measuring service

International Journal of Retail & Distribution ManagementEmerald Article: Measuring service quality in retail loyalty programmes (LPSQual): Implications for retailers' retention strategiesNor Asiah Omar, Rosidah Musa

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To cite this document: Nor Asiah Omar, Rosidah Musa, (2011),"Measuring service quality in retail loyalty programmes (LPSQual): Implications for retailers' retention strategies", International Journal of Retail & Distribution Management, Vol. 39 Iss: 10 pp. 759 - 784

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Measuring servicequality in retail loyaltyprogrammes (LPSQual)

Implications for retailers’ retention strategies

Nor Asiah OmarSchool of Management,

Universiti Kebangsaan Malaysia (National University of Malaysia),Bangi, Malaysia, and

Rosidah MusaFaculty of Business Management, Universiti Teknologi Mara,

Shah Alam, Malaysia

Abstract

Purpose – This research aims to empirically develop a reliable and valid scale for measuring theservice quality of retail loyalty programmes (loyalty programme service quality (LPSQual)) inthe context of department stores and superstores in Malaysia.

Design/methodology/approach – By adapting the process proposed by Churchill for developingmeasures of marketing constructs, an instrument to assess LPSQual in Malaysia is formulated.The methodology consists of developing the scale based on a literature review and qualitative method.The proposed scale is then purified and validated through exploratory factor analysis andconfirmatory factor analysis.

Findings – The proposed instrument (LPSQual) contains 26 attributes in seven dimensions:reward, tangibility, policy, information usefulness, courteousness/helpfulness, personalization andcommunication.

Research limitations/implications – Further testing of the scales across multiple contexts isnecessary for validity enhancement.

Practical implications – Retail managers must give serious thought to the non-material or“soft-benefits” component in a loyalty programme which emphasizes courteous/helpful andpersonalized services. Thus, managers need to focus on service personnel by providing trainingto upgrade employees’ skills in creating and delivering pleasant experience/service encounters tocardholders.

Originality/value – The main contribution of this paper is the development and validation of anew scale called LPSQual, which focuses on service quality in a loyalty programme. On the one hand,it is a pioneer in the study of service quality in loyalty programmes and, on the other hand, it confirmsresults from other researches on non-material strategies that can be used in loyalty programmes.

Keywords Loyalty programmes, Service quality, Scale development, Superstore, Department stores,Malaysia

Paper type Research paper

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0959-0552.htm

The authors would like to thank anonymous reviewers of the International Journal of Retail &Distribution Management (IJRDM) for their helpful comments on earlier drafts of this article.

Retail loyaltyprogrammes

759

Received 14 April 2010Revised 13 January 2011

Accepted 5 April 2011

International Journal of Retail &Distribution Management

Vol. 39 No. 10, 2011pp. 759-784

q Emerald Group Publishing Limited0959-0552

DOI 10.1108/09590551111162257

1. IntroductionIn mature retail markets, loyalty programmes are among the most popular retentionstrategies used by retailers. Loyalty programmes have rapidly grown across the globe,especially in the USA and the UK (Bellizi and Bristol, 2004). Favourable responses fromconsumers have encouraged many firms to install loyalty programmes as a corecomponent of their marketing strategy. The rise and expansion of retailers in Malaysiahas contributed to high competition between them, which has led to the growth ofloyalty programmes as a structured marketing effort to build store traffic and createdeeper relationship ties with customers. Frost and Sullivan, an independent marketresearch organization, reported that loyalty programmes are a growing business inMalaysia, with money spent on loyalty programmes accounting for 19.8 per cent of thetotal Advertising & Promotion (A&P) expenditure in 2005 (Ganesan, 2006). The A&Pexpenditure is expected to grow further from around USD646 million in 2005 to aroundUSD1 billion in 2010 (Ganesan, 2006). Despite their popularity, many researchersquestion whether loyalty programmes actually create customer loyalty or whetherloyalty arises from some other factor (Capizzi and Ferguson, 2005; Hoffman andLowitt, 2008). In most loyalty programmes, benefits serve as the most compellingreason for customers to participate; however, the most important parts of a loyaltyprogramme are programme design (Demoulin and Zidda, 2009; Lacey and Sneath,2006) and customer service (Lockyer, 2004). Within the restaurant sector, Jang andMattila (2005) report that by improving certain procedures – such as waiving the needto present the loyalty programme membership card, easier redemption processes andcommunicating the programme’s benefits clearly – firms could enlarge theirmembership base.

Although previous literature has studied the current design and implicationof loyalty programmes from the monetary and psychological perspectives (Bridson et al.,2008; Demoulin and Zidda, 2009; Keh and Lee, 2006), methods that hinder customerrelationships with retailers employing loyalty enhancing programmes (Wagner et al.,2009; Nobel and Phillips, 2004), and loyalty programme quality (Smith et al., 2003; Veseland Zabkar, 2009, 2010), there is no tested scale by which retailers can begin to measurethe service quality of their loyalty programmes[1] and thus evaluate the success factorsof their relationship building programmes. Zeithaml et al. (1990, p. 68) state that“knowledge about customer expectations is the key in developing quality services”.However, there is often a gap between customers’ expectations of loyalty programmesand the retailer’s estimation of those expectations. Consequently, the service quality ofmost loyalty programmes includes unimportant elements or neglects important ones(Vesel and Zabkar, 2009). In addition, most providers produce similar programmes thatcause the loyalty programme to lack distinctiveness (Meyer-Waarden, 2008). As theprogramme’s rewards are then no longer appealing or different, consumers willmove from one programme to another in response to specific promotional campaigns(Mauri, 2003).

Given these problems, loyalty programme service quality (LPSQual) as an emergingissue in relationship marketing will remain underdeveloped until its key dimensionshave been identified and operationalized. Shugan (2005) comments that the design andimplementation of loyalty programmes is an important and growing area of researchthat needs further theoretical development. In a loyalty programme setting, servicequality refers to the overall experience of customers in applying, renewing, updating,

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accumulating, redeeming and using the programme. In an increasingly competitiveglobal environment, there is growing evidence that investment in service qualityimprovements enhances customer satisfaction and builds long-term relationshipsbetween providers and customers (Crosby et al., 1990).

