form Storbacka et al., 1994)
2.1.3 Customer Retention (CR)

Since 1990s the subject of customer satisfaction and customer retention, and their
relationship with companys financial performance has become the core of attention for
many managers. By interpreting customer behaviours like retention to profit, firms move
closer to the inter-dependent variable profitability (Reichheld and Sasser, 1990;
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Reichheld et al., 2000). In addition, the marketing domain has increasingly shifted from
transactional approach (the value of an individual sale) to relationship marketing
approach (the value of long-term relationships and repeat purchases). Table 2.3 presents
the shift from transactional marketing to relationship marketing. More important,
relationship marketing acknowledges that existing and new customers require different
strategies.
Table 2.3: Transaction approach and relationship approach (Adopted from Peck et al. 2000,
p. 44)
Characteristics
Transactions focus
Relationships focus
Focus
Orientation
Timescale
Customer service
Customer commitment
Customer contact
Quality
Obtaining new customers

Service features
Short
Little emphasis
Limited
Limited
An operations concern
Customer retention
Customer value
Long
High emphasis
High
High
The concern of all
Research in this area revealed that there is an asymmetric and non linear relationship
between customer satisfaction and customer retention. Even though, customer
dissatisfaction may have a greater impact on retention than customer satisfaction. It
should be noticed that a number of factors such as type of industry, market competition,
switching costs and risk factors may change the dynamics between customer satisfaction
and retention (ACSI).
Retention and defection are like two sides of the same coin. Retention rate can be
defined as the average likelihood that a customer repurchases product/service from the
same firm. The defection or churning rate is defined as the average likelihood that a
customer switches or defects from the company to another company, see Equations 2.1
and 2.2.
Retention rate (%) = 1 (1/ Average lifetime duration)
(2.1)
Average retention rate (%) = 1 Average defection rate
(2.2)
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Lowering customer switching rates can be profitable to companies. Research confirms

that retaining customers is a more profitable strategy than acquisition of new customers
(Fornell and Wernerfelt, 1987 and 1988). Further, Reichheld and Sasser (1990) emphasis
on zero customer detections (churning) as an overall performance:
Ultimately, defections should be a key performance measure for
senior management and a fundamental component of incentive
systems. Managers should know the companys defection rate, what
happens to profits when the rate moves up or down, and why
defections occur. (p. 111)
The financial impact of customer retention assessed based on two assumptions. First,
acquiring new customers is more expensive than retaining existing customers as it
involves advertising, promotion and start-up operating expenses (Anderson and Sullivan,
1990; Reichheld and Sasser 1990). New customers, therefore, are more likely to be
unprofitable for a period of time after acquisition. Second, existing customers are more
likely to generate more profit to companies through cross-selling and word-of-mouth. A
study from Rose (1990) reveals that a customer that retain with company minimum 10
years is on average three times more profitable than a customer with 5 years customer
history.
2.1.4 Customer Loyalty (CL)

Marketing literature uses a wide range of terms to describe loyalty and methods to
measure it. Terms used interchangeably in business include loyalty, customer retention,
and switching behaviour. To this list other related terms include: relationship strength
(Patterson, 1998) and continuance commitment (Shemwell et al., 1994). There is also
the lack of distinction between measures of customer loyalty and related factors such as
customer satisfaction. Andreassen and Lindestad (1998) defined loyalty as an intended
behaviour caused by the service and operationalised loyalty as a repurchase intention
and willingness to provide positive word-of-mouth. Moreover, Jones and Sasser (1995)
have also found customer satisfaction as the key element in securing customer loyalty.
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Customer loyalty has been described in service management and marketing literature.
The service management literature defines loyalty as the behaviour that can be seen in
various forms such as relationship continuance, cross-selling, up-selling, and word of
mouth or customer referral (recommendation). This type of behaviours increase
profitability through enhanced revenues, reduced costs to obtain new customers and
retained existing customers, and lower customer-price sensitivity (Reichheld and Sasser,
1990; Hallowell, 1996). While marketing literature has defined customer loyalty into
distinct ways (Jacoby and Kyner, 1973). The first defines customer loyalty as an attitude
which indicates an individuals overall attachment to a product, service, or brand
(Fornier, 1994). The second defines loyalty as behaviour can be evaluated in form of
repurchase, word of mouth, and increasing the scale and scope of a relationship.
However, the behavioural view of loyalty is similar from both service management and
marketing point of view. In this thesis, we examine the behavioural rather than
attitudinal loyalty (word of mouth). This approach is intended to, first, to include
behavioural loyalty in the conceptualisation of customer loyalty that has been linked to
customer retention (switching intention) and satisfaction, and second, to make the
demonstrated
service
quality
attributes-
customer
satisfaction-retention-loyalty
relationship providing managers and decision makers interested in customer behaviours

linked to firm performance (Figure 1.2).
Despite of several studies into customer loyalty, there is no consensus on the most
appropriate way to measure loyalty. Existing studies in customer loyalty can be
classified into three groups regardless of definition, measurement, and limitation. These
three groups are: (1) loyalty as repeat purchase and word of mouth behaviour (Liljander
and Strandvik, 1993), (2) loyalty as a combined composite of repeat patronage and
attitudinal component (Dick and Basu, 1994), and (3) a psychological prospect of loyalty
(Czepiel, 1990). In this study, customer loyalty is defined as customer word of mouth
(WOM) behaviour. Jones and Sasser (1995) discuss that WOM is one of the most
important factors in acquiring new customers.
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Despite the benefits that accrue from WOM, many organisations can not yet link the
service quality-customer satisfaction to WOM. This is due to the fact that satisfaction
plays as a mediating attitude between service quality attributes and customers word of
mouth. More importantly, customer retention is not the same as customer loyalty.
Customer retention rate is measured on a period-by-period basis and it is used as an
indication of customer switching behaviour or intention, whereas customer loyalty has a
much stronger theoretical meaning. If a customer is loyal toward a service or a brand, he
or she has a positive emotional or psychological disposition towards this brand.
Customers might continue to purchase a particular brand but this may be purely out of
convenience or inertia. In this case, a customer may be retained, but not necessarily stay
loyal to the product or service.
3. Marketing or Business Intelligence

As it has been discussed, companies need to develop and sustain long-term working
relationship with their customers. In doing so, companies need a systematic process of
gathering, analysing, supplying and applying information about the external market and
internal environment. As a result, marketing or business intelligence plays a significant
role in the formulation and implementation of plans to achieve this goal (Lee and Trim,
2006). Marketing intelligence supports the decision-making process by providing
external (e.g., customer needs) and internal data from the environment (e.g., employee
loyalty). Cornish (1997) defined marketing intelligence as:
the process of acquiring and analysing information in order to
understand the market (both existing and potential customers) to determine
the current and future needs and preferences, attitudes and behaviour of
the market; and to assess changes in the business environment that may
affect the size and nature of the market in the future.
In reality, most businesses rely on conjecture to evaluate the efficiency of their
processes. Whereas it is hard to make decisions without objective about how to improve
business performance. As a result, the analytical result of customer value has received
lots of attentions as a force for competitive differentiation. According to analyst firm
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IDC (2006), the business intelligence market is a $20 billion market. Business
intelligence has changed dramatically since its inception in the early 1990s. Figure 2.7
illustrates how technology and business intelligence tools have changed over time.
Figure 2.7: Evolution of BI tools - Adopted from Eckerson, (2003)
Innovation and user reach
Dashboards
REPORTING
BI Search
Saas
Scorecards
Web Services Predictive
Analytics
BI Suites
Enterprise Reporting
Visualisation
Web
Ad Hoc Query
Relational
OLAP
4GL Report Client/Server
Writers
Multidimensional
EIS
OLAP
ANALYSIS
Mainframes Spreadsheets
1980s
Early 1990s
Mid-1990s
2000
2007+
4. The Link between CRM and Database Marketing

Since the significant transformation in areas of information technology (IT) and the
internet, and the improvement in flexible manufacturing and outsourcing practices,
understating individual customer needs has become a key determinant of a companys
profitability. This shift in marketing direction can be viewed in the definition of
marketing that was updated by the American Marketing Association (2004), to be:
Marketing is an organisational function and a set of processes for
creating, communicating, and delivering value to customers and for
managing customer relationships in ways that benefit the organisation and
its stakeholders.
Therefore, marketing plays an important role in aligning companys business processes
and practices with customers demand. Traditionally, database marketing provides
valuable information about customers by identifying and analysing different segments of
customer population (Figure 2.8). This provides the opportunity for firms to increasingly
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disaggregate the levels of database marketing to ultimately reach their customers. Thus,
CRM applies database marketing techniques at the customer level to strengthen
company-customer relationships.
Figure 2.8: Use of database marketing - Adapted from Kumar and Reinartz (2005), p. 82
Customer data
Segmentation
Static customer data
Expected NPV
For every customer

For all sales activities
Monthly recalculated
Demographics
Transaction data
Products sold
Campaigns received
Online decision
of associate
Online decision of
associate
Which products
Value per product
Products already
offered
Decision Captured and fed into data warehouse
Figure 2.9 illustrates a timeline of the CRM concept evolution. The shift from
transactional marketing to relational marketing has dramatically raised the importance of
evaluation of the long-term economic value of a customer for the company. The concept
of customer value refers to the present value of the future cash flows attributed to the
customer relationship. Customer value is the economic value of the customer
relationship to the company. Use of customer value as a marketing metric tends to
redirect the forms of strategic planning towards long-term customer relationship, rather
than maximising short-term sales.
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Figure 2.9: Timeline of CRM evolution - Adapted from Kumar and Reinartz (2005), p. 20
First Generation
> 1990
Call centre management
Customer service support
Second Generation
> 1996
Third Generation
>2002
Integrated customer-facing
Front-end (mktg., sales, service)
Sales force automation
Goals:
Improve service operations
Increase sales efficiency
Strategic CRM
ERP integration
Customer analytics
Complete web integration
Reduced cost of interaction
Increase customer retention
Improve customer experience
Costs reduction
Revenue growth
Competitive advantage
5. Costumers as Decision Makers

The main objective of modern companies involves measuring the quality of customer
relationship rather than track product releases to project profit and the number of
transactions. Customers are not concerned with the amount of profit they are generating
for the company, they rather expect the company to meet their needs. In other words, a
customer cares about the quality of the relationship he has with the company. According
to Yastrow (2007), relationships have become powerful differentiators. More
importantly, he argues that companies should enhance personal relationships with their
customers.
The chain of impact of the performance of service attributes on customer satisfaction,
and consequently its impact on customer retention and loyalty, leading to profitability
(Rust and Zahorik, 1993). However, there is a lack of studies investigating the
relationship between customer perception and customer future intentions, i.e. purchase
volume, length of association and word-of-mouth. Such analysis helps managers to
estimate customer migration, and assign resources accordingly.
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6. Customer Value
In order to implement long-term strategy, the management needs to know how the value
of a customer evolves over time. To do so, corresponding control measures must be put
in place. Lifetime value (LTV) is the general term used to describe the long-term
economic value of a customer. In simple terms, customer value implies the fact that each
customer has a value over his/her lifetime with a firm (Figure 2.10). Estimating,
however, the lifetime of a customer by itself requires sophisticated modelling, as it
involves prediction of the probability of retention. More importantly, the inputs of the
lifetime value can change subject to nature of product or service, data availability, and
analysis capability (Kurma and Reinartz, 2005). Therefore, the formulation should be
adapted based on the type of industry and company attributes. For example, contractual
relationship such as mobile phone subscription needs a different formulation vis a vis
non-contractual relationship such as the airline industry.
Figure 2.10: Principals of LTV Calculation (Adopted from Kurma and Reinartz (2005), p.125)
Recurring
revenues
Contribution
margin
Recurring
costs
Lifetime a
customer
Lifetime
profit
LTV
Discount
rate
Acquisition
cost
In theory, customer value represents the amount of profit generated from each customer,
and therefore it should be willing to spend money to acquire or retain each customer.
However, calculating customer value is very difficult due to its complexity and the
uncertainty surrounding customer relationships. In order to calculate customer value, the
following parameters are required:
Vahid Pezeshki
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Churn rate: is the percentage of customers who end their relationship (contract or
subscription) with a company in a given period. Therefore, one minus the churn rate
is the retention rate.
Discount rate: is the cost of capital used to discount future revenue from a
customer.
Retention cost: is the amount of money has to be spent in a given period to retain an
existing customer.
Period: is the length of customer relationship decided to be analysed (one year is
the most commonly used period). Customer lifetime value is a multi-period
calculation (for example; 3-7 years).
Periodic: revenue is the amount of revenue generated by a customer in the period.
Profit margin: is the difference between revenue and costs, even though this may
be reflected as a percentage of gross or net profit.
Using the analytical result of customer value evaluation, the marketing department
should target the customer that has the highest likelihood to be profitable to the
company. The customer value-based approach brings the following benefits to the
company:
1. Increased rate of investment (ROI)
2. Increase in acquisition and retention of profitable customers
3. Decrease in costs
7. Customer Segmentation
Due to an ever increasing number of competitors, reduction in customer switching costs
and consequent customer retention, the competition to acquire more customers has
intensified among companies. The organisation needs to prioritise its customers in order
to create the capabilities, processes and infrastructure to meet their demands. Without
segmentation, differences in customer needs might never be recognised.
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Customer segmentation is a process of classifying customers into a number of smaller

groups, or market segments based on the characteristics or responses of customers in
those segments. This approach helps managers to denitrify the most attractive segments
and to develop an appropriate strategy for winning and retaining high value customers.
Bounsaythip and Rinta-Runsala (2001) define segmentation as:
Customer segmentation is a term used to describe the process of
dividing customers into homogeneous groups on the basis of shared
or common attributes (habits, tastes, etc.).
The needs of diverse customers in the modern business environment cannot be met by
mass traditional marketing strategy (Ahn et al., 2003). Segmentation theory categorises
customers and markets into different clusters or groups with similar needs and/or
characteristics that are likely to exhibit similar behaviours. Therefore, segmentation is an
essential element for customer relationship management (CRM) system. Wedel and
Kamakura (1997) classified segmentation parameters into two groups: (1) the general
variables that include the customer demographics and lifestyles, and (2) the product
specific variables such as customer purchasing behaviours.
Customer segmentation (Kamakula, 1998) refers to the process of classifying customers
into different groups of customers. It enables viewing the entire database in a single
picture, thus allowing the firm to treat customers differently according to class and
pursue marketing that is suitable to each class. Studying customer profitability reveals
that there is not always a positive correlation between customer revenue and customer
profitability (Kaplan and Narayanan, 2001). Customers from different segments
contribute differently to financial performance. In other words, some customers bring
more income to the firm than the others. Figure 2.11 shows that two customers, A and
B, have the same revenue but their sales amount is considerably different. Foster et al.
(2001) states that each dollar of revenue does not contribute equally to net income.
Vahid Pezeshki
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Figure 2.11: Costs and revenue relationship - Adapted from Rajj (2005)
Revenue
Sales
Revenue
Sales
Cost of
credit
Sales
Revenue
Sales
Revenue
Service
Service
Sales
Sales
COGS
Customer A (Profitable)
COGS
Customer B (Unprofitable)
Keiningham et al. (2005) cited that while improving revenue for profitable clients does
indeed improve profitability, exactly the opposite occurs for unprofitable clients. As a
result, customers profitability level has an essential influence to net income. Further,
Raajj (2005) shows this difference by a pyramid segments base on their size
(percentage), revenue and profit shown (Figure 2.12). As a result, customer
segmentation can be viewed as a tactic to prioritise customers by their value, to the
company. For example, in some scenarios, a small proportion of customers bring the
most profit to the company. A study from Banc One of Columbus, Ohio, reveals that 20
per cent of their customers provide all of the banks profit, while the rest, 80%, only cost
money (McDougall et al., 1997). Therefore, different segments should be approached by
different strategies (Elsner et al., 2004).
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Figure 2.12: A customer pyramid with four revenue tiers

Large:
4% of customers
23% of revenues
25% of profits
Top:
1% of customers
50% of revenues
49% of profits
Small:
80% of customers
7% of revenues
5% of profits
Medium-Sized:
15% of customers
20% of revenues
21% of profits
(Adapted form Raaij, 2005)
8. Costumer Activity Measurement

Customer behaviours are meaningless unless it translates into a measurable metrics. In
reality, companies balance the cost of an initiative against the service attribute (e.g.,
reduced waiting in the call centre) instead of measuring the cost against the increase in,
for instance, customer satisfaction (and finally how increased satisfaction will impact
profits). The problem is that some benefits, while appearing to be objectively significant,
may have only a limited effect on customer behaviour. Unless a company realises the
cost versus benefits of increased customer outcomes (satisfaction, retention and loyalty),
the effort to implement a new strategy like new technology may be a waste of capital.
More interestingly there is evidence in the literature that there have been attempts to
describe the relationship between these constructs, nevertheless, these descriptions are
by no means fully established (Moutinho and Smith, 2000).
It is found that the link between customer behaviours and profitability is not nearly as
straightforward as usually proposed. As a result, this study aims to provide an objective
means to explain the relationship between service quality attributes and customer
behaviours.
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9. Chapter Conclusions
The review highlighted gaps in the strategic implications of relationship marketing,
therefore little direction can be offered to managers concerned with the long-term
relationship. In order to initiate those efforts, we adopt satisfaction-profit chain
(Anderson and Mittal, 2000), the thesis draw upon literature from relationship marketing
concept to establish a framework for analysing the relationship between service quality
and customer behaviours (satisfaction, retention and loyalty). Such approaches provide
guidance about the complex interrelationships among operational investments, customer
perceptions and behavioural.
The customer behaviour literature has been reviewed for the research programme to be
outlined in chapter 3. The background theory of relationship marketing (RM) was
reviewed from two perspectives: service quality and customer behaviours. Each of these
two perspectives provides a different aspect to the discipline and identifies links to the
focal point of this research. As a result, this chapter highlights the gap in the following
areas:
1. The relationship between service quality and customer satisfaction
2. The relationship between importance and performance of service attributes
3. The relationship between service quality, customer satisfaction, retention and
loyalty.
4. The impact of the length of relationship on customer future intentions
Marketing is an ongoing process in which its outcomes must be monitored continuously
in order to sustain the organisations relationships with customers and therefore generate
more profits. The key conclusion from this chapters discussion is the importance of
using customer relationship management (CRM) as an essential economic tool for
gaining competitive advantage. Focusing just on internal quality shows to be
insufficient. Consequently, marketing is a series of customer processes; optimisation of
acquisition, navigation, persuasion, conversion, loyalty and ROI. Moving to customer
profitability is the key determinant of good marketing decisions. Yet, there is a lack of
approaches that combine data such as service operations, customer perceptions and
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behaviours, and financial incomes, providing companies with both a comprehensive

diagnosis and a roadmap for implementation.
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3
CHAPTER 3
FOUNDATION OF MODEL DEVELOPMENT
"If you can not measure it, you can not improve it."
"When you can measure what you are speaking about and express it in numbers
you know something about it."
Lord Kelvin
(Scottish mathematician and physicist)
Discussion in Chapter 2 revealed that (1) the research in the area of customer
relationship profitability remains limited, and (2) there is no comprehensive approach to
model the relationship between customer relationship management and profitability,
where most studies in this area have only focused on discrete aspects of the conceptual
framework (see Figure 2.2).
In this chapter, we aim to examine the relationship among main components of service
quality-customer behaviour framework introduced in Chapter 2. In doing so, first the
relation between service quality attributes and customer satisfaction is examined. It
evaluates customer satisfaction based on two factors of service attributes: importance
and performance. Following, the connection between customer satisfaction and customer
switching intention (retention) is discussed. Next, the author discusses the relationship
between customer switching intention and word of mouth behaviour (loyalty). Finally,
the relevant hypothesis to each part will be presented and discussed.
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1. Customer Relationship Management (CRM)

There are two routes to understand CRM: (1) analytical CRM, and (2) behavioural CRM
(Kamakura et al., 2005). Analytical CRM aims to increase the revenues by analysing
customers data for a variety of purposes (e.g., marketing campaigns, product
development, pricing), while behavioural CRM supports decision-making process and
managerial strategies by conducting surveys and experiments. It is argued that CRM
systems must be organised along a continuous process consisting of three stages: (1)
customer acquisition, (2) relationship development, and (3) retention strategies (Figure
3.1). The company should attempt to acquire new customers through different channels
such as direct marketing. Appropriate strategies (e.g., delivering customised products)
enhance customer value such as cross-selling (Ansari and Mela, 2003; Kamakura et al.,
1991, 2003). Retaining existing customers significantly decreases marketing and
operation costs and enhance the total lifetime value (LTV) of the customer base. To
implement these constructs, we need a sophisticated framework includes predictions of
both customer retention probabilities and revenues.
Figure 3.1: CRM process
Customer
acquisition
Relationship
development
Retention
strategies
The dominating perspective within customer relationship research has been to assume
that there is a direct and positive correlation between service quality and customer
satisfaction, which in turn will lead to increased retention rate, degree of loyalty and
profitability (Fornell 1992; Fornell et al., 2006). Thus, the identification of the
determinants of customer satisfaction is the first priority for the management. One needs
to determine which service attributes fulfil the minimum requirements and minimise
dissatisfaction? Which service attribute adds value and increases satisfaction? And
which attributes achieve both. A good understanding of service quality attributes helps
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management to make better decisions on resource allocation and thus reduce operation
costs (Matzler and Sauerwein, 2002).
As this thesis deals with the relationship between changes in attribute-performance,
customer satisfaction and customer behaviours, therefore, it is imperative to examine
factors affecting customer retention and loyalty (customer relationship economics) in
light of the current service attribute quality and customer satisfaction paradigm.
2. The Relationship between Service Quality Attributes and Customer

Satisfaction
According to marketing literature, there is a strong and direct relationship between
service quality and customer satisfaction (Storbacka and Luukinen, 1994; Strandvik and
Liljander, 1994a, 1994b). The current customer satisfaction concepts rely on customers
perception of quality (Storbacka et al., 1994). However, there has been some discussion
whether customer satisfaction and service quality can be evaluated at a relationship
level. In other words, perceived service quality would, according to Liljander and
Strandvik (1994), refer to an outsider perspective, a cognitive judgment of a service.
Quality therefore, does not necessarily need to be experienced first time. It can be
achieved through customer referral (word of mouth) or advertising. In contrast customer
satisfaction is the outcome of direct evaluation through customer experience (Liljander
and Strandvik, 1994).
Research on customer satisfaction management has been going on for decades (see
Table 3.1). A number of methods have been proposed to identify the different categories
of service/product attributes such as the critical incident technique (CIT), a special
questionnaire by Kano (1984), importance-performance analysis (IPA), and the analysis
of complaints and compliments. Some early studies (Swan and Combs, 1976; Maddox,
1981; Cadotte and Turgeon, 1988; Johnston and Silvestro, 1990) reported two factors:
satisfiers and dissatisfiers. These findings were originally based on Herzbergs model
(two-factor or Motivator-Hygiene theory). However, later studies added the third factor
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which accounts for both dissatisfaction and satisfaction (Brandt 1987; Bitner et al.,
1990; Stauss and Hentschel, 1992; Anderson and Mittal, 2000).
Table 3.1: Empirical studies on the factor structure of customer satisfaction
Author(s)
Hypothesis
Method
Results
Swan and Combs

(1976)
Two-factor theory
Critical incident
technique
Hypothesis
confirmed
Leavitt (1977)
Two-factor theory
Factor analysis
Maddox (1981)
Replication of the findings

of Swan/Combs (1976)
Three factors: penaltyfactors (minimum
requirements), rewardfactors (value enhancing
factors), and hybrid factors
with impact on satisfaction
as well as on
dissatisfaction
Two-factor theory:
complaints as dissatisfiers
and compliments as
satisfiers
Critical incident
technique
Regression
analysis with
dummy
variables
Two-factor theory not

supported
Two-factor theory
partially supported
Three-factor theory
supported
Silvestro and
Johnston (1990),
Johnston and
Silvestro (1990)
Two-factor theory:
hygiene-factors and
motivators
Critical incident
technique
Mersha and
Adlakha (1992)
Hypothesis: different
causes of good and bad
service
Anderson and Mittal

(2000)
Non-linear relationship
between attributesatisfaction and overall
satisfaction
Rank order of
attributes
according to
perceived
importance
Regression
analysis with
dummy
variables
Brandt (1988,
1987), Brandt and
Reffet (1989)
Cadotte and
Turgeon (1988)
Analysis of the
content of
complaints and
compliments
Two-factor theory
supported. In addition
some variables elicit
both satisfaction and
dissatisfaction
Two-factor theory
supported. In addition
some variables elicit
both satisfaction and
dissatisfaction
Hypothesis
supported: causes of
good and bad service
are different
Three-factor theory
supported
(Adapted from Matzler and Sauewen, 2002)
Kano et al. (1984) argue that service attributes do not contribute to the overall customer
satisfaction and dissatisfaction with equal weight. There are significant difference
Vahid Pezeshki
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between the key drivers of customer satisfaction and dissatisfaction (Shiba et al., 1993;
Dutka, 1993; Gale, 1994; Oliver, 1997). The unpleasant experience that creates
dissatisfaction is not the same as the pleasant experience that creates satisfaction.
Service quality attributes can therefore be classified into three types (Three-factor
theory): (1) basic, (2) performance, and (3) excitement (Anderson and Mittal, 2000;
Matzler et al., 2004; Oliver, 1997). The original classification of attributes was proposed
in Kanos questionnaire. The questionnaire follows two scenarios: first the respondents
are asked to state their feeling if a product or service has a certain attribute, and second
where it does not have that attribute (Kano et al., 1984; Berger et al., 1993).
(1) Basic attributes or dissatisfiers. These are the basic functionalities that
customers expect from a service or product. Their absence would be
unacceptable, while their presence in no way generates any satisfaction or
delight (Solomon and Corbit, 1974; Solomon, 1980; Kano et al., 1984). For
example, the punctuality and safety are considered to be the basic attributes for
airline services.
(2) Performance or One-dimensional attributes. These attributes tend to have
linear relationship with overall customer satisfaction. For example, petrol
consumption of a car is considered to be a performance attribute.
(3) Exciting attributes or satisfiers. These attributes are the unexpected attributes
and contribute to increased customer satisfaction levels when presented but
cause no dissatisfaction if they do not exist. High performance on these
attributes has a greater impact on overall customer satisfaction rather than low
performance. For example, promotional offers such as extra features come
with mobile phones (e.g., games, radio, dictionary and etc.) can be considered
as an exciting factor for some customers.
The three different types of service attributes influence the relationship between service
quality attributes and customer satisfaction (Figure 3.2). They imply an asymmetric and
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nonlinear relationship between service quality attributes (performance) and customer

satisfaction. However, there is still no universal consensus amongst researchers and
practitioners regarding the nature of this relationship. Figure 3.3 shows how service
attributes may impact customer satisfaction. Moreover, the classification of service
attributes may be influenced by customer expectations and may vary between industries
(Matzler and Renzl, 2007). The three-factor theory (Kanos model of customer
satisfaction) is also supported by different research methodologies including critical
incident technique (CIT) (Stauss and Hentschel, 1992; Bitner et al., 1990; Swan and
Combs, 1976), a content analysis of complaints and compliments (Cadotte and Turgeon,
1988), a rank order of service attributes for good and bad service (Mersha and Adlakha,
1992), and regression analysis techniques (Anderson and Mittal, 2000).
Figure 3.2: Three-factor theory of customer satisfaction - Adapted from Busacca and
Padula (2005)
More importantly, the three-factor theory has some significant implications for service
quality improvement and customer satisfaction management. As a rule of thumb, basic
factors (minimum requirements) must be identified and well performed. If they are
presented at a satisfactory level, however, improving their performance does not create
or increase satisfaction-level. Performance factors (one-dimensional) typically represent
customer requirements (Matzler and Sauerwein, 2002). Therefore, companies should be
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competitive with respect to these attributes. Finally, exciting attributes are not expected,
so they may surprise the customer. So, it is therefore not prudent for a service provider
to compete on these attributes with other service providers. Research, however, on
customer satisfaction has emphasised the need to account for the non-linear and
asymmetric relationship between service quality attributes and customer satisfaction.
There are a number of methods to differentiate between the type of service attributes.
They include the critical incident technique (CIT), importance grid, Kanos
questionnaire, regression analysis with dummy variables and the analysis of complaints
and complements. Next section discusses the relationship between service attribute and
customer satisfaction based on two factors of service attributes: importance and
performance.
3. The Relationship between Attribute Performance and Importance

It is argued that understanding the relationship between service quality attributes and
customer satisfaction is vital to marketing managers. Operationally, if resource
allocation to improve attribute performance to be prioritised correctly with regard to
customer satisfaction, there is a pressing need to adopt viable analytic to help them
optimise resource allocation (Mittal et al., 1998; Anderson and Mittal, 2000; Bruno and
Padula, 2005). Several studies have pointed to the issues within misallocation of
resources resulting from viewing the relationship between customer satisfaction and
service attribute performance through a linear and symmetric prospective (Anderson and
Mittal, 2000). The basic assumption is that the performance of an attribute can be
changed without this affecting the importance of the attribute (Martilla and James, 1977;
Oliver, 1997; Bacon, 2003). Based on this assumption an attribute with low
performance-level and high importance-level is the highest priority for a company
conducting a customer satisfaction survey. However, such approach may not increase
customer satisfaction-level (Mittal et al., 2001; Matzler et al., 2003). It is argued that
there is a dynamic relationship (non-linear and asymmetric) between service attribute
performance and importance. In other words, attribute importance has to be seen as a
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function of attribute performance (Matzler and Sauerwein, 2002; Matzler et al., 2003). A
few studies discussed that the nature and magnitude of the relationship between service
attribute importance and customer satisfaction may change with fluctuation in
performance levels (Mittal et al., 1999; Matzler et al., 2003 and 2004; Bacon, 2003).
However, this relationship is more complex and the validity of this assumption has been
questioned by researcher and practitioners. Depending on a method used for estimating
the relative importance of service attributes, the managerial implementations (resource
allocation) would vary (Varva, 1997). Moreover, it is argued that direct methods
(customer self-stated importance) may not measure importance values realistically,
because customers do consider the current level of service attribute performance.
4. The relationship between Customer Satisfaction and Future intention

