Chapter 51 The Role of Relational Mediators in the CRM- Performance Link: Evidence from Indian Retail Banks

Chandrasekaran Padmavathy Vellore Institute of Technology, India

ABSTRACT

CRM literature has considered the role of relationship quality (satisfaction, trust and commitment), but its respective effects on relationship maintenance (retention) and relationship development (cross-buying) are unnoticed.

INTRODUCTION

Marketing has witnessed a paradigm shift towards relationship approach a decade ago (Gronroos, 1994). Hence, the concept of customer relation­ship management (CRM) is a constant theme in marketing. Today, many firms adopt CRM strat­egies with the aim of understanding customers better and building better relationships (Fitzgibbon and White, 2004). It provides number of benefits including increased customer satisfaction, trust, loyalty, sales effectiveness, cross selling opportu­nities, and profitability. Concisely, CRM efforts increase length, depth and breadth of a relationship (Bolton, Lemon, & Verhoef, 2004).

CRM is applicable more in banking industry as it is known to be highly human intensive and customer interactive industry (Dowling, 2002) and banks represent the economic stability and prosperity of a country (Rootman, Tait, & Bosch, 2008). But, global banking environment has been changed due to regulatory, structural and technological factors (Rao, 2008).

DOI: 10.4018/978-1-4666-6268-1.ch051

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Theoretically, numerous empirical studies have reported positive effect of CRM on customer behavioral outcomes such as customer satisfaction (Mithas, Krishnan, & Fornell, 2005), customer trust (Sin, Tse, & Yim, 2005), and customer reten­tion (Yim, Anderson, & Swaminathan, 2004); and financial performance outcomes such as return on assets (ROA) (Sin, Tse, & Yim, 2005), profitability (Reimann, Schilke, & Thomas, 2010), and return on equity (ROE) (Minami & Dawson, 2008). However, firstly, previous research has tested only partial impact of CRM either on satisfac­tion or retention and failed to address sequential effect of CRM, which is expected from customer satisfaction to firm financial benefit (Minami & Dawson, 2008). Secondly, CRM model tends to combine the effect of CRM on both customer metrics and financial metrics, and often used financial measures such as ROA and profitabil­ity to measure financial performance. But, it is argued that customer metrics like cross-buying or cross sell ratio is an important outcome of CRM efforts (Bohling et al., 2006) and it contributes to firm profits (Blattberg, Getz, & Thomas, 2001; Liang, Wang, & Farquhar, 2009). Thirdly, Aurier and N’Goala (2010) articulate that CRM theory has considered the role of relationship quality perceptions (satisfaction, trust and commitment), but ignored to examine their respective effects on relationship maintenance (customer retention) and relationship development (cross-buying).

These gaps necessitate a rationale for devel­oping and testing a more integrative conceptual framework containing the relationship between CRM, relationship quality; maintenance; and development in Indian retail bank setting from customer perception. The framework allows us to simultaneously investigate the respective impacts of relational mediators on both relation­ship maintenance and development. Specifically, we examine the impact of CRM on customer satisfaction, customer trust, customer retention and customer cross-buying. We believe that our study findings would shed light and add substan­tive theory to the body of knowledge on CRM. To realize this, we first review previous research on CRM followed by the proposed model and hypothesis construction. Second, we present the research methodology, including the instruments used for hypothesis testing. Finally, the empirical results are examined, key managerial and research implications are provided.

LITERATURE REVIEW

Concept of CRM

CRM is an integral part of relationship marketing (RM) and many of the scholars use the term RM and CRM interchangeably (Parvatiyar & Sheth, 2001). But RM becomes CRM when it is targeted towards customer market especially (Lindgreen & Antioco, 2005).

CRM research can be divided into two streams. One is process approach and the other is rela­tionship approach (Lin, Chen, & Chiu, 2010). Process approach contains initiating, maintain­ing and terminating relationship with customers (Reinartz, Krafft, & Hoyer, 2004). Relationship approach refers to activities such as understand­ing customers, giving privilege to key customers and delivering superior services from the use of available information technology (Sin, Tse, & Yim, 2005). Our study follows the tradition of relationship approach.