According to Nguyen and Leblanc (2002), perceived quality results from anevaluation that is based upon the customer’s experience with the service. Dabholkar et al.(1996) propose a retail service quality scale (RSQS) that includes five dimensions:physical aspects, reliability, personal interaction, problem solving and policy.Although Dabholkar et al.’s study contributes to understanding retail service quality,measurement of LPSQual may capture additional dimensions, as customer experiencewith a loyalty programme involves more than a retail service experience, includingaspects such as redeeming rewards, understanding the programme policy, specialevents, etc. According to Stauss et al. (2005), consumers often experience frustration withloyalty programmes as a result of difficulties that they face in reaching the thresholdrequired to qualify for the programme, programme inaccessibility, worthlessness ofrewards, or additional costs (material or mental) required to use the benefits of theloyalty programme. Moreover, difficulties in understanding the programme and lack ofinformation can discourage customers from adopting and using it (Demoulin and Zidda,2009). Loyalty programmes can be designed to accommodate individual customersthrough enhanced customer service options that are not generally given to othercustomers, such as personalized customer service for specific cardholders. Moreover,loyalty programmes can be used to convey prestige to customers and to make them feelimportant and appreciated. Consequently, this has prompted calls from severalresearchers for more research into loyalty programme design (Bridson et al., 2008;Demoulin and Zidda, 2008; Smith and Sparks, 2009) and on programme service quality(Omar et al., 2009). In terms of service quality in loyalty programmes, some researchers(Smith et al., 2003; Vesel and Zabkar, 2009) have begun to emphasize the importance ofstaff support and interaction as crucial success factors.

In response to this gap, this study attempts to offer a new dimension ofloyalty programme service quality called LPSQual[2] in the context of department storesand superstores in Malaysia. The dimensions developed by the study could assistmarketing researchers and practitioners in further understanding the dimensions andmeasurement of service quality, particularly in retail loyalty programmes. Knowledge ofthe dimensions of service quality that customers seek as members of a retail loyaltyprogramme can help managers and marketers to design programmes that better meetthe needs of consumers, thereby increasing their satisfaction and loyalty. Moreover,because many academic and managerial resources are invested in better understandingthe relationship outcome of loyalty programmes, it is essential to develop ways ofevaluating programme service quality before ultimately assessing their impact on otherkey variables, such as satisfaction and customer loyalty.

The paper is organized as follows. First, an overview of current literature and thedimensions of the LPSQual scale are presented. Second, the hypothesized dimensionsof LPSQual are set forth, along with a description of the procedures used to constructthe scales and assess their psychometric properties. Finally, a conclusion is presentedwith a discussion of the implications of the research findings and directions for futureresearch.


761

2. Conceptualization of LPSQualDelivering high-quality service is considered to be an essential strategy for successand survival in today’s competitive environment (Parasuraman et al., 1985), and hastherefore become part of the basic retailing strategy (Berry, 1986; Reichheld andSasser, 1990). Service quality has been defined as “the customer’s judgement abouta product’s overall excellence or superiority (Zeithaml, 1988, p. 3) or the consumer’soverall impression of the superiority of the organization and its service encounters”(Bitner and Hubbert, 1994, p. 77).

A review of previous literature suggests that there are two different schools ofthought on how to conceptualize or operationalize perceived quality. The firstperspective, proposed by Gronroos (1984), is the two-dimensional model based on theNordic school of thought. The first dimension, technical quality, refers to the outcomeof the service performance; the second dimension, functional quality, refers to thesubjective perception of how the service is delivered, which includes all of the cues thatthe customer receives during transactions. Later, Rust and Oliver (1994) added a thirddimension to Gronroos’s (1984) model and proposed three aspects of service quality:service product (similar to technical quality), service delivery (similar to functionalquality) and service environment (new). The significance of this model is that itstresses the importance of understanding customer expectation and deliveringservice performance that meets customers’ expectations. Similar to the Nordic model,the SERVQUAL model developed by Parasuraman et al. (1988) is based on theexpectations disconfirmation approach. The authors identified five core dimensions ofservice quality across a broad spectrum of service industries: tangibles, reliability,responsiveness, assurance and empathy. Although SERVQUAL has been appliedacross a wide range of service industries, it has been criticized in terms of severalissues with respect to conceptualization and measurement (Cronin and Taylor, 1992;Teas, 1993), dimensionality (Babakus and Boller, 1992; Mittal and Lassar, 1996) andthe universal applicability of the scale across diverse industries (Carman, 1990).

Owing to the lack of generalizability of SERVQUAL measures across differentindustries, particularly retail, Dabholkar et al. (1996) developed the RSQS. This scaleappears to be suitable for retail businesses which offer a mixture of services and goods,such as departmental or specialty stores. The scale (RSQS) is a multilevel modelviewed as a higher order factor comprising two additional levels of attributes:dimensions and subdimensions. The authors suggest that retail service qualityencompasses five primary dimensions (physical aspects, reliability, personalinteraction, problem solving and policy) and six subdimensions (appearance,convenience, promises, doing it right, inspiring confidence and courtesy). This scaleuses only performance-based measures, which possess strong validity and reliabilityand can adequately capture customer perceptions of retail service quality. Similarly, inthe field of retail, Vazquez et al. (2001) developed a research work based onsupermarkets to clarify and extend the conceptualization and measurement of servicequality in the retail context. They reveal that service quality in the retail context hasfour dimensions, namely: physical aspects, reliability, personal interaction and policies.