Customer retention is an important factor in maintaining company profitability.
According to marketing literature, recruiting an existing customer is easier and less
expensive than obtaining a new customer. Brown (2004) stated that recruiting a new
customer in wireless industry is eight times more expensive than retaining an existing
customer. In addition, companies generate more profit over customer lifetime cycle by
selling more services and products (cross-selling, up-selling). For example, in mobile
telecommunication industry, customers contribute to the revenues by purchasing extra
services such as internet broadband, insurance and music. Several studies have evaluated
the relationship between customer satisfaction and customer retention in these industries
(Kumar 1998; Bolton 1998). A study form Gupta et al. (2004) reveals that a 1% increase
in customer retention rate can increase profitability by 5%. Furthermore, Ralston (1996)
estimates that a one-unit change in customer satisfaction-level produces a 6% change in
the likelihood of customer retention. However, most of these studies assumed the
relationship between satisfaction and retention to be linear and symmetric. This,
however does not seem to be a universal rule. Figure 3.3 shows a typical asymmetric
relationship between satisfaction and retention observed in the Swedish customer
satisfaction barometer and American Customer Satisfaction Index (ACSI) databases
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(Fornell 1992; Anderson et al., 1994). The basic assumption is that satisfied customers
are less likely to consider other suppliers than dissatisfied customers (Srinivasan and
Ratchford, 1991). According to Anderson and Mittal (2000), the behaviour may be
different and rely on whether switching behaviour or switching intention is used as the
dependent variable. They also found significant differences between satisfactionswitching behaviour and switching intention in the automotive industry.
In the conceptual model, customer retention is assumed as switching intention or
churning probability. Moreover, different industries may exhibit patterns of asymmetry
that deviate from patterns presented in Figure 3.3. For instance, churning ratio would be
greater in telecommunication where customers can easily switch to other service
providers.
Customer Retention
Figure 3.3: Customer satisfaction retention link

The dotted line represents a linear approximation of the nonlinear relationship shown.
Chun et al. (2007) highlights the importance of customer retention in his study. He
reports that a typical service provider loses approximately four percent of its customers
each month. The cost of customer switching is more than four billion dollars each year
in wireless industry (Anderson Consulting, 2000). The service marketing literature
identifies two factors that influence customer retention; customer satisfaction and
switching costs (Kim et al., 2004). Companies need to understand the determinants of
customer defection and be able to predict the probability and the associated risk of
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customer switching at a particular point of time. More accurate forecasting of customer

behaviours can enable both more effective industry response.
In this research work, switching rate is assumed to be the percentage of customers who
end their relationship with a company in a given period of time. Based on this
assumption retention rate can be one minus the switching rate.
R= 1-S
(3.1)
Our research to date shows that there is a lack experimental research in measuring
customer switching intention that can be applicable to different industries. So far, most
empirical research in customer behaviour studies describe customer switching intention
based on the actual customer transaction and billing data (Mozer et al., 2000; Ng and
Liu, 2000; Wei and Liu, 2002; Drew et al., 2001; Weerahandi and Moitra, 1995). Some
research, in mobile telecommunication industry, utilised forecasting techniques, they
predict the probability of customer switching with respect to usage time, call frequency,
unpaid balances and calling plan (Ahn et al., 2006). Such models are more predictive
than descriptive in which managers may not be able to improve company operations,
specifically service quality and customer satisfaction. As the author discussed in Chapter
2, customer behaviours cannot be adequately measured and improved through financial
statement (Peppers and Rogers, 2008).
In the next section, the author discusses how switching barriers affect the risk of
customer switching.
4.1 Switching Barriers

There is a universal consensus among academics and practitioners that customer
satisfaction may not necessarily lead to customer retention. For example, a study in retail
banking shows that between 65 and 85 per cent of customers who switch suppliers
declared to be satisfied or very satisfied with their former supplier (Reichheld, 1993). In
reality, switching costs continue to be a significant barrier for the dissatisfied customers
to switch suppliers (Grnhaug and Gilly, 1991).
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Studying switching barriers from customer perspective differentiate switching barriers

into financial, psychological, and social (Storbacka et al., 1994). Considering financial
aspect of switching barriers, switching costs can be classified into three groups: (1)
transaction, (2) learning, and (3) artificial (Klemperer, 1987). However, there are
different classification such as search costs, learning costs, and emotional costs
(Storbacka et al., 1994). Transaction costs take place when a customer switches to
another supplier. For instance, joining or start up fees for setting up a new service.
Learning costs are those when a customer has to put in effort to reach to same level of
comfort and facility with the new product or service as the old one (Seo et al., 2008).
Artificial or contractual costs are those developed by service provider, for example
withdrawal penalties or loyalty benefits, to encourage retention of existing customers.
The difference between switching costs is called perceived switching cost. However,
perceived switching costs may not include non-financial switching costs. Shin and Kim
(2007) argue that perceived switching cost rather than actual switching cost explains
customer switching intention and affects the market outcome. As a result, perceived
switching costs mainly used to retain customers. In simple words, customers may have
different attitudes (negative, positive, or neutral) towards their future intentions (e.g.
switching or repurchase). A customer with a negative attitude might still buy repeatedly
because of switching costs and barriers. This also means that customer retention is not
always based on a positive attitude, and long-term relationships do not necessarily
require positive attitude and commitment from the customers. As the conceptual model
is conducted in the mobile telecommunication services, switching cost (e.g., penalty)
plays a significant role in customer switching intention. As a result, customers have been
segmented into different groups with regard to the level of switching costs.
East et al. (2008) define Word of mouth (WOM) as informal advice passed between
customers. Keaveney (1995) reported that 50% of service provider replacements were
found through word of mouth. Research shows that there is a strong theoretical
underpinning that relates customer satisfaction, customer retention and customer loyalty.
Word of mouth behaviour from loyal, satisfied customers decreases the cost of attracting
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new customers and also enhances the corporate reputation, while negative word of
mouth from dissatisfied customers, has the opposite effect (Danaher and Rust, 1996).
According to the service management and marketing literature, there seems to be a
limited number of empirical research studies that tackles the relationship between
customer satisfaction, customer retention and customer loyalty (Hallowell 1996;
Storbacka et al., 1994).
In this thesis, customer loyalty is measured by customer word of mouth behaviour. In
other words, customer loyalty is measured with regard to the customer willingness to
recommend a service provider to friends or relatives based on his/her experience with
the service. Figure 3.4 shows the service quality-customer behaviour conceptual model.
Figure 3.4: Service quality-customer behaviour model
Service
Attributes
Service
Attributes
Classification
Overall Customer
Satisfaction
1
2
.
.
.
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Basic
Customer
retention
Customer
Dissatisfaction
Profitability
Performance
Exciting
Customer Behaviours
Customer
Satisfaction
Customer
loyalty
Page 61
5. Length of Relationship
As it has been discussed in Section 2.6, combining customer insights with a
segmentation scheme may help to marketing strategies tailored to particular segments
and individuals. Segment-specific differences in the customer behaviour-profitability
relationship have been the focus of research studies in recent years. So far, several
studies have applied segmentation techniques to customer behaviour field (Reichheld,
1996; Rust et al., 1994; Garbarino and Johnson, 1999; Mittal and Kamakura, 2000;
Marple and Zimmerman, 1999; Kamakura et al., 2000). Segmentation variables can be
divided into two groups: psychological and demographic. The goal of segmentation,
however, in many studies is to separate profitable customers from non-profitable
customers. However, this study looks at the issue from proactive approach. By
segmenting customers, companies can make profitable customer more profitable and
push non-profitable to profitable group through service customisation. In reality,
companies approach to customers in various ways, while some companies just design
their service and product for rich people, some may target all segments and so on.
In this thesis, customer segmentation is implemented in order to investigate the impact
of length of relationship on customer future intention such switching and word-ofmouth. By studying the mobile telecommunication services, it is learned that customer
behaviour may vary with respect to the length of their relationship shown in Figure 3.5.
Figure 3.5 Customer segmentation
Pay-as-you-go
Customer
satisfaction
Switching
Probability
12-month contract
18-month contract
Word-ofmouth
Such approach develops a better strategic view of profitability analysis for each segment
(Anderson and Mittal, 2000). For example, Kamakura et al. (2000) compared the
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retention-profitability for several branches of a bank in Brazil. They found that once the
costs of maintaining customers in one segment takes the company 6 years to recoup the
cost of recruiting new customers, in another segment, it would have taken more than 230
years. The next section considers testing main components of the conceptual model.
7. Testing the Conceptual Model (Service Quality-Customer Behaviour)

As discussed in Section 2, the relationship between service attribute performance and
overall customer satisfaction is non-linear and asymmetric. This leads to the following
hypothesis:
H1. There is an asymmetric relationship between service quality attributes and
overall customer satisfaction.
As a result, service quality attributes can be classified into different groups with respect
to their impact on overall customer satisfaction. In order to classify service attributes, the
author proposes following hypothesises:
H1.1 For some service attributes, low performance has a greater impact on
overall customer satisfaction than high performance with the same attribute
(Basic factor).
H1.2 For some service attributes, high performance has the same impact on
overall customer satisfaction as the same magnitude of low performance with the
same attribute (Performance factor).
H1.3 For some service attributes, high performance has a greater impact on
overall customer satisfaction than low performance with the same attribute
(Exciting factor).
It is argued that customer satisfaction should be assessed based on two important factors
of service attributes: importance and performance. In Section 3, the author discussed that
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the correlation between service attribute importance and performance is not linear and
symmetric. To do so, the following hypothesises are tested:
H2. There is an asymmetric and non-linear relationship between attribute
performance and attribute importance.
H2.1 Attribute importance is a function of attribute performance.
Regarding attribute importance measurement, the results of direct and indirect methods
may differ in which affect decision making process. As a result, the following
hypotheses are tested empirically:
H3. Explicitly (self-stated importance) and implicitly (statistically inferred)
derived importance of attributes may differ.
H3.1 Customers self-stated importance is not a function of customer
satisfaction.
In Section 4, the author discussed that the relationship between customer satisfaction and
customer retention, thus, the following hypothesis proposed:
H4. There is an asymmetric correlation between customer satisfaction and
customer switching intention.
In addition, switching costs significantly affect customer switching intention. In order to
assess this relationship, customers are classified into contractual and non-contractual. It
is learned that the customers from on-contractual segment are not involved or committed
to supplier as there is little switching costs. Whereas in contractual segment, the
customers face with penalties if they switch supplier. This distinction is important as it
challenges the relationship between customer satisfaction and switching intention. This
discussion leads to the following hypothesises:
H5. There is a positive and direct correlation between length of contract and
customer switching intention.
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H6. Higher levels of switching costs are associated with higher levels of
switching barriers.
H7. Higher levels of perceived of switching barriers are associated with lower
levels of switching intention.
Finally, it is argued that customer switching intention (retention) may affect customer
word of mouth behaviour (loyalty), thus, the author would expect that these two
constructs asymmetrically linked as it proposed below:
H8. There is an asymmetric relationship between customer retention and word of
mouth behaviour.
Figure 3.6 shows the interaction between eight research hypothesises proposed for this
study and the conceptual model.
Figure 3.6: Conceptual model to study service quality-customer behaviour the in mobile
telecommunication industry
Service
attribute
importance
H3
H5
Seg 1
B
H2
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Customer
retention
H1
Service
attribute
performance
H4
Attribute classification
H8
Seg 2
Customer
satisfaction
Seg 3
H6, H7
Customer
loyalty
Page 65
This chapter discussed various aspects of the service quality-customer behaviour model
(Figure 3.4). Based on the literature review, it explained the interaction among
components of the conceptual model. As a result, the chapter proposes eight
hypothesises for testing the relationship between factors. Briefly, it is discussed that the
relationship between service quality attributes and customer satisfaction is dynamic.
There are significant difference between the key drivers of customer satisfaction and
dissatisfaction. Consequently, service attributes can be classified into three groups: (1)
Basic, (2) Exciting, and (3) Performance. In addition, it discussed and proposed that the
relationship between attribute performance and attribute importance is non-linear which
varies with respect to attribute classification. In other words, the relationship between
service attributes importance and customer satisfaction may change when performance
changes. The outcomes of this stage will help managers within the customer satisfaction
management, resource allocation and strategic planning. This distinction is important as
it leads to customised product and efficient resource allocation. It also argued that
customer satisfaction is only one dimension in increasing relationship strength, where
switching barriers may affect customer satisfaction-retention link.
Finally, the chapter proposed that the relationship between customer retention and
customer loyalty (WOM) is asymmetric and nonlinear. It is argued that the length of
relationship with supplier may not necessarily result in positive word of mouth
behaviour. In testing the conceptual model in the practical arena, the author proposed
eight research issues, which is presented in Table 3.2.
In Chapter 4, the author presents the research methodology used to test the
aforementioned model and issues proposed for investigation.
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Table 3.2: Proposed Issues for further investigation
Issue
Attribute
performanceimportance analysis
Resource allocation
Classification of
quality attributes
customer satisfaction
management
Customer retention
and loyalty
Description
There is an asymmetric relationship between
attribute importance and attribute performance.
Attribute performance can be associated with a
change of attribute importance.
There is a nonlinear correlation between attribute
importance and performance. Attribute
importance depends on attribute performance.
There is a dynamic (asymmetric and nonlinear)
relationship between service quality attributes
(performance) and customer satisfaction.
Without attributes classification and importanceperformance analysis, it would be impossible to
manage customer satisfaction.
There is an asymmetric relationship between
customer retention and customer loyalty.
Length of relationship Customer behaviours (switching behaviour, word

of mouth) would vary across different segments
regarding the length of contract and switching
costs.
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Hypothesis
H2
H2.1
H3
H3.1
H2
H2.1
H1
H1.1
H1.2
H1.3
H1
H2
H3
H4
H6
H7
H8
H5
Page 67
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4
CHAPTER 4
RESEARCH METHODOLOGY
This chapter develops an argument for choosing suitable methodologies for modelling
and
analysing
the
service
quality-customer
behaviour
framework.
Relevant
mathematical techniques will be presented which will result into the justification of the
approach that will be adopted.
1. Methods for Measuring Customer Satisfaction Factors

The measurement of customer satisfaction has received considerable attention from both
academia and practitioners in the last two decades (Parasuraman et al., 1991; Cronin and
Taylor, 1992). Pearson and Wilson (1992) report that over 15,000 articles have been
published on customer satisfaction measurement in the past 20 years. The main interest
in customer satisfaction measurement is based on service quality attributes and to help
managers to understand the relationship between these two elements
There are a number of methods for measuring customer satisfaction determinants. They
include the critical incident techniques (CIT), importance grid, Kanos questionnaire,
regression analysis with dummy variables (RADV), and the analysis of complaints and
compliments. Following, the author discussed five popular methods for measuring
1.1 Analysis of Complaints and Compliments

First developed by Cadotte and Turgeon (1988a, b), the analysis of complaints and
compliments is an analytical procedure that identifies the sources of complaints and
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complements and estimates customer satisfaction. The rational for this method can be
listed as:
The dissatisfier or basic attributes elicits complaints when performance is low

but does not elicit compliments when performance is high.
The satisfier or exciting factors elicits compliments but does not elicit
complaints.
The performance or one-dimensional factors: cause both complaints and

compliments.
This method classifies the service attributes into groups by rating the frequency of
complaints and compliments. In this method rank-order numbers are used instead of the
actual frequency values. This type of rank-order may cause ambiguity. The main reason
is that it is generally known that complimenting rates are relatively is low comparing to
complaining rates.
1.2 The Critical Incident Technique (CIT)

The method was developed by Flanagan in 1954. This method is similar to the analysis
of complaints and compliments. The method classifies service attributes into three types:
basic, exciting and performance. The basis for this procedure is that the basic attributes
are never associated with satisfaction, the exciting attributes do not elicit dissatisfaction,
and finally, the performance attributes can be associated with both satisfaction and
dissatisfaction.
The customers are asked to indicate the antecedents of dissatisfaction and satisfaction for
a specific service or product. The anecdotes are then associated with a list of attributes.
The factor structure of customer satisfaction is estimated based on the frequency of each
attribute. Several studies, in the field of service quality, have questioned the reliability of
the CIT (Silvestro and Johnston, 1990; Stauss and Hentschel, 1992; Bakhaus and Bauer,
2000). Figure 4.1 illustrates an example of CIT application in the banking industry
(Johnston, 1995).
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The method has similar limitation as the analysis of complaints and compliments has
with rank-order numbers. As a result, the reliability of the method can be questioned
with respect to attribute classification as it uses rank-order numbers instead of the actual
frequency values. Moreover, Johnston (1995) argues that the time that data collection
undertaken may significantly affect the result of CIT. If the process of data collection
takes place after the incidents (good or bad experience) then respondents perception may
Figure 4.1: An application of critical incident technique
(Adopted from Johnston, 1995)
have been modified. However, this issue can occur with all methods that are based on
customer data. The processing and analysing respondents data makes the approach a
complex method. The method is suggested for a small size. As a result, it may not be a
suitable method in marketing research where a small sample is hardly representative of
the target population.
1.3 Kanos Questionnaire

Kano (1984) developed a questionnaire to classify service attributes. For each attribute, a
pair of questions was designed in which the respondent is asked to answer two
questions: if the service attribute performed poor? and if the attributed performed well?,
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using the 5-likert scale (extremely satisfied, somewhat satisfied, neither satisfied nor
dissatisfied, somewhat dissatisfied, and extremely dissatisfied). Next, the frequency of
responds for each attribute was used for attribute classification. Figure 4.2 shows the
Kanos evaluation table.
The limitation of this method is that the questionnaire becomes too long when many
attributes are analysed. In addition, Busacca and Padula (2005) argue that the method
has weak outcomes as it is based on frequency distribution of the responses. There is a
probability that the boundaries between different categories are distorted. In general, the
application is time consuming and costly and less suitable in practice.
Figure 4.2: Kanos questionnaire
If the attribute
worked poor:
Extremely
satisfied
Somewhat
satisfied
If the attribute
worked well:
Extremely satisfied
Somewhat satisfied
Neither satisfied
nor dissatisfied
Somewhat
dissatisfied
Extremely
dissatisfied
Neither satisfied
nor dissatisfied
Somewhat
dissatisfied
Extremely
dissatisfied
R/I
R/I
R/I
R/I
R
(Adopted from Kanos 1984)
O = one dimension or performance factor

A= attractive or exciting factor
I = Indifference factor
R = reverse factor
M = must be or basic attribute
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1.4 Importance Grid

The method was first introduced by the IBM Consulting Group. It is a two dimensional
grid based on implicit (statistically inferred) and explicit importance ratings (customers
self-stated) (Varva 1997; Homburg and Warner, 1998). Figure 4.3 illustrates the twodimensional importance grid. Such approach differentiates service/product based on:
Basic attributes: high explicit and low implicit
Exciting attributes: low explicit and high implicit
Performance attribute: high explicit high implicit, low explicit low implicit
The application is a user-friendly approach and based on a typical customer satisfaction

survey data (service attribute performance and overall satisfaction) which makes it
suitable for being employed in customer satisfaction surveys. However, the reliability of
this method has not been tested so far. As we discuss later in Section 2, there are several
methods for measuring the importance of service attributes in which the result of each
method may vary (Pezeshki and Mousavi, 2008).
Statistically inferred
Figure 4.3: The importance grid - Adopted from Varva (1997)

High
Low
Exciting attributes
Performance attributes
Performance attributes
Basic attributes
Low
High
Customers self-stated importance
1.5 Regression Analysis with Dummy Variables (RADV)

The RADV method classifies attribute performance ratings into three groups: high
performance (1,0), average performance (0,0), and low performance (0,1). Based on this
coding scheme, two regression coefficients are obtained for each attribute, one to
measure the impact when the attribute performance is low, and the other one when the
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attribute performance is high. If the positive coefficient is significantly greater than the
negative coefficient, then the attribute associated to the exciting factor. On the other
hand, if the negative coefficient is significantly greater than the positive coefficient, then
the service attribute that is associated to the basic factor. Finally, if the positive and
negative coefficient is relatively close, then the service attribute associated with the
dimensional or performance factor. This method has proved to be a reliable method for
service attribute classification when compared to other methods. The method is also a
user-friendly approach since it based on customer satisfaction survey data (service
attribute performance and overall satisfaction). To date the attempts employed by
practitioners to account for non-linear and asymmetric response of customer satisfaction
to service quality attributes are based on the application of the regression with dummy
variables.
All these arguments suggest that the regression analysis with dummy variables seem the
more suitable method in the real world applications. The method can be carried out for a
sample population. It provides a measure of the relative importance of attribute
performance based on overall customer satisfaction. Based on the proposed discussion
above, Figure 4.4 shows how service attributes are classified with respect to their impact
customer satisfaction, using RADV. Next section considers the methods for measuring
service attribute importance.
Figure 4.4: Service quality attributes customer satisfaction
Service
Attributes
1
2
.
.
.
Attributes
Classification
Basic
Customer
Dissatisfaction
Performance
Exciting
Customer
Satisfaction
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2. Techniques for Measuring Service Attribute Importance

The importance of service attribute performance in service industries has accelerated
over the past twenty years (Danaher, 1997). Much of this importance has been driven by
the impact of service quality on customer satisfaction-levels, customer retention rates,
and degree of customer loyalty (Bolton and Drew, 1991; Boulding et al., 1993; Buzzel
and Gale, 1987; Danaher and Rust, 1996; Rust et al., 1994; Woodside et al., 1989).
Determining the relative importance of service and product attributes is one of the
primary objectives of customer satisfaction measurement. Typically, performance is
evaluated on a rating scale whereas importance can be either rated by the respondents or
calculated on the basis of performance (Oliver, 1997).
There are two popular methods for measuring importance of service attribute: direct
(customer self-stated importance) and indirect (statistically inferred importance). The
previous research reports that the relative importance of service attributes depends on
whether it is customer stated or statistically inferred based. Indentifying the importance
that consumers place on the service attributes that affect overall customer satisfaction, as
a mediating attribute, which in turn affects customer retention (e.g., repurchase
intention) and customer loyalty (e.g., feedback and word of mouth) is an important
criterion for resource allocation process. Thus, the study of importance of service
attributes has been one of central topics in consumer relationship and market research
for decades (Figure 4.5). Moreover, the focus of attribute importance has shifted from
traditional evaluations of service concepts within controlled settings, such as conjoint
analysis (Green and Srinivasan, 1990) and choice modelling (Gaudagni, and Little,
1983), to understanding the determinants of behaviours and intentions (Gustafsson, and
Johnson, 1997; Ryan et al., 1999).
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Figure 4.5: The three dimensions of attribute importance
(Adopted from Ittersum et al., 2007)
2.1 Customer Self-Stated Importance (Direct Method)

A common approach to execute a quality improvement strategy is to identify and select
the key performance indicators (KPIs). With customer self-stated importance method,
through surveys customers are directly asked to rate the importance of service or product
attributes based on their preferences (Danaher and Mattsson, 1994; Rust et al., 1993).
Techniques such as rating scales and constant sum scales are normally used for customer
self-stated importance. In this approach, the basic attributes normally get the highest
level of importance. Being basic attributes, they have little impact on overall customer
satisfaction even if their performance levels are high.
The exciting attributes are expected to be less important than basic attributes.
Subsequently the importance levels of performance attributes will be rated somewhere
between basic and exciting attributes. Previous studies reveal that there is a cause-effect
relationship between service attribute performance and attribute importance (Matzler et
al., 2004; Oh, 2000; Pezeshki and Mousavi, 2008). In other words, attribute performance
and importance are inter dependent (Matzler and Sauerwein, 2002). Therefore, direct
methods do not adequately measure the actual relative importance of attributes. The
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reason is that respondents may not take into account the current level of attribute
performance. For instance in airline industry, if customers are asked about importance of
safety, mostly rank it as the most important factor, at the same time this factor does not
generate additional satisfaction if it is fulfilled. To adhere this problem, practitioners
usually use statistical methods such as regression analysis and structural equation
modelling (SEM).
For the purpose of evaluating service attribute importance (customer self-stated), we
employ a methodology by Abalo et al. (2007). To doing so, respondents were asked to
rate the three (k = 3) most important attributes; from 1 = most important to 3 = least
important. In order to assign each attribute (i) an importance value ( Pi ) lying between 0
and 1 (using equation 4.1), we integrate the ranked assigned by respondents (using
Equation 1) to a ranking score ( hij ) using Equation 4.2.
hij = (k gij 1) / k
(n
(4.1)
otherwise
Pi
g ij not void
1
j
hij ) k / s
(4.2)
Where;
n = number of respondents/raters
k = top k preferences
s = number of attributes
i = attribute (i = 1,, n)
j = respondent/rater (j = 1,, n)
g ij the rank assigned to the i-th attribute by the j-th respondent
hij
the normalised g ij that lie between 0 and 1
Pi
importance value of attribute i
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2.2 Statistically Inferred Importance (Indirect Method)

In this method, the importance of attributes is inferred from customer satisfaction or
product performance surveys. The data is then analysed by one of statistical methods
such as multiple regression analysis or structural equation modelling (SEM), normalised
pair wise estimation, and partial least squares models (Danaher and Mattsson, 1994;
Wittink and Bayer, 1994; Taylor, 1997; Varva, 1997; Anderson and Mittal, 2000; Chu,
2002). Therefore, the results from such indirect methods may differ from direct methods
as they elicit importance weights regarding the current level of performance.
For the purpose of measuring attribute importance, using indirect method, we employed
multiple regression analysis. The method simply regresses the relative performance
ratings of service attributes against dependent variable (overall customer satisfaction) to
generate significant-level for individual attribute. As a result, the service attribute with
the greatest slope parameter will result into larger increase in overall customer
satisfaction per unit increase in service attribute performance. In simple words, the linear
compensatory model operationalised by regressing overall customer satisfaction on the
performance scores of the service quality attributes (Rust et al., 1994; Parasuraman et
al., 1988; Danaher and Mattsson, 1994). According to literature, multiple regression
analysis seems to be a suitable tool for measuring attribute importance.
The statistical nature of this approach makes it a suitable analytical technique. One of
the advantages of regression analysis is that the method provides a model for all
attributes and forms an overall rating. As a result, multiple regression analysis estimates
the degree of influence that attributes have in determining customer satisfaction. The
primary problem with this approach is the multicollinearity among the independent
variables.
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1X1
...
nXn
(4.3)
Page 82
Next section considers an analytical method called importance-performance analysis

(IPA). The method uses importance and performance of service attributes for customer
satisfaction management and resource allocation.
3. Analytical Methods
3.1 Importance-Performance Analysis (IPA)
Importance-performance analysis (IPA) is a method for measuring customer satisfaction
introduced by Martilla and James (1977). The IPA method has been adopted in various
industries such as tourism and hospitality (Go and Zhang, 1997; Hollenhorst et al.,
1986), education (Alberty and Mihalik, 1989), and health care (Dolinsky, 1991;
Dolinsky and Caputo, 1991). Despite its advantages a number of studies have
highlighted its shortcomings (Oh, 2000; Matzler et al., 2003, 2004; Ting and Cheng,
2002). To overcome some of its shortcomings additional features have been introduced
to the original IPA framework (Dolinsky and Caputo, 1991; Vaske et al., 1996). For
example, Matzler et al. (2003) have combined IPA with the Kanos model for improved
customer satisfaction evaluation.
The traditional IPA method is based on two primary assumptions: First, performance
and importance of attributes are independent variables (Martilla and James, 1997; Oliver
1997; Bacon 2003), and second assumption there is that a symmetric and linear
relationship exists between attribute performance and customer satisfaction.
Previous studies revealed the positive relationship between performance and the
importance levels of attributes using the IPA grid (Mittal et al., 1998; Sampson and
Showalter, 1999; Anderson and Mittal, 2000; Mittal and Katrichis, 2000; Mittal et al.,
2001; Matzler et al., 2003). The grid describes the levels of concentration of managerial
initiatives in the quadrants (in this case II and IV see Figure 4.6). In contrast, a
negative association between importance and performance shifts the focus onto
quadrants I and III. Service or product attributes that are located in Quadrant I are rated
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high in importance and low in performance. Immediate measures should therefore be

taken to increase the product performance levels. Quadrant II represents attributes that
Attribute importance
Figure 4.6: Traditional importance-performance analysis (IPA) grid

Quadrant I
Quadrant II
High Importance
Low Performance
High Importance
High Performance
Quadrant IV
Quadrant III
Low Importance
Low Performance
Low Importance
High Performance
Quadrant I:
Improvement efforts should be concentrated on
the attributes of this cell (major weakness).
Quadrant II:
Keep up the good work (major strength).
Quadrant III:
Low priority efforts should be spent on the
attributes of this cell (minor strength).
Quadrant IV:
Unnecessary to spend present efforts on the
attributes of this cell (minor weakness).
Attribute performance
are rated high in both performance and importance. In this quadrant the company should
continue to maintain the same performance levels to sustain competitive advantages.
High performance on low importance attributes demands of reallocation of resources
from this quadrant (III) to somewhere else. In quadrant IV, both importance and
performance are rated low. As a result, there would be no need for further action to be
taken. Some studies reported that companies that invested on service attributes in
Quadrant I did not experience an increase in customer satisfaction. (e.g., Mittal et al.,
1998; Sampson and Showalter, 1999).
4. Statistical Methods for Measuring the Relationship between Service

