True Value of Brand Loyalty

ABSTRACT - For companies operating in increasing global context, the importance of brand loyalty is extremely crucial to business sustainability. This paper reviews brand loyalty research done over the years and proposes another way of examining the construct: one that includes repeat purchases and non-purchase behavior. It is believed that a truly loyal customer not only buys consistently from a company but also actively engages in positive non-purchase behavior. The most important form of non-purchase behavior is positive word-of-mouth, which includes referral. A framework has been proposed and illustrated with an empirical study. The implications of this view for future research and for management of marketing programs are derived.

Citation:

Desmond Lam (2005) ,"True Value of Brand Loyalty", in AP - Asia Pacific Advances in Consumer Research Volume 6, eds. Yong-Uon Ha and Youjae Yi, Duluth, MN : Association for Consumer Research, Pages: 157-163.

Asia Pacific Advances in Consumer Research Volume 6, 2005      Pages 157-163

TRUE VALUE OF BRAND LOYALTY

Desmond Lam, University of Western Australia, Australia

ABSTRACT -

For companies operating in increasing global context, the importance of brand loyalty is extremely crucial to business sustainability. This paper reviews brand loyalty research done over the years and proposes another way of examining the construct: one that includes repeat purchases and non-purchase behavior. It is believed that a truly loyal customer not only buys consistently from a company but also actively engages in positive non-purchase behavior. The most important form of non-purchase behavior is positive word-of-mouth, which includes referral. A framework has been proposed and illustrated with an empirical study. The implications of this view for future research and for management of marketing programs are derived.

INTRODUCTION

Soliciting brand loyalty has never been more challenging. With increasing global economic uncertainty and intense competition in the global markets, companies are finding new and better ways to not only attract and satisfy their customers but also to form sustainable relationships with them. Needless to say, there are many reasons why companies are doing so. Very often, thee are related to the direct value that these customers can bring to the companiesBsales, revenue and profits. However, companies should realize that the value of a loyal customer does not simply come from his/her purchase value. It goes much further. Companies must view the value of a loyal customer as a combination of purchases as well as non-purchases such as positive word-of-mouth. This paper will first review past literature on brand loyalty and then discuss the significance of these two behavioral consequences (re-purchase and non-purchase) of loyal customers. Subsequently, a simple framework of brand loyalty will be proposed and tested through a simple empirical study.

REVIEW ON BRAND LOYALTY RESEARCH

The topic on brand loyalty was first published through the works of Copeland in 1923 (Jacoby and Chestnut 1978). Subsequently, there were numerous definitions of the construct, and with many different measurement methods employed. Many of these definitions were operational in nature and, hence, few researchers actually tried to explore the theoretical meaning of the loyalty construct. Jacoby and Chestnut (1978) cited 53 definitions in their review in 1978. In the last two decades, other researchers had attempted to improve and conceptualize the meaning of brand loyalty.

The lack of a clear definition did not hamper the progress of loyalty measurement techniques (Bass 1974; Uncles, Ehrenberg, and Hammond 1995; Bhattacharya 1997; East 1997; Ehrenberg 1996; Morrison and Schmittlein 2001). Traditionally, brand loyalty research has focused on behavioral measures that include purchase sequence, proportion of purchase and probability of purchase (Jacoby and Chestnut 1978). Most of these behavioral studies focused mainly on repeat purchases. Bass (1974) suggested that brand choice behavior (i.e. purchase) is substantially stochastic and presented a general theory of stochastic preference. He concluded that deterministic prediction of individual behavior would achieve limited success. Ehrenberg and Goodhardt (1970) extended the stochastic preference models into multi-brand buying.

While these behavioral studies claimed successes in estimating and even forecasting aggregated brand loyalty effects, they did not attempt to understand the true underlying reasons (perhaps, other than by random effects) why customers behave the way they do. Some researchers argued that these loyalty measures that were based on report of purchase decisions, do not distinguish true loyalty from "spurious" loyalty associated with consistent purchasing of one brand because there are no others readily available or because a brand offers a long series of deals, etc (Day 1969). In addition, most of the behavioral research works so far have examined behavior only in the light of consumer purchases; few, if not none, have included non-purchases such as positive word-of-mouth as the key component of loyalty behavior.