Although Dabholkar et al.’s (1996) and Vazquez et al.’s (2001) studies contributed to agreater understanding of retail service quality, the services and categories that wereused in the development of the scale are different to those relating to loyalty programmes(as a relationship marketing tool), and it may well be that consumers use different

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criteria to evaluate LPSQual that serves a critical role in developing relationships,stimulating product/service usage and retaining customers. Moreover, cardholders ofloyalty programmes face different kinds of problems with the programmes, such as thelow value or usefulness of a reward, additional cost to enjoy the benefits of a programme,the impossibility of claiming the reward, etc. (Stauss et al., 2005). Based on the uniquecharacteristics of loyalty programmes and the limited number of studies on programmeservice quality that have been conducted, there is a need to develop a suitable scale formeasuring loyalty programmes in terms of service quality. According to Shemwell andYavas (1999), the more specific the scale items are in the service quality instrument, andthe more applicable they are to a provider’s/manager’s own contextual circumstance, themore able he/she will be able to use the information. Therefore, instead of taking anexisting instrument and trying to fit it to the context, a better approach is to develop aninstrument specifically for the particular service. It is believed that measuring LPSQualmay capture additional dimensions, as the goal of a loyalty programme is to encouragecustomer loyalty.

Although companies have attempted to develop customer loyalty by incorporatinghigh-quality products in their offerings, this method of achieving loyalty differs incontext compared to loyalty programmes. Frisou and Yildiz (2011) state that the promisedreward offered by companies is not part of the product but is external to it and obtained byaccumulating points when repeated purchases are made. Although considerable researchhas been undertaken in relation to loyalty programme rewards such as direct and indirectrewards (Dowling and Uncles, 1997; Keh and Lee, 2006), immediate and delayed rewards(Yi and Jeon, 2003) and the nature of rewards (Leenheer et al., 2007; Roehm et al., 2002),customer loyalty is not automatically produced solely from the programme’s reward. Theeffectiveness of loyalty programmes also depends on other factors that are important tocustomers, such as the ability of the customer to learn the complex rules of the programme(Frisou and Yildiz, 2011), the structure of the programme (Liu, 2007), the idiosyncratic fitof the programme (Kivetz and Simonson, 2003) and information and communicationavailability (Nobel and Phillips, 2004). Some retailers have attempted to achieve loyaltyby giving personalized service and special treatment to customers. Loyalty programmescan induce a feeling of intelligence and pride about having achieved or won a prizewithout having to pay the normal price, and can create a sense of appreciation amongcustomers who relate gifts to being a preferred or special customer (Kivetz and Simonson,2003; Lacey and Sneath, 2006; Meyer-Waarden, 2008).

Table I lists the service quality dimensions and the proposed dimensions of LPSQual.It is clear that most studies have not systematically investigated the measurementof LPSQual. A review of previous literature pertaining to service quality and loyaltyprogrammes suggests that reward, service personnel, programme policy, tangibility,communication and personalization are most important to customers; each of thesedimensions of LPSQual will be discussed in detail below.

2.1 RewardAll loyalty programmes grant benefits and rewards to customers, depending upon thevolume of sales that they generate. Generally, psychologists have been interested in therole of rewards in behaviour learning and modification (Dowling and Uncles, 1997).

Stauss et al. (2005) observe that if customers do not receive the promised rewardor if the indicated benefits prove worthless to them, frustration may arise.


763

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Table I.Focus of service qualitystudies

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764

Taking programme attributes into account, Bridson et al. (2008) find that anappropriate mix of programme attributes including hard attributes (discounts,vouchers and coupons) and soft attributes (better service, special attention andrecognition) can affect store satisfaction and/or loyalty.

2.2 Service personnelThe customer-oriented behaviours of employees will impact upon customers’perceptions of service quality (Brady and Cronin, 2001). Prior research suggests thatwhen employees are customer oriented, have good rapport with customers and exhibitperceptive and attentive listening skills, customers will evaluate the service morehighly and will be more likely to return (Gremler and Gwinner, 2000).

Academic research emphasizes the importance of employee service quality fromservice settings under various terms, such as interaction quality (Brady and Cronin,2001; Vesel and Zabkar, 2009), personal interaction (Dabholkar et al., 1996) andpersonnel service (Sirohi et al., 1998). This is not surprising, given that previousresearch notes that the secret to customer relationship management is closely related tohow the retailer makes the cardholders feel, contrary to the common strategy ofdiscounts and promotions (Rosenbaum et al., 2005).

2.3 Programme policyDabholkar et al.’s (1996) RSQS suggests that successful store policy includes convenienthours and convenient parking. In a loyalty programme, the dimension of service qualityis influenced directly by strategies and programme operations in terms of redemptionprocedures, entry requirements, rebate calculation and renewal terms. Previous studies(Kivetz and Simonson, 2003; Roehm et al., 2002) demonstrate the importance of a carefulprogramme design. In examining the linkages between a programme’s design andenrolment, Fowler (2003) suggests that customers are more likely to sign up to a loyaltyprogramme that communicates its benefits clearly and have realistic identifiable andattainable rewards. Recently, some researchers have indicated that the effectiveness ofloyalty programmes depends on the programme’s policy (Demoulin and Zidda, 2009;Liu and Yang, 2009).

2.4 TangibilityTangibility refers to the physical characteristics associated with a serviceencounter, and is a key component of the perceived service quality (Dabholkar et al.,1996; Parasuraman et al., 1988). According to Dabholkar et al. (1996), physical aspectscomprise more than the physical facilities; they cover the convenience offered to thecustomer by the layout of the physical facilities. In a retail loyalty programme context,this consists of the physical appearance of the service counters, such as their being easyto access and providing space to move around.

2.5 CommunicationCommunication is generally defined as “the formal as well as informal sharingof meaningful and timely information” (Anderson and Narus, 1990, p. 44). Theconcept of communication is often viewed as a necessary condition for the existenceof a relationship (Bendapudi and Berry, 1997). Customers who become membersof a loyalty programme are likely to identify more strongly with the company,


765

because membership relates cardholders to a group of privileged customers(Bhattacharya et al., 1995). Leenheer and Bijmolt (2008) conclude that the success of aloyalty programme also depends on the organizational support provided forthe programme, and the amount of resources dedicated to the management of theprogramme. This implies that in order to create “exogenous” loyalty programmemembership it is useful to communicate the economic and noneconomic benefits,to members as well as non-members.

2.6 PersonalizationPersonalization is essential in helping to save customers time and increase perceptionsof service quality (Srinivasan et al., 2002). Javalgi and Moberg (1997) note that a lack ofpersonal attention may lead many customers to believe that little difference existsamong providers. Thus, the new model of loyalty programmes is concerned more withdeveloping perceptions of value through brand associations and customizedinteractions with members (Rowley, 2005).

