WHO OWNS THE CUSTOMER?

DISENTANGLING CUSTOMER LOYALTY IN INDIRECT DISTRIBUTION CHANNELS

ANDREAS EGGERT University of Paderborn JRG HENSELER Radboud University Nijmegen SABINE HOLLMANN University of Paderborn

Increasing levels of vertical competition make the possession of end customers loyalty an issue of major concern for brand manufacturers and distributors alike. While we can rely on a solid body of knowledge on the drivers and outcomes of customer loyalty, empirical insights into the interplay between different forms of customer loyalty in channels of distribution remain limited, ambiguous and void of theoretical explanations. Based on a nationwide survey of customers in a detail-intensive industry in the Netherlands and drawing on information integration theory and balance theory, this research identies a positive and unidirectional spillover effect from customers brand loyalty to distributor loyalty. Hence, distributors can free ride on a brand manufacturers investments in customer loyalty. From the brand manufacturers perspective, the loyalty spillover can have positive or negative consequences, depending on the level of vertical competition among channel members. While the spillover increases end customers loyalty toward the channel, it decreases the brand manufacturers odds of keeping end customers when it comes to the contest between a brand manufacturer and its distributor. Keywords: distributor loyalty; brand loyalty; loyalty spillover; vertical competition; business-to-business marketing; survey methods; structural equation modeling

INTRODUCTION
In the past decade, the level of vertical competition in marketing channels generally has risen (Webster 2000; Ailawadi 2001; Draganska and Klapper 2007). Vertical competition depicts the competition between channel members at different levels in the channel (Rosenbloom 2004, p. 82). While brand manufacturers and distributors must collaborate to deliver superior value to their customers (Anderson, Narus and Narayandas 2009; Ganesan, George, Jap, Palmatier and Weitz 2009), they also compete for their own shares of the value pie (Jap and Ganesan 2000; Dong, Shankar and Dresner 2007) and, ultimately, for end customers loyalty (Grewal, Levy and Lehmann 2004). For example, distributors increasingly use delisting as

a competitive weapon to improve their own margins, at the expense of suppliers (Sloot and Verhoef 2008), and a growing number of distributors have introduced their own private-label brands to achieve a tighter connection to their customers (ACNielsen 2005; Chan Choi and Coughlan 2006). Brand manufacturers in turn respond with direct sales that enable them to bypass their former channel partners (Yadav and Varadarajan 2005). Obviously, the ownership of end customers loyalty becomes even more important when channel partners engage in more intense vertical competition. The marketing literature provides a sound and growing body of knowledge on customer loyalty, its nature, drivers and consequences. In empirical studies,

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customer loyalty is typically conceptualized and measured with regard to a single object, such as loyalty toward the selling rm (Innis and La Londe 1994; Wallenburg 2009) or a branded product (Chaudhuri and Holbrook 2001). As supply chain management deals with the coordination of multiple business functions and entities (Giunipero, Hooker, JosephMatthews, Yoon and Brudvig 2008), researchers have begun to look beyond the management of dyadic relationships and focus on the supply chain network (Galaskiewicz 2011). In indirect distribution channels, customers may develop distinct attitudes toward brands versus distributors (Bloemer and Lemmink 1992). A triadic perspective impels managers to question which form of customer loyalty to manage (Choi, Dooley and Rungtusanatham 2001). To date, however, the potential interplay between brand and distributor loyalty is still a blind spot in supply chain management research. Against this background, the goal of this study is to understand whether and how brand and distributor loyalty impact each other in indirect distribution channels. From a managerial standpoint, the ownership of end customers loyalty becomes particularly important when manufacturers and distributors engage in vertical competition. Strong brand loyalty enables brand manufacturers to prevent or retaliate against distributors competitive inroads. Distributor loyalty, in turn, reduces brand manufacturers power base and provides greater degrees of freedom to downstream channel partners. Therefore, brand manufacturers and distributors alike require a more ne-grained understanding of who benets from investments in customer loyalty to dene a companys strategic approach in the ongoing struggle for end customers minds and hearts. From a research perspective, we must avoid confounding the different forms of customer loyalty, and a clear denition of the scope of these theoretical constructs is fundamental for further progress in the discipline (Scheer 2008). In addition to disentangling customers brand loyalty from their distributor loyalty, we recognize the importance of their interaction to channel partners. When they invest substantial resources into building and strengthening bonds with end customers, brand manufacturers need to know who will prot from their efforts, and distributors wonder whether and to what extent they can harvest their relationship-building investments. It is not sufcient to disentangle different objects of customers loyalty; we also need a sound understanding of their patterns of interaction. Yet, few studies (Bloemer and Lemmink 1992; Corstjens and Lal 2000; Huber and Herrmann 2001; Verhoef, Langerak and Donkers 2007; Hansen and Singh 2008) pursue the interplay of various objects of customer loyalty. Among them,