Attribute performance and Customer Behaviours
4.1 Multiple Regression Analysis with Dummy Variables
In order to identify the asymmetric impact of attribute performance on attribute
importance, a regression analysis with dummy variables was proposed by Anderson and
Mittal (2000), Brandt (1998), Matzler and Sauerwein (2002). Here, two sets of dummy
variables were defined; the first set dummy of variables quantify as basic attributes, and
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the second ones quantify as exciting attributes. The attribute-level performance ratings
are recoded as (0,1) for low ratings, (0,0) for average ratings, and (1,0) for high ratings.
As a result, two regression coefficients will be obtained.
Sattot al
1n
dummy1 Attn
Where Sattotal
1 Att1
dummy1 Att1
2n
2 Att1
dummy2 Att1
...
dummy2 Attn
(4.4)
is the overall customer satisfaction, and n is the number of quality
attributes (n = 7), dummy 1 indicates the lowest customer satisfaction level,

dummy 2 indicates the highest customer satisfaction levels,
is the incremental decline
in overall satisfaction associated with low satisfaction levels, and
is the incremental
increase in overall satisfaction associated with high satisfaction levels. In this case,
multiple regression analysis can be inappropriate if multicollinearly exists within the
independent variables (Matzler et al., 2004). In the case of multicollinearly, partial
correlation analysis with dummy variables and multiple regression with natural
logarithmic dummy variables are proposed to be more suitable (Ting and Chen, 2002;
Matzler et al., 2004; Brandt, 1988; Anderson and Mittal, 2000; Hair et al., 1995).
4.2 Binary Logistic Regression Analysis

Despite the similarities between linear regression and logistic regression, linear
regression can not be applied to a situation in which the dependent variable is categorical
or dichotomous. The linearity assumption of linear regression will be violated when the
dependent variable is dichotomous (Berry, 1993). Since the probability of an event must
lie between 0 and 1, it is impractical to model probabilities with linear regression
technique, because linear a regression model allows the dependent variable to take
values greater than 1 or less than 0. One solution for this issue is to transform the data
using the logarithmic transformation (Berry and Feldman, 1985, and chapter 3). There
are two forms of logit models that are suitable for this type of modelling; logit models
and logistic regression models. According to literature, the distinction between two
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models, sometime, is based on whether continuous explanatory variables are included in

the set of X variables (Liao, 1994) or not. Logit models used (equation 4.5) for
categorical variables, and logistic regression models within mixed categorical and
continuous variables.
Log
P ( y 1)
1 p ( y 1)
(4.5)
k 1
Equation 4.5 expresses the multiple linear regression equation in logarithmic terms. The
independent variables are estimated by using the maximum-likelihood estimation, which
selects coefficients that make the observed values that were most likely to occur. In this
thesis, logistic regression is used for estimating the relationship between customer
satisfaction and switching intention. The method is useful for situations in which you
need to predict the presence or absence of a characteristic or outcome based on values of
a set of predictor variables. Logistic regression is multiple regression but with
categorical dependent variable, and continuous or categorical independent variables. In
other words, which of two categories (black and white) a person or an event is likely to
belong to given certain other information. Mathematically, logistic regression predicts
the probability of Y occurring given known values of X 1 or X n ; see equations 4.6 and
4.7, while ordinary regression predicts the value of a variable Y from a predictor
variable X 1 or several predictor variables X n . The resulting value of Y is a probability
value that varies between 0 and 1, see Figure 4.7. A value close to 0 means that Y is very
unlikely to occur and value close to 1 means that Y is very likely to occur.
P(Y )
1
1
X1
iXI
P (Y )
(4.6)
(4.7)
1 e
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P(Y) is the probability of customer switching intention; is a constant, is the estimated

coefficients, X i are the independent variables, and is the base of natural logarithm.
According to equations 4.6 and 4.7, the probability of switching behaviour increases
with a unit increase in the independent variable when a coefficient of independent
variable is positive. In this research work the logistic regression technique is used to
construct a model to predict and classify customer data.
Figure 4.7: Logistic Regression
Linear Regression
4.3 Logistic Regression with Dummy Variables

In order to identify the asymmetric impact of overall customer satisfaction on customer
switching intention (CSI), a binary logistic regression analysis with dummy variables
will be used (Equation 4.8). Accordingly, two sets of dummy variables; the first dummy
variable evaluates the impact of customer dissatisfaction, and the second dummy
variable evaluates customer satisfaction. The overall customer satisfaction ratings are
recoded as (0,1) for low ratings, (0,0) for average ratings, and (1,0) for high ratings. As a
result, two regression coefficients will be obtained.
1
Customer Switching Intention =
1 e
1. Disatisfaction
dummy1
2. Satisfaction
(4.8)
dummy2 )
CRP is the customer retention probability, dummy 1 indicates lowest customer

satisfaction level, dummy 2 indicates highest customer satisfaction levels,
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Page 87
incremental decline in overall customer satisfaction associated with low satisfaction

levels, and
the incremental increase in overall customer satisfaction associated with
high satisfaction level.
4.4 Structural Equation Modelling (SEM)

Structural equation modelling (SEM) is a statistical technique for evaluating causal
relationships using a combination of statistical data and qualitative causal assumptions.
However, this technique is suited for confirmatory rather than exploratory modelling. In
simple words, it is a cause-effect modelling technique that provides a quantitative
assessment of relationships between variables. The method can be employed for two
purposes; (1) validation of theoretically based causal relationships, and (2) prediction of
the latent variables.
Effect = (specified causes, unspecified causes)
(4.10)
In other words, SEM is a statistical model that explains the relationship between
dependent and independent variable. Similar to multiple regression equation, the
technique examines the structure of the relationships expressed in a series of equations.
By using SEM, each variable needs to be linked to its theoretical construct in a reflective
manner.
Using SEM technique, a confirmatory factor analysis (CFA) is computed and the
relationships are tested using with the AMOS 7.0 software. The sample size of 200 is
seemed to be sufficient for SEM (Spector 1992; Hair et al., 1995). The reason is that
small sample sizes are not compatible with maximum likelihood (ML) estimation of
covariance structure models. However, Fornell (1983) reported that ML can be justified
when the sample size minus the number of parameters to be estimated exceeds 50.
In order to test hypothesises defined in this thesis, a case study conducted in the mobile
telecommunication industry. Next section discusses the UK mobile telecommunication
industry.
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5. Case Study: Mobile Telecommunication Services

The industry of study for this thesis is the UK mobile telecommunication industry. There
has been rapid technological growth over the last 10 years in the mobile
telecommunication market. The number of mobile subscriber per 100 fixed lines has
nearly doubled from 2000 to 2004 year, whereas this growth was much larger in 1990s.
Ofcom (2007) reported that mobile services account for 53 per cent of total telecom
revenues. The UK has one of the largest mobile markets in Europe, served by six major
operators: Vodafone, Orange, T-Mobile, Virgin, O2 and 3-network. The following are
additional information regarding the UK telecommunication:
There are over 73.4 million mobile subscribers in the UK in 2007 including more
than 115 subscriptions per hundred people (source: research markets).
People in the UK send 43 billion texts, an average of 621 per mobile user.
The number of landlines fell by 5 per cent to 34 million homes.
The number of mobile-only households in the UK has risen to around 13 per

cent.
The fierce competition have forced firms to concentrate their resources on packaging
service bundles and line service promotions, and providing mobile searching and
advertising facilities. The UK is one of the leading countries in Europe for the
telecommunications industry. It has one of the most open and competitive telecoms
market in the world. Some incentives like liberal market regime, access to leading-edge
technology, and substantial deregulation has attracted lots of telecommunication
operators, service providers and manufacturers to the UK telecoms market. In a market
characterised by high acquisition costs and falling growth, companies have focused
strongly on customer retention. The migration to longer contracts is a key trend across
the mobile telecoms industry. Until 2005, the maximum contract length available was 12
months; in the first three of months of 2007, 79% of new contracts were for 18 months
or longer (shown in Figure 4.8). In July 2007 the lunch of a 24-month contract by O2
meant that all five network operators were offering customers two-year contracts.
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Figure 4.8: Lengths of new mobile contract connections (Source: Ofcom)
UK revenues from mobile telephony includes calls and fixed charges, connection,
picture and text were about 9bn annually in 2003 (Ofcom, 2007). There is evidence of
accelerating substitution of fixed calls by mobile calls (shown in Figures 4.9 and 4.10),
driven by falling mobile prices and an increasing number of mobile contracts with a
large number of inclusive minutes.
Figure 4.9: UK total outbound call volumes (Source: Ofcom)
Billions of minutes
250
200
52
59
64
71
82
150
100
Mobile
Fixed
165
167
164
160
152
2002
2003
2004
2005
2006
50
0
Despite further growth in the number of mobile phone connections coming primarily
from ownership of multiple handsets (at the end of 2006 there were 69.7 million active
mobile connections, compared to the UK population of around 70 million), average
outbound calls per mobile connection rose to over 100 minutes for the first time in 2006,
with average call per fixed line falling below 300 minutes (Ofcom, 2006). In addition,
Figure 4.11 presents real costs of a basket of residential telecoms services. Interestingly,
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customer usage of broadband and fixed voice calls has significantly decreased in the past
few years. Following section discusses the data collection and research instrument in this
study.
Figure 4.10: Household spends on telecommunication services (Source: Ofcom)
70.00
Fixed voice
60.00
Mobile voice and text
50.00
40.00
27.95
26.16
23.91
22.81
24.37
28.31
31.36
32.42
31.72
2002
2003
2004
2005
2006
29.85
30.00
20.00
10.00
0.00
Figure 4.11: Real costs of a basket of residential telecoms services (Source: Ofcom)
Monthly cost { 2006 prices}
100%
80%
60%
11.65
11.39
11.59
11.69
18.31
17.19
15.36
13.59
11.88
Fixed access
12.8
Fixed voice calls

Mobile voice and text
Broadband
45.04
43.2
40.04
34.97
60.45
29.83
25.27
20
16.11
14.73
40%
20%
0%
2002
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2003
2004
2005
2006
Page 91
6. Data Collection and Research Instrument

This thesis utilised quantitative surveys for data collection (Appendix A). Data are
collected by face to face interview and analysed by standard statistical techniques to
establish relationships between variables. The research survey instrument was a selfadministered questionnaire. In order to have consistent responses, respondents were
selected from similar age groups and job profile. As a result, the questionnaire was
distributed among students of the Brunel University. The sample consists of 270
respondents. From this sample, 74.4% of the respondents were under 27 years old. This
consistency helps with outcomes, as customers from different groups in terms of age and
occupation are likely to have different behaviours.
Regarding the sample size, the traditional rule suggested that a study has at least 10-15
participants per variable. Later some studies recommended 5-10 participants per variable
up to a total of 300 (Kass and Tinsley, 1979). Comrey and Lee (1992) stated that a
sample size of 300 to be sufficient, 100 as poor and 1000 an excellent. Moreover,
Spector (1992) and Hair et al., 1995 declare that the sample size of 200 is seemed to be
sufficient.
Several studies strongly recommended pre-testing questionnaire to detect deficiencies in
design, administration and question wording (Robson 1993; Remenyi et al., 1998). For
this reason, the questionnaire was pre-tested by administrating it to students that had
been contacted and participated in the pilot study. A random sample of 30 students were
selected and interviewed. Pre-test respondents took between 10 and 15 minutes to
complete the questionnaire. Results of the pre-test led to minor wording changes and
design within the questionnaire structure.
There is no consensus over Likert scale in terms of how many points should be used. It
is, however, suggested to use 5 or 7 points rather than 9 points in order to reduce
respondent confusion and time (Mentzer et al., 1999; Robson, 1993). In addition, Likert
argued that it seems justifiable and to use this assumption as the basis for combining
the different statements (1932, p.22). Spector provided four characteristics of rating
Vahid Pezeshki
Page 92
scales: a scale must contain multiple items each individual item must measure
something that has an underlying, quantitative measurement continuum each item has
no right answer and each item in a scale is a statement and respondents are asked to
give ratings about statement (1992, p.1). Furthermore, he supports this format scale
through three reasons: it can produce scales that have good psychometric properties
that is good reliability and validity it is relatively cheap and easy to develop and it
is usually quick and easy for respondents to complete and typically does not induce
complaints from them (1992, p.2).
Main attributes of mobile phone services were extracted and adopted from previous
studies (Botton and Drew, 1991; Kim and Yoon, 2004; Busacca and Padula, 2005;
Ofcom). In addition, in the pilot study, participants were asked to comment on service
attributes variety. As a result, 9 different attributes selected for measuring the
performance mobile services in the UK; network performance, customer service quality,
brand image, range of services, service plans, range of phones, accuracy of billing and
payment, value for money, and entertainment features, see Appendix A.
For measuring service attribute importance, participants were asked to rank the three
most important attributes out of 9 attributes. The data of this section used for measuring
service attribute important using direct method.
Participants were asked to rate the performance of service attributes based on a 7-point
scale ranging from 1=poor to 7=Excellent. For measuring customer satisfaction
(CS), participants were asked to comment on the statement What is your overall
satisfaction level towards your mobile phone and service provider?, using a 7-point
scale anchored with the reply options 1= Strongly dissatisfied to 7 = Strongly
satisfied. For measuring customer switching intention (SI) or customer retention (CR),
participants were asked whether they would consider switching to a better offer from
another service provider? (Russ and Zahorik, 1993). Answers had to be given on a 2point scale either Yes or No. Table 4.1 reports data distribution of the CR indicator
in this sample data. The reason for measuring customer retention on binary scale is that
customer retention has defined as switching intention based on experience with a service
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Page 93
provider. To measure customer word of mouth (WOM) or customer loyalty (CL), an

indicator of willingness to recommend a product or service to others was indentified.
Reichheld (2003) argues that recommend intention is by far the best indicator of actual
customer loyalty behaviour. Therefore, participants were asked to about the extent their
experience, and would recommend their own network operator to friends or relatives.
Participants were provided with a five-point scale ranging from 1 = I would highly
oppose to 5 = I would highly recommend.
Table 4.1: Distribution of answers for variables customer satisfaction, customer loyalty,
and customer retention
Percentage frequency of answers for scale level
(Low --------------------------------------------> High)
Variables
Customer satisfaction
Mb
2.6
3.4
6.4
13.2
19.5
48.1
6.8
5.15
1.36
266
Percentage frequency of answers for scale level

1
Customer loyalty
2.3
(Low --------------------------> High)

2
3
4
5
Mb
5.3
3.72
.897
264
28.8
45.8
17.8
Unlikely to
switch
Likely to
switch
38.8
61.2
268
Customer retention
M b = mean value, S = standard deviation; n = number of valid answers received
This chapter provided a rational for the research approach and methods undertaken in
this thesis. It first justified the quantitative research approach within the context of the
service quality-customer behaviour shown in Figure 3.5. Table 4.2 lists the analytical
and statistical methods employed in this thesis. Next, the industrial sector of UK mobile
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Page 94
telecommunication was discussed. The chapter introduced and discussed the framework
of research instrument in terms of measurement scales and constructs. The application of
the two-stage approach including the pilot and main study were outlined, and finally data
collection and research instrument were briefly introduced as a precursor to more
detailed discussions in Chapter 5 regarding the data reliability and validity.
Table 4.2: Analytical and statistical methods
Method(s)
Issue
-Multiple regression analysis

Measuring attribute importance
-Customer self-stated importance (Abalo et al. 2007)
-Importance-performance analysis (IPA)
-Multiple regression with dummy variables
Customer satisfaction management

Resource allocation
-Structural equation modelling (SEM)

-Regression with dummy variables
Service attribute performance-customer satisfaction
-Logistic regression
-Logistic regression with dummy variables
Customer satisfaction-customer switching intention
-Logistic Regression analysis with dummy variables
Customer switching intention-customer loyalty (WOM)
Finally, in Table 4.3, the author summarises the outcomes of this chapter, through
highlighting the major decisions and justification made to conduct this research.
Table 4.3: Summary of the research design
Level of Decision
Choice for the Specific Research Setting
Research Topic
Three Dimensional Modelling of Customer Satisfaction,

Retention and Loyalty for Measuring Quality of Service
Case Studies
Research Timeline
Mobile Telecommunication - UK
Research Approach
Qualitative and quantitative
Research Strategy
Case Study
Data Collection
Research Methods
(a) Interviews
(b) Questionnaire
Data Analysis
Analytical and statistical analysis
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Chapter/Section
3
4.6 and 4.7
3 and 4
4.4 and 4.5
4.6
5 and 6
Page 95
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Chapter 5: Data Validation
5
CHAPTER 5
DATA Validity and Reliability
Testing the validity and reliability of survey data is the perquisite for data analysis and
inference. This chapter is organised into two parts; in the first part the reliability of the
questionnaire is tested. In the second part, the factor analysis is conducted which aims to
validate the survey questionnaire.
1. Reliability Analysis
Reliability analysis tests whether a scale consistently reflects the subset it measures
(Churchill, 1979; Dunn et al., 1994; Nunnally and Bernstein, 1994). By consistency it is
firstly meant that a respondent should score questionnaire the same way at different
times. Secondly, two respondents with the same attitude towards a product/service be
able to identically score the survey. Thus, scale reliability is a necessary prerequisite for
survey validity test (Carmines and Zeller, 1979; Lam and Woo, 1997).
Split-half could be one of the most suitable method to test survey reliability (Field,
2005). This method randomly splits the data set into two and conducts correlation
testing. In other words, a score for each participant is calculated based on each half of
the scale. If the scale is reliable, then the scores from the two halves of the questionnaire
should correlate perfectly. It is argued that the method used for splitting the data into two
can affect the results of reliability analysis. Cronbach (1951) introduced a method that is
equivalent to splitting data into two parts in every possible way (Cronbachs ). The
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Page 101
method is the most common measure of scale for reliability testing (Nunnally and
Bernstein, 1994; Flynn and Pearcy, 2001).
N 2 Cov
2
sitem
Covitem
(5.1)
Where;
N = number of items
Cov = average covariance between items

S = variance within items
In this thesis, the Cronbachs is used as measure of internal scale consistency, using
SPSS (Statistical Package for the Social Sciences). According to Field (2005), values
between 0.7 and 0.8 of Cronbachs are acceptable values of consistency. Any values
less than that would be considered as unreliable. The overall Cronbachs for the
surveys designed for this study is 0.839 (Table 5.1). Table 5.2 reports on the reliability
analysis. The values in the column labelled Corrected Item-Total Correlation indicate
measurable estimate. The values in the column labelled Cronbachs Alpha if item
deleted indicate the values of the overall when an item with survey is omitted. All
Cronbachs values in that column are in the close approximation of one another, which
indicates good reliability of the date. Furthermore, none of the items in the column are
greater than overall Cronbachs . This means the deletion of any item would not
improve reliability. However, Field (2000) argues that removing the item at this stage
may not significantly improve reliability. In addition, further omitting of any item from
the survey may affect the accuracy of the factor analysis. The other column labelled
Corrected Item-total Correlation shows the correlations between
Table 5.1: Reliability statistics
Vahid Pezeshki
Cronbachs
Alpha
Cronbachs Alpha Based

on Standardised Items
N of
Items
.839
0.840
Page 102
the values of each item and the total score from the questionnaire. For these data, all the
data have, Item-Total Correlations, above 0.3 which means that all items correlate with
the total.
Item-Total
Statistics
Table 5.2:
Item-total
statistics
Network performance
Customer service quality
Brand image
Range of services
Service plans
Range of phones
Accuracy of billing and
payment
Value for money
Entertainment features
Scale Mean if
Item Deleted
40.13
40.68
40.36
40.27
40.44
40.54
Scale
Variance if
Item Deleted
60.009
57.532
59.379
57.792
58.757
58.364
Corrected
Item-Total
Correlation
.425
.527
.546
.634
.474
.525
Squared
Multiple
Correlation
.253
.312
.384
.439
.387
.368
Cronbach's
Alpha if Item
Deleted
.836
.825
.824
.815
.831
.825
40.39
56.482
.575
.365
.820
40.63
40.87
52.732
57.224
.725
.541
.593
.368
.802
.824
The result of Cronbachs shows that the results extracted from the questionnaire is
highly reliable. Next section considers data validity by implementing factors analysis.
2. Exploratory Factor Analysis

Factor analysis is a statistical technique used to identify and explain the correlations
among variables. Furthermore, the method identifies the relationship between variables
that may indirectly be connected. The technique can be adopted:
1) to understand the structure of a set of variables
2) to construct a questionnaire to measure an underlying variable
3) to reduce a data set to a more manageable size
The first output of the preliminary analysis is based on descriptive statistics. Table 5.3
contains descriptive statistics for the mean and standard deviation of each attribute. This
information reveals that the highest agreement between correspondents responses is for
network performance and the smallest agreement is for range for phones.
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Table 5.3: Item statistics

Overall satisfaction
Network performance
Brand image
Range of services
Service plans
Range of phones
Accuracy of billing and payment
Value for money
Mean
5.28
5.41
4.86
5.18
5.27
5.10
4.99
5.15
4.91
4.67
Std. Deviation
1.287
1.428
1.469
1.249
1.254
1.455
1.389
1.479
1.549
1.474
In order to test multicollinearity within the customer data set, a correlation matrix is
constructed, using the SPSS tool. The analysis produces a matrix indicating the
significance of the value of each correlation. Table 5.4 shows the results of the
implementation of the correlation matrix or R-matrix that generates the coefficients and
significance levels. The first part of the table contains the Pearson correlation coefficient
between all service attributes whereas the second part contains the one-tailed
significance of these coefficients. The correlation matrix can be used to check the pattern
of relationships. For these data, the significance value (P) of majority of attributes
(variables) is greater than 0.05 apart from service plans. In addition, all correlation
coefficients are less than 0.9. The determinant of the correlation matrix (0.185) is greater
than necessary value of 0.00001. From this estimation values, one can conclude that all
questions in the survey are consistent and valid for data analysis. Therefore, we can be
confident that multicolinearity does not occur in our case. It further confirms that there is
no need to eliminate any attribute from the data set at this stage.
Moreover, sample size is important in the factor analysis reliability tests. As correlation
coefficients changes from sample to sample, especially in small sample size. The
traditional rule suggested that a study has at least 10-15 participants per variable. Later
some studies recommended 5-10 participants per variable up to a total of 300 (Kass and
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Page 104
Table 5.4: Correlation matrix
Correlation
Sig. (1-tailed)
Network performance
Rang of phones
Range of services
payment
Value for money
Service plans
Network performance
Rang of phones
Range of services
payment
Value for money
Service plans
Correlation Matrixa
Network
performance
1.000
.357
.247
.347
Customer
service
quality
.357
1.000
.304
.372
Rang of
phones
.247
.304
1.000
.226
Range
of
services
.347
.372
.226
1.000
Accuracy of
billing and
payment
.306
.417
.225
.344
Value
for
money
.389
.444
.291
.416
Service
plans
.076
.246
.136
.340
.306
.417
.225
.344
1.000
.550
.322
.389
.076
.444
.246
.000
.291
.136
.000
.000
.416
.340
.000
.000
.001
.550
.322
.000
.000
.001
.000
1.000
.531
.000
.000
.000
.000
.531
1.000
.141
.000
.028
.000
.000
.000
.000
.000
.000
.000
.000
.001
.000
.000
.001
.000
.000
.141
.000
.000
.000
.028
.000
.000
a. Determinant = .185
Vahid Pezeshki
Page 105
.000
.000
.000
.000
Tinsley, 1979). Comrey and Lee (1992) stated that a sample size of 300 to be sufficient,
100 as poor and 1000 an excellent.
Kaiser-Meyer-Olkin technique to measure adequacy of sampling (KMO) could be also a
suitable method (Kaiser, 1970). The method calculates the squared correlation between
variables to the squared partial correlation between variables. The KMO value varies
between 0 and 1. A value of 0 indicates that the factor analysis would be inappropriate,
whereas a value close to 1 indicates that the factor analysis is reliable. Kaiser (1974)
recommends a KMO = 0.5 to be the main acceptable value, whilst values 0.5 < KMO <
0.7 to be mediocre, 0.7 < KNO < 0.8 to be good, and KMO > 0.8 to be excellent
(Hutcheson and Sofroniou, 1999, pp. 224-225). The KMO for the current research is
equal to 0.798, which falls into the range of being good: so, we should be confident that
factor analysis is an appropriate method for data analysis.
KMOKMO
and Bartlett's
Test test
Table 5.5:
and Bartletts
Kaiser-Meyer-Olkin Measure of Sampling
Adequacy.
Bartlett's Test of
Sphericity
Approx. Chi-Square
df
Sig.
.798
332.669
21
.000
Bartletts test of sphericity and the anti-image correlation and covariance metrics
provide similar information to the relationship between correlation and covariance,
shown in Table 5.6 (Field, 2005). The KMO values for each attributes are generated on
the diagonal of the anti-image correlation matrix (as highlighted the values in red bold).
All values are above the bare minimum 0.5 which is good. The rest of anti-image
correlation matrix, the off-diagonal elements represent the partial correlations between
attributes (variables). The majority of these correlations are very small. For this study,
the Bartletts test is highly significant (P= 0.001), and therefore based on the anti-image
correlation and covariance metrics the factor analysis is appropriate.
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Page 106
Table 5.6: Anti-image metrics
Anti-image
Covariance
Anti-image
Correlation
a.
Network performance
Rang of phones
Range of services
payment
Value for money
Service plans
Network performance
Rang of phones
Range of services
payment
Value for money
Service plans
Anti-image Matrices
Network
performance
.738
-.106
-.073
-.145
Customer
service
quality
-.106
.691
-.121
-.107
Rang of
phones
-.073
-.121
.863
-.047
Range
of
services
-.145
-.107
-.047
.722
Accuracy of
billing and
payment
-.041
-.124
-.017
-.057
Value
for
money
-.139
-.083
-.068
-.049
Service
plans
.145
-.007
.015
-.131
-.041
-.124
-.017
-.057
.650
-.185
-.025
-.139
.145
.766a
-.149
-.092
-.198
-.083
-.007
-.149
.864a
-.156
-.152
-.068
.015
-.092
-.156
.880a
-.059
-.049
-.131
-.198
-.152
-.059
.861a
-.185
-.025
-.059
-.185
-.023
-.083
.474
-.242
-.235
-.145
-.107
-.084
-.242
.670
.207
-.011
.020
-.189
-.059
-.185
-.023
-.083
.842
-.334
-.038
-.235
.207
-.145
-.011
-.107
.020
-.084
-.189
-.334
-.038
.753a
-.430
-.430
.689a
a. Measures
of Sampling
Adequacy(MSA)
Measuring
of sampling
adequacy
(MSA)
In the next section, the factor extraction will be presented as part of factor analysis. The outcome of this analysis helps to determine
which factors to retain and which factor to discard
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2.1 Factor Extraction

This part of factor analysis assesses the eigenvalues that determine the linear
components within the data set. The eigenvalue is a measure for discovering whether
predictors are dependent or otherwise. Table 5.7 represents eigenvalues associated with
each linear factor (component) before extraction, after extraction and after rotation.
Before extraction, 7 linear components have been identified within the data set. The
eigenvalues with each factor represent the variance explained by that particular linear
component and using the SPSS tool eigenvalue can be reached in terms of the
percentage of the variance (for instance, attribute 1 explains 43.209% of total variance).
Some attributes explain relatively a large amounts of variance (especially attribute 1)
while subsequent attributes explain only small amounts of variance. In the Extraction
Sums of Squared Loadings column, the attributes with eigenvalues greater than 1 are
extracted from the previous part (two attributes).
Table 5.7: Total variance explained
Total Variance Explained

Extraction Sums of Squared
Loadings
Initial Eigenvalues
Component
1
2
3
4
5
6
7
Total
3.025
1.013
.792
.686
.605
.539
.339
% of
Variance
43.209
14.473
11.319
9.801
8.648
7.702
4.848
Cumulative
%
43.209
57.681
69.001
78.802
87.450
95.152
100.000
Total
3.025
1.013
% of
Variance
43.209
14.473
Cumulative
%
43.209
57.681
Rotation Sums of Squared

Loadings
Total
2.170
1.868
% of
Variance
30.999
26.682
Extraction method:
Method: Principal
Extraction
PrincipalComponent
componentAnalysis.
analysis
In the final part of the table, the eigenvalues of the attributes after rotation are displayed.
Rotation has the effect of optimising the facture structure and the consequence is that the
relative importance of the two factors is equalised. Before rotation, attribute 1 accounted
for considerably more variance than the remaining one (43.209% compared to
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Page 108
Cumulative
%
30.999
57.681
14.473%); however, after extraction it accounts for only 30.999% of variance compared
to 26.682%.
Table 5.8 reports the communalities before and after the extraction. The communality is
the proportion of common variance within a variable. Thus, the communalities after
extraction show the degree of common variance. For example, 60.4% of the variance
associated with question 1 (network performance) is common, or shared, variance. In
other words, the amount of variance in each variable is explained by the retained factors
presented by the communalities after extraction. According to Field, the results of this
part is acceptable and fine as the sample size exceeds 250 and the average of the
communalities is nearly 0.6 (2005, p.656).
Table 5.8: Communalities before and after extraction

Communalities
Component Matrix
Network
performance
Customer service
quality
Rang of phones
Range of services
Accuracy of billing
and payment
Value for money
Service plans
Initial
Extraction
1.000
.604
1.000
.528
1.000
1.000
.434
.448
1.000
.521
1.000
1.000
.718
.784
Extraction method:
Principal component analysis.
Vahid Pezeshki
Value for money

payment
Range of services
Network performance
Rang of phones
Service plans
Components
1
2
.818
.714
.696
.696
.584
.486
.579
.513
.445
-.670
Extraction method: Principal component analysis.