Companies can selectively build loyalty for their most valuable segments throughpersonalized and privileged service. These benefits help to convey valuediscrimination to selected customers.

3. Development of a scale to measure the service quality of retail loyaltyprogrammesThis section describes the scale development process, in line with proceduresadvocated in previous literature (Churchill, 1979; DeVellis, 2003).

3.1 Item generationA qualitative study among retail loyalty programme cardholders provides furtherinsight into the perceived programme service quality. Five consumer focus groups wereorganized. The sample consisted of 45 customers who had at least a year’s experience inusing the loyalty programme. The discussions began with questions about the type andnumber of loyalty programmes participated in by the respondents; questions alsopertained to the cardholders’ experiences as well as the programme’s service quality.

Based on the review of related literatures (Dabholkar et al., 1996; O’Brien and Jones,1995) and the qualitative study, LPSQual is a multidimensional construct consisting ofsix components: reward, service personnel, policy, tangibility, communication andpersonalization. A pool of 57 items to measure LPSQual was developed. Four businessfaculty members from two universities and one retail manager served as judges toevaluate the content/face validity of the items. This procedure resulted in a pool of40 items. Two surveys examined the dimensionality and relative importance of the sixconceptually identified programme’s service qualities.

3.2 Exploratory factor analysisBefore the main study was implemented, a pilot survey was conducted to test theinternal consistency of the LPSQual scale and to reduce the number of items to amanageable size. The samples for the study were collected by undergraduate marketingstudents as a part of their “subject pool” requirement. The guidelines for respondents’eligibility were provided to ensure a varied sample and to exclude ineligibleparticipation (Mick, 1996). This data collection technique resulted in 268 respondents,

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but only 255 were valid for use. The respondents were 65 per cent female and 35 per centmale; 78 per cent ranged between 25 and 54 years of age, and 60 per cent of therespondents participated in one loyalty programme. The self-administeredquestionnaire uses a five-point Likert scale to measure the programme service quality.

Given that the focus of this research was on developing measurement techniques thatcould be applicable across retail loyalty programmes, specifically department stores andsuperstores, each respondent was instructed to specify the loyalty programmes in whichthey were enrolled, and then choose the one they would like to focus on as the subject forthe questionnaire (Gwinner et al., 1998). Respondents citing programmes fromsuperstores comprised 63 per cent of the sample, while 37 per cent of the sample focusedon department stores. The responses were analyzed via principal components and itemanalyses. Each programme service quality facet with an item that has consistently low(,0.50) or very high factor loadings (.0.95), and is consistently highly correlated withanother item within its facet (.0.80), is considered for deletion (Bagozzi and Yi, 1988).To assess the instruments, all the items were factor analyzed, and the results revealedthat the Kaiser-Meyer-Olkin measure of sampling adequacy presented an index of 0.924,which indicates that there were sufficient inter-item correlations within the data toperform factor analysis. The Bartlett test of sphericity in this study also providedstatistically significant results. In the first run of the factor analysis, which comprised40 items, seven factors emerged with eigenvalues greater than 1. This accountsfor 81 per cent of the total variance. Five items related to communication, whichincludes reminders pertaining to expiry date of points/vouchers, information regardingpromotions, information regarding participating outlets and provision of statusupdates, were added to a new dimension called information usefulness. Parameterestimates of item factor loading and communalities were consulted to identify ways thateach sub-scale might improve from an empirical perspective (Hair et al., 2006). To ensureadequate measurement of the underlying construct, 14 items with cross loading andlow communalities were deleted, resulting in a 26-item scale for measuring LPSQual.Subsequent factor analysis was carried out on the 26 items. Principle componentanalysis resulted in a seven-factor solution (see Appendix 1 for the results of theexploratory factor analysis). The items made strong contributions to the factors theyrepresent (ranging from 0.682 to 0.876), and good communalities (ranging from 0.815 to0.932). The coefficient alphas for the communication, courteousness/helpfulness,tangibility, reward, information usefulness, policy and personalization dimensions were0.97, 0.95, 0.93, 0.94, 0.93, 0.89 and 0.94, respectively, all of which are above the thresholdthat Nunnally (1978) recommends.

3.3 Confirmatory factor analysisFollowing the procedure for purifying instruments employed by Jaworski and Kohli(1993), the correlation matrix of the 26 items capturing the components of LPSQual wasused as input for confirmatory factor analysis. The data for this study were collectedby using self-administered questionnaires distributed via the “drop-off and collect”technique. The target population is comprised of those who live or work withinKlang Valley, Malaysia. Klang Valley is home to the capital of Malaysia, and most ofthe modern retail establishments in Malaysia are also located in Klang Valley(Euromonitor International (Asia) Pte Ltd, 2001). Using the “drop-off and collect”technique, a sample of 400 survey respondents was obtained. The respondents mainly


767

chose loyalty programmes in superstores (70 per cent). To get a representative sampleof customers that enrolled in the loyalty programme, the sample was carefully selectedto ensure that participants would not be selected based on perceived friendliness orother characteristics that might influence the researcher’s selection. To avoid such bias,the authors personally contacted the key personnel in several organisations tonegotiate access to their staff. The key personnel explicitly explained the criteria to therespondents. Upon agreement from the key personnel and before an appointment wasset for delivery of the research instrument, the authors requested a list of names ofthose who were interested in participating. Each respondent would select a particularloyalty programme that they had been a member of for at least a year, that belongs toany department or superstore, and that they would like to focus on in thequestionnaire. Respondents were asked to focus on their favourite loyalty programme.Respondents with at least a year’s membership were specifically chosen, since this isconsidered to be a sufficiently long period whereby quitting the programme may arisein case of disappointment or regret. Moreover, this length of membership time (at leasta year) was reported to be sufficient to regard respondents as experienced cardholders,a factor that contributes to the validation of data (Morais et al., 2004).

