REVIEW OF RELATED LITERATURE

Customer satisfaction has been a popular topic in marketing practice and academic

research since Cardozo's (1965) initial study of customer effort, expectations and satisfaction.

Despite many attempts to measure and explain customer satisfaction, there still doesnot

appear to be a consensus regarding its definition (Giese and Cote, 2000). Customer

satisfaction is typically defined as a post consumption evaluative judgement concerning a

specific product or service (Gundersen, Heide and Olsson, 1996). It is the result of an

evaluative process that contrasts pre-purchase expectations with perceptions of performance

during and after the consumption experience (Oliver, 1980).

The most widely accepted conceptualization of the customer satisfaction concept is

the expectancy disconfirmation theory (Barsky, 1992; Oh and Parks, 1997; McQuitty, Finn

and Wiley, 2000). The theory was developed by Oliver (1980), who proposed that

satisfaction level is a result of the difference between expected and perceived performance.

Satisfaction (positive disconfirmation) occures when product or service is better than

expected. On the other hand, a performance worse than expected results with dissatisfaction

(negative disconfirmation).

Studies show that customer satisfaction may have direct and indirect impact on

business results. Anderson et al. (1994), Yeung et al. (2002), and Luo and Homburg (2007)

concluded that customer satisfaction positively affects business profitability. The majority of

studies have investigated the relationship with customer behaviour patterns (Söderlund, 1998;

Kandampully and Suhartanto, 2000; Dimitriades, 2006; Olorunniwo et al., 2006; Chi and Qu,

2008; Faullant et al., 2008). According to these findings, customer satisfaction increases

customer loyalty, influences repurchase intentions and leads to positive word-of-mouth.

 Given the vital role of customer satisfaction, it is not surprising that a variety of

research has been devoted to investigating the determinants of satisfaction (Churchill and

Surprenant, 1982; Oliver, 1980; Barsky, 1995; Zeithaml and Bitner, 2003). Satisfaction can

be determ

ined by subjective (e. g. customer needs, emotions) and objective factors (e. g. product and

service features). Applying to the hospitality industry, there have been numerous studies that

examine attributes that travellers may find important regarding customer satisfaction.

Atkinson (1988) found out that cleanliness, security, value for money and courtesy of

staff determine customer satisfaction. Knutson (1988) revealed that room cleanliness and

comfort, convenience of location, prompt service, safety and security, and friendliness of

employees are important. Barsky and Labagh (1992) stated that employee attitude, location

and rooms are likely to influence travellers' satisfaction. A study conducted by Akan (1995)

showed that the main determinants of hotel guest satisfaction are the behaviour of employees,

cleanliness and timeliness. Choi and Chu (2001) concluded that staff quality, room qualities

and value are the top three hotel factors that determine travellers' satisfaction.

Providing services those customers prefer is a starting point for providing customer

satisfaction.

A relatively easy way to determine what services customer prefers is simply to ask

them. According to Gilbert and Horsnell (1998), and Su (2004), guest comment cards (GCCs)

are most commonly used for determining hotel guest satisfaction. GCCs are usually

distributed in hotel rooms, at the reception desk or in some other visible place. However,

studies reveal that numerous hotel chains use guest satisfaction evaluating methods based on

inadequate practices to make important and complex managerial decisions (Barsky, 1992;

Barsky and Huxley, 1992; Jones and Ioannou, 1993, Gilbert and Horsnell, 1998; Su, 2004).
The most commonly made faults can be divided into three main areas, namely, quality of the

sample, design of the GCCs, and data collection and analysis (Gilbert and Horsnell, 1998). In

order to improve the validity of hotel guest satisfaction measurement practice, Barsky and

Huxley (1992) proposed a new sampling procedure that is a “quality sample“. It reduces

nonresponse bias by offering incentives for completing the questionnaires. The components

of their questionnaire are based on disconfirmation paradigm and expectancy-value theory. In

this manner, guests can indicate whether service was above or below their expectations and

whether they considered a particular service important or not. Furthermore, Gilbert and

Horsnell (1998) developed a list of criteria for GCC content analysis, which is adopted in this

study as well. Schall (2003) discusses the issues of question clarity, scaling, validity, survey

timing, and question order and sample size.