theoretical foundations remain surprisingly underdeveloped and empirical evidence is presented for all conceivable patterns of interaction. The relationship between customers brand loyalty and distributor loyalty is assumed to be either (1) not existent, (2) simple, or (3) of reciprocal nature. To date, we are missing a sound understanding of the mechanisms that link brand and distributor loyalty. To overcome ambiguity with regard to the interplay between customers brand loyalty and distributor loyalty, we focus on two key contributions to supply chain management literature. First, we develop and test a parsimonious theoretical framework to explain the spillover effects of customer loyalty in indirect distribution channels. Second, we apply a structural equation modeling approach based on instrumental variables to identify the dominant interaction patterns between customers brand loyalty and distributor loyalty on an empirical basis. We structure the remainder of this manuscript as follows: First, we present a literature review that highlights the conceptual weaknesses and empirical ambiguity of existing studies on customers brand and distributor loyalty. Second, we introduce information integration theory and balance theory as the foundation on which we base our hypotheses development. Third, we document our empirical study and its results. Fourth, we discuss our results and their managerial implications and offer some suggestions for further research.

LITERATURE REVIEW
Customer loyalty research has a long history in the marketing and supply chain literature. Customer loyalty can be dened from different perspectives focusing on its attitudinal and behavioral facets. For our research, we adopt the denition suggested by Sirdeshmukh, Singh and Sabol (2002). They characterize customer loyalty as an intention to perform a diverse set of behaviors that signal a motivation to maintain a relationship (Sirdeshmukh et al. 2002, p. 20). Consequently, we dene distributor loyalty as a customers intention to perform a diverse set of behaviors that signal a motivation to maintain a relationship with a distributor, whereas brand loyalty represents a customers intention to perform a diverse set of behaviors that signal a motivation to maintain a relationship with the brand. Early studies dealt predominantly with brand loyalty (Copeland 1923; Jacoby and Chestnut 1978; Dick and Basu 1994; Oliver 1999), but since the development of a relationship-oriented perspective, customer loyalty toward the selling rm has become a key focus of interest (e.g., Innis and La Londe 1994; Wallenburg 2009). Although loyalty research thus is generally

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well-established, there are still some blind spots. Most studies are limited to a single form of loyalty, directed toward a single object, so they offer little insight into the interplay among different forms of customer loyalty. Palmatier, Scheer and Steenkamp (2007b) caution, for example, against intermingling loyalty toward the selling rm with salesperson-owned loyalty. In Table 1, we summarize existing research that investigates customers brand and distributor loyalty. As Table 1 reveals, we can nd empirical evidence for any possible relationship between brand and distributor loyalty. Some studies nd them empirically unrelated (Frank, Massy and Lodahl 1969; Mittal, Kumar and Tsiros 1999; Homburg and Giering 2001), whereas others identify an association between brand and distributor loyalty but do not reveal the direction of this link (Cunningham 1961; Tranberg and Hansen 1985). A third group of studies assumes that one form of customer loyalty drives the other, although again, the direction of the link is by no means clear. Some studies imply that brand loyalty leads to distributor loyalty (Corstjens and Lal 2000; Huber and Herrmann 2001; Sudhir and Talukdar 2004; Hansen and Singh 2008), whereas others suggest a reverse causal relationship (Carman 1970; Bloemer and Lemmink 1992; Ewing 2000; Ailawadi, Neslin and Gedenk 2001; Bonfrer and Chintagunta 2004; Verhoef et al. 2007). We even nd research support for a reciprocal relationship between both forms of customer loyalty (Ailawadi, Pauwels and Steenkamp 2008).

