International Journal of Retail & Distribution Management

Emerald Article: Measuring service quality in retail loyalty programmes (LPSQual): Implications for retailers' retention strategies Nor 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 Permanent link to this document: http://dx.doi.org/10.1108/09590551111162257 Downloaded on: 24-03-2012 References: This document contains references to 108 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 1070 times.

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Measuring service quality in retail loyalty programmes (LPSQual)

Implications for retailers retention strategies
Nor Asiah Omar
School of Management, Universiti Kebangsaan Malaysia (National University of Malaysia), Bangi, Malaysia, and

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Received 14 April 2010 Revised 13 January 2011 Accepted 5 April 2011

Rosidah Musa
Faculty of Business Management, Universiti Teknologi Mara, Shah Alam, Malaysia
Abstract
Purpose This research aims to empirically develop a reliable and valid scale for measuring the service quality of retail loyalty programmes (loyalty programme service quality (LPSQual)) in the context of department stores and superstores in Malaysia. Design/methodology/approach By adapting the process proposed by Churchill for developing measures 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 puried and validated through exploratory factor analysis and conrmatory factor analysis. Findings The proposed instrument (LPSQual) contains 26 attributes in seven dimensions: reward, tangibility, policy, information usefulness, courteousness/helpfulness, personalization and communication. Research limitations/implications Further testing of the scales across multiple contexts is necessary for validity enhancement. Practical implications Retail managers must give serious thought to the non-material or soft-benets component in a loyalty programme which emphasizes courteous/helpful and personalized services. Thus, managers need to focus on service personnel by providing training to upgrade employees skills in creating and delivering pleasant experience/service encounters to cardholders. Originality/value The main contribution of this paper is the development and validation of a new 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 conrms results 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
International Journal of Retail & Distribution Management Vol. 39 No. 10, 2011 pp. 759-784 q Emerald Group Publishing Limited 0959-0552 DOI 10.1108/09590551111162257

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.

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1. Introduction In mature retail markets, loyalty programmes are among the most popular retention strategies used by retailers. Loyalty programmes have rapidly grown across the globe, especially in the USA and the UK (Bellizi and Bristol, 2004). Favourable responses from consumers have encouraged many rms to install loyalty programmes as a core component of their marketing strategy. The rise and expansion of retailers in Malaysia has contributed to high competition between them, which has led to the growth of loyalty programmes as a structured marketing effort to build store trafc and create deeper relationship ties with customers. Frost and Sullivan, an independent market research organization, reported that loyalty programmes are a growing business in Malaysia, with money spent on loyalty programmes accounting for 19.8 per cent of the total Advertising & Promotion (A&P) expenditure in 2005 (Ganesan, 2006). The A&P expenditure is expected to grow further from around USD646 million in 2005 to around USD1 billion in 2010 (Ganesan, 2006). Despite their popularity, many researchers question whether loyalty programmes actually create customer loyalty or whether loyalty arises from some other factor (Capizzi and Ferguson, 2005; Hoffman and Lowitt, 2008). In most loyalty programmes, benets serve as the most compelling reason for customers to participate; however, the most important parts of a loyalty programme are programme design (Demoulin and Zidda, 2009; Lacey and Sneath, 2006) and customer service (Lockyer, 2004). Within the restaurant sector, Jang and Mattila (2005) report that by improving certain procedures such as waiving the need to present the loyalty programme membership card, easier redemption processes and communicating the programmes benets clearly rms could enlarge their membership base. Although previous literature has studied the current design and implication of loyalty programmes from the monetary and psychological perspectives (Bridson et al., 2008; Demoulin and Zidda, 2009; Keh and Lee, 2006), methods that hinder customer relationships with retailers employing loyalty enhancing programmes (Wagner et al., 2009; Nobel and Phillips, 2004), and loyalty programme quality (Smith et al., 2003; Vesel and Zabkar, 2009, 2010), there is no tested scale by which retailers can begin to measure the service quality of their loyalty programmes[1] and thus evaluate the success factors of 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 programmes and the retailers estimation of those expectations. Consequently, the service quality of most loyalty programmes includes unimportant elements or neglects important ones (Vesel and Zabkar, 2009). In addition, most providers produce similar programmes that cause the loyalty programme to lack distinctiveness (Meyer-Waarden, 2008). As the programmes rewards are then no longer appealing or different, consumers will move from one programme to another in response to specic promotional campaigns (Mauri, 2003). Given these problems, loyalty programme service quality (LPSQual) as an emerging issue in relationship marketing will remain underdeveloped until its key dimensions have been identied and operationalized. Shugan (2005) comments that the design and implementation of loyalty programmes is an important and growing area of research that needs further theoretical development. In a loyalty programme setting, service quality refers to the overall experience of customers in applying, renewing, updating,