CRM and its Outcomes

Empirical studies report positive influence of CRM on its performance measures under vari­ous perspectives. For instance, in process related perspective, Reinartz, Krafft, and Hoyer (2004) conceptualize CRM as a process that contains three different stages including relationship ini­tiation; maintenance; and termination. It is found that initiating the relationship and maintaining it improve firm’s economic performance. In this context, Becker et al. (2009) report that techno­logical and organizational implementation posi­tively influences CRM performance at each of the three stages. Reimann, Schilke, and Thomas (2010) conclude that three stage CRM process has an indirect impact on customer satisfaction and profitability through differentiation and cost leadership. In a process oriented framework of CRM effectiveness, Chen et al. (2009) discover that elements of CRM effectiveness like RM, in­formation technology and organizational climate increase customer loyalty.

In relational activities perspective, the study by Yim, Anderson, and Swaminathan (2004) reveal that CRM dimensions such as focusing on customers and managing knowledge influence customer satisfaction; and managing knowledge and organizing around CRM increase customer retention levels.

In the perspective of technology, CRM system implementation containing BPR and organiza­tional learning increase the level of relationship quality (satisfaction, trust and commitment) and organizational performance (Chang and Ku, 2009). In B-to-B context, Richard, Thirkell, and Huff (2007) find that CRM technology adoption increases relationship strength (trust and commit­ment) and relationship performance (satisfaction, retention and loyalty). CRM system investment and CRM capability is positively significant to customer satisfaction in a retail context (Srinivasan and Moorman, 2005). CRM contains legacy and new application that increases customer satisfac­tion levels (Mithas, Krishnan, & Fornell, 2005).

In sum, review of CRM and its outcomes reveal that the majority of the studies have concentrated on customer satisfaction, customer trust and cus­tomer retention, leaving other expected outcomes of CRM. Moreover, studies with two or more outcome variables combine both financial as well as non-financial measures.

CRM in Financial Services Context

Effective implementation of CRM reduces cost, complexity and waiting time; increase perfor­mance and service levels; and increase bank customer relationships (Blery & Michalako- poulos, 2006). It also helps in increasing firms’ profit efficiency but unhelpful in improving cost efficiency (Krasnikov, Jayachandran, & Kumar, 2009).

CRM enablers are found to affect CRM success. For example, firms engaged in effective project management, realistic time scheduling and perfect programming will reap the benefits of CRM suc­cess such as customer satisfaction and retention (Blery & Michalakopoulos, 2006). Similarly, criti­cal enablers such as realistic CRM implementation schedule, personalization, customer orientation and clear CRM strategy contribute to increased customer retention (Eid, 2007).

Bank employees’ knowledgeability and attitude are the crucial factors in improving effective­ness of CRM strategy (Rootman, Tait, & Bosch, 2008) when combined with IT infrastructure, and business architecture (Coltman, 2007). Affective commitment and loyalty programs enhance cus­tomer retention and customer share development (Verhoef, 2003). Furthermore, assertiveness and affiliation of the service provider increase cus­tomer retention and share of wallet.

Adoption of mobile banking as a CRM tool assists banks in acquiring and retaining custom­ers (Riivari, 2005). Existence of online banking, virtual banking and non-banking may make the bank to lose customers and yet it is useful to iden­tify high net worth customers from the usage of e-banking (Sciglimpaglia & Ely, 2006). In Indian financial services context, recently, Khare (2010) explores that Indian customers are skeptical to use online banking. Support of bank employees in educating the importance and value of online banking will change customer perception and improve CRM strategy.

In conclusion, CRM in financial services context reveal that it is devoid of a complete conceptual model reflecting the impact of CRM on possible non-financial outcomes. So, we try to examine the influence of CRM on its expected customer outcome variables.