In addition to this empirical ambiguity, existing studies suffer from two conceptual weaknesses. First, their theoretical foundations remain underdeveloped. All the studies in Table 1 rely on conventional wisdom or ad hoc rationales to justify the assumed relationship between brand and distributor loyalty. Second, as Jacoby and Chestnut (1978, p. 82) state, any form of true loyalty requires the opportunity of being disloyal, but few studies documented in Table 1 recognize such an environment. For example, empirical research in the European automotive industry features car dealers that remained locked in to one manufacturers brand (Bloemer and Lemmink 1992; Homburg and Giering 2001; Huber and Herrmann 2001; Verhoef et al. 2007). In studies of private labels, the store brands are only listed by that store (Cunningham 1961; Carman 1970; Tranberg and Hansen 1985; Corstjens and Lal 2000; Bonfrer and Chintagunta 2004; Sudhir and Talukdar 2004; Ailawadi et al. 2008; Hansen and Singh 2008). In these empirical settings, the identied relationship between brand loyalty and distributor loyalty may mirror an idiosyncratic market structure rather than general spillover effects. In summary, current insights into the interplay between customers brand and distributor loyalty remain limited. Against the background of these gaps, we undertake an empirical study in an industrial context that offers customers a variety of branddistributor combinations providing an unconstrained opportunity of being disloyal.

TABLE 1 Empirical Evidence of the Interplay of Customer Loyalties Discovered Relationship Distributor loyalty and brand loyalty are unrelated Distributor loyalty and brand loyalty covary Brand loyalty leads to distributor loyalty Study Frank et al. (1969) Homburg and Giering (2001) Mittal et al. (1999) Cunningham (1961) Tranberg and Hansen (1985) Corstjens and Lal (2000) Hansen and Singh (2008) Huber and Herrmann (2001) Sudhir and Talukdar (2004) Ailawadi et al. (2001) Bloemer and Lemmink (1992) Bonfrer and Chintagunta (2004) Carman (1970) Ewing (2000) Verhoef et al. (2007) Ailawadi et al. (2008) Context Retailing Automobile Automobile Retailing/private labels Retailing/private labels Retailing/private labels Retailing/private labels Automobile Retailing/private labels Retailing/private labels Automobile Retailing/private labels Retailing/private labels Automobile Automobile Retailing/private labels

Distributor loyalty leads to brand loyalty

Distributor loyalty leads to brand loyalty and vice versa

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THEORETICAL FRAMEWORK AND HYPOTHESES

Our unit of analysis is a professional customer who currently purchases goods through an indirect distribution channel that contains a brand manufacturer and a distributor. We analyze the customerdistributor brand manufacturer triad from the customers point of view. Customers consider two different objects, the distributor and the brand manufacturer, so we distinguish distributor loyalty from brand loyalty. For this study, we analyze the interdependence of these forms of customer loyalty and investigate their impact on channel switching. Building on previous research (Chen, John and Narasimhan 2008), we conceptualize channel switching as customers intention to switch to a different distribution channel offered by the incumbent brand manufacturer if the current distribution channel is no longer available. We develop our conceptual model in three steps: First, we formulate hypotheses about the interdependence of distributor loyalty and brand loyalty. Second, we theorize the joint impact of the two forms of customer loyalty on channel switching. Third, we complement our model by including control and instrumental variables. To shed light on the potential interplay between brand and distributor loyalty, we draw on information integration theory (Anderson 1971, 1981). Information integration theory has been frequently applied in operations management, marketing channels and supply chain research (e.g., Gaeth, Levin, Chakraborty and Levin 1991; Pullman, Verma and Goodale 2001; Roggeveen, Bharadwaj and Hoyer 2007). It provides a theoretical lens that explains how customers form judgments when multiple information cues are available. According to information integration theory, customers process multiple chunks of information in a two-step process. First, all relevant cues are weighted according to their relevance to the individual. Second, the weighted information cues are summated to determine the individuals overall response to the evaluated entity (Carlson and White 2008). What are the relevant information cues when assessing distributor loyalty? Louviere and Gaeth (1987, p. 28) identify four high-level decision concepts that largely explain supplier choice decisions: product assortment, price, quality and convenience. A recent meta-analysis (Pan and Zinkhan 2006) suggests that product assortment has the greatest impact on store choice, and empirical research further demonstrates that store loyalty depends on the properties of the products and brands sold (Sirohi, McLaughlin and Wittink 1998; Baker, Parasuraman, Grewal and Voss 2002; Amine and Gadenat 2003). Against this background of empirical evidence, we assume that customers attitudes (such as brand

