Arab Academy Graduate School of Business

The Impact of CRM on Customer Retention

Submitted by: Amal Ali Shawky

Supervised by: Dr Wael Kortam

Table of Contents

1. LITERATURE REVIEW

1.1 Introduction

1.2 Customer Relationship Management

1.2.1 Relationship Marketing

1.2.2 The Evolution of CRM

1.2.3 What is CRM:

1.2.4 How CRM works

1.2.5 CRM usefulness:

1.2.6 Electronic CRM

1.3 Customer Retention

1.3.1 Introduction

1.3.2 Why Customer Retention is important

1.3.3 Customer Loyalty

1.3.3.1 What is Customer Loyalty

1.3.3.2 The importance of Customer Loyalty

1.3.3.3 How to measure Customer Loyalty

1.3.4 Customer Satisfaction

1.3.4.1 What is Customer Satisfaction

1.3.4.2 Relationship between Customer Satisfaction and Customer Retention

1.3.5 Trust

1.3.6 Switching barriers

1.4  The Effect of CRM on Customer Retention

1.5  Hotel industry

1.5.1 Introduction

1.5.2 Customer Loyalty in Hotel Industry

1.5.3 Positive and Negative Effects of Customer Loyalty

2. REFERENCES

1. LITERATURE REVIEW

1.1 Introduction

In recent years many companies have started to focus on customer relations as the business environment is getting more competitive due to the increasing number of actors in the market,   they have realized that is very difficult to succeed in today’s business world by relying merely on “transaction-based” exchanges. Bose (2002) argues that to gain competitive advantage, there needs to be a shift from mass marketing and traditional customer segmentation towards customer-centric orientation and one-to-one marketing, which is centered on treating every customer individually and uniquely, according to the customer preference.

In the early stages of an industry, companies grow rapidly and the increase of the customer base and the amount of potential new customers seems endless. When the industries mature and the competition increases, companies have to develop competitive advantages to keep and defend the market share gained from the first mover advantage. One of those competitive advantages is to develop a better understanding of the existing customers, it is universally accepted that it is more efficient to keep existing customers than acquire new ones this is not surprising (Reichheld, and Sasser, 1990), also to build long lasting relationships, limit churn and increase customer retention.

The implementation of a Customer Relationship Management (CRM) system is one of the solutions a company could turn to. A successful CRM integration could have major benefits for one company, as Ahn et al. (2003) acknowledged that managing relationships with customers is a key point to solidify competitive power of a company.

In my study I will examine The Effect of Customer Relationship Management (CRM) on Customer Retention in Hotel Industry. Therefore in this literature review I will examine what has been written on the subject of Customer Relationship Management, its history, usefulness, understanding how it works & also what is written on the subject of Customer Retention.

From this broad overview I will begin to focus more on, the related concepts affecting Customer Retention including Customer Loyalty, Customer Satisfaction, Trust, Switching Barriers and accordingly I will investigate the relation between CRM and Customer Retention & in what ways CRM affects Customer retention. Furthermore, I will provide some highlights about the Hotel industry; look at the benefits of implementing a CRM in it and the positive and negative effects that Customer Retention or Loyalty might create.

1.2 Customer Relationship Management

1.2.1 Relationship Marketing

Over the past years the notion of a firm adopting Relationship Marketing has become

more and more popular. Stemming from the idea that the existing 4P’s (Place, Product,

Promotion and Price) or transaction-based approach to marketing was inadequate for the majority of industries (Grönroos1996).

Although a number of authorities have suggested that relationship marketing

represents a paradigm shift (Christopher et al., 1991; Sheth and Parvatiyar, 1995) from

a longer established transactional orientation to customer management, Gro¨nroos

(2000, p. 23) noted that the relational perspective on marketing is in fact “older than the transaction perspective in marketing” and is “probably as old as the history of trade and commerce”. Gro¨nroos (2000, p. 22) concluded that “the management of customer relationships in business is not a new phenomenon” although the term relationship marketing was only recently introduced to marketers by Berry (1983).

To clarify the concept of CRM, we need to understand the close between relationship marketing and customer relationship marketing. Relationship Marketing is a concept reflecting a number of differing themes or perspectives. Some definitions of Relationship Marketing are: Relationship Marketing is attracting, maintaining and in multi-service organizations enhancing customer relationships (Berry et al., 1983; Gronroos, 1983) possibly through Internal marketing, designed to shape employees' attitudes and behaviour toward their jobs, the customers, and the internal environment, which can help service firms ensure that the customer service interaction is satisfactory. This may include identifying areas outside traditional marketing mix activities. Doyle and Thomas (1992) suggest that it is long term in orientation thus in order to become a preferred supplier one must build trust over a period of time and develop skills in the area of understanding customer needs and relationship development. According to Christopher et al. (1991) the relationship marketing concept is emerging as a new focal point, integrating customer service & quality with a market orientation. Moreover Morgan (1994) has defined it as “establishing, developing and maintaining successful relational exchanges”.

Firms introduce Relationship Marketing, or at least adopt a more relationship driven approach to their marketing activities for a number of profit driven reasons; amongst them learning about their customers characteristics and preferences, being able to create customer value through offering a mass customized product or simply to be able to better satisfy the needs and wants of existing customers ensuring they continue to purchase the product of the firm into the future (Payne, et al 1995).

CRM evolved from business concepts and processes such as relationship marketing and the increased emphasis on improved customer retention through the effective management of customer relationships. Both Relationship Marketing and CRM emphasize that Customer Retention affects company profitability in that it is more efficient to maintain an existing relationship with a customer than create a new one (Payne et al., 1999; Reichheld, 1996; Zineldin, 2005, 2000).

The idea of linking relationship marketing to CRM is fairly strong and has led others such as Newell (2000) and Zineldine (2005) to explore strategic methods for developing, maintaining or improving Customer Retention.

1.2.2 The Evolution of CRM

The concept of Customer Relationship Management, hereby referred as CRM, was developed in the late 1980´s when computers usages started to become common in firms. At that time CRM was simply a contact management tool.  With the  increasing  spread  of  the  internet and  e-commerce  during  the  mid  1990´s,  more  information  on  companies  and  products became  available  for  the  customers  and  vice  versa. Therefore interest in CRM began to grow in 1990s (Ling and Yen, 2001; Xu et al., 2002).

Owing to the customer’s extended information flow many companies tried to find a way to handle this to retain the escaping customers.  To  customize  customer  behavior  one  early  approach  was  to  document  the purchase  patterns  of  the  customers.  This  became  popular  among  many  companies  since  a lot  of  suppliers  offered  systems  that  could  automate  sales  and  marketing  processes.  The systems also synchronized call centers, dispatch and other customer related areas within the company (Reynolds, 2002).

