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A DYNAMIC MODEL OF CUSTOMER LOYALTY

By Carolyn Arnold,2014-05-01 06:03
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A DYNAMIC MODEL OF CUSTOMER LOYALTYA DY

    How relationship age moderates loyalty formation:

    The increasing effect of relational equity on customer loyalty.

    *Maria Antonietta Raimondo

    Università della Calabria, Campus of Arcavacata - Italy

    **Gaetano “Nino” Miceli

    Università della Calabria, Campus of Arcavacata - Italy

    ***Michele Costabile

    Università della Calabria, Campus of Arcavacata - Italy

    SDA Bocconi Graduate School of Management, Milan - Italy

    Luiss Management, Rome - Italy

     * Maria Antonietta Raimondo, Assistant Professor of Marketing at the Università della Calabria, Dipartimento di Scienze Aziendali, Cubo 3C - Campus di Arcavacata, 87036 Rende (CS) - Italy; Tel: +39 0984 492248; Fax: +39 0984 492267, e-mail: ma.raimondo@unical.it ** Gaetano “Nino” Miceli (contact author), M.Phil. in Marketing, Tilburg University, CentER Graduate School, The Netherlands, and Ph.D. candidate at the Department of Business Administration, University of Calabria, Cubo 3C Campus di Arcavacata, 87036 Rende (CS) Italy; Tel: +39 0984 492266; Fax: +39 0984 492267; e-

    mail: g.miceli@unical.it *** Michele Costabile, Full Professor of Management and Marketing at the Università della Calabria, Dipartimento di Scienze Aziendali, Cubo 3C - Campus di Arcavacata, 87036 Rende (CS) - Italy; Tel: +39 0984 492266; Fax: +39 0984 492267 - e-mail: mcostabile@unical.it - Marketing Professor at the SDA Bocconi

    Graduate School of Management, Via Bocconi, 8, 20136 Milano - Italy - e-mail:

    michele.costabile@sdabocconi.it, and at the Luiss “Guido Carli” University, Via Pola, 12, 00100 Roma - Italy -

    e-mail: mcostabile@luiss.it

    How relationship age moderates loyalty formation:

    The increasing effect of relational equity on customer loyalty.

Abstract

    Purpose: This paper investigates the influences of relational equity on attitudinal loyalty and behavioural loyalty, over and above satisfaction and trust effects. We introduced and focused on the concept of relational equity, that is the customer perception concerning the fairness of a whole relationship, rather than a single service encounter.

    Methodology: We adopted a cross-sectional design and collected data from a sample of Italian customers of mobile phone services (N = 461). We applied CFA and regression

    analyses to test the research hypotheses.

    Findings: Relational equity is recognized as a significant determinant of customer loyalty over and above satisfaction and trust effects, and its influence increases along with the relationship age.

    Research Implications: Relational equity is a substantial and significant determinant of customer loyalty, which relevance increases along with the relationship age. Accordingly, models focusing on continuous relationships should consider relational equity perception. Practical Implications: Loyalty programs should be tailored according to the age of the relationship. Moreover, particular care should be devoted to monitoring perceived relational equity, especially in the late stages of the relationship.

    Originality/Value of the paper: This paper introduces the concept of relational equity and

    investigates its role in loyalty formation. Moreover, we examine how relational equity, satisfaction, and trust effects on customer loyalty depend on the relationship age. Keywords: Loyalty, Relational Equity, Relationship Age, Trust.

    Paper type: Research paper

    INTRODUCTION

    Firms keep devoting huge investments in customer loyalty programs in several service markets such as airlines (Toh, Rivers and Withiam, 1991; Smith et al., 2003), retailing (Wright and Sparks, 1999), financial services (Bolton, Kannan and Bramlett, 2000), and

    telecommunications (Ranaweera e Prabhu, 2003; Johnson, Herrmann and Huber, 2006). However, aggressive competitors and variety-seeking behaviours jeopardize the effectiveness of such investments (Verhoef, 2003).

    Accordingly, marketing scholars have extensively investigated customer loyalty and stressed the relevance of achieving both behavioural and attitudinal loyalty to develop long-term, profitable relationships (Dick and Basu, 1994; Gronroos, 1994; Garbarino and Johnson, 1999; Oliver, 1999; Zins, 2001). In fact, the need for identifying the determinants of customer

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    loyalty has stimulated an extensive research stream, which has shown how constructs such as satisfaction (Bloemer and Kasper, 1995; Lam, Shankar, Erramilli and Murthy, 2004), trust

    (Garbarino and Johnson, 1999; Agustin and Singh, 2005), and value (Sirdeshmukh, Singh

    and Sabol, 2002) influence customer loyalty. These constructs generally have been found to affect positively attitudinal loyalty and repurchase intentions.