loyalty) toward the products listed by a distributor belong to the relevant information cues to form distributor loyalty judgments. As a relevant information cue, brand loyalty will play a role in the subsequent information integration process. More precisely, higher levels of brand loyalty will contribute to distributor loyalty and we thus propose a positive spillover effect from brand loyalty to distributor loyalty: H1: Brand loyalty has a positive effect on distributor loyalty. Based on information integration theory, one can also build a case for the reversed spillover effect. If customers perceive the distributor and its sales efforts as a relevant part of the brand manufacturers total market offering, they will weight and integrate distributor information cues when forming their brand loyalty judgments. In particular, higher levels of distributor loyalty will lead to a more positive response to the brand manufacturer. This direction of causality has been proposed in several publications (Bloemer and Lemmink 1992; Ailawadi et al. 2001; Verhoef et al. 2007). To account for both directions of the potential spillover effect, we model a reciprocal relationship between brand and distributor loyalty and hypothesize that: H2: Distributor loyalty has a positive effect on brand loyalty. As long as a brand forms part of a distributors assortment, customers can exhibit distributor loyalty and brand loyalty simultaneously. Disintermediation interrupts this coexistence of the two forms of customer loyalty. More specically, if a brand manufacturer implements a direct sales approach and abandons the indirect distribution channel, customers may no longer exhibit brand loyalty and distributor loyalty simultaneously. Instead, they must accept the direct sales approach and stay loyal to the brand or switch to a different brand and stay loyal to the distributor. For some customers, disintermediation thus implies channel switching. Therefore, a channel switching scenario constitutes an acid test for customer loyalty. Relationship marketing theory explicates that the decision to stay with a supplier is strongly inuenced by a customers loyalty toward the supplier (Dick and Basu 1994; Morgan and Hunt 1994). If a brand cannot be bought through the current channel, brand loyalty makes it more likely that a customer will perform channel switching. Vice versa, distributor loyalty causes a customer to refrain from customer channel switching. Empirical research in retailing has shown that distributor loyalty prevents customers from switching a distributor and that brand loyalty leads to a decrease in brand switching (Emmelhainz, Stock

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and Emmelhainz 1991; Campo, Gijsbrechts and Nisol 2000). More recent research in relationship marketing suggests that buyers look beyond the dyads they are involved in when they decide upon channels (Wuyts, Stremersch, Van den Bulte and Franses 2004), which corroborates the need for a triadic perspective. Having explanatory power in triads, balance theory offers a motivational theory of attitude change (Heider 1958) and change in interpersonal relationships (Burnstein 1967). Balance theory implies people experience a consistency motive that functions similar to a drive toward psychological balance. Thus, people strive to achieve balance in their attitudes and interpersonal relationships. According to Eagly and Chaiken (1998, p. 281), this theory offers the most systematic and enduring approach to understanding attitudes relations. Balance theory has particularly demonstrated its ability to explain important phenomena of supply chain management and marketing (Choi and Hartley 1996; Phillips, Liu and Costello 1998; Russell and Stern 2006). A system of relationships is balanced if the affect valences of all the relationships would result in a positive product if they were multiplied together. A triad is thus balanced if it contains an even number of negative relationships. In the context of indirect distribution channels, balance theory explains customers simultaneous attitudes toward a brand and a distributor by depicting the customer as being engaged in a triad of cognitive elements that connect through positive or negative relationships. The meaning of any link between two