1.2.3 What is CRM

The Customer Relationship Management (CRM) strategy evolved from the old concept that the customers are actually paying the employees salary and a company’s activities should therefore circulate round the customers. Today, it has evolved into a strategic solution for many business problems encountered in marketing, service and sales (Rajnish, Sanjeeta and Upinder, 2002) to increase the profitability through higher quality of service, sales, and reduce and eliminate redundancy and undesired costs. (Institute for International Management and Technology, 2003).

The thinking reflected in CRM is based on three aspects of marketing management: (1) customer orientation; (2) relationship marketing, and; (3) database marketing. These aspects join in CRM due to developments in Information and Communication Technology. (Verhoef & Langerak, 2002)

Although CRM has become widely recognized as an important business approach, there is no universally accepted definition of CRM. McKie (2000) mentioned that CRM is a highly

fragmented environment and has come to mean different things to different people. Also Luck and Lancaster (2003) suggest that the term CRM has become a buzzword, with the concept being used to reflect a number of different perspectives. From Customer perspective, the term CRM has its origin in the expression “the customer is always right”. In its most plain way, CRM defines the way an enterprise finds, attracts and retains its customers (Reynolds, 2002). Another view of CRM is the utilization of customer related information or knowledge to deliver relevant products or services to customers (Levine, 2000) .In addition, Strauss, J. (2001) mentioned that “CRM is a strategy used to learn more about customers’ needs and behaviors in order to develop stronger relationships with them. Identification,  differentiation  and  interaction  with  customers  are  another  way  of defining  the  term  according  to  Newell  (2002). Roberts-Phelps (2001) defines CRM in the following way; in its simplest form it is seen as an attitude, a mindset to value your business relation with your customers. As Swift (2001) defined CRM as a process designed to collect data related to customers, to grasp features of customers, and to apply those qualities in specific marketing activities.

While such definitions are widespread, they tend to offer a narrow insight into the goals or basic characteristics of CRM. As CRM evolves, richer definitions are emerging, with an emphasis on the scope, goals, logistics and complex characteristics of CRM.

However, managers often perceive CRM from different perspectives, for example, CRM is a part of marketing efforts, customer service, particular software and technology, or even process and strategy (Xu, M. & Walton, J. 2005). This means that CRM is a 360-degree, customer-centric view covering the entire business cycle it involves improved & increased communication between a company and its customers, as well as within the company itself. Not only must competing departments such as sales and marketing, accounting, customer service/support, and manufacturing or fulfillment within the enterprise learn to share information and communicate more effectively, but every point of contact with the customer must be enhanced (Xu, Y. et al. 2002).

As CRM is defined as an all-embracing approach, which seamlessly integrates sales, customer service, marketing, field support and other functions that touch customers, When using this approach, by integrating information, people, processes, technologies & leveraging the internet across the whole customer life cycle, the relationships with all the customers including e-customers, distribution channel members, internal customers & suppliers are properly managed & maximized as Xu, Y. et al. (2002) and Kincaid (2003,p.41) have mentioned.

Another view of CRM is that it is technologically orientated. Sandoe et al. (2001) argue that advances in database technologies such as data warehousing and data mining, are crucial to the functionality and effectiveness of CRM systems. Furthermore, Peppard (2000) suggests that technological advances in global networks, convergence and improved interactivity, are key to explaining the growth of e-business and CRM. The increasing use of digital technologies by customers, particularly the internet, is changing what is possible and what is expected in terms of customer management (Peppard, 2000; Tamminga and O’Halloran, 2000), as mentioned by Bauer et al., 2002 “The rapid growth of the internet and its associated technologies has greatly increased the opportunities for marketing and has transformed the way relationships between companies and their customers are managed. The appropriate use, for instance, of automation technologies, such as interactive voice response systems and Web-based frequently asked question pages, could be popular with customers and highly cost effective (Petrissans, 2000). Moreover, Choy et al. (2003) & Xu, Y. et al. (2002) both have mentioned that CRM is an “information industry term for methodologies, software, and usually internet capabilities that help an enterprise manage customer relationships in an organized way”.

According  to  Reynolds  (2002)  CRM  and  what  it really  is  can  be  defined  in many ways.  It is neither a technological or pure marketing initiative, nor an exclusive sales or a service initiative.  Rather, CRM is more of a strategy which requires technology.  In addition,  it  is  a  tool  that  helps  companies  to  manage  the relation  to  their  customers  via methodologies,  technologies  and  e-commerce.  Information  like  customers’  preferences, demographics,  and  products  purchased  during  the  years  helps  the  company  to  get  a  clear picture  of  the  actual  customers.  The collected information is then used by the sales department,  the  management  and  the  service  personnel  and  other  staff  to  forecast customers  preference;  service,  quality,  marketing,  etcetera  (Stone,  2001).

These definitions mentioned emphasize the importance of viewing CRM as a comprehensive set of strategies for managing those relationships with customers that relate to the overall process of marketing, sales, service, and support within the organization. Moreover, information technology (IT) and information systems (IS) can be used to support and integrate the CRM process to satisfy the needs of the customer. Finally I can say CRM is a complex combination of both business and technological factors and thus strategies should be formulated accordingly.

1.2.4 How CRM works

 As mentioned through the definitions, CRM is the fusion between customer centric business processes and today’s information technology. The idea is that CRM should serve as a single point interface for the organization and make it easier to achieve the objectives of increased profitability, brand loyalty and a decreased churn (Institute for International Management and Technology, 2003).

The concept of CRM is to apply a software layer or a framework that integrate the companies databases and software’s with the business processes within the company. The interface then becomes an essential tool for handling the relationship between the existing customers and the company. All transactions, communication, demographic information and contacts done, either made by the company or the customer, is recorded, stored and accessible through this interface. This information or some selected information could be open to customer through customer profile webpage if the company so desires (O´brien, 2004).

According to O´brien (2004) CRM is a functional business system that aims at creating one single overview of the complete customer relationship, both present and past events. This is done through integrating and automating the company’s business process and customer data.

