Abstract:

Satisfied customers and customer retention should be one of the highest priorities of any business enterprise. Many companies are using some form of customer satisfaction measurement, but most companies do not have methods to put the customer satisfaction program in relation to profitability. Only very few studies have focused on how to link customer satisfaction to customer loyalty and performance. This paper will present a microeconomic model for the relation of profit to customer loyalty, customer satisfaction and cost. It is shown that the degree to which the company lives up to customer expectations should be a linear function of the contribution to loyalty. The framework enables the managers to determine which customer satisfaction elements should be improved first with respect to bottom- line profitability. For practical use the only information needed is market information about customer satisfaction for the company and the main competitor, the importance of a given satisfaction element and the customers buying intentions.