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CHAPTER 2: SERVICE QUALITY AND CUSTOMER SATISFACTION IN HOTEL 
INDUSTRY 
 
This chapter outlines the concept of service quality and customer satisfaction. From the last 
decade, the service sector has become greater economic importance. The elimination of waste 
due to poor quality and meeting customer expectations are the major challenges facing managers 
in the service sector. This chapter presents the reasons why we should measure service quality, 
customer satisfaction in hotel industry as well as their measures. Time by time, different 
researchers tried to find out the way to measure of service quality and customer satisfaction in 
the hotel industry. Next scientist generation improved the model of the precedents or invented a 
new one. Among all, three most popular models to measure customer satisfaction and service 
quality in the hotel industry are SERVQUAL, HOLSERV and LODGING QUALITY INDEX. 
Each model has its own strong point and has been used flexibly in hotel industry. 
 
2.1 Definition service quality and customer satisfaction 
 
Someone say that service quality and customer satisfaction is critical for the service survival. So 
what are they? Both of them are intangible but the exact definition is still a controversial issue.   
Customer satisfaction is a psychological concept that involves the feeling of well-being and 
pleasure that results from obtaining what one hopes for and expects from an appealing product 
and/or service (WTO, 1985). To Oliver (1980), customer satisfaction definition is based on the 
expectation disconfirmation point of view. Before purchasing or using the product or service, 
customers always have their personal expectation about its performance. After buying or using 
product or service, if the result is equal or better than expectation, it means the expectation has 
positive confirmation. In the opposite case, if the result is lower than expectation, we have 
negative confirmation. Customers are said to be satisfied only if there are positive confirmations 
of expectation. However, in any case, the level of customer satisfaction is different between 

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different customers because each of them owns their personal needs, demands as well as 
experiences. 
 
Nowadays, quality of goods and service is demanding by customers than ever before. We often 
talk and hear the word “quality” but not all the people actually understand what quality is. Some 
people mistake quality with luxury or durability. Maybe more than few times in the life, we 
regret that we spent a lot of money for things which are not “deserved” with their price. We say 
“I am disappointed” or “it is low quality”. In dictionary, quality is defined as “general excellence 
of standard or level” or “a level of superiority that is usually high”. According to David Garvin’s 
analysis, quality is defined in different approaches. To transcendent approach, “quality is 
synonymous with innate excellence, absolute and universally recognizable: ‘You will know it 
when you see it’”
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. According to this point of view, a product or service is called qualify if it 
meets standards or we should say that it gets the highest standard. In this case, quality acts as a 
relative global value judgment. The research conducted by Parasuraman, Seithaml and Berry 
(1985) in four different services- retail banking, credit card, securities brokerage and product 
repair and maintenance also confirm this conclusion.  In this research, regardless of the type of 
service, customers used basically the same general criteria to evaluate the service quality. To 
user-based approach, quality is ‘lies in the eyes of the beholder’. It means quality depending on 
the customer satisfaction. With the same product or service, some people compliment it high 
quality but to others it is bad or only so-so. In other point of view, service quality is a way to 
manage business processes in order to ensure total satisfaction to the customer on all levels 
(internal and external). It is an approach that leads to an increase of competitiveness, 
effectiveness and flexibility of the entire company
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2
 Peter Mudie and Angela Pirrie, “Services Marketing Management”, 3rd Edition, Butterworth-
Heinemann
 
3
 Oakland, J.S, foreword, in: Tourism and hospitality management, no. 1, Faculty of Tourist and 
Hotel Management Opatija, Opatija.
 

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2.2 Why measure service quality and customer satisfaction?  
 
According to latest statistics, service sector accounts for 60 per cent of the value added in 
European Economic Community. In service sector, quality and customer satisfaction play 
irreplaceable roles. Various researchers such as Knutson, 1988 and Naumann, 1995 succeeded to 
prove that satisfaction of customers is the cheapest mean of promotion. Each year, billions of 
dollars are spent for improving the level of service quality. It is said that "doing things wrong" 
accounts for 30 or 40 per cent of operating costs in service organizations. “It's six to seven times 
more expensive to gain a new customer than it is to retain an existing customer. A 5% increase in 
customer retention can increase profits by 25% to 95%”
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. 
 
Figure 4: Cost per customer 
Understanding the customer satisfaction becomes more and more important these days. One 
hand, it allows the company to know how customer defines the service and products quality; 
facilitates the development of customer satisfaction questionnaires (Hayes, 1997). On the other 
hand, it impacts on the purchase repetition and word of mouth recommendations (Berkman and 
Gilson, 1986). 
 Measurement also helps the organization compare the difference before and after changes, 
identify the standard of service delivery and it is also a good chance to recognize problems 
                                                            
4
 Bain & Company study in Harvard Business Review, 2001
 

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