accumulating, redeeming and using the programme. In an increasingly competitive global environment, there is growing evidence that investment in service quality improvements enhances customer satisfaction and builds long-term relationships between providers and customers (Crosby et al., 1990). According to Nguyen and Leblanc (2002), perceived quality results from an evaluation that is based upon the customers experience with the service. Dabholkar et al. (1996) propose a retail service quality scale (RSQS) that includes ve 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 experience with a loyalty programme involves more than a retail service experience, including aspects such as redeeming rewards, understanding the programme policy, special events, etc. According to Stauss et al. (2005), consumers often experience frustration with loyalty programmes as a result of difculties that they face in reaching the threshold required to qualify for the programme, programme inaccessibility, worthlessness of rewards, or additional costs (material or mental) required to use the benets of the loyalty programme. Moreover, difculties in understanding the programme and lack of information can discourage customers from adopting and using it (Demoulin and Zidda, 2009). Loyalty programmes can be designed to accommodate individual customers through enhanced customer service options that are not generally given to other customers, such as personalized customer service for specic cardholders. Moreover, loyalty programmes can be used to convey prestige to customers and to make them feel important and appreciated. Consequently, this has prompted calls from several researchers 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 of staff support and interaction as crucial success factors. In response to this gap, this study attempts to offer a new dimension of loyalty programme service quality called LPSQual[2] in the context of department stores and superstores in Malaysia. The dimensions developed by the study could assist marketing researchers and practitioners in further understanding the dimensions and measurement of service quality, particularly in retail loyalty programmes. Knowledge of the dimensions of service quality that customers seek as members of a retail loyalty programme can help managers and marketers to design programmes that better meet the needs of consumers, thereby increasing their satisfaction and loyalty. Moreover, because many academic and managerial resources are invested in better understanding the relationship outcome of loyalty programmes, it is essential to develop ways of evaluating programme service quality before ultimately assessing their impact on other key variables, such as satisfaction and customer loyalty. The paper is organized as follows. First, an overview of current literature and the dimensions of the LPSQual scale are presented. Second, the hypothesized dimensions of LPSQual are set forth, along with a description of the procedures used to construct the scales and assess their psychometric properties. Finally, a conclusion is presented with a discussion of the implications of the research ndings and directions for future research.

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2. Conceptualization of LPSQual Delivering high-quality service is considered to be an essential strategy for success and survival in todays competitive environment (Parasuraman et al., 1985), and has therefore become part of the basic retailing strategy (Berry, 1986; Reichheld and Sasser, 1990). Service quality has been dened as the customers judgement about a products overall excellence or superiority (Zeithaml, 1988, p. 3) or the consumers overall 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 of thought on how to conceptualize or operationalize perceived quality. The rst nroos (1984), is the two-dimensional model based on the perspective, proposed by Gro Nordic school of thought. The rst dimension, technical quality, refers to the outcome of the service performance; the second dimension, functional quality, refers to the subjective perception of how the service is delivered, which includes all of the cues that the customer receives during transactions. Later, Rust and Oliver (1994) added a third nrooss (1984) model and proposed three aspects of service quality: dimension to Gro service product (similar to technical quality), service delivery (similar to functional quality) and service environment (new). The signicance of this model is that it stresses the importance of understanding customer expectation and delivering service performance that meets customers expectations. Similar to the Nordic model, the SERVQUAL model developed by Parasuraman et al. (1988) is based on the expectations disconrmation approach. The authors identied ve core dimensions of service quality across a broad spectrum of service industries: tangibles, reliability, responsiveness, assurance and empathy. Although SERVQUAL has been applied across a wide range of service industries, it has been criticized in terms of several issues with respect to conceptualization and measurement (Cronin and Taylor, 1992; Teas, 1993), dimensionality (Babakus and Boller, 1992; Mittal and Lassar, 1996) and the universal applicability of the scale across diverse industries (Carman, 1990). Owing to the lack of generalizability of SERVQUAL measures across different industries, particularly retail, Dabholkar et al. (1996) developed the RSQS. This scale appears 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 model viewed as a higher order factor comprising two additional levels of attributes: dimensions and subdimensions. The authors suggest that retail service quality encompasses ve primary dimensions (physical aspects, reliability, personal interaction, problem solving and policy) and six subdimensions (appearance, convenience, promises, doing it right, inspiring condence and courtesy). This scale uses only performance-based measures, which possess strong validity and reliability and can adequately capture customer perceptions of retail service quality. Similarly, in zquez et al. (2001) developed a research work based on the eld of retail, Va supermarkets to clarify and extend the conceptualization and measurement of service quality in the retail context. They reveal that service quality in the retail context has four dimensions, namely: physical aspects, reliability, personal interaction and policies. zquez et al.s (2001) studies contributed to a Although Dabholkar et al.s (1996) and Va greater understanding of retail service quality, the services and categories that were used 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

criteria to evaluate LPSQual that serves a critical role in developing relationships, stimulating product/service usage and retaining customers. Moreover, cardholders of loyalty programmes face different kinds of problems with the programmes, such as the low value or usefulness of a reward, additional cost to enjoy the benets of a programme, the impossibility of claiming the reward, etc. (Stauss et al., 2005). Based on the unique characteristics of loyalty programmes and the limited number of studies on programme service quality that have been conducted, there is a need to develop a suitable scale for measuring loyalty programmes in terms of service quality. According to Shemwell and Yavas (1999), the more specic the scale items are in the service quality instrument, and the more applicable they are to a providers/managers own contextual circumstance, the more able he/she will be able to use the information. Therefore, instead of taking an existing instrument and trying to t it to the context, a better approach is to develop an instrument specically for the particular service. It is believed that measuring LPSQual may capture additional dimensions, as the goal of a loyalty programme is to encourage customer loyalty. Although companies have attempted to develop customer loyalty by incorporating high-quality products in their offerings, this method of achieving loyalty differs in context compared to loyalty programmes. Frisou and Yildiz (2011) state that the promised reward offered by companies is not part of the product but is external to it and obtained by accumulating points when repeated purchases are made. Although considerable research has been undertaken in relation to loyalty programme rewards such as direct and indirect rewards (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 programmes reward. The effectiveness of loyalty programmes also depends on other factors that are important to customers, 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 t of the programme (Kivetz and Simonson, 2003) and information and communication availability (Nobel and Phillips, 2004). Some retailers have attempted to achieve loyalty by giving personalized service and special treatment to customers. Loyalty programmes can induce a feeling of intelligence and pride about having achieved or won a prize without having to pay the normal price, and can create a sense of appreciation among customers 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 measurement of LPSQual. A review of previous literature pertaining to service quality and loyalty programmes suggests that reward, service personnel, programme policy, tangibility, communication and personalization are most important to customers; each of these dimensions of LPSQual will be discussed in detail below. 2.1 Reward All loyalty programmes grant benets and rewards to customers, depending upon the volume of sales that they generate. Generally, psychologists have been interested in the role of rewards in behaviour learning and modication (Dowling and Uncles, 1997). Stauss et al. (2005) observe that if customers do not receive the promised reward or if the indicated benets prove worthless to them, frustration may arise.