The deficiency of behavioral studies has sparked other researchers to look into the attitudinal element of brand loyalty (i.e. Day 1969; Jacoby 1971; Dick and Basu 1994; MacStravic 1994; Jarvis and Wilcox 1997; Bowen 1998; Ha 1998; Iwasaki and Havitz 1998; Sirdeshmukh, Singh and Sabol 2002). Oliver (1997) defined loyalty as a "deeply held commitment to rebuy or repatronize a preferred product or service consistently in the future, despite situational influences and marketing efforts having the potential to cause switching behavior." Day (1996) viewed brand loyalty as comprising both repeated purchases and strong internal disposition (i.e. attitudes). Jacoby and Chestnut (1978) concluded a composite definition of brand loyalty that included both attitudinal and behavioral components. They defined brand loyalty as (1) biased (i.e. non-random), (2) behavioral response (i.e. purchase), (3) expressed over time, (4) by some decision-making unit, (5) with respect to one or more alternative brands out of a set of such brands, and (6) s a function of psychological (decision-making evaluative) processes. In the last decade, a number of researchers started to add new theoretical meaning to the loyalty construct. Dick and Basu (1994) viewed loyalty as the relationship between relative attitude and repeat patronage. In Oliver (1994)’s dynamic framework, customers actually progress from cognitive commitment to emotional bonding as their loyalty increases. Fournier and Yao (1997) also consider affect as an integral component of relationship in their framework. More recently, Baloglu (2002) found that truly loyal customers had more emotional commitment to a brand than any other groups of customers. Another research also discovered that evoking the loyalty emotions significantly strengthened customers’ intent to return to a hotel and their willingness to recommend a hotel brand to others (Barsky and Nash 2002). Apparently, emotive customers seem to be most loyal (Coyles and Gokey 2002). Combining all these papers together, it seems that the more recent conceptualizations of brand loyalty point towards the inclusion of affect in understanding brand loyalty. Interestingly, recent research has also linked affect to the giving of positive word-of-mouth (Harrison-Walker 2001).

Many researchers have now agreed that brand loyalty is complex and should be a multi-dimensional construct. For example, Bennett and Bove (2001) felt that both attitudinal and behavioral loyalty should be measured so as to gain an appreciation of the loyalty make-up of a firm’s customer base. Baldinger and Rubinson (1996) conducted a longitudinal customer loyalty research, measuring both attitudinal and behavioral variables. They discovered that highly loyal buyers had a probability of staying with a brand over the coming year that was related to their attitudes towards the brand. They, stressed that a combination of attitudes and behavior could provide a better loyalty definition that was the basis for assessing, tracking and taking actions to improve brand health. Chaudhuri and Holbrrok (2001) explored the effects of both purchase and attitudinal loyalty on brand performance. They found that purchase loyalty led to greater market share, while attitudinal loyalty resulted in higher relative price for the brand. Amidst the general agreement, some researchers believed the composite definition of loyalty is probably a mistake; it is difficult to operationalize, and probably very few people will be classified as truly loyal when so many criteria have to be met (East 1997).

This paper agrees that brand loyalty is a complex and multi-dimensional construct. Previous studies seemed to have neglected non-purchase loyal behavior, especially the impact of positive word-of-mouth. In fact, few researchers have investigated brand loyalty behavior simultaneously in terms of both purchases and non-purchases. Given that a few researchers have now included affect into the brand loyalty construct and that positive word-of-mouth behavior has been linked to affect in some separate studies, this paper recommends a re-orientation of loyal behavior to include both purchases and non-purchases. While acknowledging the importance of cognition/attitude as part of the brand loyalty construct, this paper will only examine the behavioral aspect.

