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MEDIATING EFFECT OF CUSTOMER SATISFACTION ON SERVICE QUALITY AND CUSTOMER LOYALTY IN NIGERIAN INFORMAL SECTOR

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MEDIATING EFFECT OF CUSTOMER SATISFACTION ON SERVICE QUALITY AND CUSTOMER LOYALTY IN NIGERIAN INFORMAL SECTOR

Abstract

Loyalty has become one of the most strategic and sustainable goals of businesses which any business organizations dream to attain. Customer loyalty is a key variable that inspire corporate businesses to compete in order to gain competitive advantage and continuous patronage against their competitors. The purpose of this paper is to investigate the mediation effect of customer satisfaction in the relationship between service quality and customer loyalty in the non-formal sector of the Nigeria economy. The study considered the informal business sector comprising of hair salons, auto repairs, tailoring and masonry in Jos and Bukuru metropolis of Plateau state Nigeria with emphasis on tailoring and auto repairs as the unit of analysis. The sample size of the study is derived by applying the Yamane sample size formula of 1967; the research arrived at 372 as the minimum sample size for the study. Data was collected from a questionnaire survey and analyzed using ADANCO 2.1.1 to test the hypotheses. Findings from the study reveal that customer satisfaction mediates service quality and customer loyalty. Service quality and customer satisfaction also have direct relationship with customer loyalty. This applies that business is not the only factor that can directly affect customer loyalty, but must first go through customer satisfaction. This means that businesses must first understand what the customer needs and service quality to be provided in other to attract customer loyalty when the level of satisfaction is resolved. The study recommended that, service quality offered by this sector needs to be improved upon to enhance customer satisfaction and loyalty.
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MEDIATING EFFECT OF CUSTOMER SATISFACTION ON SERVICE QUALITY
AND CUSTOMER LOYALTY IN NIGERIAN INFORMAL SECTOR
By
John Dongjur Kerekkum1, Cornelius Noel Wukari2 and Sallah Boniface Na’anman3
1&2Department of Marketing, University of Jos
3Department of Management Studies, Plateau State University, Bokkos
sallahboniface@plasu.edu.ng
ABSTRACT
Loyalty has become one of the most strategic and sustainable goals of businesses which any
business organizations dream to attain. Customer loyalty is a key variable that inspire
corporate businesses to compete in order to gain competitive advantage and continuous
patronage against their competitors. The purpose of this paper is to investigate the mediation
effect of customer satisfaction in the relationship between service quality and customer
loyalty in the non-formal sector of the Nigeria economy. The study considered the informal
business sector comprising of hair salons, auto repairs, tailoring and masonry in Jos and
Bukuru metropolis of Plateau state Nigeria with emphasis on tailoring and auto repairs as
the unit of analysis. The sample size of the study is derived by applying the Yamane sample
size formula of 1967; the research arrived at 372 as the minimum sample size for the study.
Data was collected from a questionnaire survey and analyzed using ADANCO 2.1.1 to test
the hypotheses. Findings from the study reveal that customer satisfaction mediates service
quality and customer loyalty. Service quality and customer satisfaction also have direct
relationship with customer loyalty. This applies that business is not the only factor that can
directly affect customer loyalty, but must first go through customer satisfaction. This means
that businesses must first understand what the customer needs and service quality to be
provided in other to attract customer loyalty when the level of satisfaction is resolved. The
study recommended that, service quality offered by this sector needs to be improved upon to
enhance customer satisfaction and loyalty.
Keywords: Service quality, Customer satisfaction, Customer loyalty, Informal sector
1.0 INTRODUCTION
Businesses depend on the continuous patronage of their customers not to only succeed in the
short term but to also remain sustainable over the long term. In this regard businesses,
especially service providers like auto repair shops, hair salons, tailoring and masonry must
come up with enduring plans that meet with or even exceed the expectations of their
customers to continue to remain relevant in the business (Belz & Peattie, 2012). The informal
sector in Nigeria as earlier mention above hardly retain customer due to improper service
delivery. Therefore, the study aims at investigating customer’s loyalty in the informal sector.
(Danish & Humayon 2018; Zhang & Wei, 2018) Due to intense competition, sophisticated
nature of customers, flexible and unpredictable demand and similarity of services offered by
auto repair shops and tailoring shops, enhanced service quality to satisfy customers is
regarded as the main concern to retain loyal customers in Nigeria.