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Authors X X X X

Parasuraman et al. (1985, 1988) (SERVQUAL), ve dimensions Parasuraman et al. (1994) (SERVQUAL-amended), ve dimensions Mittal and Lassar (1996) (SERVQUAL-P), context: health clinic and car repair facility, four dimensions Dabholkar et al. (1996) (retail service quality), ve dimensions Getty and Getty (2003) (LODGQUAL), context: hotels, ve dimensions Essex and Magal (1998) (Magal instrument measuring IS success), three dimensions Ho and Lee (2007), e-travel service quality, ve dimensions LPSQual, seven dimensions X X X X X X X X X X X X (problem solving) X X X (staff service quality) X X X X (user selfsufciency) X X X X X (courteous/ helpful) X X (reward: new dimension)

Table I. Focus of service quality studies

Dimensions Condence Web site functionality Information and security quality Reward Communications X X

Personalization/ customer Tangibility Reliability Responsiveness Assurance Empathy Policy relationships

Taking programme attributes into account, Bridson et al. (2008) nd that an appropriate mix of programme attributes including hard attributes (discounts, vouchers and coupons) and soft attributes (better service, special attention and recognition) can affect store satisfaction and/or loyalty. 2.2 Service personnel The customer-oriented behaviours of employees will impact upon customers perceptions of service quality (Brady and Cronin, 2001). Prior research suggests that when employees are customer oriented, have good rapport with customers and exhibit perceptive and attentive listening skills, customers will evaluate the service more highly and will be more likely to return (Gremler and Gwinner, 2000). Academic research emphasizes the importance of employee service quality from service settings under various terms, such as interaction quality (Brady and Cronin, 2001; Vesel and Zabkar, 2009), personal interaction (Dabholkar et al., 1996) and personnel service (Sirohi et al., 1998). This is not surprising, given that previous research notes that the secret to customer relationship management is closely related to how the retailer makes the cardholders feel, contrary to the common strategy of discounts and promotions (Rosenbaum et al., 2005). 2.3 Programme policy Dabholkar et al.s (1996) RSQS suggests that successful store policy includes convenient hours and convenient parking. In a loyalty programme, the dimension of service quality is inuenced directly by strategies and programme operations in terms of redemption procedures, entry requirements, rebate calculation and renewal terms. Previous studies (Kivetz and Simonson, 2003; Roehm et al., 2002) demonstrate the importance of a careful programme design. In examining the linkages between a programmes design and enrolment, Fowler (2003) suggests that customers are more likely to sign up to a loyalty programme that communicates its benets clearly and have realistic identiable and attainable rewards. Recently, some researchers have indicated that the effectiveness of loyalty programmes depends on the programmes policy (Demoulin and Zidda, 2009; Liu and Yang, 2009). 2.4 Tangibility Tangibility refers to the physical characteristics associated with a service encounter, 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 aspects comprise more than the physical facilities; they cover the convenience offered to the customer 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 easy to access and providing space to move around. 2.5 Communication Communication is generally dened as the formal as well as informal sharing of meaningful and timely information (Anderson and Narus, 1990, p. 44). The concept of communication is often viewed as a necessary condition for the existence of a relationship (Bendapudi and Berry, 1997). Customers who become members of a loyalty programme are likely to identify more strongly with the company,

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because membership relates cardholders to a group of privileged customers (Bhattacharya et al., 1995). Leenheer and Bijmolt (2008) conclude that the success of a loyalty programme also depends on the organizational support provided for the programme, and the amount of resources dedicated to the management of the programme. This implies that in order to create exogenous loyalty programme membership it is useful to communicate the economic and noneconomic benets, to members as well as non-members. 2.6 Personalization Personalization is essential in helping to save customers time and increase perceptions of service quality (Srinivasan et al., 2002). Javalgi and Moberg (1997) note that a lack of personal attention may lead many customers to believe that little difference exists among providers. Thus, the new model of loyalty programmes is concerned more with developing perceptions of value through brand associations and customized interactions with members (Rowley, 2005). Companies can selectively build loyalty for their most valuable segments through personalized and privileged service. These benets help to convey value discrimination to selected customers. 3. Development of a scale to measure the service quality of retail loyalty programmes This section describes the scale development process, in line with procedures advocated in previous literature (Churchill, 1979; DeVellis, 2003). 3.1 Item generation A qualitative study among retail loyalty programme cardholders provides further insight into the perceived programme service quality. Five consumer focus groups were organized. The sample consisted of 45 customers who had at least a years experience in using the loyalty programme. The discussions began with questions about the type and number of loyalty programmes participated in by the respondents; questions also pertained to the cardholders experiences as well as the programmes service quality. Based on the review of related literatures (Dabholkar et al., 1996; OBrien and Jones, 1995) and the qualitative study, LPSQual is a multidimensional construct consisting of six components: reward, service personnel, policy, tangibility, communication and personalization. A pool of 57 items to measure LPSQual was developed. Four business faculty members from two universities and one retail manager served as judges to evaluate the content/face validity of the items. This procedure resulted in a pool of 40 items. Two surveys examined the dimensionality and relative importance of the six conceptually identied programmes service qualities. 3.2 Exploratory factor analysis Before the main study was implemented, a pilot survey was conducted to test the internal consistency of the LPSQual scale and to reduce the number of items to a manageable size. The samples for the study were collected by undergraduate marketing students as a part of their subject pool requirement. The guidelines for respondents eligibility were provided to ensure a varied sample and to exclude ineligible participation (Mick, 1996). This data collection technique resulted in 268 respondents,

