How Excellent Experiences affect Customer Loyalty

The Effect of Customer Experience Quality and Product Quality on Perceived Value and Customer Loyalty Intentions

Master's Thesis 2013 60 Pages

Business economics - Offline Marketing and Online Marketing


Table of Contents

List of Figures

List of Tables

List of Abbreviations


1. Introduction

2. Literature Review
2.1 The Evolution from Products to Services to Experiences
2.2 The Initial Conceptual Model
2.2.1 Customer Experience Quality
2.2.2 Perceived Value
2.2.3 Customer Loyalty
2.2.4 Perceived Wealth

3. Methodology & Research Design
3.1 Assigning Scales to the Individual Constructs
3.2 Pre-Testing the Scales
3.2.1 Data Collection
3.2.2 Scale Purification Process CXQ scale Perceived Wealth scale Perceived Value scale Customer Loyalty scale
3.3 Adjustments and Refinements
3.4 Testing the Measurement Model
3.4.1 Data Collection
3.4.2 Measurement Model
3.4.3 Assessing Model Fit of the Measurement Model
3.4.4 Assessing Validity of the Measurement Model

4. Data Analysis
4.1 Comparison of Competing Models
4.1.1 Interpretation of Structural Model #1 suggesting Full Mediation
4.1.2 Interpretation of Structural Model #2 suggesting Partial Mediation
4.1.3 Interpretation of Structural Model #3 suggesting No Mediation
4.2 Selection of the Best Fitting Model

5. Discussion

6. Conclusion
6.1 Theoretical Implications
6.2 Managerial Implications
6.3 Limitations & Future Research

Reference List


List of Figures

Figure 1. Price of coffee offering from commodity to experience

Figure 2. Progression of Economic Value

Figure 3. Initial Conceptual Model

Figure 4. Refined Conceptual Model after Pre-Test

Figure 5. Measurement Model #1.0 in AMOS

Figure 6. Final Measurement Model #1.2 in AMOS

Figure 7. Structural Model #

Figure 8. Structural Model #

Figure 9. Structural Model #

List of Tables

Table 1. Existing Conceptualizations of Customer Experience Quality

Table 2. Dimensions of Customer Experience Quality

Table 3. Results of Factor and Reliability Analysis for the CXQ scale

Table 4. Results of Factor and Reliability Analysis for the Product Quality scale

Table 5. Results of Factor and Reliability Analysis for the Perceived Wealth scale

Table 6. Results of Factor and Reliability Analysis for the Perceived Value scale

Table 7. Results of Factor and Reliability Analysis for the Loyalty Intention scale

Table 8. Model Fit of Measurement Models

Table 9. Standardized Total Effects in Measurement Model #

Table 10. Model Fit of Structural Models (Full Dataset)

Table 11. Multi-group effects of Perceived Wealth in Structural Model #1 (e5 fixed)

Table 12. Multi-group effects of Perceived Wealth in Structural Model #2 (e5 fixed)

Table 13. Multi-group effects of Perceived Wealth in Structural Model #3 (e5 fixed)

Mulaik, S.A., James, L.R., Van Alstine, J., Bennett, N., Lind, S. & Stilwell, C.D. (1989). Evaluation of goodness-of-fit indices for structural equation models. Psychological Bulletin, 105, 430–

James, L.R., Mulaik, S.A. & Brett, J.M. (1982). Causal analysis: Assumptions, models and data. Beverly Hills: Sage

List of Abbreviations

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The thesis at hand develops a new scale to measure customer experience quality on the basis of four dimensions: service quality, atmosphere quality, flow quality, and learning quality. Product quality is found to be a separate, but related construct to customer experience quality. The author investigates the effect of customer experiences on customer loyalty and finds that customer experience quality indirectly affects customer loyalty intentions through perceived value. The relative importance of customer experience quality for perceived value and in succession customer loyalty intentions is found to be much higher than that of product quality. Moreover, perceived wealth of the customer acts as a moderator and increases the positive effect of customer experience quality on perceived value wheras it weakens the effect of product quality on perceived value. Collectively, the results extend and clarify concepts in the evolving, but inconsistent customer experience literature. The findings enable managers to stage customer experiences more effectively and more efficiently.