The Importance of Customer Loyalty in the Hotel Industry

The hotel industry today has been recognized as a global industry, with producers and

consumers spread around the world (Kandampully et al., 2000). The use of hotel facilities

such as: guestroom, restaurant, bar, spa or wellness services, is no longer considered a luxury.

For many people, these services have become an integral component of their lifestyle.

Moreover, in the last two decades, demand for supply of hospitality services beyond that of

traditional services intended for travellers have escalated the growth of the hospitality

industry globally, leading to intense competition in the marketplace (Kandampully et al.,

2000).
 According to Kandampully and Suhartanto (2000), oneof the greatest challenges

facing hotel organizations today is the ever-growing volume and pace of competition.

Competition has major implications for the customer, providing increased choice, greater

value for money, and augmented level of service. Additionally, there is little to distinguish

one hotel’s products and services from another. Thus, it is imperative for hotel organizations

to gain a competitive advantage.

To gain a competitive advantage, hotel operators are using two commonly-known

strategies. They are:

1. Providing low-cost leadership through price discounting, and

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

Hotels that attempt to improve their market share by discounting price run the serious risk

of having a negative impact on hotel’s medium- and long-term profitability. Thus, 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 (Kandampully et al., 2000). Due to the

importance of customer loyalty, companies are trying to enhance their customers’ loyalty

through retention programs and relationship marketing strategies (Hallowell, 1996).

Customer loyalty is important because loyal customers bring many benefits to a firm.

According to Reichheld and Teal (1996), the various advantages of customer loyalty

include: a continuous stream of profit, reduction of marketing cost, growth of per-customer

revenue, decrease in operating cost, increase in referral, increase in price premium, and

switching barriers among loyal customers who do not easily surrender to the competitors’

promotion efforts. Considering these benefits, customer loyalty is a necessary prerequisite for

the future survival of hotel organizations (Reichheld and Teal, 1996; Reinartz and Kumar,

2000; Yi an Jeon, 2003).

A Definition of Customer Loyalty

Customers display varying degrees of loyalty, commitment, or allegiance in various

aspects of their daily interactions. Loyalty also occurs in consumption situations, and has

received much attention in the marketing literature (Kandampully et al., 2000). Generally, the

term, customer loyalty, has been described as occurring when customers:

1. Repeatedly purchase a good service over time, and

2. Hold favorable attitudes towards a good service.

Customer loyalty consists of three separate dimensions: behavioural, attitudinal,

and composite. Behavioural loyalty considers measurements of consistent, repetitious

purchase behaviour as an indicator of loyalty. In particular, it interprets a form of customer

behaviour directed towards a particular brand over time (Bowen and Shoemaker, 1998).

Researchers (Ehrenberg, Goodhardt, and Barwise, 1990; Krishnamuthi and Raj,

1991) measured loyalty exclusively on behavioural dimensions. The problem with this

type of measurement, as Dick and Basu (1994) pointed out, is that it provides limited

understanding of the factors underlying repeat purchase. Another problem with the

behavioural approach is that repeat purchases are not always the result of a

psychological commitment towards the brand (TePeci,1999). For example, a traveller

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. Thus, repeat purchase does

not always mean commitment (Bowen and Chen, 2001).

The attitudinal measurements of loyalty use attitudinal data to reflect the emotional

and psychological attachment inherent in loyalty.

 The attitudinal measurements are concerned with the sense of loyalty, engagement, and

allegiance. There are instances when a customer holds a favorable attitude towards a hotel,

but he/she does not stay at the hotel (Toh et all., 1993).

Attitudinal dimensions refer to a customer’s intention to repurchase and recommend,

which are good indicators of a loyal customer (Getty and Thompson, 1994). 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 regular basis.

The third approach, composite measurement of loyalty, combines the first two

dimensions (behavioural and attitudinal) and measures loyalty by customers’ products

preferences, propensity of brand-switching, frequency of purchase, and total amount of

purchase(Pritchard and Howard,1997; Hunter, 1998; Wong at al., 1999). The use of both

attitude and behaviour in loyalty definition substantially increases the predictive power

of loyalty hence, composite measurement has been generally acknowledged as a two-

dimensional construct that enables researchers to understand customer loyalty in several

fields, such as retailing, recreation, upscale hotels, and airlines (Pritchard and Howard,

1997).