but only 255 were valid for use. The respondents were 65 per cent female and 35 per cent male; 78 per cent ranged between 25 and 54 years of age, and 60 per cent of the respondents participated in one loyalty programme. The self-administered questionnaire uses a ve-point Likert scale to measure the programme service quality. Given that the focus of this research was on developing measurement techniques that could be applicable across retail loyalty programmes, specically department stores and superstores, each respondent was instructed to specify the loyalty programmes in which they were enrolled, and then choose the one they would like to focus on as the subject for the questionnaire (Gwinner et al., 1998). Respondents citing programmes from superstores comprised 63 per cent of the sample, while 37 per cent of the sample focused on department stores. The responses were analyzed via principal components and item analyses. 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 with another 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 revealed that the Kaiser-Meyer-Olkin measure of sampling adequacy presented an index of 0.924, which indicates that there were sufcient inter-item correlations within the data to perform factor analysis. The Bartlett test of sphericity in this study also provided statistically signicant results. In the rst run of the factor analysis, which comprised 40 items, seven factors emerged with eigenvalues greater than 1. This accounts for 81 per cent of the total variance. Five items related to communication, which includes reminders pertaining to expiry date of points/vouchers, information regarding promotions, information regarding participating outlets and provision of status updates, were added to a new dimension called information usefulness. Parameter estimates of item factor loading and communalities were consulted to identify ways that each sub-scale might improve from an empirical perspective (Hair et al., 2006). To ensure adequate measurement of the underlying construct, 14 items with cross loading and low communalities were deleted, resulting in a 26-item scale for measuring LPSQual. Subsequent factor analysis was carried out on the 26 items. Principle component analysis resulted in a seven-factor solution (see Appendix 1 for the results of the exploratory factor analysis). The items made strong contributions to the factors they represent (ranging from 0.682 to 0.876), and good communalities (ranging from 0.815 to 0.932). The coefcient alphas for the communication, courteousness/helpfulness, tangibility, reward, information usefulness, policy and personalization dimensions were 0.97, 0.95, 0.93, 0.94, 0.93, 0.89 and 0.94, respectively, all of which are above the threshold that Nunnally (1978) recommends. 3.3 Conrmatory factor analysis Following the procedure for purifying instruments employed by Jaworski and Kohli (1993), the correlation matrix of the 26 items capturing the components of LPSQual was used as input for conrmatory factor analysis. The data for this study were collected by using self-administered questionnaires distributed via the drop-off and collect technique. The target population is comprised of those who live or work within Klang Valley, Malaysia. Klang Valley is home to the capital of Malaysia, and most of the 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

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chose loyalty programmes in superstores (70 per cent). To get a representative sample of customers that enrolled in the loyalty programme, the sample was carefully selected to ensure that participants would not be selected based on perceived friendliness or other characteristics that might inuence the researchers selection. To avoid such bias, the authors personally contacted the key personnel in several organisations to negotiate access to their staff. The key personnel explicitly explained the criteria to the respondents. Upon agreement from the key personnel and before an appointment was set for delivery of the research instrument, the authors requested a list of names of those who were interested in participating. Each respondent would select a particular loyalty programme that they had been a member of for at least a year, that belongs to any department or superstore, and that they would like to focus on in the questionnaire. Respondents were asked to focus on their favourite loyalty programme. Respondents with at least a years membership were specically chosen, since this is considered to be a sufciently long period whereby quitting the programme may arise in case of disappointment or regret. Moreover, this length of membership time (at least a year) was reported to be sufcient 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 a response 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 the respondents, 25 and 20 per cent had been members of their retail loyalty programme for two years and three years, respectively. In addition, 54 per cent of the respondents used the loyalty programme every time they made their purchases and 41 per cent of the respondents participated in more than one loyalty programme. For the conrmatory factor analysis, this study tests and compares two measurement models: (1) Model 1 (one-factor model). LPSQual is conceptualized as a unidimensional construct with seven subdimensions; the covariance among the 26 items is accounted for by a single factor. (2) Model 2 (seven-correlated-factor model). LPSQual is conceptualized as a multidimensional construct. Covariation among the items is accounted for by the seven restricted rst-order factors, with each factor representing a distinct dimension of LPSQual and each item being reective of only a single dimension (Figure 1). The summaries of statistics for these two models are shown in Table II. Model 2 outperforms model 1. The result suggests that LPSQual is a multidimensional construct with seven dimensions. The nal model (model 2) displays acceptable t indices x 2 510.78 (278), p 0.01, GFI 0.910, AGFI 0.886. Although the x 2 statistic is signicant, this is not unusual as the sample size is large (Bagozzi and Yi, 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 t (Hair et al., 2006). The scale also displays good internal consistency, with coefcient alphas ranging from 0.76 to 0.96 (Table III). To assess the reliabilities of the scales, construct reliability was computed for each factor. The composite reliability was calculated using Fornell and Larckers (1981) formula. As Table III shows, the composite reliability for the seven dimensions ranged from 0.82 to 0.97, which met the standard of 0.70 (Hair et al., 2006).