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Over time especially in the 1980s, the subject of service quality has attracted diverse empirical
research work to find out its impact on customer satisfaction and loyalty (Cahyono et al.,
2020). There are many studies examine the effects of service quality on customer satisfaction
and trust; customer satisfaction and trust on customer loyalty. Gimenez Garcia-Conde, Marin,
and Ruiz de Maya, 2016, came up with such models as the Technical and Functional Quality
Model. Many studies examine effects of service quality on customer satisfaction, customer
loyalty and trust in different areas such as the banking sector and large organizational setting
(Talebi et al., 2012; Kranias & Bourlessa, 2013; Khan & Fasih, 2014; Hidayat, Akhmed &
Machmud, 2015) ADSL Technology (Rizka & Widji, 2013), Branding (Ashraf et al., 2018),
Hospitality (Naing et al., 2019), sport(Aghaei & Elahi, 2019), healthcare (Hashem & Ali,
2019), retail industry (Ivanauskiene & Volungenaite, 2014).They came up with such models
as the Technical and Functional Quality Model (Gimenez Garcia-Conde, Marin, & Ruiz de
Maya, 2016), SERVQUAL (Brogowicz, Delene, & Lyth, 1990), and SERVPERF (Priporas
et al., 2017) all in a bid to find the meeting point of quality and satisfaction in service
industries like tourism, hospitality, banking, health, telecommunications, transportation and
insurance (Nguyen, Nguyen, Nguyen, & Phan, 2018). The study of (Cahyono 2020)
concluded that service quality has a significant effect on student loyalty and satisfaction has
a significant effect on student loyalty. Scholars have also agreed that to be competitively
relevant every business must pay attention particularly to its service quality which in turn
leads to continued patronage due to customer satisfaction and ultimately to customer loyalty
thereby building an effective relationship (Setiawan & Sayuti, 2017). Therefore, when it
comes to a business relationship between all stakeholders the desirable outcome beneficial to
all is that of loyalty as in itself it shows that the right outcome is being achieved, the business
enjoys a favorable disposition of the customer and subsequently guarantees consistent
revenues for the business (Mandhachitara & Poolthong, 2011). For these reasons that
relationship marketing especially as espoused in its service quality dimension has come to be
treated with such importance as it is a market differentiator that adds an edge to a company’s
competitiveness.
However, these models brought forth by scholars have been variously employed in carrying
out further studies(Famiyeh, 2018; Park, Lee, Kwon, & del Pobil, 2015) in the
aforementioned service industries that had helped to throw more insights on the relationship
marketing dimensions of service quality, customer satisfaction and loyalty; All of these
studies dwelt on formalized businesses leaving out the important informal sector that forms
the fulcrum of any economy especially a developing one like Nigeria. This sector which is
described as including all unregulated economic endeavors that are not sufficiently under
supervision of formal agencies of government (Becker, 2004), that are characterized by low
capital, low level of skills/education required by operators, small inputs and subsequent
outputs, and a high level of labor intensiveness (Onwe, 2013). Pioneer economists like Lewis
W. Arthur had assumed that as economies develop the informal sector comprised of such
diverse small-scale business activities like auto repairs, hair salons, tailoring and masonry
would simply disappear and fritter away in the face of more organized and highly capitalized
corporations. On the contrary, the sector has not only remained resilient but has become a
major contributor to GDP of developing economies accounting for 80% of new jobs in Africa,
a major provider of consumables especially for the lower class (Becker, 2004), engaging
retrenched/retired people as a result of structural adjustments/globalization and a convenient
avenue for entrepreneurial minds (Onwe, 2013). Li Chao (2016) finds that the perceived value
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of customers plays a complete mediating role in the positive and indirect effects of
personalized service on customer loyalty; the third is the five dimensions of service quality,
respectively, have an impact on customer loyalty levels. Li Yan (2014) believes that it can be
divided into six aspects, customer satisfaction as the middle of the variable, responsiveness,
functionality and credibility have a significant positive impact on customer satisfaction and
customer loyalty
This work, therefore, sets out to fill the gap left by other studies on the concepts of service
quality, customer satisfaction, and customer loyalty as they relate particularly to the non-
formal sector of the Nigerian economy. Two similar studies carried out in Nigeria (Izogo &
Ogba, 2015) and in Ghana (Famiyeh, 2018) dwelt on the context of automobile repair shops
and employed the SERVQUAL dimensions to arrive at their findings. This study is on its part
is contextualized within the entire non-formal sector which also includes auto repair shops,
hair salons, tailoring and masonry with respondents drawn from anyone who has ever used
any form of those service within the sector and so it is expected to come with more generalized
findings. This study aims to investigate the mediation effect of customer satisfaction in
relationship with service quality and customer loyalty in the non-formal sector of the Nigeria
economy. The study uses descriptive research design based on a cross-sectional survey
questionnaire approach. Primary data was gathered through a self-administrated questionnaire
which was modified to better fit the context of this study. Furthermore, this research was
conducted in order to further understand which variable played a bigger and more important
role in affecting customer loyalty in the non-formal sector.