(a) 2 components extracted.
Page 109
2.2 Collinearity Test

As it has been discussed in Chapter 4, two or more variables can be strongly correlated
in a regression model. In this case (multicollinearity), it becomes impossible to obtain
accurate estimates of the regression coefficients because there are infinite number of
combinations of coefficients that would work equally well.
In order to test collinearity, tolerance and variance influence factor (VIF) were measured
(Table 5.9). According to Menard (1995), a tolerance value less than 0.2 almost certainly
indicates a serious collinearity problem. All tolerance values are substantially greater
than 0.2. Moreover, a VIF value greater than 10 is a cause for concern (Myers, 1990;
Bowerman and OConnel, 1990). In this data set, the average VIF value is not
substantially greater than 1 (Equation 5.2) which confirms that collinearity would not be
a problem for this model (Bowerman and OConnel, 1990). Furthermore, SPSS
a
TableCoefficients
5.9: Coefficients
Model
1
Network performance
Brand image
Range of services
Service plans
Range of phones
payment
Value for money
Collinearity Statistics
Tolerance
VIF
.747
1.338
.688
1.454
.616
1.622
.561
1.784
.613
1.631
.632
1.583
.635
1.574
.407
.632
2.455
1.582
a. Dependent
Variable:
satisfaction
Dependent
variable: Overall
customerOverall
satisfaction
k
VIFi
VIF
i 1
.747 .688 .616 .561 .613 .632 .635 .407 .632

1.66
9
(5.2)
A table of eigenvalues of the scaled, uncentred cross-products matrix, the condition

index and the variance proportions for each predictor is displayed in Table 5.10. The
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variance proportions vary between 0 and 1, and for each eigenvalue should be
distributed across different dimensions. The variance of each regression coefficient can
be broken down across the eigenvalues. The variance proportions tell us the proportion
of the variance of each variable regression coefficient that is assigned to each
eigenvalue. It can be argued that if some of the eigenvalues are greater than others, the
any small change to the prediction of an outcome may affect the solutions for the
regressed parameters. In other words, the eigenvalues represent the accuracy of the
regression model.
In terms of collinearity, variables that have high proportions on the same small
eigenvalue indicate that the variances of their regression coefficients are dependent. The
only eigenvalues of interest mainly are the ones that have small eigenvalues (the bottom
few rows, Table 5.10). In this study, for example, 41% of the variance in the regression
coefficients of service plans and 46% of value for money are associated with
eigenvalue number 10 (the smallest eigenvalue). Moreover, 86% of the variance in the
regression coefficients of range of services is associated with eigenvalue number 9.
These results indicate a kind of dependency between these variables. In addition,
Pearson correlation between all of the attributes was conducted in this regression
analysis. The correlation between the above mentioned variables was measured (Table
5.11). The results prove that the attributes are not highly correlated (r = 0.403 and
0.455).
The Condition Index is an alternative route for expressing these eigenvalues and
presents the square root of the ratio of the largest eigenvalue of interest. For these data,
the final dimension has a condition index of 22.937.
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Table 5.10: Collinearity diagnostics

Variance Proportions
Dimension
Eigenvalue
1
2
3
4
5
6
7
8
9
10
9.600
.078
.065
.053
.050
.047
.037
.027
.025
.018
Condition
Index
1.000
11.067
12.197
13.463
13.856
14.252
16.051
18.949
19.547
22.937
(Constant)
Network
performance
Customer
Service
Brand
Image
Range of
services
Service
plans
Range of
phones
.00
.01
.01
.00
.08
.00
.10
.01
.15
.65
.00
.10
.02
.24
.16
.01
.16
.13
.01
.16
.00
.10
.11
.00
.26
.46
.01
.00
.05
.01
.00
.03
.03
.03
.00
.04
.01
.71
.04
.11
.00
.00
.02
.00
.00
.02
.04
.02
.86
.03
.00
.14
.05
.09
.20
.06
.02
.00
.01
.41
.00
.00
.21
.17
.02
.00
.11
.47
.00
.02
Dependent Variable: Overall customer satisfaction
Vahid Pezeshki
Page 112
Accuracy of
billing and
payment
Entertainment
features
.00
.00
.06
.16
.07
.11
.00
.39
.02
.10
.02
.00
.34
.01
.03
.01
.01
.16
.46
.05
Table 5.11: Correlations
Pearson
Correlation
Sig. (1-tailed)
Network performance
Brand image
Range of services
Service plans
Range of phones
Value for money
Network performance
Brand image
Range of services
Service plans
Range of phones
Value for money
Network performance
Brand image
Range of services
Service plans
Range of phones
Value for money
Vahid Pezeshki
Overall
satisfaction
Network
performance
Customer
service
quality
Brand
image
Range of
services
Service
plans
Range of
phones
1.000
.452
.466
.277
.340
.382
.268
.466
.553
.312
.
.000
.000
.000
.000
.000
.000
.000
.000
.000
158
158
158
158
158
158
158
158
158
158
.452
1.000
.370
.344
.330
.145
.188
.324
.382
.243
.000
.
.000
.000
.000
.034
.009
.000
.000
.001
158
158
158
158
158
158
158
158
158
158
.466
.370
1.000
.361
.411
.260
.324
.408
.439
.267
.000
.000
.
.000
.000
.000
.000
.000
.000
.000
158
158
158
158
158
158
158
158
158
158
.277
.344
.361
1.000
.429
.200
.507
.403
.413
.281
.000
.000
.000
.
.000
.006
.000
.000
.000
.000
158
158
158
158
158
158
158
158
158
158
.340
.330
.411
.429
1.000
.387
.462
.374
.455
.506
.000
.000
.000
.000
.
.000
.000
.000
.000
.000
158
158
158
158
158
158
158
158
158
158
.382
.145
.260
.200
.387
1.000
.265
.327
.592
.366
.000
.034
.000
.006
.000
.
.000
.000
.000
.000
158
158
158
158
158
158
158
158
158
158
.268
.188
.324
.507
.462
.265
1.000
.323
.411
.379
.000
.009
.000
.000
.000
.000
.
.000
.000
.000
158
158
158
158
158
158
158
158
158
158
Page 113
Accuracy
of billing
and
payment
.466
.324
.408
.403
.374
.327
.323
1.000
.545
.349
.000
.000
.000
.000
.000
.000
.000
.
.000
.000
158
158
158
158
158
158
158
158
158
158
Value
for
money
Entertainment
features
.553
.382
.439
.413
.455
.592
.411
.545
1.000
.509
.000
.000
.000
.000
.000
.000
.000
.000
.
.000
158
158
158
158
158
158
158
158
158
158
.312
.243
.267
.281
.506
.366
.379
.349
.509
1.000
.000
.001
.000
.000
.000
.000
.000
.000
.000
.
158
158
158
158
158
158
158
158
158
158
3. Chapter Conclusion
In this chapter, the author conducted the reliability and validity analysis for the collected
data set. For the reliability analysis, Cronbach method (1951) was implemented. The
results show that all variables are significantly reliable by the overall Cronbachs =
0.839.
For this data, all attributes correlate with the dependent variable. In the second stage, the
validity analysis was conducted by using the factor analysis method. The results of the
factor analysis revealed that 71% of the variance in the regression coefficients of brand
image is associated with eigenvalue of accuracy of billing and payment, and 86% of
the variance in the regression coefficients of range of services is associated with
eigenvalue of value for money. For this reason, two attributes of brand image and
range of services were omitted from the list of key service attributes. Moreover, the
results showed that there is no evidence of collinearity for this data set.
Chapter References
Bowerman, B.L. and OConnel, R.T. (1990), Linear statistical models: an applied approach (2nd
edition), Belmont, CA: Duxbury.
Carmines, E.G. and Zeller, R.A. (1979), Reliability and validity assessment, (Series 07
Number 017), Newbury Park, CA: Sage.
Churchill, G.A. (1979), A paradigm for developing better measures of marketing constructs,
Journal of Marketing Research, Vol. 16 (February), pp. 64-73.
Comrey, A.L. and Lee, H.B. (1992), A first course in factor analysis (2nd edition). Hilsdale: NJ:
Erlbaum.
Cronbach, L.J. (1951), Coefficient alpha and the internal structure of tests, Psychometrika,
Vol. 16, pp. 297-334.
Dunn, S.C, Seaker, R.F., and Waller, M.A. (1994), Latent variables in business logistics
research: scale development and validation, Journal of Business Logistics, Vol. 15, No.2, pp.
145-172.
Field, A.P. (2000), Discovering statistics using SPSS for windows: advanced techniques for
beginners. London: Sage.
Field, A.P. (2005), Discovering statistics using SPSS (and sex, drugs and rock n roll), SAGE
Publication,
Vahid Pezeshki
Page 114
Flynn, L.R. and Pearcy, D. (2001), Four subtle sins in scale development: some suggestions for
strengthening the current paradigm, International Journal of Market Research, Vol. 43, No. 4,
pp. 409-423.
Greene, S.B. (1991), How many subjects does it take to do a regression analysis?, Multivariate behavioural research, Vol. 26, pp. 499-510.
Hutcheson, G. and Sofroniou, N. (1999), The multivariate social scientists, London, Sage.
Kaiser, H.F. (1974), An index of factorial simplicity, Psychometrika, Vol. 39, pp. 31-36.
Kass, R.A. and Tinsley, H.E.A. (1979), Factor analysis, Journal of Leisure Research, Vol. 11,
pp. 120-138.
Lam, S.S.K. and Woo, K.S. (1997), Measuring service quality: a test-retest reliability
investigation of SERVQUAL, Journal of the Market Research Society, Vol. 39, Vol. 2, pp. 381396.
Menard, S. (1995), Applied logistic regression analysis, Sage university paper series on
quantitative applications in the social sciences, Thousand Oaks, CA: Sage, pp. 07-106.
Myers, R. (1990), Classical and modern regression with applications, 2nd edition, Boston, MA:
Duxbury.
Nunnally, J.C. and Bernstein, I.H. (1994), Psychometric Theory (3rd Edn.), New York:
McGraw-Hill.
Studenmund, A.H. and Cassidy, H.J. (1987), Using econometrics: a practical guide, Boston:
Little, Brown.
Vahid Pezeshki
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Chapter 6: Data Analysis and Findings
CHAPTER 6
DATA ANALYSIS
The literature in customer relationship management was reviewed in Chapter 2. A
conceptual model to formulate the service quality-customer behaviour profitability was
proposed in Chapter 3. The proposed conceptual framework seeks to model the
relationship between service attribute performance, customer satisfaction, customer
retention (switching probability) and customer loyalty (word of mouth). To do so, a
suitable research methodology was justified and introduced in Chapter 4. In addition, the
research instrument in terms of reliability and validity of data set and key assumptions
were appraised in Chapter 5. This chapter presents the analysis of the empirical data to
test the conceptual model (Figure 3.7). This chapter offers an empirical analysis of the
case study perspectives that describes service quality-customer behaviours model in the
UK mobile telecommunication industry.
The chapter discusses the interrelationships between service quality and customer
behaviours using various statistical and analytical methods. In Section 1 of this chapter
the relationship between service attribute performance and customer satisfaction is
measured using regression analysis with dummy variables. In Section 2, the author
evaluates the relationship between the importance and the performance of service
attributes. In order to measure attribute importance, a direct and an indirect method are
employed. However, the regression analysis with dummy variables was also used to
revise the traditional importance-performance analysis (IPA). Section 3 considers the
use of additional statistical method (SEM) to measure the service quality-customer
satisfaction. Section 4 discusses the relationship between customer satisfaction and
switching intention using logistic regression. Section 5 of this chapter assesses the
impact of length of relationship with customer satisfaction and customer switching
patterns. Finally, Section 6 measures the relationship between satisfaction, retention and
loyalty.
Vahid Pezeshki
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1. Measuring the Relationship between Service Attribute Performance and

As it has been discussed in Chapter 3, customer satisfaction management has been
traditionally based on the assumption that the relationship between attribute performance
and customer satisfaction is linear and asymmetric. This assumption has led to the
development of customer satisfaction measurement methods. The customer satisfaction
measurement method can be used to classify the more important attributes into which
managers should invest resources to maximise customer satisfaction (Wittink and Bayer,
1994; Martilla and James, 1977). Moreover, the research revealed that there are
significant difference between the key drivers of customer satisfaction and customer
dissatisfaction (Herzberg, 1987; Shiba et al., 1993; Dutka, 1993; Gale, 1994; Oliver,
1997; Cadotte and Turgeon; 1988a, b).
To assess the relationship between service attribute performance and customer
satisfaction, regression analysis with dummy variables was employed due to the
reliability of the techniques in comparison to other techniques such as Kanos
questionnaire (1984) and CIT (Flanagan, 954). To run the regression analysis with
dummy variables, the performance scores of each mobile service attribute were recorded
so that low performance was coded (0, 1), high performance (1, 0), and average
performance (0, 0), using the SPSS tool. This exercise allows for the formulation of the
dummy variables. The study defined as low performance all ratings from 1 to 3, high
performance all ratings from 5 to 7, and average performance all ratings of 4
(Equation 6.1).

1n
dummy1 Attn
2n
dummy2 Attn
1 Att1
dummy1 Att1
2 Att1
dummy2 Att1
...
(6.1)
Table 6.1 shows the results from the customer satisfaction model. The results indicate
that by entering six predictors (service attributes), the correlation (R) between predictors
and overall customer satisfaction is equal to 0.469. For this model R 2 value is 0.439.
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The value of R 2 explains that the service attributes account for 43.9% of the variation in
overall customer satisfaction.
Table 6.1: The customer satisfaction model statistics using regression with dummy
variables
R
0.685
R Square
0.469
Adjusted
R Square
0.439
Std. Error of
the Estimate
1.013
Change Statistics
R Square
Change
F Change
df1
df2
Sig. F
Change
0.469
15.338
12
208
0.000
DurbinWatson
Predictors: (Constant), network performance, customer service quality, service plans, accuracy of
billing and payment, range of phones, value for money
Dependent variable: Overall customer satisfaction
In addition, Table 6.2 contains an analysis of variance (ANOVA) that tests whether the
model is significantly better at predicting customer satisfaction when there is no visible
pattern. In other words, a variance equal to 43.9% is a significant amount. The F-ratio
represents the ratio of improvement in prediction that results from fitting the model. The
sum of squares ( SS M ) represents the improvement in prediction resulting from fitting a
regression line to the data rather than using the mean as an estimate of the outcome.
Residual sum of squares ( SS R ) represents the total difference between the model and the
observed data. The degrees of freedom (df) is equal to the number of predictors, and
for SS R is the number of observations (208) minus the number of coefficients in the
regression model. The model has twelve coefficients; one for each of the 12 independent
variables (service attributes), see Table 6.1. The F-ratio is 15.338 (p < 0.0001) which is
significant.
Model
Sum of
Squares
df
Mean Square
Sig.
Regression
Residual
Total
188.927
213.498
402.425
12
208
220
15.744
1.026
15.338
0.000
Vahid Pezeshki
Page 118
1.956
Based on this coding scheme, a multiple regression was conducted to estimate the
impact of each service quality attribute on overall customer satisfaction. For each
attribute, two regression coefficients were obtained, one to measure the impact when
performance ranked low, the other one when performance was ranked high. Table 6.3
presents the model parameters. The b-values represent the relationship between overall
customer satisfaction and each predictor (service attributes). In other words, the beta
value shows the change in the dependent variable due to a unit change in the predictor.
In this case, a unit change in the dependent variable (overall satisfaction) is the change
from 0 to 1. The positive b-value represents that there is a positive relationship
Table 6.3: The model summary of service attributes classification using regression
analysis with dummy variables
Service attribute classification
Unstandardized
Coefficients
B
Std.
Error
(Constant)
3.592
0.305
Network performance low
0.079
0.111
Network performance high
0.196
Customer service quality low
Standardized
Coefficients
95% Confidence
Interval for B
Sig.
Beta
Lower
Bound
Upper
Bound
11.765
0.000
2.990
4.194
0.048
0.713
0.477
-0.140
0.299
0.038
0.366
5.222
0.000
0.122
0.270
-0.001
0.095
-0.001
-0.010
0.992
-0.189
0.187
Customer service quality high
0.104
0.029
0.221
3.546
0.000
0.046
0.161
Service plans low
-0.014
0.093
-0.009
-0.147
0.883
-0.197
0.169
Service plans high
0.033
0.032
0.068
1.012
0.313
-0.031
0.097
Range of phones low
-0.204
0.092
-0.130
-2.230
0.027
-0.385
-0.024
Range of phones high

payment low
payment high
Value for money low
-0.054
0.029
-0.114
-1.854
0.065
-0.112
0.003
-0.178
0.099
-0.115
-1.797
0.074
-0.373
0.017
0.031
0.035
0.064
0.877
0.382
-0.038
0.100
-0.015
0.091
-0.012
-0.168
0.867
-0.195
0.164
Value for money high
0.097
0.038
0.202
2.572
0.011
0.023
0.172
between the predictor and the dependent variable whereas a negative coefficient
represents a negative relationship. For these data, we have both positive and negative
Vahid Pezeshki
Page 119
relationship between predictors and the outcome. Network performance (low and high
performance), customer service quality (high performance), service plans (high
performance), accuracy of billing and payment (high performance), and value for money
(high performance) have a positive relationship with the overall customer satisfaction.
This means, when performance level increases then overall satisfaction-level increases.
In this case, customer service quality (low performance), service plans (low
performance), range of phones (low and high performance) and value for money (low
performance) have a negative relationship with overall customer satisfaction. So as
performance-level increases, overall satisfaction may decrease. In addition, provided that
the coefficients of all other variables are held constant then the b-values demonstrate the
extent to which each variable influences the dependent variable. Each b-value contains
an associated error which is used to determine whether or not the b-value differs
significantly from zero. The standard error indicates the extent that the b-value varies
across different samples. However, the t-test is the most appropriate method to measure
the predictor significance in the model.
The other criterion for relational test is the standardised b-value which indicates the
number of standard deviations that the dependent variable will change as the result of
any standard deviation change in the independent variable. This change can be applied at
different levels to each predictor. In case of having different samples, the confidence
interval of the unstandardised b-values indicates the boundaries that 95% of samples will
contain the true value of b.
The analysis of the impact of attribute performance on overall satisfaction based on the
trend from negative to the positive performance domain, the factor structure is proposed
here to differentiate between basic, exciting, and performance service attributes (see
Table 6.4). As a result, the accuracy of billing and payment (AoBP) and range of phones
(RoP) can be classified as basic attributes. Their impact (coefficient) on overall customer
satisfaction is high when performance-level is ranked low, while they do not
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Table 6.4: The asymmetric impact of attribute performance on overall customer

satisfaction in negative and positive performance domains
Service attributes
Network performance
Service plans
Range of phones
Value for money
Dummy-variable
regression coefficient (a)
Low
High
performance performance
0.048 (ns)
0.366 ***
-0.001 (ns)
0.221***
-0.009 (ns)
0.068 (ns)
-0.130**
-0.114*
-0.115**
0.064 (ns)
-0.012 (ns)
0.202***
Service attribute
classification
Exciting
Exciting
Neutral
Basic
Basic
Exciting
(a) Standardised coefficients, R = 0.469; F-Value = 15.338

*** <0.01, **P <0.05, *P <0.1, ns = not significant
significantly affect overall customer satisfaction when performance-level is ranked high

(Figure 6.1). Customer service quality (CSQ), network performance (NP), and value for
money (VFM) can be viewed as exciting attributes. However, network performance has
a higher impact on overall customer satisfaction when performance-level is ranked high
comparing to CSQ and VFM. Furthermore, results show that the service plans (SP) is a
neutral attribute, as it does not result in either customer satisfaction or customer
dissatisfaction. However, the result for this attribute is not statistically significant (P
>0.1).
Figure 6.1: The asymmetric impact of attribute-level performance on overall satisfaction
0.4
0.3
0.2
Low performance
0.1
High performance
Value for
money
Accuracy of
billing
Range of
phones
Service
plans
Customer
service
Network
performance
-0.1
-0.2
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In this study, no performance or one dimensional attribute was identified. The impact of
service attribute performance on customer satisfaction can be varied from industry to
industry (Matzler and Renzl, 2007) and the results here are specific to mobile
telecommunication industry. It can be argued that the correlation between service
attribute performance and overall satisfaction, in the mobile communication industry, is
not linear or one-dimensional. As a result, customers expect that the main attributes
(basic) of mobile phone services to perform very well (e.g., accuracy of billing and
payment). Figure 6.2 shows the factor structure of customer satisfaction derived from the
regression with dummy variables technique.
According to attractive quality theory (Kano, 2001), the strength or importance of
service attributes may change over time. In this study we do not apply this theory to our
model, mainly because data collection should be executed at least 6 or 7 year periods.
Low Performance
Figure 6.2: The factor structure of customer satisfaction using regression

analysis with dummy variables
High Performance
High
Impact
Low
Impact
Low Impact
High Impact
Basic Factor
Range of phones
Performance Factor
NA
Performance Factor
NA
Exciting Factor
Network performance
Value for money
Finally, the results of regression with dummy variables confirm that service quality
attributes have dynamic characteristic (asymmetric and non-linear). Therefore, H1 can
be confirmed (there is an asymmetric and non-linear relationship between service
attributes performance and overall customer satisfaction). In addition, two types of
attributes were identified within the data set: the basic (H1.1) and the exciting attributes
(H1.3). In this special case, there is no performance attribute were identified.
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However, the classification of quality attributes in this industry may differ from other
industries. For instance, value for money in other industries may have different impact
on customer satisfaction. For instance, customers in automobile industry may consider
other attributes like design, brand and safety before value for money, whereas value for
money plays as core value in aviation industry. One could conclude that businesses
should fulfil all basic attributes, be competitive with regard to performance factors, and
stand out from competition regarding excitement factors.
This method is a useful tool in product/service development with respect to
product/service quality evaluation by the customers. Operationally, the classification of
service attributes helps managers to focus on the most important attributes that may
maximise customer satisfaction.
Next section considers the relationship between attribute importance and performance.
The relationship between these two factors may affect customer satisfaction
management and resource allocation processes.
2. Measuring the Relationship between Attribute Importance and

Performance of Service Attributes
The understanding of the relationship between attribute performance and overall
customer satisfaction plays a basic role in allocation of resources in business operations.
Measuring the impact of service attribute performance on customer satisfaction is an
important factor for companies and helps in determining the attributes that may yield
higher returns. However, customer satisfaction is not the only determinant in the
decision-making process. In this thesis, customer satisfaction is proposed as a mediating
attitude between performance of service quality attributes and the customers future
intentions, i.e. customer switching (retention) and word of mouth (loyalty).
In order to measure the relationship between attribute performance and attribute
importance, two methods were used in this study: (1) customer self-stated importance
(direct method), and (2) the multiple regression analysis (indirect method). There are
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several methods for measuring attribute importance-level directly (e.g. rating scales,
constant sum scales, etc.). In this study, we employed a method presented by Abalo et al.
(2007).
To measure the explicit importance (customer self-stated importance), the mean value
for customers rating of attribute importance for each attribute was computed, using
Equations 4.1 and 4.2 (Abalo et al., 2007). Respondents were asked to indicate the three
most important (k = 3) service attributes, using the Natural numbers from 1 (most
preferred) to 3 (least preferred), with no ties allowed (Shown in Appendix A). Using
such method avoids ambiguity while asking participants to rank attributes importance
one by one may result in skewness and ambiguity.
In order to assign each attribute (i) an importance value ( Pi ) lying between 0 and 1, we
integrate the attribute ranking assigned by respondents. The value of Pi should increase
with the importance of attribute i. g ij presents the rank assigned to the i-th attribute by
the j-th respondent. As a result, the value 0 is assigned to all attributes not mentioned by
respondent j. In Equation 6.2, the g ij is recoded as the ranking scores hij lies in the
desired interval. Table 6.5 lists the frequency of ranks 1, 2 and 3 assigned by the
respondents for each attributes and Table 6.6 lists the aggregate importance and
performance value of each attribute. The determination of aggregate importance is
estimated by Equation 6.3.
hij = (k gij 1) / k
(n
(6.2)
otherwise
Pi
g ij not void
1
j
hij ) k / s
(6.3)
n = number of respondents/raters
k = top k preferences
s = number of attributes
i = attribute (i = 1,, n)
j = respondent/rater (j = 1,, n)
g ij the rank assigned to the i-th attribute by the j-th respondent
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hij
the normalised g ij that lie between 0 and 1
Pi
importance value of attribute i

Table 6.5: Explicit importance ratings per each attribute and performance
Ranking order
Service attribute
1.
2.
3.
4.
5.
6.
Network performance
Service plans
Range of phones
Value for money
Total
1
82
9
87
9
6
56
253
2
51
27
47
22
19
62
252
3
52
38
31
30
18
43
249
Since the respondents were asked only to rank their top 3 preferences among 6 attributes
rather than one by one, then this procedure reduces risk of fatigue.
Table 6.6: Aggregate importance and performance scores of each attribute
Service attribute
Explicit
derived
Attribute
performance
(Mean)
0.81
0.54
0.79
0.51
0.46
0.76
5.44
4.88
5.05
4.36
5.11
4.92
1. Network performance
2. Customer service quality
3. Service plans
4. Range of phones
5. Accuracy of billing and payment
6. Value for money
To measure the implicit importance (statistically derived importance), a linear regression

model was used, using attribute performance as independent variables and overall
customer satisfaction as dependent variable (Equation 6.4). One of the advantages of
regression analysis is that the method provides a model for all attributes to form the
overall rating. As a result, multiple regression analysis estimates the degree of influence
that attributes have in determining customer satisfaction.
Overall Customer Satisfaction =
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X1
...
Xn
(6.4)
Page 125
Using multiple regression analysis, the slope coefficient (or t-statistic (Bring, 1994)) for
an attribute is proportional to the relative importance of the attribute if the standard
errors for the attribute estimates are approximately equal. Multicollinearity is the main
issue when using regression analysis. The factor analysis was conducted to evaluate
whether there is multicollinearity among the independent variables. Table 6.7 contains
an analysis of variance (ANOVA). The degrees of freedom (df) is 6 which is equal to the
number of dependent variables. For this model the F-ratio is 30.192 (P < 0.0001).
Model
Sum of
Squares
df
Mean Square
Sig.
Regression
Residual
Total
176.517
205.598
382.115
6
211
217
29.419
0.974
30.192
0.000
In addition, Table 6.8 reports the results of the linear regression model estimations. In
both methods, all attributes show a significant impact on customer satisfaction.
However, in some cases, such as the accuracy of billing & payment and the service
plans, the strength of the impact seems to be lower.
Table 6.8: linear estimates of the impact of attribute-level performance
on overall customer satisfaction
Service attribute
Network performance
Service plans
Range of phones
Value for money
Regression
coefficient (a)
0.302***
0.199***
0.141*
-0.089*
0.145**
0.222**
(a) R = .462, F-value = 30.192

In the following section, the IPA approach is adopted to discriminate among attribute as
targets for improvement actions. Using multiple regression analysis, Equation 6.5 is
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derived, where the impact of service attributes on overall customer satisfaction is

explained.
Overall Customer Satisfaction = 1.008 + 0.302 Network Performance
0.199 Customer servicequality + 0.141 Service plans
(6.5)
+ 0.145 Accuracy of billing& payment + 0.222 Value for money

In the next section, the author uses the results of attribute importance for importanceperformance analysis. The results of two methods will be discussed in terms of
managerial implementation.
2.1 Importance-Performance Analysis (IPA)

No matter which method one uses to drive attribute-level importance, the overall
conclusions of the survey are typically drawn from the importance-performance matrix
first described by Martilla and James (1977). The conventional IPA matrix is
constructed using attribute importance data and actual attribute performance data (mean)
to represent the X and Y axes, respectively. The means were used to split the axes.
Following the importance-performance analysis (IPA), one can now associate each
attribute to a satisfaction factor by using their explicit and implicit importance provided
in Tables 6.6 and 6.9. The results of IPA matrix show a significant difference, Figure 6.3
(a) and (b), between the two methods in terms of implementation. Therefore, H3
(customers self-stated importance and statistically derived importance differs) can be
confirmed.
The analysis of conventional IPA yields the following recommendations:
Quadrant I (low importance, high performance): attributes in this quadrant are
relatively unimportant to the customer though the performance level is high.
Management might wish to relocate resources to quadrant II.
Quadrant II (high importance, high performance): quality of service is the key
driver of customer satisfaction, and the firm must keep up the good work.
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Figure 6.3: Importance-performance analysis (IPA) matrix

(a) Statistically derived importance (indirect)
(b) Customer self-stated importance (direct)
NP
CSQ
AoBP
SP
VFM
RoP
4
II
IV
III
VFM
CSQ
5
AoBP
NP
SP
II
RoP
3
2
IV
III
1
1
0
0
0
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.2
0.4
0.6
0.8
Quadrant III (high importance, low performance): Low performance on highly

important attributes demand immediate attention. A firm should concentrate on
these attributes.
Quadrant IV (low importance, low performance): in this quadrant the poor
performance will not be considered as a priority, as these attributes are relatively
unimportant. The performance level should be improved if there are no often
attributes in the quadrant II (higher priority) and/or if the improvements are not
too costly.
The results of direct importance assessment are misleading because ratings are
uniformly high. As a result, all attributes crowd together at the top the right hand corner
of IPA matrix, Figure 6.2 (a). While indirect method is more realistic as relative
importance of each attribute depends on the data collected for all the attributes. It also
reduces the demands on the respondents attention since only the performance or
satisfaction level is asked rather than importance of an attribute. In other words, it can be
concluded that customer self-stated importance is not a function of customer satisfaction
(H3.1). Consequently, using invalid IPA to identify the potential improvement direction
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for customer satisfaction management can cause inefficient improvement, due to faulty
distribution of efforts and resources.
The indirect approach can have two weaknesses: (1) the possibility of collinearity
(Danaher, 1997; Bacon, 2003) and (2) the relationship between service attribute
performance and overall customer satisfaction (or overall performance) may well be
non-linear. For the criticism, collinearity test can be run among independent variables
(Chapter 5). It is reported that there is no collinearity can be detected among the service
attributes. For the second issue, the result of regression analysis with dummy variables
was applied to the traditional IPA approach.
2.2 Attribute Importance as a Function of Attribute Performance