Customer loyalty consists of both an attitudinal commitment to the relationship (such

as price insensitivity), as well as other, more-overt loyalty behavior (such as positive word of

mouth and repeat patronage) (Oliver, 1999). Therefore, loyal customers or loyal guests are

guests who hold favorable attitudes towards the hotel, commit to repurchase the

product/service, and recommend the hotel to others.

This definition of guest loyalty suggests that the loyal guest is a matter of degree,

ranging from the completely loyal to one who never considers using a hotel in the

future. According to this definition, an extremely loyal guest would be described as one who:
 1. Regularly uses a hotel,

2. Really likes the hotel and thinks very highly of it, and

3. Does not ever consider using another hotel in this region.

Conversely, at the other end of the continuum, an extremely “non-loyal” guest:

1. Does not use the hotel again,

2. Has negative feelings towards the hotel, and

3. Welcomes suggestions about other hotels and is willing to try any other hotel.

This three-dimensional definition is consistent with Zeithaml, Berry, and Parasuraman’a

(1995) “loyalty to company” factors in their behavioral-intensions battery. In their study,

the five items measuring the loyalty factor included:

1. Saying positive things about the company;

2. Recommending the company to someone who seeks advice;

3. Encouraging friends and relatives to do business with the company;

4. Considering the company the first choice to buy service; and

5. Doing more business with the company in the next five years.

Thus, in effect, their measure includes items from all three dimensions of the proposed

customer loyalty dimension.

Loyalty Prerequisites

Practitioners and researchers have not clearly identified a theoretical framework,

which identify factors leading to the development of customer loyalty (Gremler and

Brown, 1997). However, there is consensus among practitioners and academics that

customer satisfaction and service quality are prerequisites of loyalty (Gremler and
Brown, 1997; Cronin and Taylor, 1992). Their thinking is that a satisfied customer, as a result

of his/her satisfaction, naturally becomes a loyal customer with satisfaction as the only

catalyst necessary for developing such loyalty (Ostrowski, O’Brien and Gordon, 1993).That

is, satisfaction is a necessary and sufficient condition for developing service loyalty.

Guest Satisfaction

The global service marketplace continues to be very competitive. Lodging business

have been challenged to increase their levels of quality and service, improve their product

design, and decrease their product development cycle times. Significant progress has been

made in these areas, but one of the most important objectives in the hotel marketplace today

is providing total customer satisfaction (Skogland a. Siguaw, 2004).

Customer satisfaction is considered to be one of the most important outcomes of

all marketing activities in a market-oriented firm. The obvious need for satisfying the

firm’s customer is to expand the business, to gain a higher market share, and to

acquire repeat and referral business - all of which lead to improved profitability

(Barsky, 1992).

The services-marketing literature suggests that satisfied customer purchase more

each time they visit and purchase more often. The satisfied customer also refers their

family and friends. The link between sales, service, satisfaction, and profits is direct. The

more customers are satisfied, the more they spend (Gerson, 1993). The more customers

spend, the more is sold. And usually, when more is sold, profits are greater (Gerson, 1993).

In addition, satisfied customers are less likely to seek the lowest prices and the cost of selling

to them is much less than the cost of capturing new customers from the competition.

Happy customers are the cheapest and most effective form of advertising.
 Conversely, a disappointed customer not only takes their business elsewhere, but

most likely tells several others about the experience too. While it may take many positive

encounters to create customer loyalty, it usually takes only two negative encounters to

make an enemy for life (Hill and Alexander, 2000). Thus investment in customer

satisfaction does bring improvements in profitability.

Moreover, customer satisfaction has been used to refer to the satisfaction with

an individual consumption experience or service encounter (e.g. Bitner, Booms, and

Tetreault, 1990; Oliver and Swan, 1989). It has also been described as a summary

evaluation of a customer’s overall experience with an organization or its products

(Cronin and Taylor, 1992).

In many customer satisfaction studies, repurchase intention is often included as a

consequence of satisfaction (e.g. Boulding et al., 1993). Satisfying experiences influence

future purchase intention; hence, customer loyalty. Scholars argue that customer loyalty

depends critically on the overall level of satisfaction (e.g., Anderson and Fornell,

1994).