    Despite such a significant effort, the marketing literature has overlooked the role of equity (Szmigin and Bourne, 1998; Tax, Brown and Chandrashekaran, 1998) in developing customer loyalty. Social exchange theory and social psychology studies (Homans, 1961; Blau, 1964; Austin, McGinn and Susmilch, 1980) have shown that equity perception derives from the proportionality between the “outputs (benefits)/inputs (costs)” ratios experienced by a part (e.g., the customer) and a counterpart (e.g., the firm). Although the customer satisfaction literature has proposed that equity perception affects transaction-based satisfaction (Oliver and Swan, 1989a and 1989b; Smith, Bolton and Wagner, 1999), to our best knowledge the role of perceived equity within a relationship has not been analysed yet.

     In fact, long-term customers may adopt a serial perspective to assess outcomes obtained from and inputs invested in a relationship (Ganesan, 1994), and evaluate the reciprocity of the output/input ratios along a series of customer-firm encounters. Consistent with Szmigin and Bourne (1998), we define relational equity as the customer’s perception of

    the proportionality between her/his own benefits/costs ratio and the firm’s benefits/costs ratio within a continuous customer-firm relationship. Furthermore, we propose that relational equity is a key driver of behavioural and attitudinal loyalty.

    Moreover, there are reasons to believe that the effect of relational equity on customer loyalty increases along with the age of the relationship. First, long-term customers usually have developed greater knowledge and learning about the firm’s offering to assess properly

    both parties’ outputs/inputs ratios (Alba and Hutchinson, 1987; Kalwani and Nayarandas,

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    1995; Szmigin and Bourne, 1998). Second, customers are increasingly aware of the value they created over time for the firm (Dwyer, Schurr and Oh, 1987). Therefore, one might suppose that long-term customers are more concerned with the equity of the relationship. This would suggest that the effect of relational equity on customer loyalty might increase along with the relationship age.

    To date, the marketing literature does not provide any conceptual model and empirical evidence about the contribution of relational equity in promoting customer loyalty. We contribute to the customer loyalty literature by a) conceptualising and developing a measure

    of relational equity, and b) proposing and testing a conceptual model of the effect of

    relational equity on behavioural and attitudinal loyalty over and above other relational

     i.e., satisfaction and trust effects. Specifically, we hypothesize that relational constructs

    equity positively affects customer loyalty and this effect is moderated by the age of the relationship. Our conceptual model considers the effects of satisfaction and trust on customer loyalty, which previous studies have found to be significant determinants of repurchase intentions and attitude toward the firm/brand (Anderson and Sullivan, 1993; Fornell et al., 1996; Chaudhuri and Holbrook, 2001; Sirdeshmukh, Singh and Sabol, 2002). Despite not being the core issues of this research, we tested for the effects of satisfaction and trust on customer loyalty and verify how these effects evolve along with the relationship age.

    From a managerial point of view, the understanding of the role of relational equity in loyalty formation can suggest guidelines for loyalty program design and management. Therefore, we contribute to customer relationship management and practice by emphasizing how customers’ perceptions and evaluations – within a continuous relationship may

    concern the fairness of a series of encounters rather than a single transaction.

    The paper is organized as follows. First, based on relationship marketing and equity theory, we present a conceptual model of customer loyalty and specify the research

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    hypotheses. Second, we describe the measure development process, research design and methodology. Third, we show results of regression analyses and test the hypotheses. Finally, we discuss findings and propose implications for loyalty research and management.

    CONCEPTUAL MODEL

    This paper presents a conceptual model on the effect of relational equity on customer loyalty in customer-service provider relationships. Building upon contributions of relationship marketing (Ford, 1980; Dwyer, Schurr and Oh, 1987; Gronroos, 1994) and equity theory (Homans, 1961; Blau, 1964; Austin et al., 1980), we hypothesize that relational equity positively influences both behavioural and attitudinal (Dick and Basu, 1994) dimensions of customer loyalty. Moreover, our conceptual model assumes that such effects increase along with the relationship age.

