Toward An Understanding Of Loyalty: The Moderating Role Of Trust*

Gaining and holding a loyal customer base is a key corporate challenge in an increasingly competitive marketplace. Customers dictate profits, and how the customer is treated and how the company backs up its commitments to their products and services largely determine whether the customer will remain loyal or switch to another supplier. Growing competition has taken retailers and manufacturers into new areas of the loyalty business, trying to attract and hold customers with samples, vouchers and mailings, as well as traditional advertising. While applications are expanding and developing, there is still much confusion over what drives loyalty. Loyalty is about building and sustaining a relationship with your customers. Recently, businesses are again focusing on the benefits of building customer loyalty. If the Eighties rewarded widespread improvements in product quality, the Nineties will compensate the cultivation and coddling of the customer. Says Bob Wayland, a vice president with Mercer Management Consulting: "The paradigm has shifted. Products come and go. The unit of value today is the customer relationship" (Jacob, 1994: 215) Regular customers are also easier to serve; they understand your modus operandi and make fewer demands on employee time. Furthermore, managers are coming to the realization that measuring improvements in product attributes, quality, and service is not enough. A recent study by the Juran Institute found that fewer than 30 percent of the 200 respondents surveyed believed their customer satisfaction "management" efforts added economic value to their bottom line, and fewer than 2 percent were able to measure a bottom line improvement as a result of increased customer satisfaction levels (Hepworth and Mateus, 1994) The conclusion is that it doesn't pay to have satisfied customers; it pays to have loyal ones. A number of authors suggest that the construct of trust is an important element of long term buyer seller relationships in a business environment (Anderson and Narus, 1990; Dwyer et al. 1987) Trust is viewed as an important feeling because of its ability to moderate risk in the buying process. As such, trust permits the buyer to make commitments to a single source whose prior behavior has been satisfactory with the confidence that this supplier will continue to perform in a similar manner. Ganesan (1994) finds that trust and dependence play key roles in determining the longterm orientation of firms in a relationship and both are related to environmental uncertainty, transaction specific investments, reputation, and satisfaction in a buyer seller relationship. Morgan and Hunt (1994) found that trust was the key mediating variable in relational exchange between automobile fire retailers and their suppliers. While one might argue that trust is not important for a single transaction in which future performance is not a consideration, the importance of trust becomes evident as a moderator of risk when buyers move away from buying systems based on a single transaction to one of repeat purchasers. Here, alliances are often formed between buyers and sellers to share technologies and skills, and to perform required tasks as cost effectively as possible in order to meet competitive threats. The goal is to secure valued resources of selected suppliers without the costs associated with vertical integration due to resource limitations or managerial constraints. From the supplier's side, improvements in loyalty even in the absence of strategic alliances improves profits through higher revenues and more effective marketing expenditures. Furthermore, it can cost the seller many times more to "conquer" a new customer as it takes to keep an existing customer. In order to safeguard against disruptions in supply, buyers often attempt to reduce risk by using elaborate heuristics such as maintenance of multiple sources, vendor rating, insistence on safety stocks, and purchase contracts. However, implementing these safeguards is an expensive and time consuming process.