CHAPTER 2: LITERATURE SEARCH
Section I: Literature search
2.1 Research on how improved customer service affects company profitability
Güngör (2007, p. 21) in his study enumerates many key benefits of improved customer services for a firm. Generally, high satisfaction of the customers should show increased loyalty amongst the firm’s current customers, insulation of their current customers from the external competitive efforts, reduced price elasticity, lower costs to attract new customers, reduced failure costs and an enhanced farm’s reputation. Increased current customers’ loyalty implies that more customers will be retained and will repurchase in the future. Decker & Crisp Learning, Inc. (2001) stated that if a company has a strong loyalty of customers, it should make a reflection in the economic returns of the firm because it ensures a steady cash flow in future.
According to Allen & Rao (2000, p. 116), the more the customers services are improved, the longer they are likely to continue purchasing from the same supplier. A loyal customer’s cumulative value to a company can be quite high. Increasing satisfaction of the customer increases the firms’ customer assets value and future profitability.
Improved customer services should also reduce the current customers’ price elasticity (Mohammadhossein et al, 2014, p.11-31). Mafini (2014, p. 116-135) also pointed out that customers who get improved services and are satisfied are more likely to be tolerant of price increase and are more willing to pay for the benefits they receive, which implies customer loyalty and high margins. On the other hand, low customer services translates to low satisfaction of the customers, and this results into higher replacement costs, higher turnover of the customer base, and because of the difficulty satisfied customers to do business with rival, higher costs of customer acquisition. Price elasticies that reduce to increased profits for a company providing superior satisfaction for the customer.
Rajagopal (2010, p.88) also observed that improved customer services should reduce transaction costs in future. If a company has a higher retention of customers, it does not need to expend much on acquiring new customers each period. Customers who get improved services and are satisfied are likely to buy frequently more and in greater amounts, as well as purchase other products offered by the company.
Providing goods and services consistently that satisfy customers increased a firm’s profitability and reduce failure costs. A firm that provides high customer satisfaction consistently have fewer resources that are devoted to reworking defective items, handling returns, and handling and managing complaints (Güngör, 2007; Decker & Crisp Learning, Inc, 2001; Allen & Rao, 2000).
According to Mohammadhossein et al (2014, p. 11-31), the cost of attracting new customers by a company should be lower for companies that have improved customer services. For instance, customers who get good services and are satisfied have a reputation of more likely engaging in a positive word of mouth, and have a lesser likelihood of engaging in damaging word of mouth that is negative (Mafini, 2014; Rajagopal, 2010; Güngör, 2007; Decker, 2001). Furthermore, media sources convey positive information to the prospective buyers. Higher customer satisfaction through improved services may make the media advertising more effective, and this may allow the company to offer more warranties that are attractive.
Improved customer services also enhances the overall reputation of a company. A reputation that is enhanced can aid in the new products introduction by providing awareness instantly and lowering the risk trial of a buyer (Allen & Rao, 2000; Mohammadhossein et al, 2014). Reputation can also be beneficial in establishment and maintenance of relationships with key distributors, suppliers and potential allies (Mafini, 2014; Rajagopal, 2010). Additionally, reputation provides a halo effect for the company that influences customer evaluations positively and provide insulation from environmental short-term shocks. Güngör (2007, p. 229) also stated that improved customer services plays an important role in building other significant company assets such as brand equity.
2.2 Improved customer services and the market share
Improved customer services and the market share go hand in hand. Reidenbach (2010, p. 11-31) found out relative quality, and market share related positively to the companies in the PIMS database. The same relationship has also been shown to customer satisfaction, for instance, improved customer services and higher customer satisfaction helps in attracting and retaining customers. However, it is unclear where there is compatibility in high market share and improved customer services. Schieffer (2005, p. 116-135) and Denove & Power (2006) discussed in their studies the possibilities of negative relationship between market share and improved customer services. They argue that whereas a company with small market share may serve well a niche market, a large market share company must serve a more heterogeneous and diverse set of customers. There is a minimum of two principal forces at play in determining whether the relationship between market share and improved customer services is negative or positive. First, increasing the market share up to a point, can result in the economies of scale. This, for instance, may permit the company to charge lower prices, hence increasing the value of the offering of the company and consequently increase the satisfaction of the customer. On the other hand, there can be a dilution of efforts which goes with the attempt of serving an increasing number of customers or even market segments. The dilution may lead to low-quality services, and this has a higher likelihood of occurring in industries where preferences of the customer are heterogeneous, or even personal service is significant. However, in industries that are undifferentiated and has homogenous customer preferences, there is a higher likelihood that market share and improved customer services are related positively, especially in the long run (Allen & Wilburn (2002, p.65).
Because of no studies, it is significant to examine the arguments for companies that pursue different generic strategies such as low-cost leadership, niche and differentiation as suggested and categorised originally by Newell (2000). The companies that follow pure niche strategies have a higher likelihood of being successful in improved customer services compared to those that pursue other strategies. Despite the fact that it is true companies can differentiate their products and services offerings to meet their multiple segment’s needs, it may become costly or difficult to do so without diluting the quality of the products and services provided such as personal services. As a company grows bringing in further customers with preferences away from the target market of the company, the overall level of improved customer services is likely to fall (Thakur, 2005).