CONCEPTUAL MODEL AND RESEARCH HYPOTHESIS

Figure 1 represents our extended and advanced CRM model. The causal model depicts the rela­tionships between CRM and relationship qual­ity, relationship maintenance and relationship development. We now discuss the theoretical underpinnings for our hypothesis.

Relationship Quality

Relationship quality (RQ) has been used frequently in buyer-seller relationship literature (Athanaso- poulou, 2008) and it is considered as relationship strength (Garbarino & Johnson, 1999). Earlier, it has been conceptualized mainly of trust and satisfaction (Crosby et al., 1990). Later, commit­ment has been added as one more indicator of RQ (Beatson, Lings, & Gudergan, 2008). We assume RQ as satisfaction and trust of customers with the bank since they are widely used in financial services context (Bejou, Wray, & Ingram, 1996; Wray, Palmer, & Bejou, 1994).

Figure 1. Conceptual model

Relationship Maintenance

Banks try to maintain and expand relationship for achieving long-term profitability of a customer (J arrar & Neely, 2002). Aurier and N’Goala (2010) conceptualize customer retention as one of the patronage behaviors in relationship maintenance phase. McNally (2007) considers customer reten­tion as one of the maintenance phase activities. In line with above studies, we consider customer re­tention as an indicator of relationship maintenance.

Relationship Development

Retaining existing customers is not sufficient for developing relationship and enhancing profitabil­ity. Making retained customers to buy additional products (cross-buying) helps in relationship de­velopment and it will generate financial benefit to the firm (Bolton, Lemon, & Verhoef, 2004). Cross­buying is considered as relationship development or extension (Verhoef & Donkers, 2005). Ngobo (2004) conceptualizes it as expansion of the rela­tionship and Bolton, Lemon, and Verhoef (2004) consider it as breadth of the relationship. Similar to Verhoef and Donkers (2005), we conceptualize cross-buying as relationship development.

Effect of CRM on Customer Satisfaction

Customer satisfaction has been considered as an important goal of CRM activity (Yim, Anderson, and Swaminathan, 2004) and it is a focal outcome in buyer-seller relationship (Smith & Barclay, 1997). In banking context, relationship efforts made by a retailer would have an effect on customer satisfaction (Liang & Wang, 2007) and several studies have reported positive impact of CRM on customer satisfaction (e.g., Mithas, Krishnan, & Fornell, 2005; Sin, Tse, & Yim, 2005; Srinivasan & Moorman, 2005). Therefore, we hypothesize:

H1: There is a positive relationship between CRM and customer satisfaction.

Effect of CRM on Customer Trust

Trust plays a major role in the success and benefit of developing customer relationships (Hulten, 2007; Morgan & Hunt, 1994) and it is the single most powerful RM tool available to the service providers (Berry, 1995). Furthermore, empirical studies on CRM find positive association between CRM and customer trust (e.g. Richard, Thirkell, & Huff, 2007; Sin, Tse, & Yim, 2005). Therefore, we hypothesize:

H2: There is a positive relationship between CRM and customer trust.

Effect of CRM on

Customer Retention

Every relationship management activities are fo­cused at increasing customer retention. Menon and O’ Connor (2007) argue that CRM efforts such as assertiveness and affiliation will generate retention of customers. Empirical studies in the context of banking have also reported positive relationship between CRM and retention. For instance, Yim, Anderson, and Swaminathan (2004) find posi­tive effect of CRM dimensions on retention. Eid (2007) find positive impact of CRM effectiveness on customer retention. Based on these arguments and findings, we hypothesize:

H3: There is a positive relationship between CRM and customer retention.

Effect of Customer Satisfaction on Trust, Retention and Cross-Buying

Satisfied customers tend to develop their affilia­tion with the service provider and their associa­tion in the service relationship (Bolton, 1998). In a banking context, overall satisfaction arrived from service quality influences trust (Aurier & N’Goala, 2010). In the study of Liang and Wang (2007), it is found that satisfaction arrives out of relationship benefits have positive effect on customer trust.