0.65 e1 e2 e3 e4 e5 e6 PO3 PO2 PO1 CU2 CU3 CU4 0.54 e7 e8 e9 RD1 RD2 RD3 0.54 0.78 e10 e11 e12 e13 e14 e15 e16 e17 e18 e19 IF2 0.87 IF3 0.83 IF4 0.81 SP2 0.85 SP3 SP4 SP1 PS1 PS2 PS3 0.77 0.69 0.68 0.75 0.89 0.83 Communication Pesonalization 0.48 Courteousness/ helpfulness 0.46 0.52 0.43 0.37 0.56 0.61 Information usefulness 0.62 0.57 0.49 0.71 0.50 0.40 0.84 0.80 0.77 Rewards 0.48 0.49 0.50 0.78 0.79 Tangibles 0.62 0.73 0.79 0.74 Programme policy

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0.48

0.85 CO6

0.87 CO7

0.89 CO8

0.88 CO9

0.87 CO10

0.87 CO11

0.85 CO12

e20

e21

e22

e23

e24

e25

e26

Figure 1. Model 2 for seven factor correlated for LPSQual

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Absolute measures x 2 statistics (df) GFI RMSEA Incremental t measures CFI TLI NFI Parsimony t measures AGFI NC (x 2/df )

Model 1: one general factor 3,239.52 (299) 0.442 0.157 0.577 0.540 0.555 0.345 10.835

Model 2: seven correlated factors 510.78 (278) 0.910 0.046 0.967 0.961 0.930 0.886 1.837

770
Table II. Comparison of the results obtained for the LPSQual construct

Cronbachs a Policy (X1) Tangible (X2) Reward (X3) Information usefulness (X4) Courteous/helpful (X5) Personalization (X6) Communication (X7) 0.76 0.82 0.84 0.87 0.86 0.86 0.96

Composite reliability 0.82 0.86 0.89 0.88 0.91 0.89 0.97

X1 0.61 0.37 0.49 0.39 0.41 0.43 0.35

X2 0.66 0.45 0.39 0.60 0.49 0.33

X3

X4

X5

X6

X7

Table III. Reliability and convergent and discriminant validity of the scale (conrmatory analysis)

0.73 0.46 0.53 0.53 0.45

0.71 0.49 0.72 0.45 0.60 0.74 0.39 0.42 0.44 0.80

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

3.3.1 Convergent validity and discriminant validity. Evidence of convergent validity in the LPSQual scale was assessed by inspecting the variance extracted (AVE) for each factor, as Table III summarizes. According to Fornell and Larcker (1981), a variance value exceeding 0.50 for a factor indicates high convergent validity. A conrmatory factor analysis shows that the variance extracted ranged from 0.61 to 0.80. Moreover, the AVE is higher than the squared correlations among the seven dimensions, conrming discriminant validity (Fornell and Larcker, 1981). The correlation index among factors is also low and moderate and did not exceed the cut-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 model of LPSQual was also estimated. This model includes the seven rst-order factors of programme policy, reward, personalization, tangibles, information usefulness, courteousness/helpfulness and communication, along with their standardized coefcients and observable indicators (Figure 2). Each of these rst-order factors has signicant ( 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 signicant ( x 2 546.10, df 292), p , 0.05, the CFI, NFI, TLI and RMSEA are 0.96, 0.93, 0.96 and 0.046, respectively, the x 2 difference test between the seven restricted rst-order factors and second-order models is statistically signicant (Dx 2 35.32, Ddf 14). Therefore, these suggest that the second-order model accounted for the data well. Further evidence

e27 Programme policy e28

0.78 0.74 0.65

PO1 PO2 PO3

e3 e2 e1 e6 e5 e4 e9 e8 e7 e12 e11 e10 e15 e14 e13 e18 e17 e16 e19

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0.83 Reward 0.80

RD1 RD2 0.78 RD3

0.66 e29 0.78 Personalization 0.79 e30 0.74 LPSQual 0.74 0.68 0.84 e31 0.78 Infomation usefulness 0.58 e32 0.68 Courteous/helpful 0.81 0.87 Tangibles 0.78 0.75 0.89 0.83