1. Introduction

The world has changed. Customers’ increasing expectations towards companies make competition continuously harder. What it needs are new business strategies that attract customers and, even more important, business strategies that make customers loyal. This is not a new phenomenon but rather a continuous evolution in business that especially gained momentum in the last years. Over time a development took place from products to services to a post-product, post-service phenomenon which is still evolving (Maklan and Klaus, 2011).

Marketers came to the point where they realized that striving for mere customer satisfaction might not be the panacea to create customer loyalty as it was expected to be. More than 60% of customers who switch to another brand identify themselves as satisfied (Jones, 1996; Reichheld, 1993). Regardless of these academic insights, most companies still rely on it. A report by Euromonitor International based on observations in the American market acknowledges the necessity for marketers to reset strategies. “Provide not only tangible products, but also unforgettable experiences!” (Euromonitor, 2008). In recent years, customer experiences as the ultimate competitive element increasingly gained attention among practicioners and theorists (e.g., Maklan and Klaus, 2011; Verhoef et al., 2008; Gentile et al., 2007; LaSalle and Britton, 2003; Carù and Cova, 2003; Pine and Gilmore, 1998).

It is commonly acknowledged that consumption activities almost always contain experiential aspects (Holbrook and Hirschman, 1982) and it should be the company’s vital mission to make them extraordinary and compelling in order to differentiate from competition and gain a competitive advantage (Pine and Gilmore, 1998). In 2013 we can already find a customer experience focused mindset in some companies’ mission statements (e.g., Dell: “Dell’s mission is to be the most successful computer company in the world at delivering the best customer experience in markets we serve.”) or core values (e.g., McDonald’s: “We place the customer experience at the core of all we do.”).

An often cited example of experience staging and its financial benefits for the company is the American Coffee Company Starbucks. During the transformation from a commodity (=harvested coffee beans) into a good (=roasted, grinded, packaged coffee beans) into a service (=simply served cup of brewed coffee) and finally into an experience (=extraordinary way of ordering, creation, and consumption of a cup of coffee) the price charged increases exponentially (Pine and Gilmore, 2011). Figure 1 shows the different price ranges that are paid on average by customers in the distinct “evolutionary stages” for a cup of coffee in the United States.

Figure 1. Price of coffee offering from commodity to experience (Pine and Gilmore, 2011)

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We see that it is crucial for managers to extend their mindset beyond product quality and service quality. They need to manage the experience their company offers. But this is easier said than done. The American statistician William Edwards Deming once said “You cannot manage what you cannot measure” and that explains nicely the current shortcoming of customer experience literature. Although “customer experience” has become an omnipresent buzzword in marketing, it still has severe theoretical shortcomings in terms of academic research. In the existing literature, the importance of a successful management of the customer experience is indeed emphasized, but researchers often fail to measure customer experiences holisticly and if they do, like Lax (2012) also recognizes, they usually fail to link customer experience quality to the larger context of business outcomes and customer loyalty. Hence, it is hard to manage customer experiences on the basis of existing models. What is needed as a proper foundation is a conceptual framework with a set of meaningful measurement scales that links the quality of a customer experience to customer behavioral outcomes, especially customer loyalty.

Therefore, the thesis at hand aims to overcome the aforementioned pitfalls and presents a model that 1) holisticly measures customer experience quality (with the newly developed CXQ scale) and 2) links the different dimensions of customer experience quality to customer loyalty intentions in the form of word-of-mouth and the customer’s willingness to pay more. 3) In order to gain valuable insights for customer segmentation, perceived wealth is introduced as a moderating variable in the model. The study hereby primarily investigates the effect of customer experience quality on the different facets of customer loyalty.