According to Kincaid (2003), West (2001) and Xu et al. (2002), CRM comprises three major functional areas:

1)      Marketing

2)      Sales; and

3)      Services and Support

These three components may be seen as the life cycle of a customer relationship that moves from marketing, to sales, to service and support (West, 2001). Indeed, IT and IS are the other crucial components in supporting and maintaining these three functional areas as well as the whole CRM process (Kincaid, 2003)

First Marketing function, which is the function most often associated with CRM (Kincaid, 2003). CRM is founded in marketing (Russell-Jones, 2002) and relationship marketing (Ryals and Knox, 2001). Ling and Yen (2001) have described the evolution of CRM from direct sales to mass marketing, target marketing, and then to customer relationship marketing thus emphasizing that marketing and CRM are inseparable. For example, the marketing department uses the CRM system to gather information for direct marketing campaigns, product packaging, other campaign offerings, and generally to better the marketing activities to increase sales and profitability

Second Sales function, which is the direct interaction with customers, which makes up CRM (Kincaid, 2003). It is important to develop sales strategies at the customer level to build and maintain relationships with customers to achieve revenue goals (Ingram et al., 2002). With technologies emerging for the sales function, it is possible to make the sales process more efficient and automated to increase sales. For example, the sales department uses CRM to gather information about existing customers and prior customers to increase sales through cross sales, up sales.

Third Service and support function, As high quality customer service and support is the key to improving customer retention rates and maintaining a good relationship with customers (Yelkur, 2000). In today’s highly competitive environment, companies must pay attention to fulfilling the needs of each customer quickly and accurately. Customer satisfaction is hard to win and easy to lose. If customers are not satisfied, they will simply move on to other companies. For example, the customer care & service department uses CRM to provide a superior support, either through assign, reroute and allocate service agents to the variety of request.

Last IT and IS functions, as they play a key role in the development of CRM (Kincaid, 2003; Ling and Yen, 2001). They can be used to automate & enable some or all CRM processes. Appropriate CRM strategies can be adopted through the assistance of technology, which can manage the data required to understand customers. Moreover, the use of IT and IS can enable the collection of the necessary data to determine the economics of customer acquisition, retention, and life-time value. Advanced technology involves the use of databases, data warehouses, and data mining to help organizations increase customer retention rates and their own profitability.

In addition account management and customer loyalty and retention programs, can be used by the different departments within the company. As all departments could gain a sufficient knowledge of important key accounts and handle them according to their importance and needs. Important loyalty programs should be implemented & managed to reduce churn and increase customer retention.

According to the Institute for International Management and Technology (2003) when implementing a CRM system the companies are trying to enhance and improve areas such as, customer satisfaction, retention rate, Average Revenue Per Customer (ARPC) and at the same time decrease cost Customer Acquisition Cost (CAC), service cost, and the time to serve the customer. Furthermore, a churn of 10% is calculated to have a 25 % impact on the profits and that the maximum profits are generated from 85% of the customer base. The other 15% have a negative relation to the profitability. Through a CRM, these customers can be identified, targeted and converted to profitable or simply dropped.

The CRM will create entry barriers and increase the competitiveness for companies that successfully implement the information system. For example, the marketing department will get lots of real time data to build knowledge about customers and their behavior which will increase the profitability and the switching cost (Else, 2002). Loyalty programs will furthermore increase the switching cost and reduce the natural churn of the industry (Else, 2002). If the customer care department can successfully support more customers and be more efficient, other competitors will have a harder time to win them over (Else, 2002). Furthermore, a CRM system gives a company a competitive advantage in porter’s (1995) value chain in the primary business activity of service, marketing and sales.

1.2.5 CRM usefulness

A successful CRM integration could have major benefits & may be very useful for one company because:

·        It helps deliver customer centric relationships. Successful companies use customer information wisely to build relationships with their customers, on the level that the customer wants and will work towards developing a long-term relationship through retaining customers by delivering delighted customers (Xu, Y. et al. 2002).

·        It focuses on leveraging and exploiting interactions with the customer to maximize customer satisfaction, ensure return business, and ultimately enhance customer profitability (Xu, M. & Walton, J. 2005).

·        It involves the integration of marketing, sales, customer service, and the supply-chain functions of the organization to achieve greater efficiencies and effectiveness in delivering customer value (Parvatiyar, A. and Sheth, J.N. 2001).

·        It helps in providing better and enhanced service which in turn leads to customer satisfaction hence leading to customer loyalty.

·         Swift (2001) defined CRM as an “enterprise approach to understanding and influencing customer behaviour through meaningful communications in order to improve customer acquisition, customer retention, customer loyalty, customer profitability”

·        It helps a company in keeping their most profitable customers and at the same time reduces the costs; increase the values of interaction to consequently maximize the profits (Xu, Y. et al. 2002).

·        It is cost effective because it is less expensive to retain one customer than to acquire a new one and because it is easier and less costly to sell more products to one consumer than to sell that same amount to two customers.

·        It allows the spread of a good word of mouth about the company.

·        It helps in creating synergy between business partners when being applied in a B2B application.

·        It offers a huge data base of information for the business operations, as it acts as the data bank of the organization.

·        If implemented effectively it is assumed to lead to bottom-line benefits for the organization (Anton and Hoack, 2002; Connelly and Yoger, 2001; Cusack, 1998; Rust and Zahorik, 1993; Swift, 2001; Tschohl, 2001).

·        It simplifies the marketing process as Xu et al. (2002) stated that CRM technologies allow the organization to gain an insight into the behaviour of individual customers and, in turn to target and customize marketing communication and messages.

·        It generates data that support the calculation of customer lifetime value for individual customers.

·        Helps discovering new customers as well as keeping existing ones.

1.2.6 Electronic CRM

The internet has provided a platform to deliver CRM functions on the web which is called E-CRM. E-CRM Allows customer information to be available at all touch-points within the company and among external business partners through the internet and the intranet.

E-CRM can be defined as a web-centric approach to synchronizing customer relationships across communication channels, business functions, and audiences (Forrester Research, 2001). It enables online ordering, e-mail, a knowledge base that can be used to generate customer profiles, personalized service, the generation of automatic response to e-mail, and automatic help (Rowley, 2002).The E-CRM systems also allow internal and external users to enable e-commerce functionality, thus as business moves to the Web, E-CRM will move to center stage.

1.3 Customer Retention:

1.3.1 Introduction

Many  companies  focus  on  finding  new  customers  instead  of  retaining  and  satisfying  the existing  customer   base.  However, since competition among companies is tough the retention of customers has become more important than the acquisition of new customers. In  recent  years  companies  have  realized  that  a  critical  success  factor  is  not  a  single transaction  but  the  creation  of  long-term  relationship.

It  is    of  great importance  for   companies  to  preserve  and  develop  their  existing  relations  and  also  as  a company to really manage to do that. With respect to service firms and their products it is even more important how the company acts, since service products are more connected to a firm than physical products.  As many markets are highly competitive, suppliers that do not respond to customers’ needs will not succeed in retaining their customers.