The way that importance-performance matrix is interpreted is largely based on the
assumption that attribute importance and performance are independent from each other
(Eskildsen and Kristensen, 2006). Previous research asserts that the performance of an
attribute can be changed without having an impact on the importance of the attribute
(Martilla and James, 1977; Slack, 1994; Oliver, 1997; Bacon, 2003).
The result from multiple regression analysis with dummy variables accommodates the
concept of change in the relative importance of attributes with change in attribute
performance as a function of overall customer satisfaction. Assuming that changes to an
attribute performance-level may affect the relative attribute importance, then, the selfstated importance could not be the most appropriate method for evaluation attribute
importance. In order to conduct the analysis, service attribute performance ratings need
to be recoded. Using the SPSS tool the performance ratings can be recoded to form the
dummy variables as low performance (0,1), high performance (1,0) and average
performance (0,0). For each service attribute, two regression coefficients can then be
obtained. The first coefficient will be used to measure the impact on importance when
performance is low, and the second coefficient will be used when the performance is
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high. This will help to estimate the possible asymmetric impact of attribute-level
performance on overall customer satisfaction.
Figure 6.4 illustrates the asymmetric relationship between attribute performance and
importance as it was proposed in H2 (There is an asymmetric and non-linear relationship
between attribute performance and attribute importance). In addition, it is concluded that
attribute importance is a function of attribute performance (H2.1).
Figure 6.4: Relationship between importance and performance
Customer services quality
Network performance
0.25
0.2
Importance
Importance
0.4
0.3
0.2
0.15
0.1
0.05
0.1
Low
Low
high
high
performance
Performance
Range of phones
Value for money

0.135
Importance
Importance
0.25
0.2
0.15
0.1
0.05
0
Low
high
Performance
0.13
0.125
0.12
0.115
0.11
0.105
Low
high
Performance
Importance

0.15
0.1
0.05
0
Low
high
Performance
Considering attribute classification from Section 1, importance of a basic or an exciting

attribute depends on its performance. Exiting attributes are important if performance is
high but are unimportant when performance is low (network performance, customer
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service quality, and value for money). Basic attributes are important if performance is
low, but unimportant if performance is high (range of phones and accuracy of billing and
payment).
The result of regression with dummy variables contradicts the traditional view that the
relative importance of service attributes is adequately represented as a point estimate
(Pezeshki et al., 2009). Therefore, managers must be aware that changes to attribute
performance are associated with changes to attribute importance. If the asymmetries are
not considered, the impact of the different service attributes on overall customer
satisfaction is not correctly assessed. In other words, the importance of basic attributes is
underestimated if performance is high, and overestimated if performance is low. If the
performance of excitement factors is low, their impact is underestimated and vice versa.
In order to demonstrate that strategies derived from the traditional IPA are misleading,
the sample was classified into satisfied customers (5 to 7 on the satisfaction scale) and
dissatisfied customers (1 to 4 on the satisfaction scale). For both groups the IPA matrix
was constructed (shown in Figures 6.5 and 6.6). The application of the traditional IPA
matrix for two groups of satisfied and dissatisfied customers reveals that managerial
IPA for dissatisfied custom ers
Figure 6.5: IPA for dissatisfied customers

2.5
RoP
VFM
Performance
2.45
SP
NP
2.4
2.35
AoBP
2.3
CS
2.25
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
Im portance
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implementation derived from traditional IPA method could be misleading. For instance,
in the case of dissatisfied customers, the importance-level of attribute AoBP (accuracy
of billing and payment) is high whilst its performance is low. Therefore the companys
priority should be to improve the performance of that attribute.
The results also imply that fewer resources should be allocated to network performance,
service plans, and value for money as their importance-level is lower than their
performance-level. Figure 6.6 represents a similar case for satisfied customers.
IPA for satisfied customers
Figure 6.6: IPA for satisfied customers

6.05
NP
6
Performance
5.95
5.9
AoBP
5.85
SP
VFM
RoP
5.8
5.75
CS
5.7
5.65
0
0.1
0.2
0.3
0.4
Importance
By applying the multiple regression analysis with dummy variables, the attribute value
for money and network performance becomes the exciting attributes. Consequently, the
increase in performance-level increases the importance-level. Accordingly, the accuracy
of billing and payment becomes a basic attribute. So it might be to the competitive
advantage of the company to keep the performance-level high, though its importance
will not increase as shown in Figure 6.3.
In the next section, the author uses the structural equation modelling (SEM) approach
mainly for modelling the relationship between service quality attributes and customer
satisfaction. The main reason of using this method is to justify the regression analysis
with dummy variables.
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3. Structural Equation Modelling (SEM)

In order to run the analysis, the dependent variable Overall customer satisfaction was
measured with a single item on the same 7-point scale. Using AMOS 7.0 software,
structural equation modeling (SEM) tests were conducted to determine whether the data
fits the hypothesised model. The results for goodness of fit tests show that the data fits
the original hypothesis (Chi = 56.65, DF 24, P = 0.000, Chi/DF = 2.3, AGFI = 0.92,
GFI = 0.95, NFI = 0.92, RMSEA = 0.07). The Composite Reliability (CR), average
variance extracted (AVE) and the Fornell-Larcker-Ratio indicate very good
psychometric properties of the measures (Fornell and Larcker, 1981).
The hypothesised model is recursive, such that there are 45 distinct sample moments
(pieces of information) from which to compute the estimates of the default model and 21
distinct parameters to be estimated, leaving 24 degrees of freedom. The model achieves
minimum iteration, ensuring that the estimation process yields an admissible solution
and eliminating any concern about multicollinearity effects. The X2 value is 56.65. The
fit indexes demonstrate that the data is a good fit of the proposed model (Table 6.9).
Figure 6.7 displays all of the structural relationships among constructs (service
attributes, satisfaction, switching intention and word of mouth behaviour).
Table 6.9: Proposed model fit statistics (SEM)
Fit statistics
Chi
DF
Chi/DF
CFI
GFI
RMSEA
NFI
AGFI
RMR
Obtained
< 3
> 0.95
> 0.90
< 0.08
> 0.9
> 0.9
< 0.1
56.65
24
2.3
0.95
0.96
0.07
0.92
0.92
0.08
Shaded cells represent the common indexes threshold value
The path coefficients and their significance for each dependent model is also presented
in this figure. Each service attribute has been assigned a weight (coefficient) based on
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the strength of their association to the latent variable. Here, the latent variable is
considered to be the overall service performance.
Figure 6.7: Structural equation modelling (SEM) analysis
NP
Switching
Intention
0.56***
CS
0.64***
SP
0.50***
0.37***
ROP
0.32***
0.74***
Overall
Performance
Overall
Customer
Satisfaction
0.20***
0.63***
AOBP
0.76***
Word-ofmouth
behaviour
0.53***
VFM
The parameter estimates show no negative variances and covariance or correlation

matrixes that are not positively definite. Moreover, there are no parameter estimates
greater than 1.00. The standardised solutions reveal that the estimates of all hypotheses
are reasonable and statistically significant at the 0.001 level (Table 6.10).
Table 6.10: SEM regression results

Hypothesis
Regression
coefficient
Overall performance Overall customer satisfaction
0.74***
Customer satisfaction Switching intention
0.32***
Customer satisfaction Word of mouth behaviour
0.53***
Switching intention word of mouth behaviour
0.20***
Overall customer satisfaction is an imperative determinant of word of mouth (customer

loyalty), with R.W.=0.4 and C.R.=11. Moreover, switching intention has significant
Vahid Pezeshki
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impact on customers loyalty with R.W.=0.4 and C.R.= 4. Moreover, together overall
customer satisfaction and switching intention explains 40% of customer loyalty
variance. In addition, overall customer satisfaction, with R.W.= 0.1 and C.R.=6, explains
more than 10% of the switching behaviour variance. Finally overall performance, with
R.W.= 0.9 and C.R.=10, explains more than 55% of the overall satisfaction variance.
The only disadvantage of using SEM approach is that it is not able to show how change
in attribute performance-level influences customer satisfaction. This is due to the fact
that the method assumes the relationship to be symmetric and linear. While in previous
section, regression analysis with dummy variables showed how changes in attribute
performance would change the overall satisfaction-levels. Thus, it can be concluded that
SEM may not be an appropriate method for analysing asymmetric relationships.
However, the dummy variables can be also applied into AMOS since the technique is
based on multiple regression analysis. For example, if a company wishes to improve
service quality based on customer satisfaction-level, attributes with larger coefficient
would be in high priority, whereas based on this analysis some attributes may not have
similar impact on overall satisfaction. More importantly, the impact of attribute
importance and performance on satisfaction need to be also taken to into consideration.
The following section considers the relationship between customer satisfaction and
customer switching intentions.
4. The Impact of Customer Satisfaction on Customer Switching Intention

The prevention of customer churn is the ultimate goal of a company through
implementation of CRM system. By minimising customer switching ratio a company
minimises its marketing costs and, in turn, maximises its profitability. As a result,
customer retention measurement is highly important to mobile service providers, where
in the current market climate it would be relatively easy for a customer to switch to other
service providers. It was reported previously that mobile service providers have
customer churn ratio between 2.5 to 4 per cent on monthly basis (Howlett, 2000). As it
was discussed in Chapters 2 and 3, there is a link between customer satisfaction and
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customer switching intention. In order to estimate this relationship, we used binary

logistic regression analysis. Logistic regression is multiple regression but with a
categorical outcome variable and predictor variables that are continuous. In other words,
a person or an event is likely to belong to a given category based on other information.
Mathematically, logistic regression predicts the probability of Y occurring given the
known values of X 1 (or X s ) , while ordinary regression predicts the value of a variable Y
from a predictor variable X 1 or several predictor variables X s , as demonstrated in
Equations 6.6 and 6.7.
P(Y )
P(Y )
1
1 e
1 e
( b0 b1 X 1 b2 X 2 ... bn X n
or Odds =
( b0 b1 X 1
P (event)
P (no event)
1
i
(6.6)
(6.7)
Table 6.11 (a) shows the results of logistic regression analysis, using SPSS. The
significance values of the Wald statistics for each independent variable indicate that
overall satisfaction can project customer switching intentions (P < 0.0001). The
interpretation of b-value in logistic regression is that the change in the logit of the
dependent variable (switching intention probability) associated with one unit change in
the independent variable. The logit of the dependent variable is simply the natural
logarithm of the odds of Y occurring (see Equation 6.6). Thus, the value of exp b for
overall satisfaction indicates that if the level of customer satisfaction increase by one
level, then the odds of switching decreases (because exp b is less than 1). The confidence
interval for this value ranges from 0.404 to 0.679 so we can be very confident that the
value of the exp b in the population lies somewhere between these two values. In
addition, because both values are less than 1 we can be confident that the relationship
between overall satisfaction and switching behaviour is true. Consequently, equation 6.8
shows the linear estimate of customer switching.
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Table 6.11 (a): logistic regression estimates of the impact of overall customer satisfaction
on customer switching behaviour
S.E.
Wald
df
Sig.
Exp (B)
Overall customer
satisfaction
-0.647
0.132
23.834
0.000
0.524
Constant
3.894
0.740
27.708
0.000
49.096
95.0% C.I. for

EXP (B)
Lower
Upper
0.404
0.679
Dependent variable: Customer switching intention
P (Switching intention Overall customer satisfaction) =
1
1
( 3.894 .647 X 1
(6.8)
Tables 6.11b and c show a summary of the statistics with respect to the proposed model.
The overall fit of the model is assessed using the log-likelihood statistics. The value of
log-likelihood has an approximately chi-square distribution. Even though, in this case
the log-likelihood value is somehow large. The statistics from Hosmer and Lemeshows
(1989) goodness-of-fit, Table 5.8 (C), tests the hypothesis that declaring that the data are
significantly different from the predicted values from the model. Therefore, if the
statistics are non-significant then it can be interpreted that the model does not differ
significantly from the observed data. The test statistic (2.610) and the significance value
(0.456) indicate that the data is a reasonable projection.
Table 6.11 (b): Hosmer and Lemeshow Test

Chi-square
df
Sig.
2.610
0.456
Table 6.11 (c): Model summary

Cox & Snell R
Nagelkerke R
-2 Log likelihood
Square
Square
321.774
0.115
0.156
Estimation terminated at iteration number 5 due to changes in the parameter estimates by less
than 0.001.
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Page 137
Figure 6.8 is a histogram of the predicted probabilities of a customer switching intention.

It shows all of the cases in of customers may intention to churn on the left-hand side
(close to 0), and all the cases for which customers intend to stay on the right-hand side
(close to 1). The points clustered in the centre of the plot presenting a probability of 0.5
that the customer may churn. However, for these cases there is little more than 50:50
chance that the data are correctly predicted.
Figure 6.8: Predicted Probabilities of a customer switching
160
R
120
N
E
80
N
Y
N
40
Y
N
N
Y
N
N
N
Y
N
N
N
Y
Y
Y
Y
N N N
Predicted
Prob:
0
.25
.5
.75
1
Group: YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYNNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
Predicted Probability is of Membership for No
The Cut Value is .50
Symbols: Y - Yes
N - No
Each Symbol Represents 10 Cases.
Moreover, the impact of high and low level of customer satisfaction on switching
intention as it was proposed in H4 was measured. In doing so, the customer satisfaction
scores to form the dummy variables were recorded so that low satisfaction was coded
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(0, 1) and high satisfaction (1, 0). The ratings between 1 and 4 are defined as low
satisfaction, ratings between 5 and 7 are considered to be high satisfaction (Equation
6.8). Based on this coding scheme, a logistic regression was conducted to estimate the
impact of the satisfaction-levels on customer switching intentions. Two regression
coefficients were obtained, one to measure the impact when overall satisfaction ranked
low, and the other when the overall satisfaction is ranked high.
1
CSI =
1 e
1. Disatisfaction
dummy1
2. Satisfaction
dummy2 )
(6.8)
CSI = customer switching intention or switching probability

Dummy 1 = lowest customer satisfaction level
Dummy 2 = highest customer satisfaction-level
Table 6.12 shows the results of logistic regression with dummy variables. By analysing
how the impact of customer satisfaction on switching intention varies from negative to
positive within the overall satisfaction domain, the structure of customer switching
intention was identified. The results verify that there is a non-linear and asymmetric
relationship between overall satisfaction (predictor) and customer switching intention
(dependent variable). Comparing the results of satisfaction-levels on switching
intentions shows that the higher levels of customer satisfaction (B = -0.260) has greater
impact on customer switching intention rather than the lower levels (B = 0.1) (Equation
6.9). In other words, satisfied customers are twice likely to remain with the service
provider than dissatisfied customers. However, in this particular case the result of low
satisfaction is not statistically significant (P > 0.1). The sample size may have played an
important role for this conclusion. Table 6.13 presents the model summary.
CSI =
1
1 e
(1.63 0.1 X 1 0.260 X 2 )
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(6.9)
Page 139
Table 6.12: The impact of satisfaction-level on customer switching behaviour

B
S.E.
Wald
df
Sig.
Exp(B)
Low satisfaction
0.100
0.269
0.139
0.709
1.106
High satisfaction
-0.260
0.075
11.911
0.001
0.771
Constant
1.630
0.419
15.122
0.000
5.103
Independent variables: low satisfaction and high satisfaction.
Table 6.13: Model Summary of customer satisfaction vs. customer switching intention
-2 Log
likelihood
Cox & Snell R

Square
Nagelkerke R
Square
328.673
0.092
0.124
Therefore, with respect to changes in customer switching intentions, when overall

satisfaction-level fluctuates between low and high, we can confirm that there is an
asymmetric and non-linear relationship between customer satisfaction and customer
switching intention (H4). The result shows that satisfied customers are less likely to
switch than dissatisfied customers. The probability of switching of a dissatisfied
customer can therefore be 2.5 times more than satisfied customers. These statistics
highlight the role of customer satisfaction as a mediating attitude between service
attribute performance and customer switching intention.
Based on this argument, Figure 6.9 illustrates how service providers can benefit from
this approach. By understanding the relationship between service quality attributes and
customer satisfaction, decision makers will be able to manage then customer satisfaction
levels. By altering these inputs (service attribute performance), they could conceivably
alter the output (customer switching probability) in order to maximise profitability. In
the next section, the relationship between customer satisfaction and switching intention
will be analysed.
Vahid Pezeshki
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Figure 6.9: Customer retention management

Basic
attributes
Performance
attributes
Exciting
attributes
Customer
dissatisfaction
Customer
satisfaction
Customer
switching
intention
5. The Impact of Customer Satisfaction on Customer Switching Intention

across Different Customer Segments
Customer behaviours may change with respect to the length of the contract in the mobile
telecommunication industry. For this reason, customer data is divided into three
segments: pay as you go (non-contractual), 12-month (medium term) and 18-month
(long term). The logistic regression analysis separately conducted within each segment.
Table 6.14 presents the summary statistics of the model. The values are statistically
significant, however, the log-likelihood value for 18-month segment is slightly large.
Table 6.14: Logistic regression estimates of customer switching behaviour across different
customer segments
Overall customer satisfaction

Constant
Cox and Snell R
Nagelkerke R
H-L test 2 (-2log-likelihood)
Chi
Non-contractual
Short
(pay as you go)
-1.992***
-11.185***
0.373
0.499
78.663
40.550***
Contractual
Medium
Long
(12-month)
(18-month)
-1.104***
-0.378*
-7.278**
-2.223**
0.149
0.060
0.219
0.080
72.837
129.420
12.058***
6.111**
Unstandardised beta coefficient are reported for all models

***p < 0.001, **p < 0.01, *p < 0.05, ns = not significant
The strength of the relationship between customer satisfaction and their switching
intentions are positively increased from non-contractual to contractual. Non-contractual
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customers are most likely to churn than contractual customers. However, it is still
difficult to predict customer switching in non-contractual relationships where customers
do not have any switching barriers or commitments to their service provider. For
example, switching probability among non-contractual customers is nearly twice as
much as the 12-month contractual customers. Moreover, in non-contractual segment,
40% of respondents stated that they use other networks. However, the customer data
shows just only one percent use the service of a second network, on monthly basis. In
other words, customers use second network for receiving calls rather than making calls.
In addition, 33% of respondents in this segment use VOIP and the average spend is
13.36. In the 12-month segment, 30.8% of the respondents have another mobile line
from a different network. On average, they spend 17.69 per month on the second
network. Also 37.5% of the customers use VOIP services with an average cost of 7.15
per month. In the last segment (18-month), the customers use the service more
frequently than the medium or non-contractual customers. The company would spend
more resources on this segment since customers spend more (cross buying) and stay
longer which in turn generate larger profit (Table 6.15). In additional, switching
probability among customers in this segment is less than the other two segments (B = 0.378). The main reason is that customer behaviour changes over time. Customers
usually get more committed to their service provider after a while, and then they would
not easily shift to other providers (i.e. locked-in).
In addition, Figure 6.10 shows that the switching intention of customers in the three
segments. In contractual segment, customers with 18-month contract are less likely to
shift to other service providers comparing to 12-month segment, 57% against 73%.
Consider 12-month contract, if 73% of customers leave each year, then it can be
assumed that there is a 73% chance that any given customer will churn after a year.
Thus, the average customer lifetime value would be reduced at a rate of 73% each year.
Although in reality, the churn rate may not be as high as this rate. But customer churn
rate is very high in mobile telecommunication sector comparing to other industries. If
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the company by any means could improve customer churn rate, then average customer
lifetime value may increase substantially.
Table 6.15: Spending behaviour across different segments
Non-contractual
Contractual
Short
(pay as you go)
Medium
(12-month)
Long
(18-month)
21.00
27.84
34.72
NA
4.20
5.73
13.36
2.51
1.52
Average length of contract (S.D.)
NA
2.77 (1.82)
2.6 (2.017)
Share of wallet
NA
5.44
3.74
Average spending monthly basis

Cross selling monthly basis
VOIP spending monthly basis
Customer switching behaviour

Figure 6.10: Customer switching behaviour
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
26.9%
43%
44.4%
Unlikey to switch
73.1%
Pay as you go
Likely to switch
57%
55.6%
12 months
contract
18 months
contract
The equations of logistic regression for each segment are presented:

P (Switching Intention Non-contractual) =
1
1 e
P (Switching Intention Contractual 12-month) =
P (Switching Intention Contractual 18-month) =
Vahid Pezeshki
( 11.185 1.992 X 1
(6.8)
1
1 e
( 7.278 1.104 X 1
1 e
( 2.223 .378 X 1
1
i
(6.9)
(6.10)
Page 143
Such approach to customer data may help companies to visualise their profitability based
on customer equity or the lifetime value (LTV) which is based on customers churn rate
and the likely future purchases. In order to increase customer equity, we need to add
more customers, increase customer satisfaction-level, and also encourage customers to
recommend the service or product to their friends (word of mouth). Then, as customer
equity grows, it enables the service provider to generate more profit. More importantly,
when a business loses valuable customers then customer equity plummets to zero or
below zero, because they might communicate their bad experience with the service with
other existing or potential customers. As a result, if customer equity does not grow or if
it begins to shrink, then the business will eventually decline.
More importantly, being equipped with the proposed model, system decision making
could allocate resources to assess where maximum yield could be sought. Providing
other components of customer equity such as share of wallet, length of relationship and
cross-selling can strengthen the decision making process.
The discussions have concluded that the relationship between customer satisfaction and
switching intention is asymmetric. Table 6.16 performs the impact of the overall
customer satisfaction (low satisfaction and high satisfaction) on switching intentions for
each segment: pay as you go (short), 12-month (medium) and 18-month (long). The
customer data analysis reveals that the impact of customer dissatisfaction on switching
intention is significantly more than customer satisfaction on switching intention. Note
that the b-values for low satisfaction is not significant (P > 0.1). Moreover, the
probability of switching in satisfied customers decreases from the non-contractual to the
contractual customer segment. For example, a satisfied customer from non-contractual
segment is twice likely to be retained compared to a satisfied customer with 12-month
contract. As the factor structure of customer satisfaction is identified, then it is possible
to decrease customer switching probability by spending more resources on the
appropriate attributes.
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Table 6.16: The relationship between customer satisfaction and switching intention across
different segments
Pay as you go contract
12-month contract
18-month contract
Low
High
satisfaction satisfaction
Low
satisfaction
High
satisfaction
Low
satisfaction
High
satisfaction
5.247 (ns)
13.582 (ns)
-0.849**
0.289 (ns)
-0.061(ns)
-1.625**
Cox and Snell R
77.155
71.423
132.562
Nagelkerke R
0.383
0.164
0.030
0.514
0.243
0.040
H-L test
Independent variables: low satisfaction, High satisfaction.

*** p< 0.001, ** p< 0.05, * p< 0.1, ns = not significant
In Section 6, we evaluate the impact of length of relationship in customer satisfactionswitching intention model.
6. The Relationship between Customer Satisfaction, Length of Relationship

and Customer Switching Intentions
To evaluate the impact of the type of relationship or length of relationship on the
relationship between customer satisfaction and customer switching intentions, with
respect to three scenarios to test the overall model significance: scenario 1, with only
length of relationship, scenario 2, with one independent variables of overall satisfaction,
and scenario 3, with both factors: overall satisfaction and length of the relationship.
Tables 6.17 (non-contractual segment) and 6.18 (contractual segment) present the results
of the logistic regression analysis. For non-contractual segment, Cox and Snell R and
Nagelkerke R of model 1 are very low and there are 0 and 0.001 differences in Cox and
Snell R and Nagelkerke R between model 2 and model 3. Importantly, the customer
data analysis reveals that the relationship between length of relationship and switching
intention is not statistically significant, whereas overall satisfaction has a strong
relationship with switching intention.
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intention (non-contractual customers) using logistic regression
Model 1
Length of relationship
-0.184 (ns)

Cox and Snell R
Nagelkerke R
H-L test
Model 2
Model 3
-0.025 (ns)
-1.992***
-1.997***
0.009
0.012
0.373
0.499
0.373
0.500
118.442
78.663
78.655

The results of contractual segment show the similar relationship between length of
relationship, overall satisfaction and switching intention (Table 6.18). Cox and Snell R
and Nagelkerke R of model 1 are very low and there are 0.003 and 0.004 differences in
Cox and Snell R and Nagelkerke R between model 2 and model 3.
intention (contractual customers) using logistic regression
Model 1
Cox and Snell R
Nagelkerke R
H-L test
Model 2
Model 3
0.002
0.003
-0.666***
0.108
0.149
-0.018 (ns)
-0.660***
0.105
0.145
222.923
202.722
202.624
-0.052 (ns)

*** P < 0.0001, ** P < 0.01, * P < 0.05, ns = not significant
The results show that length of relationship does not really affect customer switching
intention. There, H5 can be rejected as it assumes that there is a positive and direct
correlation between length of contract and customer switching intention. It is also
revealed that the impact of customer satisfaction on switching intention in contractual
segment is stronger than non-contractual segment. In this case, contractual customers are
less likely to switch than non-contractual customers. In reality, switching barriers
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Page 146
(penalties) increases switching costs and, in turn, do not allow customers to churn easily.
Therefore, we can confirm that H6 (Higher levels of switching costs are associated with
higher levels of switching barrier.) and also H7 (Higher levels of perceived of switching
barriers are associated with lower levels of switching intention).
7. The Relationship between Customer Satisfaction, Customer Switching

Intention (Retention) and Word of Mouth (Referral)
To measure the relationship between customer satisfaction, retention and loyalty, a
multiple regression model was used, using customer satisfaction and customer retention
as independent variables and customer loyalty as dependent variable (see Equation
6.13). Thus, multiple regression analysis estimates the degree of influence that
satisfaction and retention have in determining customer loyalty (word of mouth
behaviour).
WOM=
Customer Switching Intention
(6.13)
Where:
WOM = word of mouth
CS: customer satisfaction
CSI: customer switching intention
To begin with, Table 6.19 (a) represents descriptive statistics, the mean and standard
deviation of each variable in our data set. In addition, Table 6.19 (b) shows value of
Pearson correlation coefficient between every pair of variables. For example, there is a
large positive correlation between customer satisfaction and customer loyalty (R =
0.613). Second, the one-tailed significance of each correlation is demonstrated. All
correlations are significant as P < 0.0001. Finally,
Table 6.19 (a): Descriptive Statistics of customer word of mouth behaviour model
Mean Std. Deviation
N
Loyalty
3.72
0.900
261
5.13
1.364
261
Customer retention
0.62
0.487
261
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the number of cases contributing to each correlation (N = 261) is shown. The results also
show that there is no multicollinearity between in data as there are no substantial
correlations (R > 0.9) between predictors.
Table 6.19 (b): word of mouth model
Pearson
Correlation
Sig. (1-tailed)
Customer loyalty
Overall customer
satisfaction
Customer switching
Customer loyalty
Overall customer
satisfaction
Customer switching
Customer loyalty
Overall customer
satisfaction
Customer switching
Customer
loyalty
degree
Overall
customer
satisfaction
Customer
switching
1.000
0.613
0.386
0.613
1.000
0.318
0.386
.
0.318
0.000
1.000
0.000
0.000
0.000
0.000
261
0.000
261
.
261
261
261
261
261
261
261
Table 6.20 shows the customer loyalty model statistics. This shows that by entering one
predictor (overall satisfaction), the correlation (R) between predictor and customer
loyalty is 0.613. For this model R 2 value is 0.375, which means that customer
satisfaction accounts for 41.6% of the variation in customer loyalty degree. However,
when the other predictor is included as well (model 2), this value increases to 0.416 or
41.6% of the variance in customer loyalty degree. Therefore, if customer satisfaction
accounts for 37.5%, one can deduce that the customer retention accounts for an
additional 5%. So, customer satisfaction is the major player in customer loyalty as it
explains the large degree of the measured variations.
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Table 6.20: Model summary of customer word of mouth behaviour

Adjusted
R Square
Std. Error
of the
Estimate
Model
R
Square
.613(a)
0.375
0.373
.645(b)
0.416
0.411
Change Statistics
R Square
Change
F
Change
df1
df2
Sig. F
Change
0.713
0.375
155.642
259
0.000
0.690
0.040
17.887
258
0.000
a Predictors: (Constant), Overall satisfaction

b Predictors: (Constant), Overall satisfaction, switching behaviour
Dependent Variable: Loyalty
In addition, Table 6.21 contains an analysis of variance (ANOVA) to test if the model is
significantly better at predicting the outcome than using the mean values. The F-ratio
represents the ratio of improvement in prediction that results from fitting the model. As
demonstrated, in each of the models. The sum of squares ( SS M ) represents the
improvement in prediction resulting from fitting a regression line to the data rather than
using the mean as an estimate of the outcome. Residual sum of squares ( SS R ) represents
the total difference between the model and the observed data. The degrees of freedom
(df) is equal to the number of predictors (one for the first model and two for the second),
and for SS R it is the number of observations (260) minus the number of coefficients in
the regression model. The first model has two coefficients; one for the dependent
variable and the other for the constant, whereas the second has three (one for each of the
two dependent variables and one for the constant). For the initial model the F-ratio is
155.642 (p < 0.0001) while for the second model the value of F is less (91.839), which
is also highly significant (p < 0.0001). The results prove that the initial model has
significantly improved the ability to predict customer the degree of customer loyalty, but
using customer retention did not indicate any significant relationship (the F-ratio is less
significant).
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Page 149
DurbinWatson
1.920