FIGURE 1

TWO MAIN TYPES OF LOYAL BEHAVIORS

BEHAVIOR IN DETAIL (REPEAT PURCHASES AND NON-PURCHASES)

Loyal customers usually pay higher prices, are cheaper to serve, and have more predictable sales (Jain and Singh 2002). They are also more likely to refer other customers and buy other additional complementary goods and services (Gremler and Brown 1999). Past research on customer value tends to focus on the direct impact of the loyal customers to the company such as the direct revenue that is a result of customer purchases (as described in the earlier section). However, the value of brand loyalty from a customer is not simply the purchase values; it should also include all other non-purchase values. Loyal customers often generate new businesses via positive word-of-mouth, hence expanding a company’s customer and revenue bases. As such, companies should look beyond these direct revenue streams contributed by their loyal customers and include all other positive benefits associated them especially the value of the positive word-of-mouth (Reichheld and Teal 1996; Gremler and Brown 1999).

While previous brand loyalty studies have repeatedly focused their attention solely on customers’ repeat purchases, this paper argues that a typical loyal customer would engage in two main types of behaviors: repeat purchase and non-purchase (Figure 1). For example, a brand loyal customer should be defined as one who regularly repeat-purchases and, at the same time, engages in positive non-purchase behavior such as positive word-of-mouth. As such, researchers should examine both behaviors concurrently in order to gain a better understanding of the brand loyalty construct.

Figure 2 illustrates the total cumulative value (probable) of a loyal customer to a business. As time passes and with each repeat purchases, the value of a customer’s non-purchase value may increase much faster than its purchase value. Values from a loyal customer’s non-purchase behaviors include mainly the provision of positive word-of mouth. It may also include contributing to co-production of services, acting as encouragers and mentor to new customers or other activities.

For example, a brand loyal customer may purchase a particular brand of shampoo every three months over a period of 5 years (i.e. 20 purchases). Each year, assuming he/she makes five recommendations (positive word-of-mouth) to his/her friends who may, as such, make their purchases on that brand. To the company managing the brand, the total value of that loyal customer is thus much higher than his/her purchase value. It also includes 25 probable extra purchases (5 x 5 years) made by his/her friends as a direct result of his/her recommendations.

Positive word-of-mouth represents the most important component of non-purchase behavior. It is one of the most neglected marketing areas (Silverman 2001) and to date, relatively few companies have tried to harness the full potential of its power (Buttle 1998). Word-of-mouth describes the communications between groups such as independent experts, family and friends, current and potential customers (Ennew, Banerjee, and Li 2000). Arndt (1967), one of the earliest marketing researchers on word-of-mouth’s influence on consumers, viewed word-of-mouth as an oral, person-to-person communication between a receiver and a communicator whom the receiver perceives as non-commercial, regarding a brand, product or service. It is certainly a group phenomenon involving the exchange of thoughts and ideas among two or more individuals in which none of the individuals represent a marketing source (Bone 1992).

Word-of-mouth has been shown to influence a variety of conditions: awareness, expectations, perceptions, attitudes, behavioral intentions and behaviors (Reingen 1987). It is widely reported to be many times more effective than newspapers and magazines, personal selling, and radio advertising in influencing consumers to switch brands (Katz and Lazarfeld 1955; Herr, Kardes, and Kim 1991). According to a study conducted by Herr, Kardes, and Kim (1991), a face-to-face word-of-mouth was much more persuasive than a printed format. Katz and Lazarsfeld (1955) found word-of-mouth to be the most important source of influence in the purchase of household goods and food products.

Past research has shown that satisfied customers often engage in positive word-of-mouth and make referrals (Sundram, Mitra, and Webster 1998). Similarly, loyal customers are often assumed to add business benefits to a company through their engagement of positive word-of-mouth. This paper argues that while some customers may express their loyalty to a brand by repeat purchases, others may express it by engaging in positive word-of-mouth such as referral. Thus, for better measurement of brand loyalty, researchers should examine both behaviors concurrently.