Customer retention has been shown to be a primary goal in firms that practice relationship marketing (Gro¨nroos, 1991; Coviello et al., 2002). While the precise meaning and measurement of customer retention can vary between industries and firms (Aspinall et al., 2001) there appears to be a general consensus that focusing on customer retention can yield several economic benefits (Dawkins and Reichheld, 1990; Reichheld, 1996; Buttle, 2004). As customer possession lengthens, the volumes purchased grow and customer referrals increase. Simultaneously, relationship maintenance costs fall as both customer and supplier learn more about each other. Because fewer customers churn, customer replacement costs fall.

Finally, retained customers may pay higher prices than newly acquired customers, and are less likely to receive discounted offers that are often made to acquire new customers. All of these conditions combine to increase the net present value of retained customers. Lindgreen et al. (2000, p. 295), for example, compute that “it can be [up to] ten times more expensive to win a customer than to retain a customer  and the cost of bringing a new customer to the same level of profitability as the lost one is up to 16 times more.”.

1.3.2 Why Customer Retention is important

Zineldine (1999) concedes:” Getting customers is important, but keeping and satisfying customers is more important”. Although kandampully and Duddy (1999) agree: ”It has become increasingly difficult for firms to retain distinctive product/service differentiation over long periods and retain customers’ ongoing patronage they nonetheless maintain: “Firms should focus on retention marketing and aim at achieving long-term relationships through the fulfillment of the service promise”.

Several authors highlight the strategic advantage of maintaining the customer base as opposed to merely attracting new customers (Luck and Lancaster, 2003; Rowley, 2004). It is widely believed that retaining customers is a more cost-effective than attracting new ones. For example, Kandampully and Duddy (1999) quote that “it costs five times more to attract a new customer than it does to keep an existing one” Customer retention is less costly and, therefore, more profitable than customer attraction.

Others mentioned that “The cost  of  acquiring  new  customers  is  ten  times  higher  than retention  of  existing customers”  (Almerup-Cooper  &  Edvardsson,  1998) for example the customer retention leads to decreased marketing expenditures associated with attracting new customers. Also it has been stated that: “The cost of trying to win back lost customers is absolutely stratospheric. Winning back a lost customer can cost up to 50-100 times as much as keeping a current one satisfied.” (SIEBEL, 2001)

Retaining customers is not only less expensive than finding new ones; it is also more profitable for both the supplier and buyer. Previous literature has theoretically and empirically linked customer relationships to account retention (e.g. Jackson, 1985; Kumar et al., 1995), Generally speaking, when a supplier retains a customer, it is easier to find out more about the buying firm’s business and how the supplier’s product can help that customer. This allows the supplier to serve a customer better and, perhaps, increase sales to that account.

According to a study by the Harvard Business Review ( Reichheld and Schefter, 2000), even a 5 % customer retention rate or customer loyalty may increase profits by 25 to 95 %. Retaining satisfied customers can have a distinct impact on profit. There is a belief that a customer who purchased from a firm 10 times was more profitable than a 10 individuals making one purchase (Reichheld & Sasser 1990).

The inability to retain customers can lead to negative financial consequences as customer-defection rates are high for businesses today for example, US corporations routinely loose half of their customers over a span of five years resulting in 25 to 50 percent reduction in performance (Skogland and Siguaw, 2004).According to Kotler and Amstrong (2001), companies are also realizing that loosing a customer means loosing more than a single sale: it means loosing the entire stream of purchases that the customer would have made over a lifetime of purchase.

This illustrates the importance for companies to manage the relationship with existing clients. To be able to exist, a company needs  customers;  to  survive  in  the  long  run,  a  firm  ought  to retain  long-term  customers. When  companies  face  the  problem  of  loosing  customers,  many  of  them  believe  that  this occurs  due  to  competitors’  competitive  advantages.  However, it has been proven that the customers’ main reason for changing suppliers is in fact the lack of interest of the existing suppliers.  In addition that companies  often  do  not  know  how  costly  it  is  to  acquire  a  new  customer  in comparison to retaining an existing one (Ridarstråle & Nordst m, 2003). 

Moreover, Retention contributes to the creation of reputation, which in turn further lowers customer acquisition costs. For example satisfied  customers  will furthermore  communicate  their  opinions  concerning  their  suppliers; they  thus represent  an  excellent  source  for  companies  that  intend  to  acquire  new customers.  Customer  care  is  thus  an  inexpensive  marketing  approach,  due  to  the  free publicity  the companies  obtain  through  word-of-mouth.  This shows once again how important  it  is  for  companies  to  allocate  both  time  and  resources  to  their  customers  and products.  Due  to  increasing  competition  both  from  existing  and  new  players,  it  is imperative  for  companies  to  strengthen  their  existing relations  in  order  to  be  able  to survive  in  the  long run. 

 Therefore, good communication  between  the  supplier  and  the  customer  is  crucial  for  a  well-functioning collaboration.  Hence,  the  two  parameters;  a  bad  customer relation  and  the  increasing competition  in  the  service  market,  implies  that  the  supplier  has  to retain  its  existing customers. 

1.3.3 Customer Loyalty

1.3.3.1 What is Customer Loyalty

Although there is no universally agreed definition of customer loyalty (Uncles et al., 2003), Customer Loyalty can be defined as a situation when a customer has a positive attitude

towards a company, expresses a willingness to repurchase from that company and actually does make the next purchase from that company rather than from a competitor (Chojnacki, 2000).Customer Loyalty can be defined as: A deeply held commitment to re-buy or patronize a preferred product or service consistently in the future, thereby causing repetitive same-brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behavior (Skogland and Siguaw, 2004). According to Uncles et al. (2003), loyalty is something that consumers may exhibit to brands, services, stores, product categories (e.g. cigarettes), and activities (e.g. swimming). Loyalty can be also defined as a state of mind, a set of attitudes, beliefs, desires, etc. A company benefits from customer’s loyal behavior, but this result from their state of mind. Loyalty is also a relative state of mind. It precludes loyalty to some other suppliers, but not all of them, as a customer could be loyal to more than one competing supplier. Companies, however, should segment their market by level of profitability and identify groups of customers the company wishes to retain and which are likely to provide the most profitable returns.

Reichheld (1996) has identified the following three customer groups:

1) Some customers are inherently predictable and loyal, no matter what company they’re doing business with. They simply prefer stable, long-term relationships.

2) Some customers are more profitable than others. They spend more money, pay their bills more promptly, and require less service.

3) Some customers will find your products and services more valuable than those of your competitors. No company can be all things to all people. Your particular strengths will

simply fit better with certain customers’ needs and opportunities.