In summary, the relationship between market share and improved customer services is an issue emerging that needs greater understanding. Being successful in one way may reduce the performance of the other. Gaining of the market share can be realized by attracting customers with a preference that are distant from the target market of a company. Service capabilities can also be overextended as the volume expands. Moreover, alluding to the study by Szymanski, Reidenbach (2010), effects of market share on profitability are equally problematic. Evidently, there can be scenario where increasing one or the other cannot be yield profit to a company. Conversely, a “one size fits all” or a high market share strategy can only be profitable if enough customers possess similar preferences. Similarly, there is a possibility that differentiation may also fail in providing improved customer services because of the difficulty in serving several customers within each segment. Therefore, a company that manages both provision of improved customer services by customizing it, is offering to every customer and maintaining a large share of the market would definitely enjoy very high economies of scale and scope (Schieffer, 2005).
In this section, the paper will analyze two major competitors of Wal-Mart, that is Amazon Inc. and Target Corporation (TGT) which are in the same industry and experience the same problems of getting profitable and expanding its market share. Moreover, it will examine the solutions implemented by Amazon and Target Corporation (TGT) on improving its customer services to create a large loyal customer base since it is viable and applicable to the problem facing Wal-Mart.
(1) Amazon Company
Amazon is the largest online store in the world that sells lots of merchandise like Walmart. Founded in 1994, Amazon first publicly traded in 1997 and made the first profit in 2001 (Stone, 2013, p. 10). The company started as the major internet retailers solely on online books. Because of the success, the company diversified into other services and product lines until today where it is the largest online retailer in the world.
According to Goldfayn (2011, p.332), Amazon invested a lot of money and lost a staggering amount in a bid to grasp market share and build its brand to the position where it was dominating Amazon Company lost several billion dollars of money in its early years. The problem of expanding its market share and gaining profits are similar to the problems that face Wal-Mart. However, by improving its customer service, Amazon Company has been able to gain profits in the past decade. The company cares about their customers, and it seems the customers also like it. According to Rossman (2014, p. 171), Amazon has a history of taking to extreme length its customer service policies and, therefore, it was not a surprise that it surpassed Apple Inc. As he most trusted company in United States.
However, being the most trusted company should not be confused with the profitability of a company. As much as Amazon ousted Apple, Apple still gets 46 times more profit compared to Amazons (Yahoo, 2015). Landau (2013, p. 81) observed that the difference is that Amazon Company is never intending or is waiting to cash on its success by continually ploughing back their profits into the company and focusing on long-term growth. This implies that no or little profits but an astounding large size of the market and a large base of loyal customers. In this comparative analysis, the paper will examine how self-investment by Amazon is helping it dominate the market of e-commerce and how they offer their obsessive services to customers.
1. Building warehouses in different regions
Few giant warehouses according to Stone (2013, p. 36) would have worked well for Amazon since housing everything under one roof saves on inventory costs, salary, renting and building. However, Amazon built over 50 warehouses which spread across 19 states in the United States with more plans for constructing more. The large number of warehouses in United States allows them to provide cheaper and faster delivery to a huge number of customers. More locations of the warehouses also imply more locations and an extended holiday season for buyers to pick up their purchased products.
2. Getting more personal to the customers
Amazon is constantly perfecting a genuinely personalized shopping experience by suggesting relevant and interesting products to every customer. These include site zones, personalized emails and even shipping items closer to the customers before they make an order. Depending on how long or the number of times you view an item, Amazon may choose to bring the product to the warehouses in your area so that the customer and get them much faster when they order (Goldfayn, 2011, p.16).
3. Prime Air
In a bid to continue offering better customer service, Amazon announced their plan for “Prime Air,” which will be the company’s unmanned aerial vehicles service which will be able to drop ordered packages within 30 minutes. The announced futuristic service is the most convenient delivery method. While this may be true, Amazon created the right blend of futuristic to captivate its customers (Amazon 2015).
4. Offering orders that recur
For the items that are often repeatedly ordered such as foodstuffs, toiletries, diapers among others, Amazon offers the easiest subscription. This easy subscription, when combined with one-click ordering, makes it more convenient and easy for the customers to get their essentials (Rossman, 2014, p. 22).
5. The policy of Lax Return
If a customer is not satisfied with the one-click ordering, the Amazon clients cannot worry because it is very easy to change mind before shipping and its simple as placing an order. Moreover, if the product is shipped, the return policy is flexible and easy. The willingness of the company to put first their customers in disputes is what has helped in developing the loyalty of the customers. Miller & Clifford (2012) indicated that this is why Amazon in the e-commerce searches are more frequent compared to Google.