2.0 LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
2.1 Model Building
This study reviews the previous scholars’ research on service quality, customer satisfaction
and customer loyalty. It is reference “Empirical Study on the Impact of Service Quality on
Customer Loyalty in Chinese Chain Catering Industry” (Lihua Wei, 2013) and “Empirical
Study on the Impact of Supermarket Service Quality on Customer Loyalty” (Shuwei Tang,
2013), the construction model is as shown in the following Fig. 1.
Fig 1: Research Model
Service Quality
Customer Loyalty
Customer
Satisfaction
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2.2 Hypotheses Development
Hypotheses of the study are following:
H1 - Service Quality positively influences Customer Satisfaction
H2 - Customer Satisfaction positively influences Customer Loyalty
H3 - Service Quality positively influence Customer Loyalty
H4 - Customer satisfaction mediates the effect of service quality on customer loyalty
2.3 Theoretical Review
This study is guided by relationship marketing theory. It outlined how the theory and the
model were employed in the study.
2.4 Relationship Marketing Theory
Relationship marketing theory states that successful relationship marketing is occasioned by
certain aspects of cooperative relationships that characterize successful relational exchanges
(Arnett & Badrinayanan, 2005). The theory suggests that successful relationship marketing
efforts enhance customer loyalty and firm’s performance through stronger relational bonds
(Sirdeshmukh, Singh, & Sabol, 2002). There are diverse perspectives about which relational
constructs mediate the effects of relationship marketing efforts on outcomes. Besides
commitment, trust and communication, satisfaction and quality service have been identified
as vital components of relationship marketing orientation (Sin et al., 2005; Eisingerich & Bell,
2006). Relationship marketing theory is adopted in this study to explain the link between the
various components of relationship marketing (particularly service quality, customer’s
satisfaction) and customer loyalty.
Therefore, the advancement of relationship marketing indicates an important movement in
the truism of marketing, the basic aim of relationship marketing is to improve the marketing
output through attaining effectiveness and efficiency (Sheth & Sisodia, 2000). Several
relationship marketing tactics enable efficiency, for example, efficient consumer response
(ECR), customer retention and the allocation of resources among the marketing actors.
Several studies have adopted the loyalty model regarding the service quality, customer
satisfaction and customer loyalty in the service industry. In proposing the relationships
between the service quality, the customer satisfaction and customer loyalty, this study applied
the approach proposed by Choi and Kim (2013). Choi and Kim (2013) developed a model in
which the influence of the service quality on customer satisfaction was investigated, revealing
that the outcome quality had a direct effect on customer satisfaction. It was also concluded
that customer satisfaction was a mediator variable between service quality and customer
loyalty. Liat and Abdul-Rashid (2013) provided a model of customer loyalty in the hotel
industry in which loyalty was affected by satisfaction, while satisfaction was influenced by
the process and outcome quality. Liat and Abdul-Rashid (2011) found that customer
satisfaction mediated the relationship between the process and outcome quality with customer
loyalty.
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Relationship marketing theory is adopted in this study to explain the link between the various
components of relationship marketing (particularly service quality, customer’s satisfaction)
and customer loyalty. The theory of relationship marketing is related to this study base on
adoption of it dimensional model with key factors underlying the variable of this study
(Service Quality, Customer Loyalty and Customer Satisfaction). In this study, TRM is used
for explaining the relationship of the variables. Though no study known to us has applied this
framework to CS in the informal sector, we contend that since several of its dimensions have
been successfully tested for significant relationship with or effect on related sectors.