    We include other well-acknowledged determinants of customer loyalty in our conceptual framework. Specifically, based on a literature analysis, we consider the effects of customer satisfaction (Oliver, 1997) and trust (Morgan and Hunt, 1994) on customer loyalty.

    Satisfaction and trust are by far the most studied determinants of customer loyalty (e.g., Chaudhuri and Holbrook, 2001; Sirdeshmukh, Singh and Sabol, 2002; Lam et al., 2004). Including satisfaction and trust in our model allows us to test our main hypotheses

    concerning the effect of relational equity on customer loyalty reducing the risk of omitted

    variable bias (Wittink, 1988). We expect to find significant and positive effects of satisfaction and trust on both attitudinal and behavioural loyalty, and thus offer further support to previous studies (e.g., Anderson and Sullivan, 1993; Chaudhuri and Holbrook, 2001). As side research goals, we test the hypothesis that the effect of satisfaction on customer loyalty decreases over time (Agustin and Singh, 2005); whereas we expect to find that the effect of trust on customer loyalty increases over time (Garbarino and Johnson, 1999).

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    Therefore, we define customer loyalty considering both its attitudinal and behavioural

    dimensions as the chief dependent variable, and relational equity, satisfaction, and trust as independent variables. Next, we substantiate and present our hypotheses.

Customer Loyalty

    The literature on customer loyalty has emphasized how loyal customers promote firm and shareholder value (Reichheld, 1996 and 2006; Srivastava, Shervani and Fahey, 1998). Accordingly, this research stream has devoted many studies to defining the loyalty construct and exploring its dimensions.

    In his seminal study, Day (1970) proposed that brand loyalty is expressed by a strong commitment to the brand and a repeating purchasing behaviour. Accordingly, Jacoby and Chestnut (1978) assumed that brand loyalty is manifested by a non-random behavioural response expressed over time by some decision-making unit with respect to one or more alternative brands, as a function of an evaluative process. Later on, Dick and Basu (1994) synthesized the former contributions and explicitly distinguished a behavioural dimension of loyalty, which consists in repeating buying behaviour; and an attitudinal one, which is expressed by a favourable attitude towards a firm or a brand (relative to other firms offering the same product/service). Dick and Basu argued that both dimensions are critical for representing true loyalty, rather than a spurious form of loyalty based on mere repeating buying behaviour.

    Many scholars have analysed the related concept of commitment, which Moorman,

    Zaltman and Deshpandè (1992) defined as “an enduring desire to maintain a valued

    relationship”. This definition of commitment emphasizes an attitudinal dimension based on a psychological sense of attachment to the relationship (see also Morgan and Hunt, 1994).

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    Despite some authors have shown that commitment influences measures of behavioural loyalty (Garbarino and Johnson, 1999; Fullerton, 2003), there is a considerable, conceptual overlap between the concept of commitment and the domain of customer loyalty. As Assael (1995) noted, brand loyalty is not simply manifested by repeating purchase, but also by a commitment to the brand arising from a favourable attitude. Accordingly, Chaudhuri and Holbrook (2001) claimed that attitudinal loyalty is the level of commitment of the customer

    toward the brand. Oliver (1999) stressed that loyalty consists in “a deeply held commitment

    to rebuy or repatronize a preferred product/service consistently in the future”. On these

    bases, we conclude that the concept of commitment significantly overlaps with that of attitudinal loyalty. Therefore, we focus on the behavioural and attitudinal dimensions of loyalty and exclude commitment from our framework to avoid any potential, conceptual overlapping.

Relational Equity

    An overlooked construct that might have a role in determining customer loyalty is relational equity. Based on equity theory and the social psychology literature (Homans, 1961; Adams, 1963; Austin, McGinn and Susmilch, 1980), marketing scholars have traditionally defined equity in terms of distributive justice (Smith, Bolton and Wagner, 1999), namely

    focusing on the proportionality between the outputs/inputs ratios experienced by the two parties of a dyad.

    Based on a transactional perspective, several scholars have postulated distributive equity as a determinant of satisfaction judgments. Empirical evidence presented by Oliver and DeSarbo (1988) and Oliver and Swan (1989a and 1989b) indeed demonstrated a significant effect of equity perception on satisfaction.

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    Bolton and Lemon (1999) introduced the concept of payment equity, as the customer

    perceived fairness of the price paid for their consumed services, and demonstrated that payment equity positively affects usage of services. Similarly, Verhoef, Franses and Hoekstra (2002) showed that payment equity positively influences customer referrals and the number of services purchased.