Overall, 400 out of 460 participants completed the questionnaires, representing aresponse rate of 87 per cent. The majority of the respondents (68 per cent) were female.Of the respondents, 41 per cent were aged between 30 and 39 years of age. Of therespondents, 25 and 20 per cent had been members of their retail loyalty programmefor two years and three years, respectively. In addition, 54 per cent of the respondentsused the loyalty programme every time they made their purchases and 41 per cent ofthe respondents participated in more than one loyalty programme. For theconfirmatory factor analysis, this study tests and compares two measurement models:

(1) Model 1 (one-factor model). LPSQual is conceptualized as a unidimensionalconstruct with seven subdimensions; the covariance among the 26 items isaccounted for by a single factor.

(2) Model 2 (seven-correlated-factor model). LPSQual is conceptualized as amultidimensional construct. Covariation among the items is accounted for bythe seven restricted first-order factors, with each factor representing a distinctdimension of LPSQual and each item being reflective of only a single dimension(Figure 1). The summaries of statistics for these two models are shown inTable II.

Model 2 outperforms model 1. The result suggests that LPSQual is a multidimensionalconstruct with seven dimensions. The final model (model 2) displays acceptable fitindices x 2 ¼ 510.78 (278), p ¼ 0.01, GFI ¼ 0.910, AGFI ¼ 0.886. Although the x 2

statistic is significant, this is not unusual as the sample size is large (Bagozzi andYi, 1988). The CFI, NFI, TLI and RMSEA of 0.967, 0.930, 0.961 and 0.046, respectively,meet the recommended levels for a model with a good fit (Hair et al., 2006).

The scale also displays good internal consistency, with coefficient alphas rangingfrom 0.76 to 0.96 (Table III). To assess the reliabilities of the scales, construct reliabilitywas computed for each factor. The composite reliability was calculated usingFornell and Larcker’s (1981) formula. As Table III shows, the composite reliabilityfor the seven dimensions ranged from 0.82 to 0.97, which met the standard of 0.70(Hair et al., 2006).

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Figure 1.Model 2 for seven factor

correlated for LPSQual

Programmepolicy

PO1e3

PO2e2 0.73

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Rewards

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0.49

0.37

0.890.87 0.87 0.87 0.85

0.80

0.52

0.56

0.54

0.62

0.54

0.48

0.48

0.40

0.50

0.89

0.83

0.77

0.81

0.83

0.87

0.78

0.77

0.84

0.79

0.74

0.79

0.65

0.75

0.68

0.78

0.85


769

3.3.1 Convergent validity and discriminant validity. Evidence of convergent validity inthe LPSQual scale was assessed by inspecting the variance extracted (AVE) for eachfactor, as Table III summarizes. According to Fornell and Larcker (1981), a variancevalue exceeding 0.50 for a factor indicates high convergent validity. A confirmatoryfactor analysis shows that the variance extracted ranged from 0.61 to 0.80.

Moreover, the AVE is higher than the squared correlations among the sevendimensions, confirming discriminant validity (Fornell and Larcker, 1981).The correlation index among factors is also low and moderate and did not exceed thecut-off point of 0.85 (Kline, 2005). This implies discriminant validity (Churchill, 1995).To further test the dimensionality and convergent validity, a second-order factor modelof LPSQual was also estimated. This model includes the seven first-order factors ofprogramme policy, reward, personalization, tangibles, information usefulness,courteousness/helpfulness and communication, along with their standardizedcoefficients and observable indicators (Figure 2). Each of these first-order factors hassignificant ( p , 0.001) loading of 0.66, 0.78, 0.79, 0.74, 0.68, 0.84 and 0.58, respectively,on the second-order factor. Although the x 2 for the second-order model is significant( x 2 ¼ 546.10, df ¼ 292), p , 0.05, the CFI, NFI, TLI and RMSEA are 0.96, 0.93, 0.96 and0.046, respectively, the x 2 difference test between the seven restricted first-order factorsand second-order models is statistically significant (Dx 2 ¼ 35.32,Ddf ¼ 14). Therefore,these suggest that the second-order model accounted for the data well. Further evidence

Model 1: one general factor Model 2: seven correlated factors

Absolute measuresx 2 statistics (df) 3,239.52 (299) 510.78 (278)GFI 0.442 0.910RMSEA 0.157 0.046Incremental fit measuresCFI 0.577 0.967TLI 0.540 0.961NFI 0.555 0.930Parsimony fit measuresAGFI 0.345 0.886NC (x 2/df ) 10.835 1.837

Table II.Comparison of the resultsobtained for the LPSQualconstruct

Cronbach’s aCompositereliability X1 X2 X3 X4 X5 X6 X7

Policy (X1) 0.76 0.82 0.61Tangible (X2) 0.82 0.86 0.37 0.66Reward (X3) 0.84 0.89 0.49 0.45 0.73Information usefulness (X4) 0.87 0.88 0.39 0.39 0.46 0.71Courteous/helpful (X5) 0.86 0.91 0.41 0.60 0.53 0.49 0.72Personalization (X6) 0.86 0.89 0.43 0.49 0.53 0.45 0.60 0.74Communication (X7) 0.96 0.97 0.35 0.33 0.45 0.39 0.42 0.44 0.80

Notes: Correlation is significant at the 0.01 level (two-tailed); AVE is represented on the diagonal

Table III.Reliability andconvergent anddiscriminant validityof the scale (confirmatoryanalysis)

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Figure 2.The LPSQual scale – CFA

standardized coefficientsfor higher order model

Programmepolicy

PO3 e1

0.65

PO2 e2

PO1 e30.78

Reward

RD3 e4

RD2 e5

RD1 e6

0.78

0.80

0.83

Personalization

PS3 e7

PS2 e8

PS1 e9

0.83

0.89

0.75

Tangibles

CU4 e10

CU3 e11

CU2 e12

0.79

0.78

0.74

Infomationusefulness

IF4 e13

IF3 e14

IF2 e15

0.83

0.87

0.78

Courteous/helpful

SP3 e16

SP2 e17

SP1 e18

SP4 e19

Communication

CO8

e20

CO7

e21

CO6

e22

CO9

e23

0.88CO10

e24

CO11

e25

0.87

CO12

e26

e27

e28

e29

e30

e31

e32

e33

LPSQual

0.770.85

0.81

0.68

0.58

0.84

0.68

0.74

0.66

0.78

0.79

0.74

0.85 0.87 0.89 0.87

0.85


771

is shown by inspecting the correlations between the seven factors (Table IV). Allcorrelations are significant at p , 0.001, indicating that the seven factors converge on acommon underlying construct (Cadogan et al., 1999; Lages et al., 2005).