Model
1
Regression
Residual
Total
Regression
Residual
Total
Sum of
Squares
df
Mean Square
Sig.
79.045
131.537
210.582
87.574
123.009
210.582
1
259
260
2
258
260
79.045
0.508
155.642
.000 (a)
43.787
0.477
91.839
.000 (b)
a Predictors: (Constant), Overall satisfaction

b Predictors: (Constant), Overall satisfaction, customer switching
Dependent Variable: Customer loyalty
Finally, Table 6.22 shows the model parameters for both steps in the hierarchy. The bvalues represent the relationship between the degree of customer loyalty and each of the
predictor. If the b-value is positive then there is a positive relationship between the
predictor and the independent variable whereas a negative coefficient represents a
negative relationship. For these data both customer satisfaction and customer retention
have positive relationship with the outcome. So, as customer satisfaction-level increases,
customer loyalty increases, and as the customer retention increases customer loyalty also
increases.
In addition, the b-values demonstrate the extent that each independent variable affects
the dependent variable if all the other predictors remain constant.
Therefore in the fist model;
Overall customer satisfaction (B = 0.404): This value indicates that as the
overall satisfaction-level increases by one level, customer loyalty degree
increases by 0.404 levels. Each b-value has an associated error used to determine
whether or not the b-value differs significantly from 0. The standard error
indicates the extend of the b-value with respect to different samples. The t-test is
a suitable method to measure whether the predictor is making a significant
contribution to the model or otherwise. For the first model, overall customer
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satisfaction (t (260) = 12.476, P < 0.0001) is significant predictor of the degree

of customer loyalty (the smaller the value of Sig. and the larger the value of t).
However, the standardised b-values are more convenient to interpret. The bvalues indicate the number of standard deviations that the dependent variable
will change as the result of one standard deviation change in the independent
variable. In the second model, the standardised beta () values for the overall
satisfaction and customer retention are 0.545 and 0.212. This demonstrates that
the overall satisfaction comparable is more dependent on the importance of the
service attribute than customer retention. In case of having different samples, the
confidence interval of the non-standardised b-values indicate that the boundaries
of 95% confidence interval of samples will contain the true value of b.
Table 6.22: The impact of overall satisfaction and switching intention on customer referral
(loyalty) using multiple regression analysis
Model
Unstandardised
Coefficients
Std.
B
Error
Constant
1.646***
0.172
0.404***
0.032
Constant
2.117***
0.200
0.360***
0.033
Customer switching intention
-0.392***
0.093
Standardised
Coefficients
Beta
95% confidence
interval for B
Lower
Upper
Bound Bound
9.570
1.307
1.985
12.476
0.340
0.468
10.284
1.722
2.511
0.545
10.860
0.294
0.425
-0.212
-4.229
0.575
0.210
0.613
(a) Dependent Variable: customer loyalty

*** P < 0.0001, ** P < 0.01, * P < 0.05, ns = not significant
In the second model, the b-values for overall satisfaction and switching intention are
0.360 and -0.392 respectively. But as discussed previously, the t-test and standardised
beta value () is more significant in the first model. If we replace the b-values from
models 1 and 2 into Equation 6.14, then the model can be expressed as:
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Page 151
Customer Word of Mouth = 1.646 + 0.172 CS +
(6.15)
Customer Word of Mouth = 2.117 + 0.360 CS - 0.392 CR +
(6.16)
In conclusion of this section, it can be confirmed that there is a positive relationship

between customer satisfaction, switching intention and word of mouth behaviour (H8).
The following section provides an analysis of the impact of word of mouth across
different customer segments.
8. The Relationship between Overall Satisfaction, Switching Intention and

Word-of-mouth (loyalty) across Different Segments
Similar analysis for customers word of mouth model was also conducted across
different customer segments. Such approach shows how customer satisfaction, switching
intention and length of relationship may affect word of mouth (loyalty) behaviour within
various segments. Table 6.23 presents the statistics of this analysis. The data reveals that
the length of relationship is not statistically significant. However, previous literature
argues that the length of relationship plays a significant role in word of mouth
behaviour. Both customer satisfaction and switching intentions significantly affect the
word of mouth. However, switching intention has more impact on word of mouth than
customer satisfaction. It was also noticed that the impact of customer satisfaction and
switching intention on WOM in 18-month segment is stronger than 12-month segment.
Table 6.23: The impact of customer satisfaction, switching intention, length of relationship
on switching intention using multiple regression
Noncontractual

Switching intention
Contractual
Pay as you go
12-month
18-month
0.291***
0.360**
0.011 (ns)
0.291***
0.321 (ns)
0.023 (ns)
0.383***
0.627***
-0.011 (ns)
*** p < 0.001, ** p < 0.05, * p <0.1, ns = not significant
Dependent: Customer loyalty
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This chapter presented the tests that were conducted to explain the service qualitycustomer behaviour conceptual model in the mobile telecommunication industry. Based
on the empirical data reported in this chapter, the research work drew some conclusions.
However, it is important to appreciate the positioning of such conclusions within the
context of empirical methodology presented in previous chapter. Table 6.24 represents
the conclusions derived from the implantation of various stages of the empirical research
presented in this chapter. The empirical investigation indicates that the proposed
methods can be used to model the service quality attributes-customer behaviours and (b)
could support the decision making. This section has both theoretical and practical
contributions.
The study also employed multiple regression analysis with dummy variables to indentify
three types of service attributes within mobile telecommunication sector: the basic, the
neutral and the exciting attributes. As a result, network performance, customer service
quality and value for money are classified as exciting attributes, range of phones and
accuracy of billing and payment are classified as basic attributes and service plans
categorised as neutral (Objective 1). In other words, exciting attributes generate
satisfaction levels and do not impact overall customer satisfaction if the attributes
performed poor. While basic attributes make dissatisfaction if they are not performed
well and do not affect satisfaction if they are fulfilled well. And finally, neutral attributes
do not generate satisfaction and dissatisfaction. As a result, network performance,
customer service quality, and value for money are classified as exciting attributes. These
findings contradict the traditional assumption that the relationship between service
quality attributes and customer satisfaction is symmetric and linear.
Such approach also reveals the fact that researchers and practitioners can apply dummy
variables technique to SEM method where it is based on multiple regression analysis. By
adding dummy variables, then, SEM can be also used where there is a possibility of
asymmetric correlation between variables. In other words, researchers can evaluate the
impact of different levels of independent valuables on depend variable. However, the
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Page 153
limitations posed by SEM can be overcome by combining the method with other
techniques such as Bayesian networks (not in the scope of this study, but a possible
future area for exploration).
Table 6.24: Main findings

Stage of
Empirical
Research Issue Defined Applied Tested Validated Findings and Propositions
Investigation
Service
attribute
classification
Importanceperformance
analysis
Resource
allocation
Customer
switching
intention
Customer
segmentation
Word of mouth
behaviour
Vahid Pezeshki
Three types of attributes

were identified within
mobile
telecommunication
industry: Basic, Exciting
and Neutral/Indifference.
- There is a dynamic
correlation between
importance and
performance of attributes.
- Attribute importance is
a function of attribute
performance.
The result of regression
with dummy variable
applied to the traditional
IPA method.
- Dissatisfied customers
are twice likely to switch
than satisfied customers.
- There is a significant
difference among
different customer
segments in terms of
switching intention ratio.
Customer behaviours
may vary based on
switching barriers and
costs.
- There is a strong
relationship between
customer switching
intention and word of
mouth behaviour.
Page 154
Comparing the results of methods for measuring attribute importance (direct and
indirect) reveals the controversary over the relationship between service attribute
performance and overall customer satisfaction (Objective 2). From a theoretical
perspective, the use of the regression with dummy variables provided a holistic view of
service quality analysis. As a result, the outcomes oppose an assumption of
independence between the importance of an attribute and its performance. In other
words, attribute importance is an antecedent of attribute performance. The relationship,
however, between these two factors change based on the type of service attribute. In
addition, the thesis proposed a revised IPA approach that comprises three-factor theory
concept and multiple regression analysis with dummy variables. As the outcome of the
traditional IPA analysis do not converge with the results provided by the regression
analysis with dummy variables. By applying such approaches to real business, managers
should be aware that changes to attribute performance are associated with changes to
attribute importance since service attributes has a dynamic characteristic.
As a result, the need to develop customer satisfaction that properly account for the nonlinear and asymmetric relationship between attribute performance and overall
satisfaction is paramount if resource allocation to enhance customer satisfaction is to be
correctly prioritised. The revised IPA method that includes the actual importance of
customer satisfaction attributes may assist managers in resolving service quality
management and customer relationship management (CRM) issues. However, quality
improvement is not a guarantee of increased sales or profits. This fact is avoided by
previous studies as it assumed that management are keen to improve service quality and
customer satisfaction, though this increase will increase costs as well.
The research also investigated the role of customer satisfaction in the chain of service
quality-customer behaviour. It is found that customer satisfaction plays as a mediating
attitude between service quality performance and customer future intention such
customer retention and customer loyalty (Objective 3). As a result, it is found that there
is a nonlinear and asymmetric relationship between customer satisfaction, retention and
Vahid Pezeshki
Page 155
loyalty. Finally, the study found that the length of relationship does not really affect
customer future intention such as switching and word of mouth (Objective 4).
The findings have implications for management strategies and telecommunication
policy. The telecommunication industry is facing an accelerated rate of churning among
customers since over its market has reached to maturity stage. With intensified
competition, non-contractual relationships with customers may not be an effective way
to improve customer retention in the future. By using this methodology, companies can
set up different strategies for different customer segments to develop and promote
various services instead of uniform strategies for all customers.
The main conclusions drawn from the evaluation of customer behaviour (Figure 6.11) in
the mobile telecommunication are summarised as below:
Service quality attributes can be classified into different groups with respect to
their impact on customer satisfaction. In this study, we identified three types of
factors: basic, exciting, and neutral.
Attribute importance is a function of attribute performance.
There is a different relationship between attribute importance and attribute

performance with regard to attribute classification.
Figure 6.11: The behavioural and financial consequences of service quality attributes
Service
Attributes
1
Service
Attributes
Classification
Basic
.
.
.
Overall Customer
Satisfaction
Customer
Dissatisfaction
Seg 1
Seg 2
Performance
Exciting
Customer
Segmentation
Customer
Satisfaction
Customer
retention
Profitability
Seg 3
Customer
loyalty
Customer Behaviours
Customer satisfaction plays a mediating role between attribute performance and

customer switching intention and word of mouth behaviour.
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There is asymmetric relationship between overall customer satisfaction and

switching intention.
The length of relationship does not significantly affect customer switching

intention in both contractual and non-contractual segment.
There is a strong and positive relationship between switching costs and customer
switching intention. Customers with high switching barriers and costs may have
higher switching intention rather than customers from non-contractual segment.
There is a positive correlation between customer switching intention and word of

mouth behaviour.
If the companies were to add up the lifetime values of all existing customers and future
customers, the result would be customer equity which presents the net present value
(NPV) of all the cash flow that ever will be produced by customers. In other words,
customer equity equals to the economic value of business. Activities like retaining
profitable customers, increasing cross-selling, word-of-mouth and reducing the cost of
services can increase customer equity. Using such analysis really depends on a firms
strategy, where managers can create new value to the business in two different ways or
maybe in both ways at once:
1. Generate more profit today, and
2. Generate more customer equity today.
There are still companies that build their strategic planning on earliest return on
investment (ROI). Therefore, such approaches can be useful where top management
thoroughly believe in that customers are durable assets who make generate profit for the
company.
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Chapter References
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www.findarticles.com/p/articles/mi_m0EIN/is_2008_March_7/ai_n24378952
01/08/2008]
[Accessed
www.ofcome.org.uk, Communications Market Report, [Accessed at 23 Aug 2007]

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at
Chapter 7: Conclusions and Recommendations for Future Research
7
CHAPTER 7
CONCLUSIONS AND RECOMMENDATIONS FOR
FUTURE RESEARCH
This chapter concludes the research reported in this thesis, presents its contribution, and
proposes areas of further research. It begins with a summary of the thesis and draws
conclusions that are derived from both the literature and empirical research reported in
this dissertation. The limitations of the research undertaken are identified and discussed.
The chapter concludes by proposing further direction of this research.
1. Summary of the Thesis

The thesis proposes a framework for service quality-customer behaviour. It uses the
volatile mobile telecommunication industry case study. The study tests the
interrelationship between service quality attributes, customer satisfaction, customer
retention of switching and customer loyalty (word of mouth). It attempts to highlight the
role of customers in determining the strategies and of service design. When a customer
complains, the actual value of business will probably decline, since the expected future
earning from that customer may decline. It may be argues that a companys current sales
and profit figures may not be the most suitable measure of success of their business. If
customers experience high quality of service then they are likely to purchase services
from the provider and recommend the service to others. On the other hand, unsatisfied
customers may shift to other providers and also based on their experience may also
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discourage other to subscribe to the service. More importantly, these value transactions
(creation or destruction) can not be captured in simplistic financial analysis.
The factors that drive the effectiveness of customer behaviour modelling can be
structured into the following categories:
1. Customer characteristics
2. Product or service characteristics
The key customer characteristic relevant to the effectiveness of service quality attributescustomer behaviour modelling is the skewness of customer value distribution.
Depending on the industry, the skewness of the distribution of the customers value may
differ.
The thesis discussed how a business can create new value for shareholders by converting
prospects to customers. It linked service quality attributes to three metrics; customer
satisfaction, retention and loyalty. In chapter 2, the author reviewed the normative
literature of service management and marketing. In Chapter 3 the conceptual model and
the hypothesises of the research were discussed. In Chapter 5, reliability and validity
analysis for the collected data set was conducted. And finally in Chapter 6 the empirical
data derived from the case study was used to test the hypothesis proposed in Chapter 3.
The empirical findings confirmed that the relationship between service quality attributes
and customer behaviour.
The proposed conceptual model can be easily adopted by a broad range of industries for
customer experience management (CEM), customer relationship management (CRM),
strategic planning, resource allocation, and decision making processes.
2. Meeting the Objective of this Dissertation

In order to achieve the aim of this dissertation, a number of objectives were defined in
Chapter 1 and have accomplished as discussed in the previous chapters. These objectives
are summarised in Table 7.1 and analysed in the following paragraphs.
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Table 7.1: Meeting the objectives of this dissertation

Objective
Section/Chapter
Objective 1
To understand the notion of quality of service and

Objective 2
To understand the relationship between service

attribute importance and performance and their impact
on resource allocation.
Objective 3
To establish a framework that links service attribute

performance to customer satisfaction and then to
customer future intentions (customer retention and
customer loyalty).
Objective 4
To understand the impact of length of relationship on

customer future intention.
Objective 1
To assess the relationship between service attribute performance and customer
satisfaction, regression analysis with dummy variables was employed. For these data, we
found both positive and negative relationship between predictors and the outcome. This
means, when performance level increases then overall satisfaction-level increases and
vice versa. As a result, the accuracy of billing and payment (AoBP) and range of phones
(RoP) can be classified as basic attributes. Their impact (coefficient) on overall customer
satisfaction is high when performance-level is ranked low, while they do not
significantly affect overall customer satisfaction when performance-level is ranked high.
Customer service quality (CSQ), network performance (NP), and value for money
(VFM) can be viewed as exciting attributes. They increase customer satisfaction levels if
they fulfilled, while they do not significantly affect overall customer satisfaction when
performance-level is ranked high. However, network performance has a higher impact
on overall customer satisfaction when performance-level is ranked high comparing to
CSQ and VFM. Furthermore, results show that the service plans (SP) is a neutral
attribute, as it does not result in either customer satisfaction or customer dissatisfaction.
In this study, no performance or one dimensional attribute was identified.
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The results show that the relationship between service quality attributes and customer
satisfaction is non-linear and asymmetric.
Objective 2
The result from multiple regression analysis with dummy variables accommodates the
concept of change in the relative importance of attributes with change in attribute
performance as a function of overall customer satisfaction. In other words, there is
asymmetric relationship between attribute performance and importance. Considering
service attribute classification, importance of a basic or an exciting attribute depends on
its performance. Exiting attributes are important if performance is high but are
unimportant when performance is low (network performance, customer service quality,
and value for money). Basic attributes are important if performance is low, but
unimportant if performance is high (range of phones and accuracy of billing and
payment).
Such approach contradicts the traditional view that the relative importance of service
attributes is adequately represented as a point estimate. If the asymmetries are not
considered, the impact of the different service attributes on overall customer satisfaction
is not correctly assessed.
Objective 3
The results verify that there is a non-linear and asymmetric relationship between
customer satisfaction and customer switching intention. In other words, the impact of
customer satisfaction on switching intention varies from negative to positive within the
overall satisfaction domain. The results show that the higher levels of customer
satisfaction has greater impact on customer switching intention rather than the lower
levels. In addition, the strength of the relationship between customer satisfaction and
switching intentions are positively increased from non-contractual to contractual.
Moreover, studying the relationship between customer satisfaction, customer switching
intention and customer loyalty show that there is a positive relationship between three
constructs.
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Objective 4
The results show that length of relationship does not impact customer switching
intention and word of mouth. It is confirmed that customer satisfaction plays an
important role in customer switching intention and word of mouth behaviour. In other
words, customer satisfaction plays as mediating attitude between service quality
attributes and customer future intention.
3. Main Findings
By applying the methods introduced in this thesis, there is a possibility for companies to:
Improve sale productivity and effectiveness
Achieve higher customer satisfaction through better responsiveness
Increase visibility of service or product in the market
Better project customer reaction to service attributes
The main findings derived from the work presented in this dissertation are presented
below:
Finding 1
By reviewing the normative literature, it was suggested that service

quality attributes should be classified based on their impact on
customer overall satisfaction. Such classification was applied and
proved to help understanding the relationship between satisfaction,
retention and loyalty of customers.
Finding 2
The study compared two methods for measuring service attribute

importance. These two methods were the direct and the indirect
method. The indirect method was chosen as the better method due
to the fact that in the direct method respondents may not take into
account the current level of attribute performance with respect to
satisfaction while in the direct method the importance of the
attribute is based on the current level of performance with respect to
satisfaction for that attribute.
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Finding 3
using IPA method, the impact of service attribute classification on

resource allocation process was measured, and as a consequence,
the importance-performance analysis was revised.
Finding 4
The literature review indicated that there is limited research in the

area of service quality-customer behaviour.
Finding 5
The conceptual model can be used as a tool for decision-making to

support organisations, and to allow researchers and practitioners to
relate customer behaviours to profitability.
4. Statement of Contribution and Research Novelty

It was proposed that service industries should consider the influence of service attribute
classification when designing their services and products. To date, several studies
assume the relationship between service quality attributes and customer satisfaction
linear and symmetric. Considering the relationship linear can not help managers to
understand how to improve performance with respect to customers opinion, needs and
preferences. As a result, it can decrease profitability and also increase switching rate
with customers. Understanding the impact of service attributes on customer satisfaction
can help decision makers within resource allocation process. A model was proposed
interrelating three factors in product and service design, i.e. satisfaction, retention and
loyalty. The empirical studies prove that the proposed model can be used to identify
customer satisfaction behaviour, customer retention and loyalty. The case was proposed
and tested in one of the most volatile service industry, the mobile telecommunication
industry.
5. Research Limitations
The empirical study conducted here has a number of limitations. Some of the limitation
can be listed as relatively small sample size of customers. This was due to the
complexity of survey, and that was direct to measure accuracy of responses. Secondly,
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the case studies could have been extended to other sectors such as manufacturing,
transportation, healthcare and etc.
6. Further Research
While the findings reported in this thesis go some way to resolving the research problem
outlined, much remains unresolved. Accordingly, for broad areas are suggested for
future research direction. These research areas are: (1) lifetime value (LTV), (2) cross
cultural study, (3) further exploration of hypothesised relationships including new
methods of investigation, and (4) test of the models for applicability in other industrial
sectors. While customer equity or LTV is an accepted concept in marketing circles, there
is little empirical evidence released so far. In addition to study the customer behaviour
cross different cultures could provide more in-depth insight. As customers from different
cultures have different preferences and expectations.
A third broad approach my involve testing the nature of hypothesised relationships. For
instance some previous studies suggested that relationships might be better represented
by curvilinear. Finally, researchers could consider testing the relationships investigated
in this thesis in different sectors, to find a compromised general model that can be used
in all sectors as the basic formulation for projecting changes to customer satisfaction,
retention and loyalty where product attributes vary. Based on the case data validated the
proposed method, the following propositions have been made for further research:
Linking structural equation modelling to other techniques such as Bayesin

networks can improve its limitations and be highly beneficial for both academy
and industry.
strong
implication
to
identify
exciting
attributes
within
mobile
telecommunication service by benchmarking. For instance, recently Vodafone

has added a new feature to its services which enables subscribers to transfer their
money by their mobile phone. The new attribute should be measured by a new
metric which can affect other customer behavioural and attitudinal variables.
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A cross cultural investigation to identify the role of culture in customer

behaviour can significantly benefit service providers especially within service
attributes design and customisation, as most of mobile telecommunication
service providers are multinational.
Applying product attractiveness theory to service quality attributes. However, the

study would take long time but can bring lots of value to the business.
Applying the presented conceptual model in this thesis to other service industries
can identify the gap between major players.
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Appendix A: Questionnaire Agenda
A
APPENDIX A:
QUESTIONNAIRE AGENDA USED FOR MOBILE
TELECOMMUNICATION - UK
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Questionnaire Agenda
Dear Respondent;
In this survey, we aim to measure customer behavioural variables, in mobile network,
which significantly affect profitability. The survey should not take long to complete
(max 4 min). Most questions can be answered with a tick, but there are also
opportunities for you to add your own comments.
-Please supply the following information:
Age: ... Occupation: ....

-Are you on:
-Which network(s) are you with:
T-In case of contract please specify;
The length of your contract: 12 months
On average how much you pay for your mobile phone bill each month?
Fixed bill = ---+ others ----In case of pay as you go please specify;
How much on average you top up your mobile phone each month? -----Please rank just the three most important attributes in order of importance to
choose a new mobile network, from 1 (most important) to 3 (least important)?
Network performance (coverage and reception)
Brand image
Range of services (e.g. broadband, voicemail, and video message)
Service plans (Tariffs and Charges)
Range of phones
Value for money
Entertainment features (e.g. music club)
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1
2
3
-Please rank your service provider based on?

(1= Poor, 2=very bad, 3=bad, 4= Reasonable, 5=good, 6=very good, 7= Excellent) and
NA= not applicable
1
6 7 NA
1.Network performance (coverage and reception)

2.Customer service quality
3.Brand image
4.Range of services (e.g. broadband, voicemail, and video message)
6.Service plans (Tariffs and Charges)
7.Range of phones
8.Accuracy of billing and payment
9.Value for money
10. Entertainment features (e.g. music club)
11. Overall performance
- What is your overall satisfaction level towards your mobile phone and service
provider?
1.
4.Neutral
-Do you use the following services?
MMS
Would you consider usi
Internet
Would you consider using this service for better price/value?
Roaming
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Extra bundle message

Video message
Insurance
Maybe
-Please specify number of years you have been using same network? ___
-What are the main reasons for you to stay with same service provider?
1
2
3
-Would you consider switching to a better offer from another service provider?
-Do you have another mobile phone with a different service provider, either pay as
you go or contract?
If yes, on average how much you pay for that each month? ------ Do you use VOIP, Telephone card, Skype?
month? ------Do you recommend your mobile network provider to friends or relatives?
1.
2.
3.
4.
5.
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Addendum
ADDENDUM - PUBLISHED PAPERS
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Addendum Sample of paper by the author
Journal of Measuring Business Excellence, Vol. 13, No., pp. 82-92
Importance-Performance Analysis of Service Attributes and its Impact on

Decision Making in the
Mobile Telecommunication Industry
Vahid Pezeshki, Alireza Mousavi, Susan Grant
School of Engineering and Design, Brunel University, Middlesex, UK
Abstract
Purpose Customer relationship management (CRM) strategies rely heavily on the importance and performance of
the attributes that define a service. The aim of this paper is to firstly investigate the asymmetric relationship between
performance of service attributes and customer satisfaction. And secondly, through a case study in the mobile
telecommunication industry to prove that the importance of a service attribute is a function of the performance of
that attribute.
Design/methodology/ approach An empirical study using questionnaires with a focus on service enquiring about
the performance of service key attributes and overall customer satisfaction was conducted. The data is fed into the
Kano customer satisfaction model and the importance-performance analysis (IPA) method for analysis and
comparison.
Findings The results indicate that there is a dynamic relationship between service attributes and overall customer
satisfaction. Service attributes have different impact on customer satisfaction regardless of their classification. The
importance of service attributes can be derived from their performance and this can be proved in the Mobile
Telecommunication sector. Also this research concludes that the major weaknesses in the Mobile
Telecommunication Industry that causes the highest customer dissatisfaction are the range of phones, the accuracy
of billing and payment, and the service plans, whereas the major strengths as source of customer satisfaction are the
customer service quality, the value for money and network performance.
Research limitations/implications The Kanos model of customer satisfaction needs to be extended the to other
customer behaviour variables such as customer retention (e.g. purchase intention) and customer loyalty (e.g. wordof-mouth, feedback) for improved decision analysis. This research paper does not include customer retention and
loyalty factors.
Practical implications The methodology employed in this paper can be easily applied by marketers for evaluating
customer behaviours and service quality performance for improved decision making and resource allocation.
Originality/value There is little evidence that extensive work has been dedicated to studying the relationship
between service attributes and customer satisfaction through Kanos model. This paper in specific investigates the
applicability of the model and the key factors in mobile telecommunication industry.
Keywords Decision Making, Kano's model, Customer satisfaction, Importance-performance analysis (IPA),
Resource management, Customer relationship management (CRM), Mobile telecommunication industry
Paper type Research paper
1. Introduction
Lack of practical tools and methodologies which ensure managers a better understanding of the customer
needs and expectations can waste scarce available resources. As a result, customer relationship
management (CRM) systems have become a must-have set of tools and techniques in the past decade. The
CRM concept designs services and products with attributes that would maximise customer behaviour (i.e.
customer satisfaction and loyalty) and profitability. Evidence from previous research work shows there is
a positive relationship between service quality and customer behaviour (Anderson and Mittal, 2000;
Brady et al., 2002). Thus, service quality can be considered as the main antecedent of customer
behavioural variables such as satisfaction and loyalty (Anderson and Sullivan, 1993).
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One of the key issues within customer behaviour modelling is that some practitioners have not considered
the potential relationship between the two key characteristics of service quality attributes namely; (1)
performance, and (2) importance. These two elements seem to be the key factors in customer behaviour
and decision analysis. Each service attribute may have different values of importance and performance
that lead to variations in customer satisfaction, retention and loyalty. In other words, depending on the
type of an attribute, the relationship between attribute performance and customer satisfaction becomes
asymmetric and non-linear (Kano, 1984; Cadotte and Turgeon, 1988; Berger et al., 1993; Johnston, 1995;
Matzler et al., 1996 and 2004; Lee and Newcomb, 1997; Vavra, 1997; Mittal et al., 1998). Service
attributes with different levels of importance have different impact on satisfying customer expectations.
As a result, it is essential for companies to understand the effect of the quality of service attribute on
Several studies argue that importance of attributes is an antecedent of performance (Cronin and Taylor,
1994; Oh and Parks, 1998; Tse and Wilton, 1988; Matzler et al., 2004), though this relationship is more
complex and the validity of this assumption has been questioned by others. For instance, some service
attributes, despite good performance may not significantly affect the rate of increase in customer
satisfaction, but underperformance of the same attributes may lead to large rate in decreasing levels of
customer satisfaction. By understanding the relationship between performance of service attributes and
their importance to the customer, marketers would then be able to concentrate resources on the right
attributes to increase customer satisfaction-level.
According to marketing literature, there are several methods for measuring performance and importance
of service attributes (Herzberg et al., 1959; Martilla and James, 1977; Kano et al., 1984; Crompton and
Duray, 1985; Cadotte and Turgeon, 1988; Brandt, 1988; Venkitaraman and Jaworski, 1993; Varva, 1997;
Brandt and Scharioth, 1998; Liosa, 1997 and 1999). Traditional techniques assume that there is a linear
relationship between performance of service attributes and customer satisfaction which contradicts with
the results of other techniques like the Kano model of customer satisfaction (1984). The performance of
an attribute is typically measured on a rating scale while attributes importance is rated either directly by
customers (self-stated) using a scale or statistically (indirect method) based on the relationship between
performance of attributes and customer satisfaction.
In this article the authors attempt to evaluate the results of Kanos model (three-factor theory) and the
importance-performance analysis (IPA), using data from a customer satisfaction survey in the mobile
telecommunication sector in the UK. A regression analysis with dummy variables is employed to identify
the impact of variations in performance of service attributes on customer satisfaction.
The paper is structured as follows: A brief overview of IPA (section 2) and Kanos model (section 3) is
provided. In section 4 and 5 the implementation of the model in the mobile telecommunication sector is
discussed followed by the managerial implications of the findings. The conclusions and future work is
discussed in the final section.
2. Identification of customer satisfaction attributes using IPA

Importance-performance analysis (IPA) was introduced by Martilla and James (1977). It is a method for
measuring customer satisfaction. The IPA method has been adopted in various industries such as tourism
and hospitality (Go and Zhang, 1997; Hollenhorst et al., 1986), education (Alberty and Mihalik, 1989),
and health care (Dolinsky, 1991; Dolinsky and Caputo, 1991). Despite its advantages a number of studies
have highlighted its shortcomings (Oh, 2000; Matzler et al., 2003, 2004; Ting and Cheng, 2002). To
overcome some of its shortcomings additional features have been introduced to the original IPA
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framework (Dolinsky and Caputo, 1991; Vaske et al., 1996). For instance, Matzler et al. (2003) have
combined IPA with the Kanos model for improved customer satisfaction evaluation.
The traditional IPA method is based on two primary assumptions; (1) performance and importance of
attributes are independent variables (Martilla and James, 1997; Oliver 1997; Bacon 2003), and (2) there is
a symmetric and linear relationship between attribute performance and customer satisfaction.
Previous studies revealed the positive relationship between performance and the importance levels of
attributes using the IPA grid (Mittal et al., 1998; Sampson and Showalter, 1999; Anderson and Mittal,
2000; Mittal and Katrichis, 2000; Mittal et al., 2001; Matzler et al., 2003). The grid also describes to the
levels of concentration of managerial initiatives in the quadrants (in this case II and IV see Table 1). In
contrast, a negative association between these two variables shifts the focus onto quadrants I and III.
Service or product attributes that are located in Quadrant I are rated high in importance and low in
performance. Immediate measures should therefore be taken to increase the product performance levels.
Quadrant II represents attributes that are rated high in both performance and importance. In this quadrant
the company should continue to maintain the same performance levels to sustain competitive advantages.
High performance on low importance attributes demands of reallocation of resources from this quadrant
(III) to somewhere else. In quadrant IV, both importance and performance are rated low. As a result, there
would be no need for further action to be taken. Some studies reported that companies that invested on
service attributes in Quadrant I did not experience an increase in customer satisfaction. (e.g., Mittal et al.,
1998; Sampson and Showalter, 1999).
Table.1 Traditional Importance-performance analysis (IPA) grid