In chapter two, the conceptual model will be presented and acts as a framework for the discussion on existing literature regarding customer experiences, including its implications and gaps. On this basis the hypotheses will be developed.

Chapter three describes the research design and methodology used to empirically test the conceptual model and hypotheses. Structural Equation Modeling (SEM) will be applied in this thesis to validate the model and test the hypotheses. Based on common sense and the literature discussed in chapter three, the proposed scales to measure the distinct constructs will be presented. Via exploratory factor analysis the scales will be purified and refined to be afterwards transferred into a measurement model which is tested via confirmatory factor analysis. As soon as the fit, reliability and validity of the measurement model is assessed, the relationships as stated by the hypotheses will be integrated into a set of competing structural models and tested in chapter four.

In chapter five, explanations for the observed findings will be discussed critically. During the conclusion in chapter six, the author outlines the theoretical and managerial implications in detail, discusses limitations of the study, and suggests topics for future research.

In advance, the findings of this study are valuable for both theory and practice. It will bring companies one major step forward towards the successful management of customer experiences and allows companies to stage them efficiently and effectively in order to gain a significant competitive advantage. Other researchers can use the CXQ measurement scale for future research and introduce new moderators in order to advise companies in terms of customer segmentation. Additional behavioral outcome or business outcome variables which are integrated in the model might lead to valuable insights as well.

2. Literature Review

Customer experience is a popular, but equivocal marketing buzzword. There are as many different academic conceptualizations as there are scholars and measuring it is a challenge due to its latent nature. Although the literature regarding customer experiences already evolved three decades ago from articles such as Hirschmann and Holbrook (1982), dealing with experiential aspects of consumption, literature still fails to provide a precise terminology and standardized, generalizable approaches (Gentile et al., 2007). To provide the reader with a profound overview of the topic without losing ourselves in the width of diverging definitions, the following literature review will be structured as follows: First, the author will describe the ongoing process in today’s business to increasingly focus on experiences as a progression from products and services. Second, the author presents a conceptual model that combines insights of different studies from the fields of marketing, psychology as well as financial economics. The conceptual model serves as a framework to discuss the different variables, logically relates them to each other based on previous research and visualizes the hypotheses which are consequtively tested in chapter three, four and five.

2.1 The Evolution from Products to Services to Experiences

Over the past three decades, marketing theory underwent several large-scale paradigm shifts. The described paradigm shifts in theoretical literature reflect real-world changes in the competitive landscape that companies face. Maklan and Klaus (2011) conclude that a development from products to services to a post-product, post-service phenomenon took place which is still evolving. It is important to emphasize that the requirements for companies were not substituted over the different phases but rather extended into new dimensions, making competition more and more complex.

In the 1990s the first paradigm shift occurred when marketers took the relational aspects between customer and company into account (Grönroos, 1997; Christopher, 1996). Before, the classic product marketing was largely focused on sales and the creation of fast moving consumer good brands (Merz and Vargo, 2009; Copeland, 1923). Now, instead of bringing products “to market” and considering consumers as targets, firms started to co-create value collaboratively and “marketed with” their customers over an extended time frame. Instead of “delivering value” like in previous eras, the firm’s role was now seen as “proposing value” which was ultimately co-created when the customer uses the firm’s products and services (Vargo and Lusch, 2004). This so-called “value-in-use” is not embedded in a product or service at the moment of exchange, but rather obtained via usage processes (Tynan et al., 2010; Macdonald et al., 2009).

The dichotomous interpretation of goods and services which characterized prior research impeded a combined, simultaneous conceptualization of the two. This was finally resolved when Vargo and Lusch (2004) presented their service-dominant logic. According to Vargo and Lusch (2004), services and goods can be seen as distribution mechanisms for service provision. All economies hereby are considered as service economies (Vargo and Lusch, 2004) and all market offers can be interpreted as customer-centric product-service systems that fulfill customer needs (Ulaga and Reinartz, 2011; Shankar et al., 2009; Baines, 2007). In the following years, value-added services were integrated in the portfolio of many manufacturers to increase their customers’ value-in-use.