2.4.1 Customer Satisfaction
Customer satisfaction is customer expectations which are strategy and this strategic
component is very important, it compel customers towards a particular product or
services(Danish et al., 2018). If the relationship is negative, more chances of switch the
customer to another supplier (Fraering & Minor, 2013). Satisfaction is the awareness of each
person separately. These feelings plagiaristic by comparing expected service with perceived
service. (Ratanavaraha et al., 2016). Customer satisfaction is individual person reaction
toward particular product when compare the performance of the product with any person
expectation (Leong, Hew, Lee, & Ooi, 2015). Customer satisfaction considered
psychosomatic state reaction of customer when its emotion about expectations not positive in
near future(Naing et al., 2019).
2.4.2 Customer Loyalty
The approach based on behavior, loyalty is the behavioral reaction based on Influence as the
function of psychological processes by the decision-maker in the existence of one or more
alternative in time (Jacoby & Keyner, 2007). According to Gounaris and Stathakopoulos
(2004), there are four types of loyalty based on purchase, social effect and emotional devotion
to the brand. Loyalty is a psychological condition related to behavior toward a product,
consumers form their beliefs, whether they like it or not, and decide whether they want to buy
the product or not (Hasan, 2008). In business, customer loyalty plays an important role in a
business as maintaining customer's means of improving performance and maintaining the
viability of the business (Hashem & Ali, 2019). It is the main reason for businesses to maintain
their customers. To obtain the consumer's loyal several stages are starting from obtaining
potential customer until obtaining partners.
2.4.3 Service Quality
Quality has varied definitions such as “fit for use,” “fulfilment of requirements,” and
“variation” (Kotler, 2007). The American Society for Quality (Kotler & Keller 2007) defines
quality as the totality of features and characteristics of a product or service that bear on its
ability to satisfy expressed or implied needs. Service quality which is often abbreviated to
Servqual (Service Quality), according to (Hashem & Ali, 2019) is the comparison between
two main factors, namely, the customer perception on the real received/perceived service and
the actual expected/desired service. If the reality is better than the expected service, the service
can be said to have high quality. Service quality is the provision of service that can meet the
expectations of customers (Aghaei & Elahi, 2019) . (Agwu, 2018) had defined service quality
as "function of the difference between service expected and customer's perceptions of the
actual service delivered." Researchers have pointed out that service quality leads to customer
satisfaction (de Oña & de Oña, 2015; dell' Olio et al., 2010). Parawansa (2016) found that
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service quality influent the positive significance of customer loyalty. (Naing et al., 2019)
reported that the service quality of financial services in Europe has significant positive media
to give a big impact on customer loyalty. There is a notable relationship between service
quality and customer satisfaction, and it affects the customers of service industries (Yilmaz
& Ari, 2017). In this article, functional service quality, technical service quality, and service
planning and reliability are seen as indicators of service quality; these factors may be well
distinguished.
2.5 Empirical Review and Hypotheses Testing
This study reviewed scholars findings on service quality, customer satisfaction and customer
loyalty to see the basic relationship that exist between them, both in the global and Nigeria
contexts based on different measurement method and instruments.
H1 - Service Quality positively influences Customer Satisfaction
Service quality is the customer assessment of the excellence/specialty of products or whole
service (Danish et al., 2018) It means that the service quality is the customer assessment of
the service company's performance compared to customer hope. According to (Hashem &
Ali, 2019; Of et al., 2017; Zhang & Wei, 2018) good service quality will influent the customer
satisfaction. One of the ways of the company to get customer loyalty is giving the service
quality to the customer. Makanyeza and Chikaze (2017) in their study, they found service
quality, satisfaction influent directly significant positive to the bank customer loyalty in
Zimbabwe. Kashif (2016) found that customers of Sharia Bank in Pakistan are satisfied with
the service quality offered. The opinion above lead to the study to be observes in informal
sector of Nigeria context.
H2 - Customer Satisfaction positively influences Customer Loyalty
Satisfaction is happiness or the sadness of someone that appeared after comparing the product
performance thought to the performance hope (Kotler & Keller 2011). Customer satisfaction
is the commitment held deeply to buy or support the product or service preferred in the future
although the influence situation and the marketing effort has a potential to make the customer
changing (Kotler & Keller, 2011). Minh and Huu (2016) found that customer satisfaction
influent significant positive to customer loyalty. Parawansa (2016) found that service quality
influent the positive significance of customer loyalty. (Abu-alhaija et al., 2018; Jaén et al.,
2013) reported that the service quality of financial services in Europe has significant positive
media to give a big impact on customer loyalty. Customer Satisfaction has a significant
positive impact on customer loyalty and it can mediate the service quality relationship and
customer loyalty (Makanyeza & Chikaze, 2017). Opinions mentioned above lead to the
following hypotheses. That product quality, rather than service quality, determines customer
satisfaction in the automobile industry. Therefore, adding product quality into the proposed
model would be another key area for future research which is the contribution of this study to
literature.