Quadrant I
Quadrant II
High Importance
Low Performance
High Importance
High Performance
Quadrant IV
Quadrant III
Low Importance
Low Performance
Low Importance
High Performance
Quadrant I:
Improvement efforts should be concentrated on
the attributes of this cell (major weakness).
Quadrant II:
Keep up the good work (major strength).
Quadrant III:
Low priority efforts should be spent on the
attributes of this cell (minor strength).
Quadrant IV:
Unnecessary to spend present efforts on the
attributes of this cell (minor weakness).
3. Kanos model of customer satisfaction

There are significant difference between the key drivers of customer satisfaction and dissatisfaction
(Shiba et al., 1993; Dutka, 1993; Gale, 1994; Oliver, 1997). In other words, the bad experience that
creates dissatisfaction is not the same as the good experience that creates satisfaction. According to Kano
(1984) service quality attributes can be classified into three groups; (1) basic, (2) performance, and (3)
excitement (Anderson and Mittal, 2000; Matzler et al., 2004; Oliver, 1997), see Fig 1.
Basic attributes or dissatisfiers are the minimum required features that customers naturally expect
from a service or product. These attributes are not able to elicit satisfaction but they produce
dissatisfaction when not fulfilled (Solomon and Corbit, 1974; Solomon, 1980; Kano et al., 1984). For
example, punctuality and safety of airline are considered as basic attributes.
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Performance or one-dimensional attributes produce both satisfaction and dissatisfaction depending

on performance levels. For example, petrol consumption of a car is considered to be a performance
attribute. Lower consumption leads to higher customer satisfaction.
Fig. 1. Three-factor theory (Source: Busacca and Padula, 2005)
Exciting attributes or satisfiers are the attributes that increase satisfaction levels when delivered but
cause no dissatisfaction if not delivered. High performance on these attributes has a greater impact on
overall satisfaction rather than low performance. For instance, promotional offers (e.g. buy one get
one free) can be considered as an exciting factor for some customers.
4. Measuring the importance of service attributes

The main shortcoming of many customer behaviour models is that they tend to formulate the relationship
between service attributes and customer behaviour (e.g. customer satisfaction) without considering the
relationship between performance and importance. Measuring the importance of service attributes
therefore cannot be simply ignored when analysing customer behaviour. The nature and magnitude of the
relationship between the importance of service attributes and customer satisfaction may change with
performance (Kano et al., 1984; Mittal et al., 1999; Matzler et al., 2003 and 2004; Bacon, 2003).
Understanding and projecting the relationship between performance and importance and their impact on
customer satisfaction is critical during the process of product or service design.
There are two methods to estimate the importance of service attributes; (1) customers self-stated
(explicit), and (2) statistically inferred importance (implicit). Techniques such as multiple regression
analysis, structural equation modelling (SEM) or partial correlation (Danaher and Mattsson, 1994;
Wittink and Bayer, 1994; Taylor, 1997; Varva, 1997) are normally used for statistically inferred
importance ratings.
In the self-stated importance method, through surveys customers are directly asked to rate the importance
of service or product attributes based on their preferences (e.g. rating scales, constant sum scales, etc.).
The importance of attributes that represent the basic functions are normally ranked the highest compared
with other attributes, since they are expected to exist as the minimum requirement. While exciting
attributes receive lower rates compared to basic attributes as customers are not expecting them. The
performance attributes, however, are rated somewhere between basic and exciting attributes.
Vahid Pezeshki
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In the statistically inferred attribute importance rating, the importance of product attributes are inferred
based on the results of customer satisfaction or product performance surveys. The data is then fed into
multiple regression analysis, structural equation modelling, normalised pair wise estimation and partial
least squares models to obtain importance levels.
The results from both methods are different, since the self-stated method does not consider the
relationship between attribute importance and overall satisfaction (Kano et al., 1984; Matzler and
Sauerwein, 2002). However, multicolinearity can be one of possible disadvantage of implicitly derived
importance (Matzler and Sauerwein, 2002).
In this paper, the multiple regression with dummy variables (statistically inferred) method is adopted for
mobile telecommunication service attributes ranking. A linear multiple regression equation is adjusted
between each attributes performance (independent variables) and overall satisfaction (dependent
variable). According to this method, attributes with higher regression coefficients would be considered
more important to customers than attributes with lower regression coefficients.
5. Research methodology
A test was designed to assess the applicability of Kanos model in the mobile telecommunication
industry. The main attributes of services within this sector were extracted from existing literature (see
Appendix). The survey was conducted with a random sample of 270 students of a University.
Questionnaires were completed and returned either via email or were collected in face-to-face interviews.
From this sample, 74.4% percent of the respondents were under 27 years old.
The questionnaire comprises of five parts. In the first part respondents were asked to provide information
about their network brand. Then, performance-level with the single service attributes as well as overall
satisfaction with the service were measured using a seven-point Likert scale (scaling performance level
from 1 = poor to 7 = excellent and scaling overall satisfaction from 1 = strongly dissatisfied to 7 =
strongly satisfied).
The data of the survey was used to test the following two hypotheses:
H1: Attribute performance and attribute importance are dependent, therefore, attribute importance can be
interpreted as a function of attribute performance.
H2: The relationship between attribute performance and customer satisfaction is asymmetric and nonlinear.
5.1. IPA method

In order to construct the API grid, the mean performance ratings of each attribute was calculated. Then
the importance of an attribute was measured using a multiple regression with attribute performance to be
independent and the overall customer satisfaction to be dependent variables. The results are shown in
Table 2.
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Table 2. Importance-performance measurement

Attribute
Network performance (NP)
Customer service quality (CSQ)
Service plans (SP)
Range of phones (RoP)
Accuracy of billing and payment (AoBP)
Value for money (VFM)
R = .480, F-value = 34.936,
*** < .01, ** P<.05, *P<.1, ns = not significant
Regression
coefficient
0.302***
0.199***
0.141*
-0.089*
0.145**
0.222**
Attribute
Performance (S.D.)
5.44 (1.43)
4.88 (1.36)
5.05 (1.43)
4.36 (1.63)
5.11 (1.49)
4.92 (1.51)
Figure 2 illustrates the IPA grid where mean values were used to split the axes. The results suggest that
within the mobile telecommunication industry Range of Phones (RoP), Accuracy of billing and Payment
(AoBP) and Service Plans (SP) are sources of major weakness and require improvement (quadrant I). And
the attributes, Customer Service Quality (CSM), Value for Money (VFM) and Network Performance
(NP) (quadrant II) are the major strengths of the industry that lead to higher levels of customer
satisfaction.
Fig. 2. IPA grid
6
AoBP
NP
CSQ
SP
VFM
RoP
4
0
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
Attribute im portance
5.2. The Kano model analysis

In order to identify the asymmetric impact of attributes performance on customer satisfaction, as
proposed in H2, a regression analysis with dummy variables was used (Anderson and Mittal, 2000;
Brandt, 1998; Matzler and Sauerwein; 2002). Accordingly, two sets of dummy variables; the first dummy
variables quantify basic attributes, and the second ones quantify exciting attributes are set. The attributelevel performance ratings are recoded as (0,1) for low ratings, (0,0) for average ratings, and (1,0) for high
ratings. As a result, two regression coefficients are obtained (see Table 3 and Fig 3).
Sat tot al
1n
1 Att.1
dummy1Att.n
Vahid Pezeshki
dummy1 Att.1
2n
2 Att.1
dummy 2 Att.1
...
dummy 2 Att.n
Page 179
Sattotal is the overall customer satisfaction, and n is the number of quality attributes ( n = 7), dummy 1
indicates lowest customer satisfaction level, dummy 2 indicates highest customer satisfaction levels,
the incremental decline in overall satisfaction associated with low satisfaction levels, and
incremental increase in overall satisfaction associated with high satisfaction level.
the
Table 3. The asymmetric impact of attribute-level performance on overall satisfaction

Dummy-Variable Regression
Coefficient
Dependent Variable: Overall satisfaction
Low
High
performance
performance
Network performance
0.048 (ns)
.366***
-.001 (ns)
.221***
Service plans
-.009 (ns)
.068 (ns)
Range of phones
-.130 **
-.114*
-.115**
.064 (ns)
Value for money
-.012 (ns)
.202***
R = .469; F-Value = 15.338
The results indicate that accuracy of billing and payment and Range of phones can be classified as basic
attributes. Their impact on customer satisfaction is high when performance-level is ranked low, while
they do not significantly affect customer satisfaction when performance-level is high. Customer service
quality, network performance, and value for money can be viewed as excitement attributes. However,
network performance has a higher impact on overall customer satisfaction when performance is high.
Results show that the service plans is a neutral attribute, as it does not affect satisfaction or
dissatisfaction. In this particular study no performance attribute was identified. The results confirm that
the service attributes have dynamic characteristic (asymmetric and non-linear). Therefore H1 can be
confirmed the first hypothesis. Note that the classification of quality attributes may differ based on
customer expectations and type of industry (Matzler and Renzl, 2007).
Fig. 3. Quality attributes impact on overall satisfaction
0.4
0.3
0.2
Low performance
0.1
High performance
Value for
money
Accuracy of
billing
Range of
phones
Service
plans
Customer
service
Network
performance
-0.1
-0.2
Fig. 4 shows the asymmetric relationship between performance of attributes and their importance as it
was proposed in H2. For basic attributes, the importancelevels decrease as performance-levels increase
Vahid Pezeshki
Page 180
(range of phones and accuracy of billing and payment), while in the case of exciting attributes
importance-levels increase with increases in performance-levels (network performance, customer service
quality, and value for money).
Network performance
0.25
0.2
Importance
Importance
0.4
0.3
0.2
0.15
0.1
0.05
0.1
Low
Low
high
high
performance
Performance
Value for money
Range of phones
0.135
0.2
Importance
Importance
0.25
0.15
0.1
0.05
0
Low
high
0.13
0.125
0.12
0.115
0.11
0.105
Low
Performance
high
Performance
Importance

0.15
0.1
0.05
0
Low
high
Performance
Fig. 4. Relationship between importance and performance
The application of the traditional IPA matrix for two groups of satisfied and dissatisfied customers (Figs.
5 and 6) show that managerial implementation derived from traditional IPA method could be misleading.
For example, in the case of dissatisfied customers, the importance-level of attribute AoBP is high whilst
its performance is low. Therefore companys priority should be to improve the performance of that
attribute. The results also imply that fewer resources should be allocated to network performance, service
plans, and value for money as their importance-level is lower than their performance-level.
By applying the multiple regression with dummy variables technique (shown in Table 3), the attribute
value for money and network performance becomes an excitement attributes. Consequently, the increase
in performance-levels increases the importance-levels. Accordingly, the accuracy of billing and payment
becomes a basic attribute. So it might be to the competitive advantage of the company to keep the
performance-level high, though its importance will not increase as shown in Fig 4.
Vahid Pezeshki
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IPA for dissatisfied custom ers

2.5
RoP
VFM
Performance
2.45
SP
NP
2.4
2.35
AoBP
2.3
CS
2.25
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
Im portance
Fig. 5. IPA for dissatisfied customers
Figure 6 shows a similar case for satisfied customers.

IPA for satisfied custom ers
6.05
NP
Performance
5.95
5.9
AoBP
5.85
SP
VFM
RoP
5.8
5.75
CS
5.7
5.65
0
0.1
0.2
0.3
0.4
Im portance
Fig. 6. IPA for satisfied customers
6. Conclusions
This paper evaluates the importance and performance of the main attributes in the mobile
telecommunication industry for the purpose of customer satisfaction improvement. Practitioners need to
consider that the relationship between performance of attributes and customer satisfaction depends on the
classification of attributes. This paper analysed two methods of IPA and the Kano model for customer
satisfaction improvement. As a result, it is confirmed that there is an asymmetric relationship between
performance of attributes and overall customer satisfaction. The study also confirms that attribute
importance can be seen as a function of attribute performance.
Vahid Pezeshki
Page 182
Finally we suggest a simplified diagram which shows the relationship between service attributes and
customer behaviour (see Fig. 8). There is a need for more research in to the nature of attributes
classification and other behavioural variables (e.g. retention and loyalty) in relation to the practical
implications this has on the way that customer profitability is conducted.
Fig. 8. Customer behaviour modelling
Service
Attributes
Attribute
Classification
Customer Behavioural Outcomes
Basic
attributes
.
.
.
Customer
retention
Dissatisfied
Performance
attributes
Market
share
Satisfied
Customer
loyalty
Excitement
attributes
Appendix
Mobile network attributes
1 Network performance
2 Customer service quality
3 Service plans
4 Range of phones
5 Accuracy of billing and payment
6 Value for money
-Please rank your service provider performance based on the following attributes?
1=Poor, 2=very bad, 3=bad, 4=Reasonable, 5=good, 6=very good, 7=Excellent, NA=not applicable
1
7 NA
1.Network performance
2.Customer service quality
3.Service plans
4.Range of phones
5.Accuracy of billing and payment
6.Value for money
7. Overall performance
- What is your overall satisfaction level towards your mobile phone and service provider?
1. Strongly dissa
Vahid Pezeshki
Page 183
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Corresponding authors
Vahid Pezeshki can be contacted at: [email protected]
Ali Mousavi can be contacted at: [email protected]
Susan Grant can be contacted at: [email protected]
6th International Conference on Manufacturing Research (ICMR08)
Service attribute importance and strategic planning: An

empirical study
Vahid Pezeshki and Ali Mousavi
School of Engineering and Design, Brunel University, Middlesex, UK
Abstract
There is growing evidence that attribute importance is a function of attribute performance.
Several studies reported that service quality attributes fall into three categories: basic,
performance, and excitement. Thus, the identification of attribute importance is
significantly important as a key to customer satisfaction evaluation and other behavioural
intentions. According to customer behaviour literature, attribute importance can be
measured in two ways: (1) self-stated importance, and (2) statistically inferred importance.
The article evaluates two methods according to their impact on overall customer
satisfaction measurement and, managerial implementation. A case study is conducted on
the telecommunication industry for analysis.
Keywords: Customer satisfaction; Importance-performance analysis (IPA); Strategy.
1. Introduction
Vahid Pezeshki
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The importance of service attributes to customers is a central element to the management within the context of
customer behaviour analysis, resource allocation process, and organisational behaviour. According to service
marketing literature, there are two key characteristics of service quality attributes namely importance and
performance. Using these two dimensions together facilitates the prescription of prioritising customer attributes
when enhancing service quality and customer satisfaction [1]. In other words, measuring attribute importance and
performance certainly draw a clear image for top managers to best deploy scarce resources, using importanceperformance analysis (IPA).
There are several methods for measuring attribute importance in behavioural sciences such as free-elicitation
method, direct rating method, direct ranking method, analytical hierarchy process, and information-display board,
multi-attribute attitude methods. However, there is a lack of convergent among and nomolological validity of
different methods [2]. These issues can cause inconsistent outcomes among methods. Previous research argues that
the main reason of the lack of validity among methods is multi-dimensionality of attribute importance [3]. As a
result, all inconsistency among methods can be interpreted by the fact that different methods measure different
dimensions of importance. According to literature, key dimensions of attribute importance can be classified into
three groups: (1) salience, (2) relevance, and (3) determinance [4], [5], see Fig 1.
In this article, we investigate the validity of two existing methods that are proposed to measure the determinance of
service attributes in overall customer satisfaction in the mobile telecommunication industry, using statistical inferred
importance and customers stated importance. The findings show that the type of importance measure and the
dynamic nature of importance to response influence management decision making. As a result, there are significant
differences in nomological validity- the relationship between the importance of service attributes and overall
Fig. I.
The three dimensions of attribute importance (Adopted from [3])
We begin by describing the impact of attribute importance on customer behaviour and the methods we compare. We
examine two different statistical methods for driving importance measures including multiple regression and
regression with dummy variables. An empirical analysis of three data sets highlights interesting results.
2. Service attribute importance
Vahid Pezeshki
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Indentifying the importance that consumers place on the service attributes that affect customer satisfaction, customer
retention (e.g., repurchase intention), and loyalty (e.g., feedback, and word-of-mouth) is an important element for
resource allocation process. Thus, the study of importance of service attributes has been a central topic in consumer
behaviour and market research for decades. Most importantly, the focus of attribute importance has shifted from
traditional evaluations of service concepts within controlled settings, such as conjoint analysis [6] and choice
modelling [7], to understanding the determinants of behaviours intentions [8], [9].
In this study we focus specifically on the impact of service attribute on cumulative customer satisfaction, defined as
an overall evaluation of a customer perception of service performance to date [10], [11]. As previous research
reported, customer satisfaction has significant impact on other customer behavioural intentions in the form of
retention and loyalty. In other words, it plays as mediating attitude between service quality or attribute performance
and other behavioural variables. Thus, indentifying the determinants of customer satisfaction can help managers
within their long term business planning.
3. Methodology
Most research studies which have investigated the importance of service attributes in customer behaviour employed
two methods: customers self-stated or explicitly derived importance (direct method), and (2) implicitly derived
importance or statistically derived importance (indirect method). By using explicitly derived importance, customers
are asked to rate a list of service or product attributes according their importance (e.g. rating scales, constant sum
scales, etc.). As a result, basic attributes usually receive the highest rating levels as they are naturally expected by
customers (minimum requirements). However, they have literally no impact on overall customer satisfaction and
future intentions even if they performed at a satisfactory level. For instance, consider an airline safety. Most
customers would rank safety as highly important attribute. But in reality it does not contribute significantly to the
prediction of airline choice, since it is more of a minimum requirement (basic attribute). So, do we need to take
resources away from this kind of attributes?
It is argued that direct methods do not effectively measure attribute importance [12], [13]. The main issue with this
method is that respondents may not take into account the current level of attribute performance. Moreover, there is
an asymmetric and nonlinear relationship between attribute importance and performance [12], [11], [14], [15].
Therefore, the customers self-stated importance is not the actual value for attribute importance.
Importance performance analysis (IPA) is widely used technique indentifying the relative importance of service
attributes with associated performance of service attributes [16]. The technique determines where a company should
focus its resources to produce the greatest impact on customer satisfaction and subsequent behavioural intentions
like retention and loyalty.
3.1. Self-stated importance

For the purpose of the evaluation of service attribute importance (explicitly derived), we employed methodology
from previous study [17]. Respondents were asked to rate just the three most important attributes; from 1=most
important to 3=least important. In order to assign each attribute (i) an importance value ( Pi ) lying between 0 and
1, we integrate the ranked assigned by respondents, using Equation 1, to a ranking score ( hij ) using Equation 2.
Table I lists the frequency of ranks 1, 2 and 3 for each attributes and also the aggregate importance value (using Eq.
2).
hij
Pi
(k
(n
g ij 1) / k
0
(1)
hij ) k / s
(2)
1
j
3.2. Multiple regression analysis (MR)
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There are various statistical methods for measuring attribute importance such as multiple regression (MR), structural
equation modelling or partial correlation [18], [19], [20]. Several researchers have suggested multiple regression
analysis as a suitable tool for measuring attribute importance. The method simply regresses the relative performance
ratings of service attributes against dependent variable (overall customer satisfaction) to generate significant-level
for individual attribute. This approach is the easiest to implement statistically. One of the advantages of regression
analysis is that the method provides a model of all attributes to form the overall rating. As a result, multiple
regression analysis estimates the degree of influence that attributes have in determining customer satisfaction
(shown in Table I). The primary problem with this approach is multicollinearity among the independent variables.
Sat total
1 X1
...
nXn
(3)
3.3. Regression analysis with dummy variables

In order to identify the asymmetric impact of attributes performance on attribute importance, a regression analysis
with dummy variables was used [21], [22], and [13]. Accordingly, two sets of dummy variables; the first dummy
variables quantify basic attributes, and the second ones quantify exciting attributes are set. The attribute-level
performance ratings are recoded as (0,1) for low ratings, (0,0) for average ratings, and (1,0) for high ratings. As a
result, two regression coefficients are obtained (shown in Table I and Fig II).
Sat tot al
1n
1 Att.1
dummy1Att.n
dummy1 Att.1
2n
2 Att.1
dummy 2 Att.1
dummy 2 Att.n
...
(4)
Sattotal is the overall customer satisfaction, and n is the number of quality attributes ( n = 7), dummy 1 indicates
lowest customer satisfaction level, dummy 2 indicates highest customer satisfaction levels, 1 the incremental
decline in overall satisfaction associated with low satisfaction levels, and 2 the incremental increase in overall
satisfaction associated with high satisfaction level.
4. Survey methods
The survey was conducted with a random sample of 270 students of a University. Questionnaires were completed
and returned either via email or were collected in face-to-face interviews. From this sample, 74.4% percent of the
respondents were under 27 years old. In this study, market segmentation is highly considered in order to avoid the
risk of displacement and strategy application bias.
Respondents were asked to indicate the most three important service attributes in the mobile service with the
anchors of 1=Most important to 3=Least important. In second part, the performance for each service attribute
was rated using a seven-point Likert scale from 1=Poor to 7=Excellent. Finally respondents were asked to rate
overall satisfaction using a seven-point Likert scale from 1=Strongly dissatisfied to 7=Strongly satisfied.
4.1. Findings
Table I presents the results of three methods for perceived importance. Applying the results of two methods (indirect
and direct) into IPA grid shows a change in strategic outcomes for service attributes. The difference between two
IPA models emphasises the influence of measurement on managerial implementation [23].
Table I.
Attribute importance analysis
Attribute
Vahid Pezeshki
Ranking order
1
Explicit
derived
Regression
coefficient
Dummy-variable
regression coefficient (b)
Page 189
Attribute
performance
(a)
Network performance
Service plans
Range of phones
Value for money
Total
82
9
87
9
6
56
253
51
27
47
22
19
62
252
52
38
31
30
18
43
249
0.81
0.54
0.79
0.51
0.46
0.76
0.302***
0.199***
0.141*
-0.089*
0.145**
0.222**
Low
performance
0.048 (ns)
-.001 (ns)
-.009 (ns)
-.130 **
-.115**
-.012 (ns)
High
performance
.366***
.221***
.068 (ns)
-.114*
.064 (ns)
.202***
5.44
4.88
5.05
4.36
5.11
4.92
(a) R = .480, F-value = 34.936,

(b) R = .469; F-Value = 15.338,
More importantly, the results from regression with dummy variables accommodates the concept of change in the
relative importance of attributes with change in attribute performance as a function of overall customer satisfaction,
see Fig. II. Since changes to attribute performance affects the relative attribute importance, therefore, the self-stated
importance is not appropriate method. However, multiple regression analysis can be an inappropriate if
multicollinearly exists within independent variables [14]. In the case of multicollinearly, partial correlation analysis
with dummy variables and multiple regression with natural logarithmic dummy variables are more suitable [24],
[14], [22], [21], [25]. By using regression with dummy variables, we also found two types of service attribute within
the mobile industry: Basic and Exciting [12].
Fig. II.
Relationship between importance and performance
Network performance
0.25
0.2
Importance
Importance
0.4
0.3
0.2
0.15
0.1
0.05
0.1
0
Low
Low
high
high
performance
P erformance
Range of phones
Value for money

0.135
Importance
Importance
0.25
0.2
0.15
0.1
0.05
0
0.12
0.115
0.11
0.105
Low
high
Performance
Vahid Pezeshki
0.13
0.125
Low
high
Performance
Page 190
Importance

0.15
0.1
0.05
0
Low
high
Performance
Fig III demonstrates two IPA models. There are some differences between two methods as some attributes located in
different quadrants. However, managers must consider the relationship between importance and performance since
changes in performance will affect attrite importance-level.
Fig. III.
IPA models
Statistically importance derived
Customer self-stated importance
NP
CSQ
AoBP
CSQ
SP
VFM
AoBP
RoP
4
VFM
NP
SP
RoP
3
2
1
0
0
0
0
0.05
0.1
0.15
0.2
Vahid Pezeshki
0.25
0.3
0.2
0.4
0.6
0.8
0.35
Page 191
5. Conclusion and management implications

This article evaluates the effect of importance measurement variation on outcome strategy variance, using IPA
technique. The comparative analysis of outcomes from different IPA analysis demonstrates the influence of
respective importance measures. In addition, the results of regression analysis with dummy variables highlight the
dynamic nature of importance relating to response variance. As a result, managers should consider the fact that
changes to attribute performance are associated with changes to attribute importance since quality attributes have
impact on customer satisfaction [12]. Differences between two methods of direct and indirect are particularly
marked. From managerial perspective, there is absolutely no assurance that increasing scores on attributes with the
highest self-stated importance will provide maximised increase in the overall measure [26].
References
[1] Matzler, K., Bailom, F., Hinterhuber, H. H., Renzl, B. and Pichler, J. (2004), The asymmetric relationship between attributelevel performance and overall customer satisfaction: a reconsideration of the importance-performance analysis, Industrial
Marketing Management, Vo. 33, No. 4, pp. 271-277.
[2] Jaccard, J., Brinberg, D. and Ackerman, L.J. (1986), Assessing attribute importance: a comparison of six methods,Journal
of Consumer Research, Vol. 12 (March), pp. 463-8.
[3] Ittersum, K.V., Pennings, J.M.E., Wansik, B. and Trijp, H.C.M. (2007), The validity of attribute-importance measurement: A
review, Journal of Business Research, Vol. 60, pp. 1177-1190.
[4] Myers, J.H. and Alpert, M.I. (1968), Determinant buying attitudes: meaning and measurement, Journal of Marketing, Vol.
32 (July), pp. 13-20.
[5] Myers, J.H. and Alpert, M.I. (1977), Semantic confusion in attitude research: salience vs. importance vs. determinance,
Advertising Consumer Research, Vol. 4, pp. 106-10.
[6] Green, P.E. and Srinivasan, V. (1990), Conjoint analysis in marketing: new developments and directions,
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[7] Gaudagni, P.M. and Little, J.D.C. (1983), A logit model of brand choice calibrated on scanner data, Marketing
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[8] Gustafsson, and Johnson, (1997), Determining attribute importance in a service satisfaction model, Journal of
Service Research, Vol. 7, No. 2, pp. 124-141.
[9] Ryan, M.J., Rayner, R. and Morrison, A. (1999), Diagnosing customer loyalty drivers: Partial Least Squares vs.
Regression, Marketing Research, Vol. 11 (summer), pp. 19-26.
[10] Fornell, C. (1992), A national customer barometer: The Swedish Experience, Journal of Marketing, Vol. 56,
(January), pp. 6-21.
[11] Fornell, C., Johnson, M.D., Anderson, E.W., Cha, J. and Bryant, B.E. (1996), The American Customer
Satisfaction Index: Nature, Purpose and Findings, Journal of Marketing, Vol. 60 (October), pp. 7-18.
[12] Kano, N., Seraku, N., Takahashi, F. and Tsuji, S. (1984), Alternative quality and must-be quality, Hinshitsu
(Quality, The Journal of Japanese Society Control), Vol. 14, pp. 39-48.
[13] Matzler, K. and Sauerwein, E. (2002), The factor structure of customer satisfaction: an empirical test of the performance
grid and the penalty-reward-contrast analysis, International Journal of Industrial Management, Vol. 13, No. 4, pp. 371-32.
Vahid Pezeshki
Page 192
[14] Matzler, K., Fuchs, M. and Schubert, A.K. (2004), Employee satisfaction: Does Kanos model apply?, Total Quality
Management and Business Excellence, Vol. 15, No. 9/10, pp. 1179-1198.
[15] Oh, H. (2001), Revisiting importance-performance analysis, Tourism Management, Vol. 22, No. 6, pp. 617627.
[16] Matrilla, J.A. and James, J.C. (1977), Importance-performance analysis, Journal of Marketing, Vol. 41. pp. 77-79.
[17] Abalo, J., Varela, J., Manzano, V. (2007), Importance values for Importance-Performance Analysis: A formula for
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[18] Danaher, P.J. and Mattsson, J. (1994), Customer satisfaction during the service deliver process, European Journal of
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[20] Varva, T.G. (1997), Improving your measurement of Customer Satisfaction, ASQ Quality Press, Milwaukee, WI.
[21] Anderson, E.W. and Mittal, V. (2000), Strengthening the satisfaction-profit chain, Journal of Service Research, vol. 3, No.
2, pp. 107-120.
[22] Brandt, D.R. (1988), How service marketers can identify value-enhancing service elements, The journal of Service
[23] Matzler, K., Sauerwein, E. and Heischmidt, K.A. (2002), The factor structure of customer satisfaction: an empirical test of
the performance grid and the penalty-reward-contrast analysis, International Journal of service industry Management, Vol. 23,
No. 2. pp. 112-29.
[24] Hair, J.F., Anderson, R.E., Tatham, R.L. and Black, W.C. (1995), Multivariate Data Analysis, Upper Saddle River, New
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[25] Ting, S.C. and Chen, C.N. (2002), The asymmetrical and non-linear effects of store quality attributes on customer
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of Management Science, Vol. 49 (September), pp. 1251-63.
Vahid Pezeshki
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Vahid Pezeshki
Page 194
International Computer and Industrial Management (ICIM)
Profitability through Customer Relationship Marketing