3.3.2 Nomological validity. To establish the nomological validity of the LPSQualscale, this study relies on structural equation modelling and tests the relationshipsbetween LPSQual and two related constructs identified in the literature – satisfactionand customer loyalty (Churchill, 1995). There are well-grounded theoretical reasons toexpect a positive association between service quality and satisfaction (Caruana, 2002;Cronin et al., 2000; McDougall and Levesque, 2000; Ting, 2004) and service quality as anantecedent of loyalty or consumers’ behavioural intentions (Fornell et al., 1996; Loureiroand Gonzalez, 2008; Parasuraman et al., 1994; Too et al., 2001). Satisfaction has oftenbeen perceived as the ultimate outcome of all activities carried out during the process ofpurchase and consumption. Satisfaction has always been described as processes andoutcomes that have been identified as a key determinant for loyalty, particularly in theretail context (Bloemer and de Ruyter, 1998). According to Parasuraman et al. (1985,1988), higher levels of perceived service quality result in better consumer satisfaction.Cronin and Taylor (1992) have suggested that service quality is an antecedent ofconsumer satisfaction. Some researchers ( Johnson and Fornell, 1991) suggest thatcustomer satisfaction is the overall evaluation based on the total experience with agood or service over time. In line with previous studies, programme satisfaction isdefined as a programme member’s affective state as a result of the cumulative evaluationof experience with the loyalty programme (Mimouni-Chaabane and Volle, 2010;Omar et al., 2007; Vesel and Zabkar, 2009).

Although most previous studies indicate that service quality influences loyaltyindirectly through other variables like satisfaction (Baker and Crompton, 2000;Brady and Robertson, 2001), others argue for a direct effect (Parasuraman et al., 1988;Taylor and Baker, 1994). In the loyalty programme literature, Vesel and Zabkar (2009)have empirically tested the nature of the effect of perceptions regarding the quality ofthe loyalty programme and quality of personal interactions on customer loyalty,through the mediating variable of customer satisfaction. The result of the study

Variables 1 2 3 4 5 6 7 8 9 10

Policy (1) 1.00Reward (2) 0.50 1.00Tangibles (3) 0.37 0.45 1.00Courteous/helpful (4) 0.41 0.53 0.60 1.00Personalization (5) 0.43 0.53 0.49 0.60 1.00Information (6) 0.40 0.46 0.39 0.49 0.45 1.00Communication (7) 0.35 0.45 0.33 0.42 0.45 0.39 1.00LPSQual (8) 0.67 0.77 0.71 0.79 0.78 0.72 0.67 1.00Programme satisfaction (9) 0.45 0.44 0.32 0.43 0.36 0.42 0.42 0.56 1.00Loyalty (10) 0.46 0.44 0.43 0.48 0.45 0.34 0.40 0.59 0.45 1.00Mean 3.79 3.46 3.49 3.43 3.35 3.65 3.25 3.49 3.62 3.53SD 0.70 0.71 0.74 0.65 0.77 0.84 0.78 0.54 0.68 0.67

Notes: All correlations are significant at the 0.01 level (two-tailed); correlations among the sevencomponents of LPSQual with programme satisfaction and loyalty; composite scores for each measurewere obtained by averaging scores across items representing that measure

Table IV.Means, standarddeviations andcorrelations among theseven componentsof LPSQual withprogramme satisfactionand customer loyalty

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shows that loyalty programme quality has a positive direct and indirect influence oncustomer loyalty.

Customer satisfaction towards a loyalty programme is a post-experience, subjectiveevaluation of the extent to which the loyalty programme meets or exceeds thecustomer’s expectations (Demoulin and Zidda, 2008; Omar et al., 2007). In the retailcontext, several studies suggest that satisfaction has a positive influence on loyalty withthe store (Bloemer and de Ruyter, 1998; Sivadas and Baker-Prewitt, 2000). It is difficultfor a retailer to achieve loyalty without customers first having some degree ofsatisfaction (Seymour and Rifkin, 1998). Indeed, past studies of loyalty programmeshave reported a positive association between programme satisfaction and loyalty(Demoulin and Zidda, 2008; Omar et al., 2007). Hence, in the loyalty programme context,nomological validity would be demonstrated if the scores of the measures of LPSQualwere positively and significantly correlated with programme satisfaction and customerloyalty. We conceptualize programme satisfaction as the overall feeling towards theretail loyalty programme on which the respondents chose to focus in this study(Mimouni-Chaabane and Volle, 2010). Five semantic differential scales commonly usedin satisfaction studies (Oliver and Swan, 1989) were used to measure overall programmesatisfaction. As Oliver (1999) suggested, for satisfaction to affect loyalty, cumulativesatisfaction is required. When operationalizing the construct of consumer loyalty, thisstudy focuses on the measurement of the behavioural intentions and attitudes of theconstruct (Too et al., 2001; Vesel and Zabkar, 2009; Yi and Jeon, 2003). The customerloyalty construct was operationalized with five items, and a scale anchored (1) “stronglydisagree” to (5) “strongly agree” was employed (see Appendix 2 for measurement of thevariables used for the nomological validity test).