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H3 - Service Quality positively influence Customer Loyalty
(Hashem & Ali, 2019) employed the SERVQUAL model developed by (Naing et al., 2019;
Vencataya et al., 2019) with five dimensions to evaluate the impact of service quality on
customer loyalty among bank customers in Penang, Malaysia. Customer satisfaction was used
as an intermediate variable. The findings show that improvement in service quality can
enhance customer loyalty. The service quality dimensions that play a significant role in the
equation are reliability, empathy, and assurance. The findings indicate that the overall
respondents evaluate the bank positively, but still there are rooms for improvements.
H4 - Customer satisfaction mediates the effect of service quality on customer loyalty
Customer satisfaction is the outcome that customers received when service experienced meets
and/or even exceed their expectation. In marketing, it is being viewed as the global evaluation
of service experience over time (Lim 2006). Customer satisfaction is generally known as an
outcome of service quality. Numerous studies in different industries have proved this
relationship. Szwajca (2018; 2016), Ngo and Pavelková (2017) in airline, Srivastava and
Sharma (2013) in telecommunication, and (Vencataya et al., 2019) in the banking industry.
Customer satisfaction portrays the quality of products or services provided to the customer in
a positive manner, whereby the level of customer satisfaction enhanced along with an
increased level of service quality (Yeo 2015). Customer satisfaction depends on the quality
of the service provided (Zhang & Wei, 2018). Del Castillo and Benitez (2013) found time
satisfaction, comfort, accessibility, connectivity, and information as important factors of
customer satisfaction. It is important to identify which factors of service quality have an
important effect on customer satisfaction. A study by Shen et al. (2016) showed that safety
and security were the most important factors that influence the passengers to use the urban
rail transit in Suzhou. Canming and Jianjun (2011) studied the mediating role of customer
satisfaction between service quality and customer loyalty, and the results showed that service
quality had a direct effect on customer satisfaction and an indirect effect on customer loyalty
for Nanjing Shanghai high-speed rail. This shows that the more positive customers' perceived
service quality, the better their satisfaction level with the service provider is likely to be. The
concept of customer value should be an important element in the design and implementation
of corporate strategies. According to (Tefula & Tefula, 2017), good value contributes to
higher customer loyalty and retention. The indirect influence of the value on the behavioral
intention via satisfaction was supported by service marketing researchers and postulated the
value as a direct and indirect predictor of loyalty (Chen & Chen, 2010; Kim 2013; Ashraf
2018). Moreover, it was supported that customer satisfaction plays a mediating role between
service quality and customer loyalty in several industries (Lai et al., 2009).
In proposing the relationships between the service quality, the customer satisfaction and
customer loyalty, this study applied the approach proposed by Choi and Kim (2013). Choi
and Kim (2013) developed a model in which the influence of the service quality on customer
satisfaction was investigated, revealing that the outcome quality had a direct effect on
customer satisfaction. It was also concluded that customer satisfaction was a mediator
variable between service quality and customer loyalty.
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Summarizing the above, lots of attributes should be taken into account when assessing the
service quality, customer satisfaction, and reuse intention of urban rail transit, and these
attributes may belong to different categories. As widely treated in the previous literature,
service quality, customer satisfaction, and reuse intention are a multidimensional construct,
and then, the variation of the quality level perceived by the users depends on how passengers'
satisfaction with the various service aspects changes over time. Base on literature review
studies on the relationship between service quality and customers’ satisfaction have been
study and relationship tested. Therefore, mediating the relationship is important base on
empirical review, which this study aims at investigating and contribute to literature.
3.0 METHODOLOGY
3.1 Design, Population and Sample Size
The study uses descriptive research design based on a cross-sectional survey questionnaire
approach. The population (estimated from available information at 5250) which comprises
auto repairs mechanics and tailors random sampling procedure was adopted in the selection
of the participants from their various association incubators from NACIN (National
Association of Cortege Industries in Nigeria) in their zonal office at school of catering Riyom
LGA, it is imperative to select a representative sample.