Today, as competition quickly adapts, also (value-added) services are increasingly commoditized and no longer sufficient to guarantee a competitive advantage (Meyer and Schwager, 2007; Shaw, 2002; Schmitt, 1999). Several scholars recently identified customer experiences as the ultimate competitive element and their effective management as the most promising strategy for company’s long-term success (e.g., Lax, 2012; Lemke et al. 2010; SAS, 2009; Klaus and Maklan, 2007). Pine and Gilmore (2011) even go so far to claim the rise of the Experience Economy as a logical progression from Service Economy. Addis and Holbrook (2001) interpret the overall economic development within the last decades as an evolution from mass production to mass customization, replacing supply chains with demand chains. The idea behind mass customization is to serve customers uniquely and efficiently. Hereby, mass customizing any good turns a good automatically into a service; mass customizing any service turns a service automatically into an experience (Pine and Gilmore, 2011; Addis and Holbrook, 2001). Figure 2 illustrates this Progression of Economic Value.

Figure 2: Progression of Economic Value, based on Pine and Gilmore (2011)

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The degree of standardization continuously decreases from commodity to experience. As a company moves up the ladder it is able to fulfill individual needs better and becomes more relevant to its customers. Due to this individual focus and personal relevance, a company which stages experiences can easily differentiate from competitors and is able to charge a premium price for its offerings based on the distinctive value provided, instead of a market price dictated by competition (Pine and Gilmore, 2011).

But how can be evaluated if a company has reached the state of experience staging? How can the quality of a customer experience be measured? One measurement instrument for this purpose which gained more and more attention in the last years is the construct of ‘customer experience quality’.

2.2 The Initial Conceptual Model

The conceptual model shown in Figure 3 presents the proposed relationships among the single constructs of interest: customer experience quality, perceived value, perceived wealth and customer loyalty in the form of the customer’s intention to recommend the company to others and the willingness to pay more.

Figure 3 Initial Conceptual Model

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The single constructs will be subsequently described in more detail. The basic idea in a nutshell is the following: As was found in the studies of Lemke et al. (2010) and Hueiju and Wenchang (2009), perceived value is supposed to play a mediating role between customer experience quality and customer loyalty. Perceived wealth is introduced as a moderating variable. The author hypothesizes that the more wealthy customers perceive themselves, the more dimensions of (customer experience) quality they take into account when evaluating the value they receive and hereby the higher is the effect of customer experience quality on perceived value and, in turn, customer loyalty.

2.2.1 Customer Experience Quality

The existing practically oriented literature on customer experiences claims that customer experiences need to be extraordinary, memorable and compelling in order to generate a competitive advantage (e.g., Pine and Gilmore, 2011; Holbrook, 2007; LaSalle and Britton, 2003; Schmitt, 2003; Addis and Holbrook, 2001). But how is it possible to measure an experience, and moreover, how is it possible to manage customer experiences?

First of all, one needs to understand the nature of customer experiences. Customer experiences blur the traditional dichotomy of goods and services by ultimately focusing on customers’ value-in-use, which is created by the orchestral combination of goods and services during the interaction between customer and company (Poullson and Kale, 2004). Customer experiences are by nature co-created by customers and lead to value perceptions both on a cognitive as well as on an affective level (Prahalad and Ramaswamy, 2004). A customer experience hereby is a holistic personal, customer specific perception of a company’s overall market offering which is generated in a wide array of situations and contains a significant amount of hedonic benefits and emotional value for the customer. According to Bruhn and Hadwich (2012), the academic literature regarding customer experiences can be classified into four streams of research: product experience (e.g., Hoch, 1989), service experience (e.g., Patricio et al., 2011), brand experience (e.g., Brakus et al., 2009), and consumption experience (e.g., Hirschmann and Holbrook, 1982). The study at hand tries to merge the parallel concepts of product experience, service experience, and consumption experience by consolidating them in a holistic quality scale.