To test the structural model, the second-order model of LPSQual (Figure 2) wastransferred to the first-order model via the method of “parcelling” (Figure 3). Thiswas achieved using composite scores for each dimension, which was calculated byaveraging the items measuring each dimension of LPSQual. This is common practiceamong researchers (Roberts et al., 2003), and can be used provided the correct fit of asecond-order factorial model has been checked. The estimated parameter values andthe t-values (in brackets) are shown in Figure 3. The results of the overall model fitindicate that the data fit the model well. The goodness-of-fit falls within the acceptablerange as CMIN/df (1.974) is less than 2 (Chin and Todd, 1995). CFI, TLI, GFI, AGFI andRMSEA are found to be 0.97, 0.96, 0.941, 0.920 and 0.049, respectively. The estimatessupport the nomological validity as both the direct and indirect effect of service qualityon loyalty are significant. That is, the standardized regression coefficients from:

. service quality to programme satisfaction (g ¼ 0.624, t ¼ 9.206);

. service quality to customer loyalty (g ¼ 0.565, t ¼ 7.122); and

. programme satisfaction to loyalty (b ¼ 0.137, t ¼ 2.115) are all statisticallysignificant.

These findings support prior theoretical research suggesting that service quality is afactor in determining satisfaction and loyalty (Brady and Robertson, 2001; Wong andSohal, 2003; Vesel and Zabkar, 2009, 2010). The implication is that a retail loyaltyprogramme can improve cardholders’ satisfaction and loyalty by delivering servicequality. This link is in line with Demoulin and Zidda’s (2008) results, which showedthat when cardholders are satisfied with the reward scheme of the loyalty programme,


773

they are more loyal and less price sensitive than unsatisfied cardholders. As such, wecan conclude that the LPSQual scale has a nomological validity.

Further evidence of nomological validity is demonstrated by inspecting thecorrelations between the components of LPSQual with programme satisfaction andloyalty (Table IV). The results indicate that all pair-wise correlations are statisticallysignificant. Based on the results of these analyses, it can be concluded that the measureof LPSQual has nomological validity. In sum, this study finds evidence of convergentvalidity, discriminant validity and nomological validity, and thus the findings lendsupport to the construct validity of the seven-factor model of LPSQual.

4. Academic and managerial implicationsThe present study makes both academic and practical contributions thatsuggest several important findings and clear applications for future research. From anacademic point of view, this study explores the aspects of LPSQual that contribute tothe existing body of knowledge about relationship marketing. First, this study providesa clear conceptualization of the LPSQual construct by developing a conceptualmodel with seven dimensions (i.e. reward, policy, information usefulness, tangibility,courteousness/helpfulness, personalization and communication). By developing a newconstruct called LPSQual, this research identifies the important factors that explain howcustomers and programme members evaluate programme service quality. The findingsof the study show interaction quality by service personnel with customers(i.e. courteousness/helpful staff and personalized services) to be a principle determinantof service quality in a loyalty programme. The positive experience continuously deliveredby employees could positively affect customer loyalty (Sunny Hu et al., 2010).

Figure 3.Assessment ofnomologicalvalidity with SEM

LPSQual

Programmepolicy

Customerloyalty

Tangible

Communication

Personalization

Courteous/helpful

Informationusefulness

Reward

CusLoy3

CusLoy1

CusLoy4

CusLoy2

CusLoy5

Programmesatisfaction

ProSatis1 ProSatis2 ProSatis3

Notes: *p < 0.05, **p < 0.001; the model was estimated by reducing the second-order models of LPSQualto first-order model by averaging the items measuring each of the dimensions of LPSQual

ProSatis4

0.62

0.66

0.72

0.630.770.73

0.59

0.72 0.81 0.82 0.86

0.800.82

0.640.57

0.79

0.14*(2.12)

0.62**(9.21)

0.57**(7.12)

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Previous researchers (Sunny Hu et al., 2010; Smith et al., 2003) note that to create aloyalty programme, firms need to focus their attention on social “means”, or how one istreated (experience) rather than on economic “outcome”. This change in focus allowsmanagers to move away from the conventional wisdom of the “me-too” approach andactually build loyalty programmes. As such, several brave loyalty programme sponsorshave embraced a new concept in hard-benefit design through the “wow” factor usingexperiential or aspirational rewards (Capizzi and Ferguson, 2005).

Second, this study finds that LPSQual is related to programme satisfaction andloyalty. The findings suggest that LPSQual has a stronger influence on loyalty thansatisfaction with the programme does. These findings emphasize the role of servicequality in a loyalty programme, particularly in terms of staff interaction quality. Recentfindings suggest that personal interaction quality has a positive and strong impact onperceived relationship quality (satisfaction/trust and commitment), while perceivedloyalty programme quality was positively related to customer loyalty (Vesel and Zabkar,2010). In fact, Stauss et al. (2005) suggest that loyalty programmes can cause frustrationto customers due to certain factors linked with the programme, such as difficulties inmeeting the programme’s requirements, programme inaccessibility, worthlessness ofrewards and the additional cost needed to use the benefits of the programme. All thesefactors can have an inverse influence on the loyalty programme and on the entirerelationship between the customer and programme supplier (Vesel and Zabkar, 2009).

The current study provides useful insights for managerial action. First, it reveals thatservice quality in loyalty programmes has seven dimensions, which include tangibility,policy, courteousness/helpfulness, reward, information usefulness, personalization andcommunication. The results of this study show that courteousness/helpfulness andpersonalization are the first and second key determinants of LPSQual, emphasizingthe role of employees as actual part-time marketers to enhance customer relationships(Gronroos, 1984).

The results suggest that a system of merely calculating points and purchasingvolume are insufficient in a loyalty programme. This finding gives support to the workof Liu and Yang (2009), which suggests point accumulation and redemption choices in aloyalty programme may have negative consequences in the long run, such as diversionfrom the main purpose of the programme (i.e. to increase consumer loyalty toward thefirm). Hence, developing a people-based and member interaction membership servicemode and procedure are considered to be more important in a loyalty programme.The service experience of cardholders from the first encounter onward is important tomanagers, as it can influence consumer satisfaction and loyalty. To establish and buildrelationships with customers, managers need to focus on how they select, train,educate and evaluate and reward sales personnel (Smith et al., 2003). Hence, it is vital tolaunch employee training programmes that educate service personnel to have a friendly,courteous/helpful attitude and deliver better services to all cardholders. In fact,Bridson et al. (2008) and Vesel and Zabkar (2009, 2010) noted the importance of personnelinteraction quality in loyalty programmes in terms of reflecting the non-materialbenefits, or the “soft-benefits”, of a loyalty programme.