The study considered the informal business sector comprising of hair salons, auto repairs,
tailoring and masonry in Jos and Bukuru metropolis of Plateau state Nigeria as the unit of
analysis. The sample size of the study is derived by applying the Yamane sample size formula
n=N/1+N (e)2 with N and (e) being population (5250) and 1 less assumed confidence level of
(95%). The researchers arrived at 372 as the minimum sample size for the study. However,
as advice by Israel (2013), the study adds 20% of the sample size to make up for the
unreturned questionnaire. Regarding the amount of sample size determined in this research,
Hair et al. (2010) stated that between 150 to 400 sample sizes were the right number for a
research or study considering the relevant influences including the nature of analysis,
population and cost either both structural model (PLS-SEM) and ADANCO. Beaver, Iwata
and Lerman (2013) had also stated that for a multivariate research, sample size between 150
to 300 respondents had been deemed appropriate. Furthermore, previous research by Wilson
and Keni (2018) also underlined that for a research, the total number of sample size
determined by researchers should exceed 200. Based on the theories stated above, a total of
550 sample size was determined and set for this research, in which this number was twice the
amount of sample size suggested by researchers stated above.
3.2 Measures
Primary data was gathered through a self-administrated questionnaire which was modified to
better fit the context of this study. The questionnaire consists of two-part; the demographic
part and statements on the variables used in the study. Service quality was measured using six
(6) items adopted from (Cahyono et al., 2020). Customer satisfaction was also measured with
six (6) items adopted from Kabu and Soniya (2017). Finally, customer loyalty was measured
with five (5) items adopted from(Cahyono et al., 2020). All items were measured using a five-
point Likert scale. The questionnaire was validated through expert interviews and by a panel
of expert practitioners which was then physically administered to respondents. The results of
the validity assessed using the content validity indexes were above 0.6.
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4.0 DATA ANALYSIS
Out of the 447 questionnaires that were distributed, only 387 were collected back, amounting
to 92% response rate. Missing data has been seen to be a problem in most data analysis.
Adhering to the advice of Hair et al., (2014), 10% was used as a maximum threshold for
missing values. Out of 6,592 data points, only 83 were found to be missing in the data set,
which constitutes 1.25% of the data set which is far below the 10% benchmark. Mean
substitution was used by the study to replace the missing data (Hair et al., 2014).
Table 1: Demographic Characteristics of Respondents (n=387)
Characteristics
Frequency
Percentage
Gender
Male
309
79.8
Female
78
20.2
Age Distribution
Frequency
Percentage
18 25
56
14.5
26 35
149
38.5
36 45
102
26.3
45 and Above
80
20.7
Year of Operation
Frequency
Percentage
6 Month 2 Years
3 Years 5 Years
6 Years and Above
65
182
140
16.8
47.0
36.2
Occupation
Frequency
Percentage
Cumulative Percentage
Mechanic
175
45.2
Tailor
212
54.8
Table 1 presents the demographic distribution employed in the study. The gender distribution
of the sampled respondents shows that 79.8% of the sampled respondents were males, which
show that males were more sampled than females. As presented in the table, it can be deduced
that most of the sampled respondents of this study are either between the ages of 26-35 and
ages 36-45, with 38.5% and 26.3% respectively, therefore most of the respondents are
between ages 26 to 45. The year of operation of sampled respondent's shows that majority of
the respondents have been in operation between 3 years to 5 years which represent 47% of
the total population, 36.2% are in operation from 6 years and above and 16.8% are between
6 months to 2 years. The occupation of the respondent sampled in the informal sector shows
that 54.8% while 45.2% are mechanics, According to (Wilson, 2018) that demographic profile
is important to determine average respondent which provide sufficient basis for meaningful
understanding of the problem being study. The objective of study is to investigate the
relationship between the variables.