Vahid Pezeshki, Alireza Mousavi, and Richard T. Rakowski
E-mail: [email protected]
School of Engineering and Design, Brunel University, London, UK.
Keywords: Relationship Marketing, Customer Satisfaction, Customer Retention, Profitability.
Abstract
The purpose of this literature study is to
review and summaries the previous work on
relationship marketing based on the
relationship between satisfaction, loyalty and
retention.
The framework of relationship marketing is
described within relationship between
customer satisfaction, customer loyalty, and
customer retention. For todays savvy
managers, Relationship Marketing is hardly a
new concept. The firms have already focused
on understanding the customers needs and
building a marketing strategy around those
needs. But it is critical that the main
underlying principals (satisfaction, retention,
and loyalty) are understood before an
organisation starts to develop a relationship
marketing strategy. In this literature study,
we aim to understand that high levels of each
of relationship marketing principals do not
always yield high levels of the others and so
as increased sales even though the
relationship is positive.
This paper intends to discuss previous
research findings, and an exploration of the
theoretical and managerial implications.
Vahid Pezeshki
Introduction
In order to determine the success of a product
within the context of customer relationship
marketing (CRM), three main factors need to
be observed. These factors can be defined as:
Customer Satisfaction Level (CSL), Customer
Retention Probability (CRP) and the Degrees
of Customer Loyalty (DCL). In recent years
there have been substantial literature
dedicated to evaluating CSL (CORE, QFD,
ServQual,
and
Mass
Customisation).
Similarly, CRP and DCL experts have
produced substantial research into these
subjects (Hansemark and Albinsson 2004;
Ranaweera et al., 2003). However, there
seems to be a lack in comprehensive and
practical solutions to relate CSL with CRP
and DCL.
In this article we tend to investigate the latest
literature regarding these relationships, and
later provide an outline proposal to find a
relationship between customer satisfaction,
retention and loyalty and their impact on
product/service design cost.
In essence we propose a marketing and
process analysts tool that enable marketing
and process analysts focus investments on
product features that ensure the highest return
of investment (ROI).
Page 195
Relationship marketing attempts to improve

profitability within two main dimensions; cost
effective and time manner. The aim of this
study is to consider two central constructs,
satisfaction and retention, which may result
loyalty. Therefore, it helps understanding
clearly the process of generating leads
resulting in higher revenue through a clear set
of principles, and definition for attracting and
sustaining customers.
The concept of relationship marketing is not
new, as W. Edwards Deming commented:
Profit in business comes from repeat
customers, customers that boast about
your product and service, and that bring
friends with them [1].
Based on a recent literature review, we define
marketing relationship as a process includes
three main stages (Figure 1).
Figure 1
Foster
Prospec
ts
Customer
Re-Valuation
Customer
Retention
At foster prospects, companies try to

encourage customers to purchase their
products by providing the essential and
desirable requirements. These requirements
must be supplied through purchasing cycle
and also with exchanging information. During
this stage we are needed to make a decent
trial within moral incentive, encourage
consideration and awareness due to attract
more customers. This stage is a critical phase
always to a business. They need to make wise
choices about which lead generation tactics
they pick and choose for investing their
marketing dollars to gain higher revenue (for
instance; relationship-building, demonstrating
expertise, building trust and creating value
within purchasing cycle).
The second stage includes the construction of
long-term and profitable relationship based on
Vahid Pezeshki
repeat purchases incentive. Finally, in the last

stage the firms attempt to classify customers
and sustain the customer by re-engineering
products and services.
It is important to note that a company
implementing the process of marketing
relationship should design its strategies and
tactics based on the industry.
We continue the paper by introducing the
relationship marketing significant principals
(satisfaction, retention, and loyalty) across the
format illustrated above. We then present the
results of the study and discuss their
significance.
Satisfaction is defined as an emotional postconsumption response that may occur as the

result of comparing expected and actual
performance (disconfirmation), or it can be an
outcome that occurs without comparing
expectations [2].
Customer satisfaction is a substantial issue in
relationship marketing, particularly those in
services industries. Keiningham et al. (2005),
state that it is a significant affiliation between
customer satisfaction, purchase intentions,
and consequently financial performance [3].
The value of satisfaction has been more highlighted through some past studies. Researches
reveal that customer could defect at a rate of
10-30 per cent per year and meanwhile a
decrease of only 5 per cent in customer
defection can increase profits up to 95 per
cent, depending on the industry [3].
Therefore, Satisfaction should always be a
permanent goal for all businesses in the
purchase cycle. But, it is important to realize
that satisfaction may not necessary lead to
high levels of customer retention and loyalty.
In fact in many cases, measuring satisfaction
becomes difficult due to its fuzzy nature
obtaining customer satisfaction may not be
Page 196
straight forward. For this reason, some

believe that there is a weak relationship
between customer satisfaction and retention.
For example; there may be cases where the
product enjoys customer satisfaction by due
to other factors they may shift to other similar
products such as changes in competitors
offerings, new requirements of customers or
other unknown intervention like changes in
personal characteristics (e.g. demographic
variables). Fredrick F. Reichheld (1994)
states that in most businesses, 60%-80% of
customer defectors said that they were
satisfied or very satisfied on the last
satisfaction survey prior to their defection! In
the interim, anything can happen and often
does [4]. Also, Bennett and Rundel-Thiele
(2004), reveal in their research that there are
different myriad factors (including latent and
overt) influence the strength of satisfactionretention and satisfaction- loyalty relationship
[2]. Therefore, we cannot assume that high
levels of satisfaction will certainly lead to
increased sales.
Although satisfaction is an important factor in
assessing the success of the product in the
market, it may not be the sole factor to
determine market value.
As a result, satisfaction is an effort to measure
sate of mind. So, it may not always be
reliable.
Yet, it is believed that high levels of
attitudinal loyalty are an outcome of high
levels of satisfaction. In short, it is important
to understand that the link between
satisfaction and profitability is not simple and
straightforward as typically assumed.
Customer Retention
Retention can be defined as a commitment to

continue to do business or exchange with a
particular company on an ongoing basis [5].
Also, The direct retention effect is based on
the customer benefit effect. [2]
Vahid Pezeshki
In todays highly competitive markets,

companies strive to build professional
customer retention management system
alongside common strategies like process reengineering and employee redundancy
exercises. There are two central reasons for
doing so, the first is the intensive cost of
gaining new customers in competitive
markets which is claimed that attracting a
new customer costs five to six times more
than retaining one [6]. It is therefore safe to
know that profitability gained by a sustained
customer is much higher than new customer
attendant. Second, it is a considerable
profitability gained by a sustained customer is
much higher than new customer attendant
during the duration of business relationship.
This was confirmed by Jamieson (1994)
states that a two per cent improvement on
customer retention has the same impact on
profit as a ten per cent reduction in overheads
[7]. The main questions that need to be
addressed in customer retention are about
customer satisfaction drivers? What are
customers expectations? What are of their
towards product attributes? And how much
effort needs to be invested to improve their
attributes?
It is recognized in this literature study that
customer satisfaction has a good feedback to
the firms to answer following questions in
terms of customer needs. It is also confirmed
that retention issues are initially based on
customer satisfaction. As Bennett and
Rundle-Thiele argue [2], customer retention
is central to the development of business
relationships with respect to satisfaction.
While some surveys and researches confirm
satisfaction as a profitability driver and state
that a satisfied customer is a sustained
customer [5], [2].
Customer retention brings some remarkable
benefits such as lower price sensitivity, higher
market share, positive word-of-mouth, lower
costs [4], higher efficiency, and higher
Page 197
Customer Loyalty
In a business context of loyalty has come to
describe a customers commitment to do
business with a particular organization,
purchasing their goods and services
repeatedly, and recommending the services
and products to friends and associates. [8]
The aim of loyalty in all successful firms is
based on long term beneficial relationship
between the customer, and enterprise. When
a company consistently delivers superior
value and wins customer loyalty, market
share and revenues go up and the cost of
acquiring new customers goes down. [9]
The nature of the relationships between
satisfaction and loyalty is complex. Anyway
it has emphatic influence in cash flow terms
because of the link between loyalty, value,
and profit [4], [2].
Loyalty depends on industry, culture and
market behavior. For instance, management
consultant KPMG has defined three ways in
which retail loyalty strategy works; (1) pure
loyalty, (2) pull loyalty and (3) push loyalty.
But the ultimate goal of all firms is to make
the intention in their customers to make future
purchases. The relationship between loyalty
and satisfaction is not simple. It is assumed
Vahid Pezeshki
that loyalty is an outcome of high levels of

satisfaction. But, there are some instances that
show the prerequisite for loyalty is not always
high levels of satisfaction. For instance, a
study on 4 Australian big banks demonstrate
that banks have 23-32 percent dissatisfied
customers while their profits are in the top six
public companies in Australia [2]. This shows
that dissatisfied customers can remain loyal.
By this we mean a highly satisfied customer
may not be a loyal customer.
Customer loyalty schemes bring some long
term advantages and benefits through
premium prices, decreasing costs, and
increasing volume of purchases.
If the customer feels a stronger identification
with the corporation, he or she will remain
[2]. This can be due to other factors such as
price, demand experiences and habits. For
instance, Waitrose management stress that it
is the total customer experience that creates
loyalty, not promotions. [10]
Proposal
Our findings to date show that, there is little
evidence of practical demonstrator for
determining the relationship between CSL,
CRP and DCL. We propose that CSL
evaluation (Mousavi et. al., 2001) to be the
intermediary between CRP/DCL and product
key attributes (Figure 2).
Product
Attributes
Process
Costs
CORE Model
productivity [5]. Furthermore, customer

retention has often been assumed as a sign of
the customer loyalty. We also have to
consider this fact that the factors have found
to increase retention differ widely such as
chemistry between people, presentation of
changes and so on.
There is some factors help measure retention,
such as annual retention rate, frequency of
purchases. They aim directly at the real
target: does customers behavior show that
they are being convinced to maintain their
stake in the firm? Do they buy the value
proposition of the company, i.e., are they
coming back for more?
CRP
Customer
Satisfaction
CLD
Profitability
Figure 2
Page 198
For example, assume that, CSL for a specific

product attribute is 55/100, and CRP is 60%,
and DCL is average. The company may need
to invest 100 on modifying the attribute to
increase the CSL to 75/100, this increase may
increases the CRP to 65% and customer
loyalty may stay at average level. This
investment results in 5% improvement in
CRP that may affect profitability by 25% to
85%. This analysis can only be viable if and
only if we are able to find the relationship
between the three CRM factors. Our next step
is to investigate this relationship and possibly
provide a model represent this relationship.
The aim will be to measure the influence of
satisfaction levels on CLD and CRP, and their
impacts on profitability of product or service.
We employ CORE model [12] to measure
satisfaction levels, which is based on product/
service attributes.
In the next step, the impact of changes in
satisfaction levels on customer retention and
loyalty will be measured.
In this model, we aim to maximize
profitability through identifying the sources
of customer dissatisfied towards a product or
service attributes. This may then become a
practical tool to make the proper decision on
investments and quality improvements. For
example if the company invests on
redesigning of their product, the customer
satisfaction will increase, and the probability
of customers wanting to purchase the product
will also increase. Therefore my investment
will be returned with a profit will be made.
Discussion and Conclusion
In this paper we tried to argue the case for
profitability modeling based on three CRM
main principals. We reviewed the latest
relevant literature to outline the relationships
between these three key factors
The ultimate goal here is to obtain
experimental analysis to prove the concept.
Vahid Pezeshki
The focus of this study has been on

understanding client profitability through key
issues relating to relationship marketing
(satisfaction, loyalty and retention). This
research reveals that customer needs must be
defined as a continuous process improvement.
References:
[1] Deming, W. Edwards (1996, 1998), Out of the crisis,
Cambridge, Mass, Center for Advanced Educational
Services, pp.141.
[2] Bennett, R. and Rundle-Thiele, S. (2004), Customer
satisfaction should not be the only goal, Journal of
Services Marketing, Vol. 18 No. 7, pp. 514-523.
[3] Keiningham, T.L., Perkins-Munn, T., Aksoy, L. and
Estrin D. (2005), Does customer satisfaction lead to
profitability?, Managing Service Quality, Vol. 15
No. 2, pp. 172-181.
[4] Reichheld, Frederick F. (1994), Loyalty and the
renaissance of marketing, Marketing Management,
Vol. 2 No. 4, pp. 10-12.
[5] Zineldin, M. (2000), TRM Total Relationship
Management, Student Literature, Lund, pp.28.
[6] Reid L.J. and Reid, S.D (1993), Communicating
tourism supplier services: building repeat visitor
relationships, Communication and Channel Systems
in Tourism Marketing, pp. 3-19.
[7] Jamieson, D (1994), Customer Retention: Focus or
Failure, The TQM Magazine, Vol. 6 No. 5, pp. 1113.
[8] McLlroy, A. and Barnett, S. (2000), Building customer
relatiohsips: do discount cards work?, Managing
Service Quality, Vol. 10 No. 6, pp. 347-355.
[9] Kobulnicky, P.J. (1996), The Quest for Loyalty:
Creating Value through Partnership edited with an
introduction by Frederick F. Riechheld, The Journal
of Academic Librarianship, Vol. 23 Issue 4, pp. 332.
[10] Humby, C., Hunt, T. and Phillips, T., Scoring Points:
How Tesco is winning customer loyalty, Kognan
Page, London, 2003, pp. 17.
[11] Mousavi, A., Adl, P., Gunasekaran, A. and Mirnezami,
N. (2001), Customer optimization route and
evaluation (CORE) for product design, International
Journal Computer Integrated Manufacturing, Vol. 14
No. 2, pp. 236-243.
[12] Stauss, B., Chojnacki, K., Decker, A. and Hoffmann, F.
(2001), Retention effects of a customer club,
Industry Management, Vol. 12 No. 1, pp.7-19.
Page 199
Addendum Published Papers
2th International Conference on Business Management and Economics

Exploring Sources of Profitability in Customer Relationship Management
(Service Industry)
Vahid Pezeshki
School of Engineering and Design, Brunel University, Uxbridge, Middlesex, UB8 3PH, UK
[email protected]
Ali Mousavi
School of Engineering and Design, Brunel University, Uxbridge, Middlesex, UB8 3PH, UK
[email protected]
ABSTRACT
This study aims at demonstrating the interrelationship between service attributes, customer
behaviours, and customer profitability. The proposed framework attempts to apply the customer
segmentation concept to profitability analysis. The four important measures of customer
outcomes: customer satisfaction, customer retention, customer loyalty, and profitability need to
be mapped against service attributes. We will further elaborate on methods to help address the
shortcomings prevailing current customer relationship management (CRM) in service industry.
In order to have a successful CRM, an organisation needs to fully understand customer needs
through a well-defined customer knowledge management (CKM). A well-defined CKM requires
an in-depth knowledge of customer segmentation, customer satisfaction (CS), customer retention
rate, and degrees of customer loyalty. This can be achieved by designing a customised relational
database that contains the necessary information coupled with the logical and mathematical
relationship (Business logic) that relates to profitability.
In this paper, we will introduce the latest developments in customer data acquisition and
proposed profitability models to demonstrate the shortcomings and offer an outline to bridge the
gap.
Keywords: Customer Relationship Management (CRM); Customer Segmentation; Customer

Profitability
JEL Classification: Economics and Marketing
Vahid Pezeshki
Page 200
1. INTRODUCTION
In the last few years, businesses gained many insights into customer relationship management
(CRM). Companies experienced what they have to focus on more, and what they should not
have done. Consequently, it is learnt that there is no universal recipe for managing customer
relationship profitability. Nowadays, CRM has become the major part of the fabric of marketing
ecosystem. It is confronted with global challenges and marketing opportunities. It supports firms
to manage their customer relationships by targeting specific customers for specific product or
service offerings. However, there have been reports on unsuccessful CRM due to lack of
attention to the customers.
The real competition is based on the speed of responding to the market demands with customised
and innovative services and products. This can not be achieved unless enhanced customer
relationships (Roh et al., 2005) are achieved. An appropriate relationship with customers could
easily lead to customer loyalty.
Due to marketing shift towards customer orientation, the
knowledge about customer behaviours and customer segmentation are becoming extensively
important. Hence the shift from supplier power to the power of buyers.
Accurate information about customers helps companies design and produce products that meet
customer needs and desires. It is also indicated by a number of researches (for example; Bose,
2002; Ahn et al., 2003) that companies willing to gain more market share, need to shift to
customer orientation instead of mass marketing.
All companies have to identify profitable customers, satisfy them, expand existing relationships,
and eventually invest on loyalty programmes. In todays business world, it is learnt that profit
comes from customers, not from products. And the sole purpose of any business is to create and
retain customers (for example loyalty schemes). Customers are the most important asset of an
organisation (Reichheld & Kenny, 1990). Once the importance of building customer
relationships has been recognised in a company, then it is necessary to decide with which
customers a closer relationship needs to be built. In order to do this, the company must value his
customer relationships. The main reason behind valuing a relationship is to put appropriate
marketing strategies in place. As a result, the most valuable relationships have to receive priority
and more attention. Also the less valuable customer relationships have to be studied in order to
see how their returns can be improved.
Vahid Pezeshki
Page 201
We discovered that only a few number of scientific works have focused on the measurement of
customer behaviours impacts on profitability through CRM systems. While the question
Which factors would improve customer relationship and what are their contributions to
profitability? remains unresolved. There is still a question for all managers that how much our
customer relationships are worth to us, otherwise how we can make rational decisions about how
to serve our customers?
Even though findings clearly show that the link from customer
behaviours to profitability is not as straightforward as usually proposed.

In this paper, we investigate customer profitability based on customer segmentation. As such we
would be able to analyse the direct relationship between a segment of customers explanatory
and numerical variables (customer behaviours) and its generated profits. The remainder of the
article is organised as follows. It first reviews the literature on customer relationship
management, identifying key areas. It continues by bringing together different concepts which
contribute to the successful implementation of CRM, in the form of the relationship management
assessment tool. Also, the paper suggests which factors could have priority for CRM
implementation.
2. Evolution of Management and Marketing Approach

Customer relationship management (CRM) terminology has emerged in the market after fall off
enthusiasm of ERP, in 1990s, in the light of developing the concept of customer orientation.
CRM concept attempts to optimise the relationship between customers and organisations. CRM
systems are considered as an essential requirement and tool for profitability these days (Meyer,
2005).
One of the main issues with businesses chief executives at the moment is that they still do not
know their return of investment (ROI) within customer relationship? Customer relationship has
passed its maturity period, since its beginning in 1960s with Customer Orientation Concept
(General Electric). CMR is much more than collecting customers information, advertising, and
offering new products. CRM has moved to the centre of corporate strategy as a process of
learning and understanding the customer needs and values, and consequently make it easier for
customers to do their business with the company.
In fact, the whole concept of CRM is an evaluation of relational marketing. Nevertheless, CRM
covers and support more areas in order to decrease the gap between the company and its
customers by integrating sales, marketing, and the customer-care service. In the other word,
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CRM attempts to manage more effectively customers are acquired, retained, and can be grown in
value over time. The following improvements can be observed by CRM implementation:
Improving customer relationships (greater customer satisfaction, retention, and loyalty),
Providing and distributing customer information across the enterprise,
Helping in customer segmentation,
Efficient operation (low expenses, and competitive price)
As a result of these benefits, companies invested over $2.3 billion in CRM software in 2003, and
it is predicted to reach to $2.9 billion by 2007 (Topolinski, 2003), while the total annual market
is expected to reach to $14.5 billion in 2007. Further, government sectors are rapidly adopting
and adapting CRM ideas as well. Thus, investment in CRM systems is expected to establish the
mutual collaboration between an organisation and its customers.
3. Customer Behaviours
From a business perspective, CRM is considered as an organisational strategy concerning the
understanding and predicting customer behaviour, customer segmentation, marketing, and
purchasing analysis. All these show the need for organisations to know who the customers are
and what they actually need. That is why the management of customer relationships becomes a
fundamental issue. Considerably, the success of CRM concept requires accurate measurement of
relationship among initiatives (process), intrinsic (customer satisfaction, retention, loyalty), and
extrinsic (profitability).
Customer satisfaction is an essential factor for building strong relationships and profitability. It
is as much as necessary to business as people can not live without food (Gould, 1995). It is
revealed that customer satisfaction is improved by improving the quality of the product or
service. Marketing ecosystem nowadays has changed and a lot of new concepts have replaced.
Customer satisfaction was a part of this transformation. According to American customer
satisfaction index (ACSI), which is prepared by university of Michigan business school,
customer satisfaction level has been steadily declining since 1994, while companies profitability
has been increasing. Then, we may conclude that customer satisfaction can not solely bring
profit but it contributes to financial performance through its effect on retention and loyalty.
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Marketing strategy has transformed from offensive marketing to defensive marketing during the
last decade (Storbacka et al., 1994). Marketing ecosystem changed direction from obtaining new
customers to minimising customer turnover.
There are three main financial benefits from Customer Retention. (1) customer acquisition cost,
(2) customer price sensitivity, (3) cross-selling (Gould, 1995). In fact, gaining new customer is
far more expensive than keeping existing customer. The findings show that a new customer
roughly costs 20 times more than retaining the remained customer (Pegler, 2004). The cost
includes all aspects like marketing, customer training, and so on. Also, it is reported that 20% of
customers provide organisations with 80% of profit, which highlights the importance of
customer retention and long-term relationships with profitability. Thus, companies have focused
their strategy more on retaining existing customers rather than some approaches such as cutting
costs, in order to increase profitability.
The establishment of trustful relationship between the suppliers and the customers leads to loyal
behaviour. Even though, it can not be achieved apart from positive experience (Bernd and
Wolfgang, 2004, page 3).
It is important to an organisation to have the knowledge of its Customers loyalty (Buckinx et.
al., 2006). Buckinx et.al.,(2006) explain the importance of loyalty concept (in banking and
finance sector) by an example; It would be most likely be more lucrative to offer an additional
savings product to a customer who has a high balance at the focal bank and at the same time has
large amounts invested at other banking organisations, than to offer the savings product to a
customer that has an equally high balance, but where all his/her money is invested at the focal
bank. (Buckinx et. al., 2006).
The knowledge about customers has become an important part in marketing. However, the
previous research shows that only 7.5% of companies collect customer purchase behaviour data
(Verhof et. al., 2002).
4. Customer Segmentation Profitability (CSP)
Nowadays, firms constantly focus to differentiate and customise their products for distinct
market segments in order to establish better relationship with customers. The concept of
customer segmentation is playing a critical role in marketing (Jonker et. al., 2004) and customer
profitability. The main target of segmentation is to lead marketing resources and activities
towards the profitable segments. This can help firms to improve their knowledge about their
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customers, and customer relationships. For instance, there is a relationship between customer
satisfaction and profitability, while some customers will never be profitable or may not be
satisfied given the product attributes and prices. For that reason, all companies would be wise to
discriminate and target the segment of customers whose needs can be meet better than other
competitors in a profitable manner (Hwang et al., 2004). In addition, different customers use
resources very differently (e.g., customer service). More interesting, some customers may not be
profitable at the beginning of their relationship with a company (for example, frequency of
purchasing), and identified as unprofitable customers and in reverse, any long-term relationship
is not a sufficient prerequisite for profitability (storbacka, 1994b). But it must take into account
that the relationship may be developed concerning future profit potential (Ryals, 2002). This
information insight in customer behaviours generate new opportunities for companies as
following: cost management, revenue management, and strategic marketing management
(Hwang et al., 2004).
There are different methods to segment the customers which from business to business it would
be different. For instance, Dyche and Dych (2001) indicate that companies can segment
customers based on profitability, expectations, and behaviours (Hsieh, 2004).
5. Research Model
There were three main topics at the centre of this article: (1) customer behaviour, (2) customer
segmentation, and (3) profitability. Our research to-date shows a gap that needs to be addressed.
Most companies still cannot measure their CRM efficiency. So, the need for a generic model that
relates different areas of customer relationship with other activities of the firm is needed. As a
result, within any given customer base (satisfaction level, retention rate, and loyalty degree),
there will the revenues customers generate (relationship revenue) for the firm and in the costs the
firm spends (relationship costs) base on the customer segment (storbacka, 1994b). This line of
information can help companies to extend their strategy horizon from current customers to
potential customers and eventually to where the most profitable new customers can be acquired.
In our model, customer relationships are configured base on product attributes (content), Figure
1. As Storbacka et al. (1994) introduces episodes in customer relationships which differ as to
content, frequency, duration, etc. Configuration of episodes in different customer relationships
believed as a key explanatory factor that drives relationship costs and thus affects customer
relationship profitability (Storbacka et al., 1994).
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Page 205
E1
E2
E3
E4
Em
CR1
CR2
CR3
CR4
CR
CRn
Figure 1: Adapted from Storbacka (1994)
In each customer relationships (CRi, i = 1, 2, , n), customer satisfaction level (CSL), retention
rate (CRR), and loyalty degree (CLD) must be measured. We propose that profitability can be a
function of customer behaviours, Profitability = (CSL, CRR, CLD) (Figure 2). As it illustrated,
customer satisfaction and retention are measured from 0 to 100, and customer loyalty degree is
between 1 and 3.
Vahid Pezeshki
Page 206
Level
Figure 2: Customer profitability measurement

In this model, we aim to maximise profitability through identifying profitable segment of
customers. This leads managers in their organisation strategy and CRM implementation not only
to retain profitable customers but also make unprofitable customers profitable. In order to find
the relationship between customer behaviour outcomes (CSL, CRR, CLD), we will use a fuzzy
logic model.
Conclusions
In this study, we attempt to provide a framework that makes CRM a more tangible asset for the
managers. It can lead relationship management in its contribution to strategy and organisation
performance. The consistency between information technology and marketing strategies is the
key success for CRM implementation. Lately, the value of this kind of researches will only
become apparent while companies maintain transactional database that includes all details on
any of a given customer and also the amount of products that he purchases. In next stage, we aim
to experience our CRM model in car rental industry.
Vahid Pezeshki
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References:
- Soderlund, M. (2006), Measuring customer loyalty with multi-item scales, International
- Pfeifer, P.E., Haskins, M.E. and Conroy, R.M. (2005), Customer lifetime Value, Customer
Profitability, and the Treatment of Acquisition Spending, Journal of Managerial Issues, Vol.
XVII, No.1.
- Reichheld, F.F. and Kenny, D.W. (1990), The hidden advantages of customer retention,
Journal of Retail Banking, Vol. 12, No. 4, pp. 19-24.
- Bowen, J.W. and Hedges, R.B. (1993), Increasing service quality in retail banking, Journal
of Retail Banking, Vol. 19, No. 3, pp. 21-28.
- Torkzadeh, G., Chang, J.C.J and Hansen, G.W. (2005), Identifying issues in customer
relationship management at Merck-Medco, Decision Support Systems.
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segmentation and predictive modelling techniques for database marketing in the Netherlands,
Decision Support Systems, Vol. 34, pp. 471-481.
- Buckinx, W., Verstraeten, G. and Poel, D. (2006), Predicting customer loyalty using the
internal transactional database, Expert Systems with Applications.
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management system success, Export Systems with applications (28), pp. 641-654.
- Ryals, L. (2002), Are your customers worth more than money?, Journal of Retailing and
Customer Services, No. 9, pp. 241-251.
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customer value: a case study on the wireless telecommunication industry, Expert Systems with
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- Hsieh, N. (2004), An integrated data mining and behavioural scoring model for analysing
bank customers, Expert Systems with Applications, No. 27, pp. 623-633.
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management, Reading, MA: Addison-Wesley.
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marketing policy to maximise long-term profitability, Expert Systems with Applications, No.
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Service Quality, Vol. 5, No.1, pp. 15-19.
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Profit: the Dynamics of Relationship Quality, International Journal of Service Industry
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Strategy, pp. 223-226.
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Three Dimensional Modelling of Customer Satisfaction,

Retention and Loyalty for Measuring Quality of Service

A thesis submitted for the degree of Doctor of Philosophy by

School of Engineering and Design, Brunel University

Abstract, Acknowledgments and Comments

Abstract, Acknowledgments and Comments

company (switching probability), and (e) describes the interrelationship between

Abstract, Acknowledgments and Comments

Abstract, Acknowledgments and Comments

[1] Pezeshki, V. and Mousavi, A. and Grant, S. (2009), Importance-performance

Published or Accepted for Publication

[1] Pezeshki, V., Mousavi, A. and Rakowski, R. (2005), Profitability through

Abstract, Acknowledgments and Comments

CHAPTER 2: LITERATURE REVIEW... 22

CHAPTER 3: FOUNDATION OF MODEL DEVELOPMENT.

1. Customer Relationship Management (CRM)....

CHAPTER 4: RESEARCH METHOLODGY ...

1. Methods for Measuring Customer Satisfaction Factors....

Abstract, Acknowledgments and Comments

1.4 Importance Grid.

CHAPTER 5: DATA VALIDITY AND RELIABILITY..

CHAPTER 6: DATA ANALYSIS ...

1. Measuring the Relationship between Service Attribute Performance and Customer

Abstract, Acknowledgments and Comments

CHAPTER 7: CONCLUSIONS AND RECOMMENDATION FOR

ADDENDUM PUBLISHED PAPERS

Abstract, Acknowledgments and Comments

Abstract, Acknowledgments and Comments

Abstract, Acknowledgments and Comments

Abstract, Acknowledgments and Comments

Customer Relationship Management

The marketing literature on customer relationship or behaviour outlines potential

2. The Research Problem

3. The Context of the Study

Overall Customer Satisfaction

importance. In other words, attribute importance is the function of attribute performance.

customer satisfaction is proposed. The study also suggests a mechanism to clarify

4. Research Aim and Objectives

To understand the notion of quality of service (QOS) and customer

To understand the relationship between service attribute importance

To establish a framework that links service attribute performance to

To understand the impact of length of relationship on customer future

Chapter 3: Foundation of Model Development

Introduction to Research Problem

Empirical Research Data Collection

Conclusions and Further

Chapter 2: Literature Review

1. The Evolution of Marketing

Chapter 2: Literature Review

In RM the focus is not on service encounters or transactions.

RM is focused on retaining customers and enhancing the relationship with the

Chapter 2: Literature Review

(Source: Sheth and Kellstadt, 2002)

Chapter 2: Literature Review

Attracting, maintaining and in multi-service organizations

Lusch and Vargo (2006)

Grnroos (1990, 1994)

Morgan and Hunt (1994)

Chapter 2: Literature Review