FIGURE 2

PROBABLE CUMULATIVE LIFE-TIME VALUE OF A LOYAL CUSTOMER

FIGURE 3

A SIMPLE BRAND LOYALTY MODEL

CONCEPTUAL FRAMEWORK AND DISCUSSION

Figure 3 shows a proposed model for brand loyalty in a 2x2 matrix. This simple framework intends to encourage the examination and discussion of a loyal customer in terms of both re-purchase and non-purchase behavior. The framework also highlights the inclusion of positive word-of-mouth as a major component of brand loyalty. It will encourage marketers to broaden their marketing outlook and their understanding of brand loyalty within their customer segments. For example, a customer may purchase brand X (purchase loyalty) and yet loyal to brand Y (affective loyalty). Further research will include developing a reliable methodology to accurately estimate the value of word-of-mouth.

A customer has little brand loyalty when he/she exhibits low purchase and non-purchase behaviors. If he/she demonstrates high purchase behavior but low non-purchase behavior, he/she is simply just purchase loyal. Many consumers should fall into this category. When the customer exhibits low purchase behavior but high non-purchase behavior, he/she is affective loyal to the brand. Such customer may exhibit strong psychological emotions/affect to the brand that propels him/her to engage in positive word-of-mouth. He/she does not purchase as often perhaps due to both personal and market situations. For example, a customer may love Toyota cars and may own one in the past. Perhaps due to economic difficulties, he/she is unable to repeat purchase a Toyota car. This customer may still engage in positive word-of-mouth and make recommendations to his/her friends, families, colleagues, etc. If a customer shows high purchase and high non-purchase behaviors, he/she is truly a brand loyal customer. This customer is strongly committed to the brand, frequently engages in both purchase and non-purchase behaviors, and has the highest value to any businesses.

Given this framework, marketers can attempt to differentiate their customers based on this 2x2 matrix. They can then develop the appropriate marketing strategies to suit each particular segment. For example, to move consumers with little/no loyalty to the true brand loyalty segment, marketers may need to pursue multi-level strategies. For those customers with little/no loyalty, marketers can implement strategies to encourage purchases and move them up to purchase loyalty segment. Alternatively, they can encourage positive word-of-mouth and move them horizontally to affective loyalty segment. In either strategy, marketers will reap some customer values for their businesses. The former strategy is a rather traditional way of marketing products in the marketplace. The latter strategy is commonly used by the Internet companies via of viral marketing. Once the customers are placed in either affective or purchase loyalty segment, marketers may then pursue more specific strategies to increase their purchases or positive word-of-mouth behavior respectively.

A SIMPLE EMPIRICAL ILLUSTRATION OF THE FRAMEWORK

To illustrate the framework, a self-administrated survey was conducted on a sample of 77 participants in Singapore. The participants were white-collar working Singaporeans with ages ranged from 18 to 41 years old, and a median of 26 years old. The participants were solicited through a number of sources including an evening university class, an international hotel and an international financial institution. About 82% of the participants were female.

Each participant was given a questionnaire consisting of six items. Four of the items were used to solicit responses with reference to a downtown restaurant that was hugely popular among people working in downtown offices. Out of the four items, two items were designed to measure the level of positive word-of-mouth given on the reference restaurant. Participants were also asked if they think they were loyal patrons to the reference restaurant. These items were measured using a five-point likert scale that ranged from strongly disagree (1) to strongly agree (5). In addition, the participants were asked to estimate the total number of times that they had patronized the reference restaurant in the last 12 months. The last two items were questions on age and gender.

Data Treatment

A factor analysis was performed on the two items that were used to measure positive word-of-mouth. The method yielded a single factor with equal loading (.884) among the two items and an item reliability coefficient (alpha) of .719. Nunnally (1967) has suggested that reliabilities in the range of .5 to .6 are satisfactory in the early stages of research. The obtained coefficient was, hence, deemed sufficient given the exploratory nature of this study. Subsequently, averaging the two items created a positive word-of-mouth index. Using a median split across the new positive word-of-mouth index, the participants were separated into two categories: low and high positive word-of-mouth groups. Median splits were also performed on the frequency of patron and self-reported loyalty results; the participants were split into light/heavy patrons, and low/high reported loyalty groups. Lastly, the responses to gender and age were treated as extraneous variables and were tested for differences between the described groups. No significant differences were found (p>.05).