PS1 PS2 PS3 CU2 CU3 0.79 CU4 IF2 IF3 0.83 IF4 SP1 SP2

e33 Communication 0.85 CO12

0.85 0.77 SP3 SP4 CO6

0.85 0.87 0.89 0.87 0.87 0.88 CO11 CO10 CO9 CO8 CO7

e26

e25

e24

e23

e20

e21

e22

Figure 2. The LPSQual scale CFA standardized coefcients for higher order model

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is shown by inspecting the correlations between the seven factors (Table IV). All correlations are signicant at p , 0.001, indicating that the seven factors converge on a common underlying construct (Cadogan et al., 1999; Lages et al., 2005). 3.3.2 Nomological validity. To establish the nomological validity of the LPSQual scale, this study relies on structural equation modelling and tests the relationships between LPSQual and two related constructs identied in the literature satisfaction and customer loyalty (Churchill, 1995). There are well-grounded theoretical reasons to expect a positive association between service quality and satisfaction (Caruana, 2002; Cronin et al., 2000; McDougall and Levesque, 2000; Ting, 2004) and service quality as an antecedent of loyalty or consumers behavioural intentions (Fornell et al., 1996; Loureiro lez, 2008; Parasuraman et al., 1994; Too et al., 2001). Satisfaction has often and Gonza been perceived as the ultimate outcome of all activities carried out during the process of purchase and consumption. Satisfaction has always been described as processes and outcomes that have been identied as a key determinant for loyalty, particularly in the retail 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 of consumer satisfaction. Some researchers (Johnson and Fornell, 1991) suggest that customer satisfaction is the overall evaluation based on the total experience with a good or service over time. In line with previous studies, programme satisfaction is dened as a programme members affective state as a result of the cumulative evaluation of 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 inuences loyalty indirectly 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 of the loyalty programme and quality of personal interactions on customer loyalty, through the mediating variable of customer satisfaction. The result of the study
Variables Policy (1) Reward (2) Tangibles (3) Courteous/helpful (4) Personalization (5) Information (6) Communication (7) LPSQual (8) Programme satisfaction (9) Loyalty (10) Mean SD 1 1.00 0.50 0.37 0.41 0.43 0.40 0.35 0.67 0.45 0.46 3.79 0.70 2 1.00 0.45 0.53 0.53 0.46 0.45 0.77 0.44 0.44 3.46 0.71 3 4 5 6 7 8 9 10

Table IV. Means, standard deviations and correlations among the seven components of LPSQual with programme satisfaction and customer loyalty

1.00 0.60 0.49 0.39 0.33 0.71 0.32 0.43 3.49 0.74

1.00 0.60 0.49 0.42 0.79 0.43 0.48 3.43 0.65

1.00 0.45 0.45 0.78 0.36 0.45 3.35 0.77

1.00 0.39 0.72 0.42 0.34 3.65 0.84

1.00 0.67 0.42 0.40 3.25 0.78

1.00 0.56 0.59 3.49 0.54

1.00 0.45 3.62 0.68

1.00 3.53 0.67

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

shows that loyalty programme quality has a positive direct and indirect inuence on customer loyalty. Customer satisfaction towards a loyalty programme is a post-experience, subjective evaluation of the extent to which the loyalty programme meets or exceeds the customers expectations (Demoulin and Zidda, 2008; Omar et al., 2007). In the retail context, several studies suggest that satisfaction has a positive inuence on loyalty with the store (Bloemer and de Ruyter, 1998; Sivadas and Baker-Prewitt, 2000). It is difcult for a retailer to achieve loyalty without customers rst having some degree of satisfaction (Seymour and Rifkin, 1998). Indeed, past studies of loyalty programmes have 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 LPSQual were positively and signicantly correlated with programme satisfaction and customer loyalty. We conceptualize programme satisfaction as the overall feeling towards the retail loyalty programme on which the respondents chose to focus in this study (Mimouni-Chaabane and Volle, 2010). Five semantic differential scales commonly used in satisfaction studies (Oliver and Swan, 1989) were used to measure overall programme satisfaction. As Oliver (1999) suggested, for satisfaction to affect loyalty, cumulative satisfaction is required. When operationalizing the construct of consumer loyalty, this study focuses on the measurement of the behavioural intentions and attitudes of the construct (Too et al., 2001; Vesel and Zabkar, 2009; Yi and Jeon, 2003). The customer loyalty construct was operationalized with ve items, and a scale anchored (1) strongly disagree to (5) strongly agree was employed (see Appendix 2 for measurement of the variables used for the nomological validity test). To test the structural model, the second-order model of LPSQual (Figure 2) was transferred to the rst-order model via the method of parcelling (Figure 3). This was achieved using composite scores for each dimension, which was calculated by averaging the items measuring each dimension of LPSQual. This is common practice among researchers (Roberts et al., 2003), and can be used provided the correct t of a second-order factorial model has been checked. The estimated parameter values and the t-values (in brackets) are shown in Figure 3. The results of the overall model t indicate that the data t the model well. The goodness-of-t falls within the acceptable range as CMIN/df (1.974) is less than 2 (Chin and Todd, 1995). CFI, TLI, GFI, AGFI and RMSEA are found to be 0.97, 0.96, 0.941, 0.920 and 0.049, respectively. The estimates support the nomological validity as both the direct and indirect effect of service quality on loyalty are signicant. That is, the standardized regression coefcients from: . service quality to programme satisfaction (g 0.624, t 9.206); . service quality to customer loyalty (g 0.565, t 7.122); and . programme satisfaction to loyalty (b 0.137, t 2.115) are all statistically signicant. These ndings support prior theoretical research suggesting that service quality is a factor in determining satisfaction and loyalty (Brady and Robertson, 2001; Wong and Sohal, 2003; Vesel and Zabkar, 2009, 2010). The implication is that a retail loyalty programme can improve cardholders satisfaction and loyalty by delivering service quality. This link is in line with Demoulin and Ziddas (2008) results, which showed that when cardholders are satised with the reward scheme of the loyalty programme,