Several studies have found empirical evidence to support the notion that satisfaction

is, if not, the leading factor in determining customer loyalty (Bolton, 1994; Rust and

Zahorik, 1993). Other studies have linked customer satisfaction to repurchase intentions

(Cronin and Taylor, 1992; Oliver, 1980). However, as Anderson and Fornell (1994) point out,

it is not well-understood how predictive repurchase intentions are of actual purchase

behavior; nevertheless, a satisfied customer is likely to repurchase the product/service

simply because it minimizes risk associated with an unknown product offering.

Researchers are still attempting to determine both conceptual and empirical

distinctions between customer satisfaction and service quality (e.g. Bitner and Hubert, 1993;

Oliver, 1993; Taylor and Baker, 1994). To date, however, the relationship “is not universally
agreed upon” (Zahorik and Rust, 1992). In fact, in many instances, customer satisfaction and

service quality are used interchangeably (Iacobucci, Grayson and Ostrom, 1994).

Liljander and Strandvik (1995) after reviewing the literature on service quality and

customer satisfaction suggested that satisfaction is more closely related to future

behavior than service quality. Quality and service are the means to the ends of satisfaction

and

retention.

Confirmation-Disconfirmation Theory

Customer satisfaction is defined as a post-purchase evaluative judgment

concerning a specific buying decision (Homburg and Giering, 2001). According to the

confirmation-disconfirmation paradigm, customers assess their levels of satisfaction by

comparing their actual experiences with their previous experiences, expectations, and

perceptions of the product’s performance (Oliver, 1980).

The theory postulates that three outcomes of this evaluation are possible:

1. Conformation occurs when the actual performance matches the standard, leading

to a neutral feeling;

2. Positive disconfirmation occurs when the performance is better than the standard,

which then leads to satisfaction; and

3. Negative disconfirmation occurs when the performance is worse than the standard

which then leads to dissatisfaction.

Comparison-Level Theory

This theory proposes that consumers use comparison levels for the relationship under

consideration. In addition, they use comparison levels for alternative relationship to

determine satisfaction with and propensity to remain in a relationship (Thibaout and Kelley,

2001). The comparison level is “the standard against which a member evaluates the

attractiveness of the relationship” (Skogland and Siguaw, 2004). These consumer standards

reflect what the brand is to achieve, not just what it does achieve (Cadotte, Woodruff and

Jenkis, 1987).

If product performance exceeds expectations derived from past experience the

consumer had with the product, then that experience leads to satisfaction. Otherwise, it

results in dissatisfaction. As soon as the current level of outcomes drops below the

perceived comparison level for alternatives, the customer is motivated to leave the

relationship (Rust 21 and Zahorik, 1993). Previous research has found a positive

relationship between prior experiences and current levels of expectations related to

satisfaction of the firm (Zeithaml, Berry and Parasuraman, 1993).

Dimensions of Customer Satisfaction

Although an investigation of overall satisfaction with services provides relevant

insight regarding loyalty, even greater knowledge can be obtained by distilling satisfaction

into its various dimensions, especially in an industry where switching behavior and

customer loyalty are paramount (Rust and Zahorik, 1993). Indeed, some dimensions of

satisfaction may be more important antecedents of repeat-purchase behavior and loyalty

than others are.

 Common dimensions of satisfaction with service components include: service

quality, product quality, price, and location. Researchers suggest that the “people factor”

(i.e., service quality), in terms of tangibility, reliability, responsiveness, assurance, and

empathy (Zeithaml et al., 1994), may be the most silent in determining overall satisfaction

and repeated purchasing in service industry (Ganeshet al, 2000; Yüksel and Yüksel, 2002).

The argument for the importance of the “people factor” is further supported by the

services-marketing literature, which, emphasize the intangibility of services, advances

service encounters as predominantly interpersonal interactions (Czepiel, 1990).

Consequently, as with other social relationships, the bond between the hotel

representative and the guest is more heavily weighed when the guest makes a

satisfaction judgment than when the guest makes no such judgment. Crosby, Evans, and

Cowles (1990) found that the quality of the relationship between the hotel representative

and the guest determines the probability of continued interchange(i.e., loyalty) between

those parties in the future. These and other studies seem to suggest that having an

interpersonal relationship with someone in the organization can lead a customer to become

more committed, or loyal, to that firm. Thus, in this study, we examine not onlythe effects of

overall satisfaction but also the effects on loyalty of both satisfaction with the people

factor and satisfaction with hotel ambience.

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