1.3.3.2 The importance of Customer Loyalty

Reynolds (2002) explained the importance of Customer Loyalty should be seen not only as only a tool to gain market share but as a tool to maximize the value of individual customers. This means shifting the emphasis from selling one million widgets, to that of ensuring that the companies’ widgets are used daily by its customers for the next 20 years. That customer loyalty in a nutshell is earned one customer at a time. Butscher (2002) stated that most customer loyalty strategies offer primarily financial benefits. In essence, they provide price discounts and discounts are the last thing that creates loyalty among customers. Customers who buy the organizations’ product or service merely because of its price will not continue to do so if they can find a better price elsewhere. The only way to create long-term customer loyalty is to establish a true relationship with customers, which is based not on financial incentives, but on emotion, trust and partnership. (Butscher, 2002)

Dunn (1997) from Carlson Marketing suggested that companies who adopt loyalty strategies may have a number of goals or expectations from implementing these strategies, these may include, acquiring high value customers from competitors and maximizing the value of those they already have, identifying existing customer that could be of greater value to the company in the future, keeping a “core group” of moderate value customers and generating “opportunity cost” for using a competitor. Also, long-term loyal customers are accustomed to how a company conducts business and so ask fewer questions and cause fewer problems. This reduces costs of serving them. All of these positive effects of loyalty enhance the lifetime value of the customer.

1.3.3.3 How to measure Customer Loyalty

There are three distinctive approaches to measure loyalty:

1)      Behavioral measurements;

2)      Attitudinal measurements; and

3)      Composite measurements

The behavioral measurements consider consistent, repetitious purchase behavior as an indicator of loyalty. One problem with the behavioral approach is that repeat purchases are not always the result of a psychological commitment toward the brand (TePeci, 1999). For example, a traveler may stay at a hotel because it is the most convenient location. When a new hotel opens across the street, they switch because the new hotel offers better value. Anyway most loyalty programs in existence today reward behavioral loyalty.

Attitudinal measurements use attitudinal data to reflect the emotional and psychological attachment inherent in loyalty. The attitudinal measurements are concerned with the sense of loyalty, engagement & allegiance. For example, there are instances when a customer holds a favorable attitude toward a hotel, but he/she does not stay at the hotel (Toh et al., 1993). As a guest could hold a hotel in high regard & recommend the hotel to others, but feel the hotel was too expensive for him/her to use on a regular basis

The third approach, composite measurements of loyalty, combine the first two dimensions and measure loyalty by customers’ product preferences, propensity of brand switching, frequency of purchase, recency of purchase and total amount of purchase (Pritchard and Howard, 1997; Hunter, 1998; Wong et al., 1999).

1.3.4 Customer Satisfaction

1.3.4.1 What is Customer Satisfaction

Customer Satisfaction is defined as “the individual’s perception of the performance of the product or service in relation to his or her expectations” (Schiffman and Kanuk, 2004). However it is noteworthy to state that the perceptions of service quality might differ among service recipients and service providers (Nightingale, 1985).

The more satisfied customers are the greater is their retention (Anderson and Sullivan, 1993; Fornell, 1992), the positive word of mouth generated through them (Reichheld and Sasser, 1990; Schneider and Bowen, 1999), and the financial benefits to the firms who serve them (Fornell et al., 1995). Customer Satisfaction will affect not only one’s next purchase decision, but also one’s recommendation.

1.3.4.2 Relationship between Customer Satisfaction and Customer Retention

Many firms are putting a lot of effort into improving customer satisfaction since it is believed that customer satisfaction generates superior economic returns. Fornell (1992) stated that high customer satisfaction increases loyalty for current customers, reduces price elasticity, protects current customers from competitive efforts, lowers the cost of future transactions, reduces failure costs, reduces the need to attract new customers, and enhances the reputation of a firm. According to the research on the relationship between quality and customer satisfaction and economic benefits, conducted by Anderson, Fornell and Lehmann (1994), even though economic returns from improving customer satisfaction are not immediately realized, with a long run perspective, increasing customer satisfaction is extremely important because it affects future cash flows and market share increases. Customer satisfaction has been deemed directly to affect customer retention and companies’ market share (Rust and Subramanian, 1992)

From the study of relationships between customer satisfaction and loyalty, done by Jones & Sasser (1995), highly satisfied customers become highly loyal customers. They found the link between satisfaction and loyalty in markets where customers have choices is a simple, linear relationship as satisfaction goes up so does loyalty. This finding can be applied to the hospitality industry given that customers have a number of choices. Therefore Customer Satisfaction is especially important in order to improve loyalty.

On the other hand, Fornell, et al (1996) stated that Customer Satisfaction is generally seen as having a simple effect on loyalty. Customer satisfaction does not have a direct positive link to customer retention. As satisfied customers are not necessarily always loyal customers, customers can be satisfied, repeating orders, and also likely to buy from the competitors in the future. Reichheld (1993) found that even satisfied customers can switch relationships.

Dissatisfied customers do not necessarily leave, and satisfied customers do not necessarily stay in a relationship. Even though it has been indisputably shown that service quality contributes significantly to the start of a relationship, we will determine whether quality also contributes to relationship maintenance, next to other factors that have been proposed and found to influence relationship commitment.

According  to  Almerup-Cooper   and  Edvardsson  (1998)  dissatisfied  customers  are  more willing to communicate their  opinion than satisfied customers . Customers who are pleased with a service will only spread their satisfaction to seven to nine contacts, while dissatisfied customers will spread their displeasure to approximately 15 to 20 contacts. Although these numbers vary among different studies, unsatisfied customers certainly spread their opinion more than satisfied customers.  According  to research  conducted  by  US  news  and  World Report,  68  percent  of  customers  are  lost  because  of  a  lack  of  interest  from  the  supplier.

This  implies  that  it  is  of  great  importance  for  companies  to  satisfy  their  customers.  The majority of companies which are contacted by new customers have been recommended by previously satisfied customers. This does not only show that Customer Satisfaction is crucial and but also illustrates that the price of the product and the competitors play a small role in the consumer’s mind (Almerup-Cooper & Edvardsson, 1998). 

However, satisfaction alone does not ensure continued customer patronage (Jones and Sasser, 1995). While satisfaction may be one important driver, trust and Switching barriers are also likely to influence Customer Retention.

1.3.5 Trust

In order to establish a long-term relationship with the customer, firms need to win their customers’ trust on a continuous basis (Kandampully and Duddy, 1999). Morgan and Hunt conceptualized trust as existing when one party has confidence in a partner’s reliability and integrity. Indeed, trust could exist at the individual level (see Rotter, 1967) or at the firm level (Moorman et al., 1993).