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Programme policy 0.62 Tangible Reward Information usefulness Courteous/helpful Personalization Communication 0.66 0.72 0.63 0.77 0.73 0.59 LPSQual 0.57** (7.12) 0.62** (9.21) Customer loyalty 0.14* (2.12) 0.80 0.82 0.79 0.64 0.57 CusLoy4 CusLoy5 Programme satisfaction 0.72 0.81 0.82 0.86 ProSatis4 CusLoy1 CusLoy2 CusLoy3

774

Figure 3. Assessment of nomological validity with SEM

ProSatis1

ProSatis2

ProSatis3

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

they are more loyal and less price sensitive than unsatised cardholders. As such, we can conclude that the LPSQual scale has a nomological validity. Further evidence of nomological validity is demonstrated by inspecting the correlations between the components of LPSQual with programme satisfaction and loyalty (Table IV). The results indicate that all pair-wise correlations are statistically signicant. Based on the results of these analyses, it can be concluded that the measure of LPSQual has nomological validity. In sum, this study nds evidence of convergent validity, discriminant validity and nomological validity, and thus the ndings lend support to the construct validity of the seven-factor model of LPSQual. 4. Academic and managerial implications The present study makes both academic and practical contributions that suggest several important ndings and clear applications for future research. From an academic point of view, this study explores the aspects of LPSQual that contribute to the existing body of knowledge about relationship marketing. First, this study provides a clear conceptualization of the LPSQual construct by developing a conceptual model with seven dimensions (i.e. reward, policy, information usefulness, tangibility, courteousness/helpfulness, personalization and communication). By developing a new construct called LPSQual, this research identies the important factors that explain how customers and programme members evaluate programme service quality. The ndings of the study show interaction quality by service personnel with customers (i.e. courteousness/helpful staff and personalized services) to be a principle determinant of service quality in a loyalty programme. The positive experience continuously delivered by employees could positively affect customer loyalty (Sunny Hu et al., 2010).

Previous researchers (Sunny Hu et al., 2010; Smith et al., 2003) note that to create a loyalty programme, rms need to focus their attention on social means, or how one is treated (experience) rather than on economic outcome. This change in focus allows managers to move away from the conventional wisdom of the me-too approach and actually build loyalty programmes. As such, several brave loyalty programme sponsors have embraced a new concept in hard-benet design through the wow factor using experiential or aspirational rewards (Capizzi and Ferguson, 2005). Second, this study nds that LPSQual is related to programme satisfaction and loyalty. The ndings suggest that LPSQual has a stronger inuence on loyalty than satisfaction with the programme does. These ndings emphasize the role of service quality in a loyalty programme, particularly in terms of staff interaction quality. Recent ndings suggest that personal interaction quality has a positive and strong impact on perceived relationship quality (satisfaction/trust and commitment), while perceived loyalty programme quality was positively related to customer loyalty (Vesel and Zabkar, 2010). In fact, Stauss et al. (2005) suggest that loyalty programmes can cause frustration to customers due to certain factors linked with the programme, such as difculties in meeting the programmes requirements, programme inaccessibility, worthlessness of rewards and the additional cost needed to use the benets of the programme. All these factors can have an inverse inuence on the loyalty programme and on the entire relationship between the customer and programme supplier (Vesel and Zabkar, 2009). The current study provides useful insights for managerial action. First, it reveals that service quality in loyalty programmes has seven dimensions, which include tangibility, policy, courteousness/helpfulness, reward, information usefulness, personalization and communication. The results of this study show that courteousness/helpfulness and personalization are the rst and second key determinants of LPSQual, emphasizing the role of employees as actual part-time marketers to enhance customer relationships nroos, 1984). (Gro The results suggest that a system of merely calculating points and purchasing volume are insufcient in a loyalty programme. This nding gives support to the work of Liu and Yang (2009), which suggests point accumulation and redemption choices in a loyalty programme may have negative consequences in the long run, such as diversion from the main purpose of the programme (i.e. to increase consumer loyalty toward the rm). Hence, developing a people-based and member interaction membership service mode and procedure are considered to be more important in a loyalty programme. The service experience of cardholders from the rst encounter onward is important to managers, as it can inuence consumer satisfaction and loyalty. To establish and build relationships 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 to launch 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 personnel interaction quality in loyalty programmes in terms of reecting the non-material benets, or the soft-benets, of a loyalty programme. Second, managers should help spread to service personnel and customers the virtues of being truly customer-centric and providing a strong sense of belonging to the 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