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4.1 Accessing Model Fit
Fig. 2: Measurement Model
Table 2: Construct Reliability and Validity
Construct
Items
Loadings
AVE
CR
Service Quality
SEQ2
SEQ4
SEQ5
0.864
0.614
0.922
0.657
0.849
Customer Satisfaction
CUS1
CUS2
CUS3
CUS4
0.741
0.801
0.795
0.783
0.608
0.861
Customer Loyalty
CUL1
0.836
0.713
0.882
CUL3
0.837
CUL5
0.859
Note: AVE represents Average Variance Extracted; CR represents Composite
Reliability; CA represents Cronbach’s Alpha
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Table 2 shows the indicators loading on their intended factors. According to Hair et al. (2014),
loadings should not be below 0.5; therefore, indicators that do not meet this prerequisite were
deleted. Composite reliability should be greater than 0.7 and average variance expectation
should be greater than 0.5 (Garson, 2016). From the table, the composite reliability ranges
from 0.849 to 0.882 and AVE of the variables ranges from 0.657 to 0.713. This implies that
the overall reliability measurement of the instrument is acceptable in terms of reliability thus
depicting its internal consistency. Convergent validity is items in a scale ability to come or
load together as a single construct. It is determined by examining each loading for each
indicators block. The whole path coefficients in this study are statistically significant and
larger than 0.50. Discriminant validity indicates how fit individual item factor attaches to its
hypothesized construct comparatively to other construct. Discriminant validity is
approximated via: The relationship between correlations among first-order constructs and the
square roots of AVE.
Table 3: Discriminant Validity
Construct
Customer
Loyalty
Customer
Satisfaction
Service
Quality
Customer Loyalty
Customer Satisfaction
0.862
Service Quality
0.568
0.642
Note: The heterotrait-monotrait ratio of correlations (HTMT) measures the factors'
discriminant validity.
Table 3 presents the result of discriminant validity. The heterotrait-monotrait ratio of
correlations (HTMT) measures the factors' discriminant validity. Henseler et al. (2015)
proposes a threshold value of 0.90 for structural models with constructs that are conceptually
very similar. The smaller the HTMT of a pair of constructs, the more likely they are to be
distinct. HTMT values should be below 0.9, or, better, below 0.85 (Henseler, 2017). Table 3,
shows HTMT report, all values are below the minimum threshold of 0.85 therefore, the
construct of the study achieved discriminant validity. None of the 95 percent upper-bound
HTMT scores were above 1.00, thus satisfying the third condition. Our measurement model,
therefore, demonstrates satisfactory discriminant validity.
4.2 Test of Hypotheses
It is important to carry out a bootstrapping analysis to determine the direct effect of the
independent variables on the independent variable of the study. Bootstrapping was done by
using 5000 subsamples using 387 cases.
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Fig. 3: Structural Model
Table 4: Direct Path Coefficient
Hypotheses
Beta Value
Standard
Deviation
T Stat
P-Value
R2
Decision
CUS -> CUL
0.655
0.051
12.834
0.00***
0.510
Supported
SEQ-> CUL
0.100
0.082
1.225
0.22
Not Supported
***p< 0.01, **p< 0.05, *p< 0.1
Table 4, shows that service quality has a positive and significant effect on customer loyalty,
significant at (β=0.65, p<0.01). Therefore, the stated alternate hypothesis is supported.
Service quality has a positive and insignificant effect on customer loyalty at (β=0.65, p>0.1),
thus, the stated alternate hypotheses are not supported empirically. The R square of 0.510,
indicating that service quality and customer satisfaction account for 51.0% of customer
loyalty the remaining 49% is accounted for by other variables that are not incorporated in this
study.
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4.3 Mediating Effect
Fig. 4: Structural Model (Mediating Path)
Table 5: Mediated Path Coefficient
Hypotheses
Beta
Value
Standard
Deviation
T
Stat
P
Value
Decision
CUS -> CUL
0.666
0.053
12.667
0.00***
Supported
SEQ -> CUL
SEQ -> CUS
SEQ-> CUS-> CUL
0.076
0.571
0.380
0.095
0.066
0.050
0.805
8.650
7.638
0.42
0.00***
0.00***
Not Supported
Supported
Supported
***p< 0.01, **p< 0.05, *p< 0.1
Table 5 presents information on the test of hypotheses. Results in table 5 and figure 4 indicate
that, 3 out of 4 hypotheses are supported. CUS significantly predicts CUL. Hence, H1 and H3
are supported with (β=0.666, t=12.667, P<0.05) and (β=0.571, t=8.650, p<0.001).
Additionally, SEQ significantly predicts CUL. Hence H2 is Not supported with (β=0.076,
t=0.805, P<0.001). Furthermore, the results highlighted that, CUS significantly mediates the
relationship among SEQ and CUL (β=0.380, t=7.638, P<0.001), hence H4 is supported. It is
seen that customer satisfaction has a positive and significant effect on customer loyalty.