Recent research suggests that, in some cases, service providers may be unable to retain even those customers who are satisfied (e.g. Heskett et al., 1994; Schneider and Bowen, 1999). Thus, satisfaction alone may not be adequate to ensure long-term customer commitment to a single provider. Instead, it may be necessary to look beyond satisfaction to other variables that strengthen retention such as trust (Hart and Johnson, 1999). Once Trust is built into a relationship, the likelihood of either party ending the relationship decreases due to high termination costs.

1.3.6 Switching barriers

Bansal and Taylor (1999) defined perceived switching barriers as the consumer’s assessment of the resources and opportunities needed to perform the switching act, or alternatively, the constraints that prevent the switching act. Also Gremler and Brown (1996) defined switching costs as the investment of time, money and effort that, in customers’ perception, made it difficult to switch. Since then, Bansal and Taylor (1999) and Lee et al. (2001) among others have tested and confirmed the positive effect of switching barriers on customer retention.

Research also shows that switching barriers may have both main and interaction effects on retention (Gremler and Brown, 1996; Bansal and Taylor, 1999; Lee et al., 2001). As a consequence, when switching barriers are high, service firms may continue to retain customers even if they are not highly satisfied. Furthermore, switching costs is not only “economic” cost, but also “non economic cost” such as search costs, transaction costs, learning costs, loyal customer discount, customer habit, emotional cost, and cognitive effort, coupled with financial, social, and psychological risk on the part of the buyer (Fornell, 1992)

According to Dick and Basu (1994), switching costs can lead businesses to falsely assume that all repeat purchase customers are loyal to the firm when many are less than satisfied but perceive the cost of switching to an alternative supplier to be too high. Jones et al (2000) suggested that the creation of switching costs could be used to complement customer retention strategies. But sometimes frequently dissatisfied customers leave firms that fail to perform up to their expectations as their feeling of risk or danger associated with switching brands is almost none, because they have nothing to loose; the firm in question has failed to satisfy them.

When the customer is very satisfied; the risk or danger is great, since they will expect the competitor to be able to deliver a comparable experience or even exceed their expectations. Thus the customer will have greater uncertainty whether the new choice will be able to deliver at this level; this will make the customer hesitate when faced with other choices.

Due  to  the  great resources  the  customer  has  to  expense  to  change the  supplier,  the risk  for  the  supplier  of  loosing  a  customer  is  small.  Thus, for firms mainly interested in maintaining market share, switching barriers may be an effective means of retaining customers. In a climate of strong competition, where firms are faced with the challenge to find alternative, cost effective means of retaining customers, switching barriers can be a useful alternative to pursuing higher and higher levels of customer satisfaction for their own sake.

On the other hand, some customers could become resentful of switching barriers, especially if these barriers lead to a scenario of complete entrapment and in the process, affecting other dimensions of loyalty such as positive word of mouth. Given that the time and effort required to switching are perceived to be important switching barriers, service providers may therefore wish to focus on service features that increase switching costs without necessarily creating absolute barriers to switching. This means that an ideal way for firms to prevent customer resentment is to create switching barriers that also add value to the service. Therefore, while switching barriers could be thought of as an alternative means of retaining customers, they could also be a complementary source of satisfaction through the provision of added value to the service bundle.

Finally I can say, Customer Satisfaction, Trust and Switching barriers may lead to higher Customer Retention, higher Customer Loyalty, higher revenue, and higher profitability.

1.4 The Effect of CRM on Customer Retention

O’Malley and Prothero (2002) have defined that the purpose of relationship marketing is

to create, extend and keep the relationships with customers and other stakeholders.

Because of this fact, customer loyalty & retention as relationship marketing is significant.

CRM is mostly defined in terms of the acquisition and retention of customers and the resulting profitability (Menconi, 2000; Nykamp, 2001).According to Light (2001), CRM evolved from business processes such as relationship marketing and the increased emphasis on improved customer retention through the effective management of customer relationships. Relationship marketing emphasizes that customer retention affects company profitability in that it is more efficient to maintain an existing relationship with a customer that create a new one (Payne et al., 1999; Reichheld, 1996).According to Bain and Company, profits increase by 25-80 percent when customer retention rates increase by five points. The idea of relationship marketing within CRM is fairly strong and has led others such as Newell (2000) to explore strategic methods for maintaining or improving customer retention.

Reasons for implementing CRM, The motivating factors for companies moving towards CRM technology are presented in Table 1 which is a part of the results of four surveys reported by Sweet (2001, 2002, 2003, 2004) related to CRM applications in UK companies

The data shows that major considerations for companies in using CRM are to improve customer satisfaction level, to retain existing customers and to improve customer lifetime value. Using CRM systems to attract new customers has been perceived less important in the four surveys. This shows that most managers accept the view that gaining a new customer is more costly than retaining an existing customer. Managers no longer see CRM as a quick way to bring new customers on board (Xu,M. & Walton, J. 2005).

CRM has been widely regarded as a company activity related to developing and retaining customers through increased satisfaction and loyalty (Xu,M. & Walton, J. 2005). An enhanced relationship with one’s customers can ultimately lead to greater customer loyalty & retention &, also, profitability (Ngai E.W.T., 2005).When  managers realized  the  importance  of  a  good relation  to  their  customers  and  started to gather information on them, they decided to create a loyalty program. A lot of marketing people believe that costly discounts buy loyalty.  Newell  (2000)  has  learned  through consulting  that  a  company  cannot  buy  loyalty;  instead,  the  company  should  create  loyalty by offering value in ways that are significant to the customer. The method of doing this is according to Newell (2000) CRM.

As CRM is a process of learning  and  understanding  customers,  for  example  what  is  important  for  them.  This gathered information should then be used to supply the clientele with benefits as well as to make it uncomplicated to do business with the actual firm (Newell, 2000). One way to deal with  customers’  uncertainty  and  problems  is  to  have  a  personal  contact  between  the supplier  and  the  customer.  (Ford,  Gadde,  Håkansson,  Lundgren,  Snehota,  Turnbull  & Wilson, 1998).

Customer retention, the development of customer potential and the de-selection of customers are the three fundamentals of CRM according to Roberts-Phelps (2001).  The first step it is of great significance to realize the importance of retaining customer and not just trying to find new ones. Additionally, it is not motivating for personnel to serve customers that will switch to another firm soon. The second step of this approach is to increase customer profitability in terms of spending and frequency. Furthermore, the last step deals with the identification of profitable customers. It also emphasizes that firms should try to relieve customer which are not consider to be profitable in the long run.