Similar to the evolution from products to services to experiences, the scales used for measuring quality have evolved and were continuously extended. Customer assessments of quality are phenomenological in nature and quality is commonly defined (e.g., Caruana et al., 2000; Zeithaml et al. 1996; Parasuramam et al. 1988) as a “perceived judgment about an entity’s overall excellence or superiority” (Zeithaml, 1988, p.3). According to the evolution outlined in section 2.1, product quality can be considered as the very basic dimension of quality. It is commonly agreed on that product quality scales are embedded-value measures and have a rather limited scope of what they measure (Lemke et al., 2010; Parasumaran et al., 1988). Moreover, they are largely limited to cognitive evaluations and hereby insufficient to capture the abundance of feelings a person develops when being a customer of a specific company. Service quality scales, such as the SERVQUAL scale, (Parasumaran et al., 1988), acknowledge more quality dimensions beyond tangible product attributes (e.g. reliability, responsiveness, assurance, and empathy) but still fail to measure affective and especially hedonic components properly (Lemke et al, 2010). Therefore it is necessary to conceptualize a scale which also enables the holistic measurement of customer’s feelings when experiencing to be a customer of a specific company.

A common measurement for customer experiences, although very inconsistent regarding the employed scale items, is the use of ‘customer experience quality´ (e.g, Maklan and Klaus, 2011; Lemke et al., 2010; Hueiju and Wenchang, 2009; Verhoef et al., 2009). Table 1 presents an overview of the most important conceptualizations of this construct, in how far the scholars related customer experience quality to other variables and which study design was used. Research context and sample size are reported as well.

In the author’s opinion, Ting-Yueh and Shun-Ching (2010) so far have created the most convincing scale to measure customer experience quality. Nevertheless, they in return fail to consider product quality as a crucial element of a customer experience. Studies of Maklan and Klaus (2011) and Lemke et al. (2010) have demonstrated that customers evidentially also consider product attributes when judging customer experience quality. These studies did include product quality as a dimension of customer experience quality, but did not capture the affective components of the experience properly. Therefore, the author suggests the creation of a new scale that overcomes the pitfalls of previous research. This new scale for customer experience quality (the CXQ scale) will be developed on the basis of Ting-Yueh and Shun-Ching’s (2010) five major dimensions and additionally contains the dimension product quality (see also section Table 2 presents an overview of each of the six proposed major dimensions of the CXQ scale. Taking the sub-dimensions into account as well, customer experience quality hereby incorporates nine different dimensions. Table 2 summarizes each of the dimensions and explains in how far it affects the overall construct. The single items of the CXQ scale can be found in Table A1 and are discussed and refined in chapter three.

Table 1. Existing Conceptualizations of Customer Experience Quality

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The CXQ scale includes experiential factors of which companies have direct control as well as factors they cannot control directly. Based on the ratio between controllable and uncontrollable factors, Carù and Cova (2007) introduced a “continuum of consuming experiences” that ranges from experiences which are primarily developed by the company to

Table 2. Dimensions of Customer Experience Quality

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experiences which are largely constructed by the consumers. For the measurement of customer experience quality this information might be negligible, however, for its management it is crucial. Verhoef et al. (2009) introduced the dimension of time to distinguish among experiences prior, at, and post purchase. Related to this differentiation, the presented CXQ scale can be seen as an aggregation across time and measures the quality of the overall customer experience with a particular focus on the phases of purchase and consumption of the product.

This aggregation is considered to be sensible. As customers rather update their overall impression of a company than dissect their experiences with surgical accuracy, what is important in the end is how the customer subjectively perceives its overall quality.