In satisfaction literature, it has been explored that a key determinant to customers’ decisions to continue or terminate a business relationship arrives from satisfaction (e.g., Bolton, 1998). Greater customer satisfaction is generally believed to increase customer retention levels (Yim, Ander­son, & Swaminathan, 2004). Number of empirical studies finds positive influence of satisfaction on retention (e.g. Hennig-Thurau, 2004; Mohd Kas- sim & Souiden, 2007).

When customers are satisfied in the initial stages, they build necessary trust and expand their relationship through cross-buying behavior (Bendapudi & Berry, 1997; Reinartz, Thomas, & Bascoul, 2008). In a recent study, Dimitriadis (2010) finds that satisfaction with a bank influ­ences cross-buying. Some studies have reported direct or indirect relationship between satisfaction and cross-buying (Bloemer et al., 2002; Ngobo, 2004). On the other hand, insignificant relation­ship between satisfaction and cross-buying is also reported (Liu & Wu, 2007; Soureli et al., 2008). However, based on the argument that satisfied customers tend to buy additional products (Liu & Wu, 2007), we expect the relationship between customer satisfaction and cross-buying to be positive. Therefore, we hypothesize the following:

H4: Customer satisfaction will have a positive influence on customer trust.

H5: Customer satisfaction will have a positive influence on customer retention.

H6: Customer satisfaction will have a positive influence on cross-buying.

Effect of Trust on Retention and Cross-Buying

Trust is generally considered as a fundamental requirement for successful relationship mainte­nance and enhancement (Gronroos, 1999). Several studies in RM consider trust as a determinant of customer retention (Doney & Cannon, 1997; Johnson & Grayson, 2005). The positive effect of trust on customer retention has been examined in literature (e.g. Liu & Wu, 2007).

Many studies have reported that trust influences cross-buying intention (Crosby et al., 1990; Liang, Chen, & Wang, 2008; Liu & Wu, 2007; Soureli et al., 2007). Whereas Verhoef, Franses, and Hoekstra (2002) report insignificant relationship between trust and cross-buying and argued that trust is important for clients only in choosing a new service provider. Nevertheless, trust is regarded as a scope for extending relationship (Selnes, 1998). Therefore, we hypothesize the following:

H7: Customer trust will have a positive influence on customer retention.

H8: Customer trust will have a positive influence on cross-buying.

and Cadogan (2000). All the statements were measured on a five-point Likert scale ranging from 1 ‘strongly disagree to 5 ‘strongly agree’.

Pretest

Items and definitions were given to three marketing professors and two bank managers to assess item wordings and applicability of measures to suit the banking context. Word changes were carried

METHODOLOGY

Sample and Data Collection Procedure

To empirically test the model proposed in Figure 1, we collected survey data on CRM, customer satisfaction, customer trust, customer retention and cross-buying. The study sample consisted of retail bank customers. A self-completion web question­naire was mailed to a convenience sample of 1100 respondents. Due to lack of population informa­tion or sample frame, convenience sampling was used to improve the precision of the estimates as suggested by Cooper and Schindler (1998). Web survey resulted in usable 426 responses, yielding a response rate of 38.7 per cent. Table 1 describes the demographic profile of the respondents.

Measurements

Measurements for all constructs were taken from existing literature. To measure CRM, 9 items were adopted from Sin, Tse, and Yim (2005). 3 items were adapted from Singh (1990) and Verhoef, Franses, and Hoekstra (2001) to measure customer satisfaction. Based on Crosby et al. (1990) and Morgan and Hunt (1994), we adopted 3 items for measuring customer trust. 3 customer reten­tion items were based on Zeithaml, Berry, and Parasuraman (1996) and finally for measuring cross-buying, 2 items were adopted from Foster

Table 1. Demographic profile

out based on the comments received. Instrument containing all 20 items were pretested by 210 MBA students. 3 items from the initial battery of 9 items of CRM were deleted based on item-to- total correlation criterion (< 0.4), factor loading of less than 0.4, cross-loading of less than 0.4 (Hair et al., 1998) and Cronbach’s alpha less than 0.7. EFA using principal component extraction and varimax rotation performed on the remaining 6 items of CRM resulted in one single factor.