There is an additional four steps  management program  to  get  close  relationships  with  customers;  segmentation,  analyzing  current  behavior, developing  a  strategy  to  achieve  target  behaviors  and  behavior  maintenance.  Segmentation  should  be done  in  terms  of  the  customer’s  value  and  manners.  Analyzing current behavior is about value; potential value and historical behavior.  An example could be the customer’s purchasing  frequency  and  how  well  the  customer  has responded  to  different  marketing activities.  These  parameters  should  be  evaluated  with  existing  buying  patterns  &  their present  behavior &  should  as  well  be  compared  with  the  future &  the  ultimate  loyal customer. After having gathered this information, the company has to develop a strategy to attract the desired target clientele. 

In  addition,  the  company  has  to  forecast  a  budget  to each  this  objective.  The concluding phase is the evaluation of the implemented program (Roberts-Phelps, 2001).

According  to  Newell  (2002)  CRM  needs  to  be  considered  a  continuous  process  and  not just as a new campaign to be successful. Albeit companies have at lot to gain if this is made right.  Hence,  CRM  needs  to  permeate  the  entire  organization  and  also  has  to  be  further developed  during  the  implementation.  With  more  developed  products  and  services  it  is even  more  important  for  companies  to  strengthen  the relations  with  customers.  It  is difficult  for  companies  to  only  compete  with  their  products,  as  they  tend  to  be  similar  to other products on the market, for example, they have relatively comparable techniques and features.  Many  of  the  launched  products  with  special  and  unique  characteristics  are  soon imitated  by  competitors.  One  solution  to  this  problem  can  be  to  adopt  CRM  which  can offer  more  meaningful  sales  as  well  as  service  experience.  The  use  of  the  model  can  be  a  reason  for  customers  to  choose  the  actual  firm  instead  of  others. 

Firms  that  desire  to implement  CRM  also  face  the  problem  that  their  customers  value  other  factors  than  just the  actual  product  and  price.  These firms also experience that sales, service, recognition and support are more valued.  If the firm succeeds in their  implementation  it  will  enjoy  continuous  customer  loyalty  and  value,  which  will most  likely  lead  to  higher  profit  margin in the long  run. For a company to success with their CRM-approach they need to put a lot of resources into this (Reynolds, 2002).

Moreover, CRM is a useful tool in terms of identifying the right customer groups and for helping to decide which customers to last and keep (Newell, 2000). Clemons (2000) estimates there may be a tenfold difference between the most profitable customers and the average.

One method for identifying customer groups is the notion of distinguishing between transaction and relationship customers. While transaction customers are highly volatile and have little loyalty, Relationship customers have far more potential for loyalty as they are often prepared to pay a premium price for a range of reliable goods or services (Newell, 2000). Once relationship customers are recruited they are less likely to defect, provided they continue to receive quality service. Relationship customers are also more cost effective than new ones because they are already familiar with, & require far less persuasion to buy the company’s products or services. CRM should be used to identify the potential loyal customer groups and seriously consider the response required. However, CRM strategies are only effective if they deliver positive outcomes and profit for organizations and competitive value and quality for customer. It is no longer good enough just to argue that an organization is customer focused, but it matters what and how it does. If the CRM strategy is improving the profitability and increasing the quality of the prodserv (Product and service, according to Zineldin (2000)) with more reasonable price than the competitors, then the organization is clearly on the right path and able to have better and stronger market position.

Today a competitive market position and a good reputation of a company can quickly translate into market share and profit, but that distinction is often earned only through a philosophical commitment to service backed by careful attention to what customers want and need (Zineldin and Bredenlo¨ w, 2001). In an era when intense competition is being greatly facilitated by technology, the need of providing adequate product/service quality will necessitate that companies have to focus attention on issues of improving, measuring and controlling their product/service quality (Sylvestro et al., 1990). One way to measure quality is through customer complaints (Chapman et al., 1997) and customer survey.

Companies should emphasize deeper penetration of the existing customer data base. CRM is an effective way to maintain an effective customer data base which allows a company to best understand customer’s needs  particularly their relationship needs  better than the competitors. The customer database will also include data about the current and past attitude, state/trend of customers business, market shares, profitability, etc. The data about customer’s needs, attitudes and behaviour enables companies to identify today’s key customers, develop CRM with tomorrow’s customers, and calculate the revenue the customer generates, and estimate own future investment opportunities.

Companies must build strong foundations that will not be blown away in the storm. They won’t do that by focusing on advertising and promotions. Rather, they need to gain an understanding of the market structure. Then they must develop long-term customer relationships. Those relationships are more important than low prices, flashy promotions, or even advanced technology. The feedback loop is central to these types of relationships. Changes in the market environment can quickly alter prices and technologies, but close relationships with loyal customers can last a lifetime. Close relationships provide a boost to the added value. The added value creates customer loyalty (Zineldin, 2000, 2005).

By linking infrastructure, interaction and atmosphere indicators to the quality of object and processes, however, researchers and managers can document which changes in CRM strategy improve the overall satisfaction and loyalty, hence the ultimate outcomes.

Moreover, focusing marketing strategy on the existing segments of customer base is referred to as defensive marketing strategy. This strategy permits a company to normally produce most of the required revenue and increase market share without investing in new customers. The basic argument is that the cost of obtaining a new customer exceeds the cost of retaining an existing customer. Investing in new customers can be referred to as offensive marketing strategy. Offensive marketing focuses on obtaining new customers and increasing customers’ purchase frequency. The traditional four Ps, i.e. advertising, pricing, sales promotion, and personal selling are main tools in the offensive marketing. Offensive marketing strategy strives to attract competitors’ dissatisfied customers while defensive marketing strategy is geared to managing the dissatisfaction among a company’s own customers. The business world has become much more aware of defensive marketing in recent years, retaining existing customers reduces the necessity of attracting new ones (Replacement) and can even reduce offensive marketing cost.

Finally, as mentioned CRM is concerned with customer retention and how this can be achieved by creating long-term customer loyalty. This means that companies are seeking to create committed customers, not customers who are “locked in”. A customer who is locked in is a “prisoner” and is unlikely to stay with a company if an alternative supplier makes a satisfactory offer. CRM enables organizations to provide high quality product & services with a reasonable cost relative to the competitors. Evidence suggests that higher quality improves margins by helping to create customer loyalty and a competitive edge, thus increasing market share, which in turn leads to higher profitability and scale economies. Quality and CRM provide a company with opportunities to offer the customer something, which is distinctive and special need to be exploited.