Service quality has a positive but insignificant effect on customer loyalty. Service quality has
a positive effect on customer satisfaction. However, there is a positive effect and significant
relationship when testing for the mediating effect of customer satisfaction on service quality
and customer loyalty.
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5.0 DISCUSSION OF FINDINGS
The study examined the mediating effect of customer satisfaction on service quality and
customer loyalty in the informal sector. The result shows that service quality has an
insignificant effect on customer loyalty. This can be interpreted to mean that the quality of
services does not necessarily determine or make a customer loyal. This might be as a result
of intense competition in the informal sector where prices of services determined the loyalty
of a customer. Also going by the relative scarcity of money in the current economic reality in
Nigeria which has reduced purchasing power of an individual, the customers tends to be price-
conscious. On the other hand, customer satisfaction has a significant effect on customer
loyalty in the informal sector. The result states that when customers are satisfied with services
rendered, they tend to be loyal. Therefore, when customers are well satisfied, they tend to stay
loyal to a particular service. In auto repairs customers turn to by loyal if they are satisfied with
the service provided, so, also tailoring in Nigeria.
The associations among SEQ and CUS and CUL have been investigated widely. This study’s
results provide extra support for these causal relationships, mainly in the auto mobile repairs
and tailoring customers, and propose that SEQ is additional significant factor that indirectly
affects these significant customers’ outcomes. Similarly, the results also revealed that SEQ
has an indirect effect on CUL and CUS, among customers within the auto repairs and tailoring
in Nigeria, which confirms the mediation role that CUS has in this context, this is supported
by previous studies (Al-Ali et al., 2019; Alkhateri et al., 2019; Deng et al., 2010; Qoura &
Khalifa, 2016). This concept has significant value for researchers interested in customer
loyalty.
However, the mediating effect of customer satisfaction on the relationship between service
quality and customer loyalty show a significant effect. This shows that providing the customer
with quality service needs to be enhanced by satisfaction before they can be loyal. Therefore,
providing customers with quality services is not enough to gain their loyalty, thus the need to
ensure that customers are well satisfied. Customer satisfaction is important in the relationship
between service quality and customer loyalty. The strength of the relationship between service
quality and loyalty accounted by the mediator was (0.380-7.638), which equal to 51.10% of
direct effect. Therefore, there is evidence that satisfaction is partially mediating the
relationship between service quality and customer loyalty and it also shows that satisfaction
as mediator has mediating influence on service quality and customer loyalty relationship in
the non-formal or informal sector in Nigeria.
6.0 CONCLUSION
The study examined the mediating effect of customer satisfaction on service quality and
customer loyalty in Nigerian informal sector. The study with it dimension adopted from the
theory of relationship marketing shows that customer satisfaction and service quality have a
positive and significant effect on customer loyalty. Customer satisfaction was found to have
mediated the relationship between service quality and customer loyalty. The study, therefore,
concludes that service quality and customer satisfaction are important factors considered to
influence customer loyalty. Achieving greater success in the aforementioned variables will
help Nigeria informal sector to reward loyal customers with quality and satisfactory services.
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7.0 IMPLICATIONS
The study drew its conceptual framework from relationship marketing theory and has
contributed to the theory development by empirically examining that the relationship
marketing theory is pegged on major factors. These are trust, service quality, customer
satisfaction, relationship commitment, and communication as a predictor of customer loyalty
in Nigeria informal institutions. The study has contributed to literature and knowledge by
establishing a relationship between service quality and customer loyalty, and also the
mediating role of customer satisfaction. Hence, the study reaffirms the findings of other
scholars that service quality along with other mediating variables like customer satisfaction
should be enhanced to achieve customer loyalty.
8.0 RECOMMENDATIONS
The study recommends that the informal sector should devote their time to creating good
customer relationship by providing quality and satisfactory services that will attract repeat
buying behavior. The study is only restricted to Jos and Bukuru metropolis of Plateau state,
Nigeria. The study uses descriptive research design based on a cross-sectional survey
questionnaire approach and primary data was gathered through a self-administrated
questionnaire which was modified to better fit the context of this study.
9.0 AREAS FOR FURTHER STUDY (RESEARCH)
Further research could be conducted in the formal and informal sector respectively in Nigeria
that this research work could not capture and also different methodological approach and
theory could also be examined. It is equally possible that there are other factors that can
moderate and may contribute to influencing customer loyalty in Nigeria informal sector of
the economy that were not part of this study.
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