ANALYSIS AND RESULTS

Measurement Model

In order to test the validity of measures used in the study, we conducted confirmatory factor analysis using AMOS 16.0 and by employing maximum likelihood method. The model fit the data well with a (chi-square value (103) = 260.08, p = 0.000, GFI = 0.94, AGFI = 0.91, CFI = 0.96, TLI = 0.94 and RMR = 0.027). Measurement reliability was confirmed by assessing Cronbach’s alpha values. All the alphas exceeded the threshold limit of.70 (Table 2). All the items were loaded on their respective factors, thus validating the unidimen­sionality of the constructs (Anderson & Gerbing, 1988). The t-values for the loadings were high, demonstrating adequate convergent validity. All measures of composite reliability and all average variance-extracted (AVE) estimate were exceeded the threshold limit of 0.6 and 0.5 respectively (Hair et al., 1998; Fornell & Larcker, 1981) (Table 2). Moreover, AVE for each dimension was higher than the squared correlation among the five fac­tors, confirming discriminant validity (Fornell & Larcker, 1981) (Table 3).

Structural Model and Hypothesis Results

Given a valid and reliable scale to measure, we tested the overall model. The model fit the data well with a (chi-square value (106) = 315.85, p = 0.000, GFI = 0.93, AGFI = 0.90, CFI = 0.94, TLI = 0.92 and RMR = 0.03).

Structural model evaluation shows that as hy­pothesized, CRM was found to positively affect customer satisfaction (p= 0.000, t-value = 10.98), thus supporting H1. As predicted, satisfaction positively influences customer trust (p= 0.000, t-value = 6.77), customer retention (p= 0.003, t- value = 4.52) and cross-buying (p= 0.000, t-value = 8.53), supporting H4, H5 and H6. In case of customer trust, it did influence customer retention (p= 0.002, t-value = 3.05), supporting H7.

However, we find no direct relationship be­tween CRM and customer trust (p= 0. 585, t-value = -0.55), customer retention (p= 0.679, t-value = -0.414). Therefore, H2 and H3 are rejected. Trust did not have relationship with cross-buying (p= 0.584, t-value = 0.548), rejecting H8. Moreover, the indirect effect of CRM on trust was 0.539 (0.77 * 0.70). CRM also had an indirect effect on retention through satisfaction and trust (0.42 * 0.12 = 0.54).

DISCUSSION

Although previous research has extensively stud­ied relationships between CRM and customer satisfaction, customer trust and customer reten­tion, they were incomplete by considering partial impact of CRM on its performance outcomes. Moreover, only few studies have addressed the impact of CRM purely on customer outcome variables and provided empirical evidence. The primary contribution of this study is in the development of an extended conceptual model for CRM with its expected customer outcomes. The model included five variables such as CRM, customer satisfaction, customer trust, customer retention and cross-buying. As one step further, besides replicating CRM model in Indian con­text, we expanded the model by considering all the possible non-financial indicators. Empirical

Table 2. Measurement model

Table 3. Discriminant validity and descriptive statistics

evidence examining CRM effect on relationship development (cross-buying) has been very mod­est, but cross-buying behavior is specifically indispensable to banks where establishing, main­taining and developing relationship is important (Sin, Tse, & Yim, 2005). Therefore, to the best of our knowledge, this is the first empirical study to investigate relational mediators sequentially in the CRM-performance link as well as to examine CRM from the perception of customers in Indian retail bank setting.