2.2.2 Perceived Value

The perception of quality regarding experiences is the ultimate foundation of the proposed model but it is not sufficient to explain customer behavioral intentions. Bolton and Drew (1991), Caruana et al. (2000), Oliver (1999), and Sweeney and Soutar (2001) found that quality does not directly lead to behavioral outcomes such as purchase. Rather, it indirectly influences behavioral outcomes via a value perception that mediates the relationship. Perceived value is defined as “the consumer’s objective assessment of the utility of a brand based on perceptions of what is given up for what is received” (Gupta and Zeithaml, 2006). The customer may perceive value in each phase of the customer journey, also including aspects outside the company’s direct control but still related to the company, such as when interacting with other customers (Verhoef et al., 2009). On this basis the author concludes that customer experience quality as conceptualized in this research can be considered an antecedent of perceived value. Moreover, it will be hypothesized that perceived value fully mediates the relationship of customer experience quality and customer loyalty.

2.2.3 Customer Loyalty

Customer loyalty can be investigated either behaviorally or psychologically. Behaviorally, consumers are defined as loyal if they continue to buy the same product over a certain time period (Gupta and Zeithaml, 2006). This is usually measured as repeat purchase frequency or relative volume of purchasing (e.g., Tellis, 1988). However, Jacoby and Chestnut (1978) point out that this kind of behavioral customer loyalty is in some cases merely the result of convenience or high switching costs and hereby might be spurious. Customer loyalty can also be measured by psychological indicators, i.e. the customer’s intention to perform a diverse set of certain behaviors. Intentions can be seen as the psychological antecedents of behavior. In terms of customer loyalty, these intentions comprise repurchase intention (e.g., Reynolds and Arnold, 2000), intention to recommend to others, also known as word-of-mouth (WOM) (e.g., Mattila, 2001), likelihood of switching and likelihood of buying more (e.g., Selnes and Gonhaug, 2000). Zeithaml et al. (1996) merge these four aspects of loyalty into a behavioral-intentions battery with four factors – loyalty (i.e. recommend company to others), propensity to switch, willingness to pay more, and external response to service problems.

Because of the aforementioned risk of a spurious relationship between customer experience quality and behavioral customer loyalty, the author decides to apply the concept of psychological loyalty intentions. With regard to Reichheld (2003) who advocates that complex measures besides customers’ intention to recommend the company to others are unnecessary to capture loyalty, the model will be kept as simple as possible. Therefore not all of Zeithaml et al.’s (1996) identified aspects will be taken into account. Only two factors are employed in the measurement model: 1) intention to recommend the company to others and 2) since people apparently are willing to accept an exponential increase in prices for experiences (Figure 1), also customer’s willingness to pay more will be considered.

Hypothesis 1 and 2 connect the aforementioned constructs in the following way:

H 1 Customer experience quality affects customer’s intention to recommend the company to others positively and indirectly through perceived value.

H 2 Customer experience quality affects customer’s willingness to pay more positively and indirectly through perceived value.

2.2.4 Perceived Wealth

In financial economics, a consumer’s wealth is defined by several observable variables, i.e. cash balances, government bonds, housing equity, stocks, other assets, and debts. This concept of wealth hereby assesses quantitatively how ‘wealthy’ or ‘rich’ a person actually is. By aggregating this wealth across a nation or a sample, and linking it to aggregated consumption in a longitudinal study, financial economists were able to find evidence for the so called ‘wealth effect’ which is measured by the wealth elasticity of demand (e.g., Peltonen et al., 2012; Campbell and Cocco, 2007). The wealth elasticity of demand describes the proportional change in consumption of a good relative to a change in consumer’s wealth. The wealth effect predicts that an increase in wealth leads to an increase in spending, i.e. people are both willing to purchase a higher quantity of products, which stimulates repurchases, and are willing to accept higher prices.



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Title: How Excellent Experiences affect Customer Loyalty