1.5 Hotel industry

1.5.1 Introduction

The hotel industry today has been recognized as a global industry, with producers and consumers spread around the world, the use of hotel facilities such as room, restaurant, bar, nightclub or health club; is no longer considered luxury. For many people these services have become an integral component of lifestyle. Moreover, in the last two decades, demand for and supply of hospitality services beyond that of the traditional services intended for travelers have escalated the growth of the hospitality industry globally, leading to intense competition in the market-place. One of the greatest challenges facing hotel organizations today is the ever-growing volume and pace of competition. Competition has had major implications for the customer, providing: Increased choice; greater value for money; & augmented levels of service.

Additionally, there is little to distinguish one hotel’s products and services from another. Thus it has become imperative for hotel organizations to gain a competitive advantage.

There are two strategies most commonly used by hotel managers in order to gain a competitive advantage; they are:

1)      Low-cost leadership through price discounting, &

2)      Developing customer loyalty by providing unique benefits to customers.

Customer loyalty is particularly important to the hotel industry, because most hotel-industry segments are mature and competition is strong (Bowen and Shoemaker, 2003).

Hotels that attempt to improve their market share by discounting price, however run the serious risk of having a negative impact on the hotel’s medium and long-term profitability, As a result, it is quality of service rather than price that has become the key to a hotel’s ability to differentiate itself from its competitors and to gain customer loyalty as most of services which hotels offer, are intangible. Because of this, hotels should make an effort to succeed in the industry by improving service quality and the service itself in order to maximize the customers’ satisfaction and ensure guests become “loyal guests”. Numerous examples illustrate that it is important that the hotel industry develop customer loyalty, as opposed to relying solely on pricing strategies.

1.5.2 Customer Loyalty in Hotel Industry

In the current competitive market place hotel companies have found it necessary to win the loyalty of the reduced number of customers. As such they need to reorient their thinking away from merely attracting customers to retaining customers. This is due to the need to reduce the cost acquiring customers as indicated by Rosenberg and Czepiel (1984), Barnes and Cumby (1993), and Liswood (1989). Buttle (1996) notes that there are the direct costs of the successful conversion of prospect into a customer (selling costs, commission, product   samples, credit checking costs, administrative costs, database costs) as well as the costs of unsuccessful prospecting. Thus, keeping customers loyal is a sensible business strategy.

Even with successful campaigns, companies still face the risk of customers defecting, i.e. stop coming back. Defection rates affect retention rates, which is a central issue in relationship marketing. Price Waterhouse calculated that a 2% increase in customer retention is equivalent to a 10% reduction in costs (Caterer & Hotelkeeper, 1994). There is growing awareness of the lifetime value of customers. . In addition, existing customers tend to make more frequent visits, may broaden the base of their own purchases over time, and influence others through word-of-mouth advertising (Haywood, 1988).

A relationship marketing paradigm is most suitable when (Gilpin, 1996; Lewis and Chambers, 1989, Reichheld, 1993, Juttner and Wehrli, 1994):

• There is an ongoing or periodic desire for service on the part of the customer;
• the service customer controls the selection the service supplier; 
• there exists alternative choice of suppliers;
• word-of-mouth is an especially potent form communication about a product;
• brand switching is a common phenomenon (high turnover rates);
• there is an ability to cross sell products.

These characteristics are typical of the hotel industry. CRM can also be considered as particularly suitable for the hotel industry because of the ease with which the industry can adopt it. Hotels already possess important customer data from accommodation bookings and the registration process. It is also possible for hotels to retrieve other valuable information from hotel records, such as frequency of stay and spending behaviour. This data can be organized in a database system and manipulated to identify and target customers directly.  Hotels are then in an ideal position to begin a relationship with customers.

Barsky and Nash (2002) mentioned that the emotions a guest feels during a hotel stay are vital

components of satisfaction and loyalty. However it is important to recognize the difference between customer satisfaction and customer loyalty. Customer satisfaction assesses how much the transactions exceeded customers’ expectations whereas customer loyalty assesses how possible it is that the customers will return to the hotel (Bowen and Shoemaker, 2003).

Moreover, Diller (2000) mentioned that the fact loyalty is difficult to measure as a serious matter for hotels. As it can make it difficult to reward loyalty since the value of loyalty is established by both qualitative and quantitative phases. However this problem can be seen as challenge as if hotel could overcome the matter, then the hotel can differentiate itself from the other hotels.

1.5.3 Positive and Negative Effects of Customer Loyalty

Diller (2000) defined both positive and negative ways in which customer loyalty may effect to hotels from an economic point of view. Loyal customers tend to bring more certainty to hotels since they will stay at the hotels frequently. Loyal customers, who have emotional connections, are less likely to switch to rival companies based on price alone. Additionally loyal customers tend to spend more money than non-loyal customers (Bowen and Shoemaker, 2003). Barsky and Lin’s research (2004) also came to a similar conclusion; satisfied guests are less price-sensitive. They also found that it is possible to bring business travellers back as private travellers by improving customer loyalty as opposed to simply lowering prices. It is important to understand the value of retaining loyal customers since they are not restricted by contracts, which means that they are always able to switch to other hotels (Shapiro and Vivian, 2000).

 Moreover loyalty customers will bring more feedback, both positive and negative, to the hotels, which is indispensable to the hotel’s development. The feedback can provide new ideas, highlights areas that need improvement and influence their marketing strategy towards non-loyalty customers. Needless to say, the trust between loyal customers and hotels is a precious asset. However, having too close relationship with loyal customers and paying attention only to their opinions may bring inflexibility and inactivity to the hotels. Loyal customers have strong effect towards the hotels growth since the more they are satisfied, the more they give recommendations. It is a well-known fact that recommendation and positive words of mouth is the best marketing strategy for hotels. However if hotel makes loyal customers feel bad, those customers may spread negative word of mouth.

It is more profitable for hotels to have loyal customers instead of several opportunistic customers. The cost of convincing loyal customers to stay in a hotel compared to that of obtaining new customers is much lower. Furthermore hotels loyal customers cost less to take care of from a guest management point of view given they are already aware of hotel procedures and can form accurate expectations based of their experience from the previous stays. Diller (2000) mentioned that loyalty customers are less price-sensitive, but at the same time he is unsure of their expectation for lower prices as a compensation for their loyalty. It is also important to be aware of the costs of having customer loyalty programs. Also, long-term loyal customers are accustomed to how a company conducts business and so ask fewer questions and cause fewer problems. This reduces the costs of serving them.

All of these positive effects of customer loyalty enhance the lifetime value of the customer.

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