Second, managers should help spread to service personnel and customers thevirtues of being truly customer-centric and providing a strong sense of belonging tothe programme, as well as belonging to the retail store via internal marketing efforts.Service personnel and frontline employees should be empowered, so they can adapt


775

their service activities and abilities to address specific customer and cardholder needsand act in a fully customer-centric manner. A scale measuring service quality in theloyalty programme may be useful as a diagnostic tool to identify areas where specificimprovements and differentiators are still necessary in discovering aspects of thestore’s loyalty programme that require changes.

Third, top management can use this framework to track the evolution of customerneeds and develop relevant and effective marketing strategies and tactics in theirloyalty programme that will let their firm achieve superior financial performance.A high level of service quality is associated with several key outcomes, such asimproving customer loyalty and the probability of purchase (Zeithaml and Bitner, 2003),enhancing market share (Buzzell and Gale, 1987), customer satisfaction (Cronin andTaylor, 1992) and corporate image (Helgesen et al., 2010). Hence, managers should relyon this industry-specific scale (LPSQual) to measure the level of service quality actuallydelivered to their customers and/or cardholders. By exploring performance scores oneach attribute within and across various designated dimensions, enhancement needswill be clearly acknowledged.

Fourth, firms that employ a service quality scale are better able to categorisedistinct customer segments or clusters that hold different perceptions about servicequality in a loyalty programme. Segmentation of customer portfolios provides valuableinformation on how to entertain each segment, increase spending and retain customers.Many existing loyalty programmes fail because they lack precise customersegmentation and targeting. According to Meyer-Waarden (2007), loyaltyprogrammes may become strategic tools to manage customer heterogeneity byselecting, identifying and segmenting customers, which improves and personalizes thefocus of market resources.

In essence, it is critical for retail organisations to identify the dimensions of LPSQualand recognise the significant relationship between LPSQual and satisfaction in thedevelopment of loyalty. Hence, it should be realized that when consumers deal with theirloyalty programmes, they are not only evaluating the outcomes of the programme, suchas the rewards, but they are also assessing the entire process and their total experience ofusing the loyalty programme. Retail managers cannot rely on rewards alone, as othernon-material elements such as interaction with service personnel and personalizationare crucial in retaining customers.

5. Limitations and directions for future researchThe present study relies primarily on a sample drawn specifically from alimited geographical area in Malaysia. Using the “drop-off and collect” and quotasampling techniques, the findings may not represent the entire population, and requiresreplication. This study relates to the high percentage of loyalty programmes in the retailsector, specifically superstores and department stores, which prevents generalization ofthe results. Establishing the scale’s nomological validity across different sectors, such asairlines, hotels and restaurants, as well as extending it to other nations such as the USAand European countries, is important. With more replicative and creative research,a more comprehensive conceptual framework related to LPSQual can be developed inthe future.

In addition, this study employed a cross-sectional design whereby all the constructswere assessed at a single point in time. Therefore, no definite conclusion can be drawn

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concerning the causality of relationships among constructs, but rather as lendingsupport for the prior causal scheme. Finally, continuous improvement and refinement ofthe LPSQual scale is undoubtedly possible and even desired, based on future researchand changes in business environments. Although the author covers all relevant aspectsof LPSQual by carefully examining the loyalty programme literature, advancement intechnology will bring many creative and innovative approaches to the developmentand administration of loyalty programmes. Therefore, researchers are stronglyrecommended to incorporate these relevant aspects into their future research, so that avalid measure of LPSQual occurs on an ongoing basis.

Notes

1. Loyalty programmes represent tools used to build lasting relationships with customersthrough various reward types such as special events for cardholders, discounts, free parking,saving schemes, points redeemed as prizes from a catalogue, or insurance coverage. The aimof these rewards is to make customers more loyal. Loyalty programmes focus on a singlemerchant (private label) programme where cardholders can only redeem points from themerchant’s outlets.

2. LPSQual is defined as the overall experience of customers in applying, renewing, updating,redeeming and using the programme.

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Appendix 1

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783

Appendix 2

About the authorsNor Asiah Omar is a Senior Lecturer at the School of Management, Faculty of Economics andManagement, Universiti Kebangsaan Malaysia (UKM). She holds a PhD in Marketingspecializing in loyalty programmes, relationship quality and retailing. Her research interestsinclude loyalty programmes, service quality, relationship quality and retailing. She is the authorof numerous academic articles on the topics of loyalty programmes, child care and entrepreneursin small and medium industry. Beside academic research involvement, she is also currentlyinvolved in contract research with local banks in developing satisfaction index for customers.Nor Asiah Omar is the corresponding author and can be contacted at: [email protected]

Rosidah Musa is currently the Head of Publication at the Institute of Business Excellence atthe Faculty of Business Management, Universiti Teknologi MARA, Malaysia. She holds a PhDin Marketing from Cardiff University, Wales, UK; MBA from New Hampshire College, USA andBSc (Business Administration) from Indiana State University, USA. Her research interests are inthe areas of consumer behaviour, specifically in consumer satisfaction, retail relationship quality,loyalty programme quality, sport event experiential value, university quality and experiencequality. Beside academic research involvement, she also actively conducts contract research forMinistry of Agriculture (international market research) and retail organisations in developingand tracking customer satisfaction index. She has presented several papers at national as well asinternational conferences and also has published papers in journals. She has 23 years experienceof working in the academic world and teaches mainly marketing and retailing courses atundergraduate as well as postgraduate levels.

To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints

Variable MeasurementCoefficient

alpha

Programme satisfaction 1. Dissatisfied 1 2 3 4 5 Satisfied 0.882. Unpleasant 1 2 3 4 5 Pleasant3. Unfavourable1 2 3 4 5 Favourable4. Displeased 1 2 3 4 5 Pleased

Customer loyalty 1. I would recommend this retail store to others 0.842. I visit this store more frequently than other retail stores3. In the near future, I am likely to purchase from this retail

store again4. I would continue to purchase from this retail store even if

there was a slight increase in price5. I consider the store to be my first choice of retail store

Table AII.Measurement of thevariables used fornomological validity test

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measuring service

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