     However, these studies did not consider the role of equity within a long-term relationship, and specifically in building customer loyalty. Following a relational perspective, Szmigin and Bourne (1998) have suggested that perceived equity may critically determine the evolution of a customer-provider relationship. Consistent with such a relational view, we focus on relational equity, which is defined as the customer’s perception of the

    proportionality between her/his own benefits/costs ratio and the provider’s benefits/costs ratio within a continuous relationship. We maintain that a customer’s perception of relational equity is based on the principle of reciprocity (Bagozzi, 1995). This means that the parties of a relationship accept short-term costs because of the expectations of future compensation (greater benefits or lower costs) and serial equity (Ganesan, 1994).

    We want to stress that our conceptualisation of relational equity follows a distributive perspective, namely it concerns an evaluation of the proportionality of both parties’ outputs/inputs ratios. Differently, payment equity concerns the customer’s evaluation of price fairness and tends to represent a value-for-money assessment. Indeed, measures of payment equity (Verhoef et al., 2002) have much in common with quality over price

    conceptualisations of customer value (e.g., Monroe, 1990). On these bases, we believe that

    relational equity is conceptually distinct from the constructs of value and payment equity, which objects refer to an individual’s benefits and costs assessment, rather than a dyadic and serial perception.

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    Based on this conceptualisation, we claim that relational equity may be a significant determinant of stable and durable relationships, and hence of loyalty. In particular, a higher perception of relational equity would be expected to increase attitudinal loyalty because customers that feel to be treated fairly along the relationship will reinforce their favourable attitude towards the provider even relative to potentially satisfying competitors (Szmigin and Bourne, 1998). Moreover, a higher perception of relational equity is thought to boost behavioural loyalty due to the customer’s expectations of reciprocity. This means that

    customers will increasingly repurchase from a relationally equitable provider because they expect that greater purchases will be rewarded with higher value within the relationship (Ganesan, 1994). Therefore, we hypothesize:

    H1: Relational equity has a positive influence on a) attitudinal loyalty and b)

    behavioural loyalty.

    There are reasons to believe that the effect of relational equity on customer loyalty may increase along with the age of the relationship. Indeed, as relationship age increases customers can collect progressively more information about a service offering system and a provider (Kalwani and Nayarandas, 1995), or at least they become more self-confident about the capability to evaluate the provider behaviours (Alba and Hutchinson, 1987; Gill, Swann Jr. and Silvera, 1998). Moreover, due to greater knowledge about their relationship with a provider, long-term customers usually recognize that they generate extra-value for the provider through repeated purchases over time, word-of-mouth, and cross-buying (Reichheld, 1996). Accordingly, we argue that relational equity perception becomes increasingly salient for customers, as they are progressively more sensitive to the proportionality of their own benefits/costs ratio and the provider’s benefits/costs ratio (Szmigin and Bourne, 1998).

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    Increasing customer knowledge about the relationship and awareness about the extra-value generated for the provider over time are supposed to enhance the effects of relational equity on both the customer’s attitude toward the provider and the behavioural responses along with the relationship age. This would consist in a moderation effect of relationship age on the relational equity to attitudinal and behavioural loyalty paths. Formally:

    H2: The effects of relational equity on a) attitudinal loyalty and b) behavioural loyalty

    increase along with the relationship age.

Other determinants of customer loyalty

     Customer satisfaction is a judgment that a product or service has provided or is Satisfaction

    providing a pleasurable level of consumption-related fulfilment (Oliver, 1997). Since the seminal work of Cardozo (1965), extensive literature has explored the role of satisfaction in determining post-purchase attitude and intentions and has demonstrated that satisfied customers engage in repurchase behaviour (e.g., Anderson and Sullivan, 1993; Fornell et al., 1996). In a recent meta-analysis, Szymanski and Henard (2001) showed that the average effect of satisfaction on repurchase intentions is .52; the average effect of satisfaction on negative word-of-mouth is -.57. This shows that satisfaction positively influences two measures of behavioural loyalty. Moreover, several authors have shown that satisfaction affects the customer attitude toward the brand/firm (e.g., LaBarbera and Mazursky, 1983; Bloemer and Kasper, 1995). We aim at replicating these results in a service context and hypothesize:

    H3: Satisfaction has a positive influence on a) attitudinal loyalty and b) behavioural

    loyalty.

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