ARE LOYAL CUSTOMERS PROFITABLE? Customer Satisfaction, Customer Loyalty and Customer Profitability at the Individual Level

Customer satisfaction is supposed to be positively related to profitability. This conception may be called “the paradigm of customer satisfaction”. Nevertheless, only a few studies have examined this fundamental relationship. Thus, evidence for this “much talked about relationship” is questioned. In this working paper the focus is on the individual customer with respect to the relationships between customer satisfaction, customer loyalty and customer profitability at the customer level. The following hypotheses are tested; H1 : The more satisfied a customer tends to be, the higher is the loyalty of the customer; H2 : The more loyal a customer tends to be, the higher customer profitability is obtained; H3: The more satisfied and loyal a customer tends to be, the higher is the obtained customer profitability. As expected, the findings (results) provide strong support for the three hypotheses. However, the relationships between the variables seem to be non-linear (increasingly downward sloping), and only valid beyond certain levels or thresholds. As long as customer satisfaction is not achieved without costs, the findings suggest that an optimal level of customer satisfaction may be estimated.