Results and Discussion

The survey revealed some interesting findings. Figure 4 shows the percentage of participants classified accordingly to each category/group of the proposed model. As expected, substantially more participants lie in the low purchase/low non-purchase group (46.8%) than the other groups. There were also more purchase-loyal customers (35.1%) than affective-loyal customers (7.8%). Only about 10% of the sample taken could be considered as truly-loyal customers according to the proposed model. Working with simple mathematics, one would notice that only 23% (i.e. 8 divided by 35) of those who regularly patron (i.e. high purchase behavior) the reference restaurant engaged in high non-purchase behavior or positive word-of-mouth behavior. Marketers should focus on pursuing strategies to encourage the other 77% of regular patrons to engage in more positive word-of-mouth and subsequently move them to the true-loyal quadrant of the model. As there are relatively few affective-loyal customers (i.e. customers who seldom patron the restaurant but engage in positive word-of-mouth) than any other groups in this case, it is unsure if the economic benefits can outweigh the costs of promoting more purchase behaviors from these affective-loyal customers.

Next, the mean self-reported customer loyalty index was compared between the groups using a one-way ANOVA with Tukey-HSD multiple comparison test (See Figure 5). The results of the ANOVA showed significant differences between the groups, F(3,77)=8.93, p<.001. Post hoc Tukey-HSD tests showed that the mean reported loyalty scores of the true-loyalty (M=5.00) and affective-loyalty groups (M=4.67) were significantly higher (p<.05) than the mean loyalty scores of both the little/no-loyalty (M=3.50) as well as the purchase-loyalty groups (M=3.63). Expectedly, the no/little loyalty group scored lowest in mean reported loyalty. It is, however, surprising to find the mean loyalty score of the purchase-loyalty group to be much lower than the affective-loyalty and true-loyalty groups. Under normal circumstances, one would expect customers who buy/patron regularly to think they are loyal to that brand. Interestingly, many regular customers to the reference restaurant do not think that they are loyal customers (i.e. the mean reported loyalty score was lower). Another important finding in this study was that participants who showed high self-reported loyalty toward the reference restaurant were those who actively engaged in non-purchase behavior or positive word-f-mouth. This finding further supported the proposal to include positive word-of-mouth behavior into the brand loyalty construct.

FIGURE 4

ILLUSTRATION OF PROPOSED MODEL USING EMPIRICAL DATA

FIGURE 5

MEAN REPORTED LOYALTY SCORE OF EACH GROUP

CONCLUSION

This paper proposes a framework for brand loyalty and provides a simple illustration. Of particular importance is the re-orientation of what defines brand loyalty behavior. It is paramount that marketers view the value of a loyal customer as the total benefits that can be derived from keeping a customer loyal. Hence, both repeat purchase and non-purchase behavior should be measured simultaneously so as to gain a deeper understanding of true brand loyalty. This paper merely promotes a concept. More empirical works are required to accurately estimate the value of the positive word-of-mouth of a loyal customer.

The paper cites positive word-of-mouth as the most important non-purchase behavior that a loyal customer engages in. While this is true in most sense and vastly confirmed by past research, there are other behaviors engaged by a loyal customer such as co-production of goods and services, and as mentor to new customers that can be explored in greater details. Moreover, this paper did not examine the attitudinal components of brand loyalty and the types of mediators as well as moderators to brand loyalty such as satisfaction, trust, service quality, commitment, and personal characteristics. Lastly, the paper illustrated the model/framework through a simple empirical study that was conducted on a single service product-market, with limited sample size, and in a single country. As such, readers must be cautious with any generalizations. Future research will address these issues in order to provide a more holistic view of the brand loyalty construct.

APPENDIX

(ITEMS USED IN SIMPLE EMPIRICAL STUDY)

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