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their service activities and abilities to address specic customer and cardholder needs and act in a fully customer-centric manner. A scale measuring service quality in the loyalty programme may be useful as a diagnostic tool to identify areas where specic improvements and differentiators are still necessary in discovering aspects of the stores loyalty programme that require changes. Third, top management can use this framework to track the evolution of customer needs and develop relevant and effective marketing strategies and tactics in their loyalty programme that will let their rm achieve superior nancial performance. A high level of service quality is associated with several key outcomes, such as improving customer loyalty and the probability of purchase (Zeithaml and Bitner, 2003), enhancing market share (Buzzell and Gale, 1987), customer satisfaction (Cronin and Taylor, 1992) and corporate image (Helgesen et al., 2010). Hence, managers should rely on this industry-specic scale (LPSQual) to measure the level of service quality actually delivered to their customers and/or cardholders. By exploring performance scores on each attribute within and across various designated dimensions, enhancement needs will be clearly acknowledged. Fourth, rms that employ a service quality scale are better able to categorise distinct customer segments or clusters that hold different perceptions about service quality in a loyalty programme. Segmentation of customer portfolios provides valuable information on how to entertain each segment, increase spending and retain customers. Many existing loyalty programmes fail because they lack precise customer segmentation and targeting. According to Meyer-Waarden (2007), loyalty programmes may become strategic tools to manage customer heterogeneity by selecting, identifying and segmenting customers, which improves and personalizes the focus of market resources. In essence, it is critical for retail organisations to identify the dimensions of LPSQual and recognise the signicant relationship between LPSQual and satisfaction in the development of loyalty. Hence, it should be realized that when consumers deal with their loyalty programmes, they are not only evaluating the outcomes of the programme, such as the rewards, but they are also assessing the entire process and their total experience of using the loyalty programme. Retail managers cannot rely on rewards alone, as other non-material elements such as interaction with service personnel and personalization are crucial in retaining customers. 5. Limitations and directions for future research The present study relies primarily on a sample drawn specically from a limited geographical area in Malaysia. Using the drop-off and collect and quota sampling techniques, the ndings may not represent the entire population, and requires replication. This study relates to the high percentage of loyalty programmes in the retail sector, specically superstores and department stores, which prevents generalization of the results. Establishing the scales nomological validity across different sectors, such as airlines, hotels and restaurants, as well as extending it to other nations such as the USA and European countries, is important. With more replicative and creative research, a more comprehensive conceptual framework related to LPSQual can be developed in the future. In addition, this study employed a cross-sectional design whereby all the constructs were assessed at a single point in time. Therefore, no denite conclusion can be drawn

concerning the causality of relationships among constructs, but rather as lending support for the prior causal scheme. Finally, continuous improvement and renement of the LPSQual scale is undoubtedly possible and even desired, based on future research and changes in business environments. Although the author covers all relevant aspects of LPSQual by carefully examining the loyalty programme literature, advancement in technology will bring many creative and innovative approaches to the development and administration of loyalty programmes. Therefore, researchers are strongly recommended to incorporate these relevant aspects into their future research, so that a valid measure of LPSQual occurs on an ongoing basis.
Notes 1. Loyalty programmes represent tools used to build lasting relationships with customers through 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 aim of these rewards is to make customers more loyal. Loyalty programmes focus on a single merchant (private label) programme where cardholders can only redeem points from the merchants outlets. 2. LPSQual is dened as the overall experience of customers in applying, renewing, updating, redeeming and using the programme.

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Appendix 1

Items 0.835 0.794 0.763 0.834 0.722 0.691 0.804 0.789 0.705 0.754 0.731 0.682 0.833 0.797 0.728 0.840 0.777 0.772 0.708

Reward Policy Tangible Personalization

Information usefulness Communication

Courteous/ helpful

Offers high-quality gifts Offers branded reward gifts Provides desirable reward gifts Procedures that are easy to understand Enough time to redeem the points Earned points quickly Provides a comfortable seating area Service counter is easy to nd Service counter has space to move around Provides personalized service Gives personal attention Acts in cardholders best interest Reminds about expiry date of points Informs about participating outlets Reminds about expiry date of vouchers The staff solves cardholders queries The staff cares about receiving feedback The staff often have cardholders best interests at heart The staff listens to cardholders suggestions Web site is useful Offers a reliable web site Web site is informative Web site is easy to access Web site updated regularly Prompt feedback through the web site Web site is attractive Eigenvalues Percentage of variance 14.975 2.634 23.584 13.299 1.454 11.707 1.295 10.835 0.958 10.382 0.827 9.279 0.876 0.855 0.848 0.841 0.787 0.774 0.701 0.762 9.007

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Table AI. Results of exploratory factor analysis

IJRDM 39,10

Appendix 2

Variable

Measurement Dissatised 1 2 3 4 5 Satised Unpleasant 1 2 3 4 5 Pleasant Unfavourable1 2 3 4 5 Favourable Displeased 1 2 3 4 5 Pleased I would recommend this retail store to others I visit this store more frequently than other retail stores In the near future, I am likely to purchase from this retail store again 4. I would continue to purchase from this retail store even if there was a slight increase in price 5. I consider the store to be my rst choice of retail store

Coefcient alpha 0.88

784

Programme satisfaction 1. 2. 3. 4. Customer loyalty 1. 2. 3.

0.84

Table AII. Measurement of the variables used for nomological validity test

About the authors Nor Asiah Omar is a Senior Lecturer at the School of Management, Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM). She holds a PhD in Marketing specializing in loyalty programmes, relationship quality and retailing. Her research interests include loyalty programmes, service quality, relationship quality and retailing. She is the author of numerous academic articles on the topics of loyalty programmes, child care and entrepreneurs in small and medium industry. Beside academic research involvement, she is also currently involved in contract research with local banks in developing satisfaction index for customers. Nor Asiah Omar is the corresponding author and can be contacted at: norasiah@ukm.my Rosidah Musa is currently the Head of Publication at the Institute of Business Excellence at the Faculty of Business Management, Universiti Teknologi MARA, Malaysia. She holds a PhD in Marketing from Cardiff University, Wales, UK; MBA from New Hampshire College, USA and BSc (Business Administration) from Indiana State University, USA. Her research interests are in the areas of consumer behaviour, specically in consumer satisfaction, retail relationship quality, loyalty programme quality, sport event experiential value, university quality and experience quality. Beside academic research involvement, she also actively conducts contract research for Ministry of Agriculture (international market research) and retail organisations in developing and tracking customer satisfaction index. She has presented several papers at national as well as international conferences and also has published papers in journals. She has 23 years experience of working in the academic world and teaches mainly marketing and retailing courses at undergraduate as well as postgraduate levels.

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