Empirical results of this study show that CRM positively influences customer satisfaction and this is consistent with previous research (Sin, Tse, & Yim, 2005; Yim, Anderson, & Swaminathan, 2004). The negative and insignificant effect of CRM on trust and retention is offset by its indi­rect effect through customer satisfaction and this indicates that satisfaction mediates the relation­ship between CRM and its outcomes. This finding support the views of Morgan and Hunt, 1994 that impact of RM strategies on outcomes are fully mediated by one or more of the relational con­structs such as satisfaction, trust and commitment. Moreover, Chan (2005) and Chen and Popovich (2003) suggest that the mere use of CRM does not automatically lead to customer retention. Aurier and N’Goala (2010) and Bolton (1998) suggest that satisfaction is a basic and necessary condition in developing affiliation and reinforcing trust with the service provider.

This study also provides support for the link between satisfaction, trust, retention and cross­buying. Satisfaction positively predicts trust and it is in line with prior studies (Aurier & Gilles N’Goala, 2010; Liang & Wang, 2007). Satisfac­tion and trust have direct positive association with retention, exhibiting similar results of Liu and Wu (2007). Influence of satisfaction on cross­buying is supported by Bloemer et al. (2002) and Ngobo (2004). Somewhat surprisingly, we found insignificant impact of trust on cross-buying. This is in contrast with the results of Liu and Wu

(2007). Yet, this can be explained by the fact that relationship between trust and cross-buying var­ies to different contexts of the studies (Verhoef, Franses, & Hoekstra, 2002).

MANAGERIAL IMPLICATIONS

Results of the study show that CRM aids in the improvement and development of relationship through customer satisfaction. This hints the bank marketers that the fore most goal of CRM is to satisfy the customer, which in turn, provides financial benefit to them. Our results indicate that managers who focus on building, maintaining and developing relationship with customers should note that delivery of prompt services; effective communication; customized products/services; and efficient use of information technology are the most vital CRM strategies. Precisely, bank marketers can concentrate on the orchestration of people, process and technology in implementing CRM activities (Chen & Popovich, 2003; Sin, Tse, & Yim, 2005). By focusing on higher levels of customer satisfaction, managers can develop trust with customer, retain existing customers, con­vince customers for repeat business and thereby, cutting cost by keeping current customers than acquiring a new.

This study also provides evidence for the impact of satisfaction and trust on retention. Notably, satisfaction dominantly increases retention levels, while trust is the secondary one. This means that satisfaction should be the primary aim of the service provider, since customer develops trust only for the first time they involve in the relation­ship (Verhoef, Franses, & Hoekstra, 2002). In the later stages of relationship, satisfaction plays an important role in developing relationship as satis­fied customers will evaluate the risk associated with the service provider and decide to maintain or develop relationship (Aurier & N’ Goala, 2010). Our study results have shown that satisfaction also affects cross-buying behavior. This implies that for persuading existing customers to buy additional products, satisfying customers should be the mantra for bank mangers. Altogether, managers can achieve customer profitability through retention and cross-buying (Liang, Chen, & Wang, 2008). In conclusion, the study proved the long held belief that CRM increases business performance. And customer satisfaction appears as a pivotal concept and remains as an important basis for building trust; maintaining and develop­ing customer relationship.

Limitations and future

RESEARCH DIRECTIONS

Our study has included only 6 items for measuring customer perception towards CRM activities. Fu­ture research can develop a standardized scale for measuring CRM in Indian retail banking context and investigate it impacts on both objective and subjective outcomes. The chosen set of factors in our framework is not exhaustive nor a list of the most important factors. For example, customer loyalty and customer commitment could also be added in the CRM-performance link. Convenience sampling warrant caution before generalizing the results beyond the population studied. This study is limited to banking context and warrant caution before generalizing to other industries and nations. The study is cross sectional and future research can consider longitudinal observations.

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This work was previously published in International Journal of Customer Relationship Marketing and Management (IJCRMM), 4(2); edited by Riyad Eid, pages 21-35, copyright 2013 by IGI Publishing (an imprint of IGI Global).