6. Incredible and everywhere customer service
The customer service center of Amazon is everywhere digitally. Landau (2013) observed that the customer service team at Amazon Company are found everywhere troubleshooting in chat rooms, blogs and everywhere there is a problem. Moreover, it is just not available, but the team has the ability to solve problems
7. Using technology to offer customer services
Amazon also used a battery of strategies to turn its Iron customers into Gold clients. Initially, Amazon Company focused to being to get any book virtually that their customers needed. However, after establishing its ability, it started developing individual customer’s profiles as a winning strategy. After a customer had bought an item from Amazon, the company would build their information databases on the preferences of the customer. Whenever a customer ordered a book, the Amazon database produced a list of books on similar topics and also from the same author that could expand purchase. The suggestions according to Zeithaml, Rust & Lemon (2001, p. 118-142) were welcomed by customers who might not be aware of the existence of other books. Before, the company expanded its product lines to CDs and movies after discovering their preferences. Additionally, the company asked their clients if they wanted to receive news and information of the new products through their emails. This way, Amazon created an ongoing communication with their clients on their personal interest (Zeithaml, Rust & Lemon, 2001, p. 118-142).
(2) Target Corporation (TGT)
Target Corporation (TGT) is a discount retailer in United States. This means that the corporation generates revenue by offering consumer goods that are priced competitively. Target Corporation is one of the major competitors to Wal-Mart apart from Amazon and Costco. Opening its first store in Minneapolis in1962, the focus of Target Corporation was for convenient shopping with prices that are discount competitive. Currently, the corporation remains steadfast to providing for its guests a one-stop shop experience for delivering outstanding value and differentiated merchandise with its “Expects More, Pay Less” brand. Its website is ranked as one of the retail websites most visited apart from being the second largest retailer f general merchandise (Pressroom, 2015).
Target Corporation (TGT) deals in hardliners, household essentials. Home furnishings and décor, apparel and accessories, groceries and pet supplies among others. Moreover, it offers several services including a pharmacy, Target Optical, Walk-in clinic, portrait studio, photo center, in-store pickup and Target REDcard among others (Target, 2015). However, just like other major retailers in United States, Target Corporation (TGT) faces the problem of profitability and market share. However, the corporation has recorded robust financial profitability compared due to its marketing strategies and improved customer services (n.a, 2004). Some of the improved customer services that has led to the success of Target Corporation (TGT) and are viable and applicable to Wal-Mart include the following:
1. High-end atmosphere
Target Corporation (TGT) offers high-end atmosphere to their clients since customers prefer shopping in environments where they feel good about the store and are treated well. The results of those are the willingness of the customers to pay more for the goods and services and individuals who are not very sensitive to prices (Rowley, 2003, p. 254).
2. Larger inventory
Target Corporation (TGT) is regarded as an upscale discount store in United States because it has major designers designing product lines just for their corporation. They see their upscale discounter images focus on enhancing and building their brand personality, with the ability of better targeting key groups of customers (Gilbert, 2015, p. 139).
3. Gaining customer loyalty
Maritz Research conducted a study and found out that 20% of the shoppers of Target Corporation (TGT) are highly loyal and shop regularly at TGT. Moreover, 80% are under the age of 40 years and also have a college education and are in the middle of upper range of income. There are more females compared to men. Similarly, Target Corporation (TGT) customers prefer shopping in places where their families and friends are likely to shop, and they are not sensitive to prices (Target Corporation, 2000, p. 19).
4. Online customer services
For the customers who are unable to go physically go shopping at the TGT stores, they have an option of shopping online. Moreover, these tech-savvy buyers have the ability of searching and reviewing products online. The online platform for Target Corporation (TGT) allows the customers to see where TGT contributes their money such as charities, donations and corporate social responsibilities.
Moreover, they have Mobile app which notifies their customers on updates, latest news, sales, deals, coupons and many more. They also active in the social media such as Twitter and Facebook for marketing their products and also for customer services (Datamonitor, 2000)
5. Great guest service
Target Corporation ensures that whenever a customer shop with them, their Target shopping trip is exciting and enjoyable. They perform this through their friendly services from their team members who are willing and ready to assist with the customer’s shopping list. Moreover, their shelves are fully stocked, and they also have speedy checkout processes (n.a, 2004).
Other customer services provided by Target Corporation include:
6. Gift Registry
7. Credit card services to their customers through their “Target Card” which offers discounts and savings
8. Large shopping carts for their clients with built in baby seat
9. Price checkers found in all their stores
10. No solicitation policy to provide shopping distraction free
11. Savings programs like Cartwheel and REDcard (Rowley, 2003, p.87).
Section III: Summary
In summary, chapter 2 majorly dealt with literature search and company comparative analysis. The literature search of section one detailed key theoretical concepts on the relationships between company profitability and improved customer service, and also the relationship between market shares of a company with improved customer care.
On the comparative company analysis, the paper examined two major competitors of Wal-Mart, that is Amazon Inc. and Target Corporation (TGT) since thy all experience the same problem of market share expansion and need to profitability of their companies. The paper then examined the viable solutions applied by both Amazon and Target Corporation (TGT) of improving their customer services. These solutions are also applicable in the case of Wal-Mart’s problem of profitability and market share.
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