parties A and B can be described manifestly, such as A visits B, A buys B or A lists B. On the lefthand side of Figure 1 (at time t0), the system of relationships includes a customer in a triad with a distributor and a brand. If the distributor carries the brand in its assortment, the customer assumes a positive relationship between the distributor and brand. In the beginning, the customer exhibits loyalty to both the distributor and the brand, and the system of relationships is in a state of balance (Choi and Wu 2009) (another possible state of balance would result if a customer had neither brand loyalty nor distributor loyalty). In case of disintermediation, the relationship between the brand and the distributor becomes negative (t1 in Figure 1), creating an imbalanced system of relationships from the customers point of view. According to balance theory, this customer wants to restore a balanced state by changing one positive relationship into a negative one (see the two different options at t2 in Figure 1). Finally, the triad consists of one positive and two negative relationships, which enables the customer to regain psychological balance. Drawing on relationship marketing theory and balance theory, we assume that customers channel switching intention depends on the respective levels of brand and distributor loyalty and propose the following hypotheses: H3: Brand loyalty has a positive effect on channel switching.

FIGURE 1
Balance Theory Applied to Evaluations of Indirect Distribution Channels
t0 t1 t2

Customer

Customer Customer Distributor

+ Brand

+
Distributor

+ +
Brand

+
Distributor

+ Brand Customer

+
Distributor

Brand

balanced triad

imbalanced triad

balanced triad

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H4: Distributor loyalty has a negative effect on channel switching. Next, we propose that H3 and H4 should not be regarded in isolation, but as part of a customers thought process. This means that customers do not exhibit channel switching by assessing the level of either their brand loyalty or their distributor loyalty in isolation. Instead, they react according to the outcome of a comparison between the two forms of loyalty. To develop this argument, we rely on another element of balance theory, namely the principle of minimum effort. Rebalancing relationship systems occurs according to the principle of minimum effort (Rosenberg and Abelson 1960). Individuals rebalance relationships while keeping their systems unchanged as far as possible, which for instance implies altering the fewest possible relationships (Burnstein 1967). Applied to our context, the principle of minimum effort entails that customers rebalance their cognitive system such that their levels of brand loyalty and distributor loyalty change as little as possible. If a customer needs to adjust a loyal relationship to disloyalty, the mental effort becomes larger the higher the current level of loyalty. Customers can thus reduce their mental effort if they diminish their loyalty toward the entity that they have been less loyal to in comparison with the other entity. If customers weight their brand loyalty against their distributor loyalty, it is indispensable not only to examine the effects of brand loyalty and distributor loyalty together but also to acknowledge that customers draw a comparison between the two forms of loyalty. Dick and Basu (1994) emphasize that a customers relative appraisal of objects is likely to provide a stronger indication of repeat patronage than their attitude toward a brand determined in isolation. That is, whether a customer chooses to perform a channel switch depends on his or her relative levels of distributor loyalty and brand loyalty and the joint effects of the two forms. Based on these arguments, we expect that customers perform channel switching if their brand loyalty exceeds their distributor loyalty, whereas customers refrain from channel switching if their distributor loyalty exceeds their brand loyalty. Hence: H5: Channel switching is more likely to occur if brand loyalty exceeds distributor loyalty. Finally, we include control and instrumental variables in our model. The extant marketing literature suggests that the most important antecedent of customer loyalty is customer satisfaction (Fornell 1992). Not only does including customer satisfaction into our conceptual model decrease the omitted variable bias but it also helps control for potential recency effects (Sirdeshmukh et al. 2002). We therefore control for the direct effects of customers satisfaction

FIGURE 2
Conceptual Model

Customer Distributor Relationship

Number of Distributors

Customer Distributor Satisfaction

Distributor Loyalty

H4

H1+ H2+
Customer Brand Satisfaction Brand Loyalty

Channel Switching

H3+

Customer Brand Relationship

Number of Brands

with the distributor and with the brand in terms of their respective forms of loyalty. To allow for the estimation of reciprocal paths between both forms of loyalty, we added two instrumental variables (customers overall number of distributors and customers overall number of brands in the category) to our conceptual model (Kenny 1979). Figure 2 shows our conceptual model, which captures the interdependence of brand loyalty and distributor loyalty and links both forms of customer loyalty to channel switching.

EMPIRICAL STUDY
Study Design To test our set of hypotheses, we conducted a nationwide survey in the medical instruments industry in the Netherlands. More specically, we surveyed dental practices, selected dental burrs as our focal product, and gathered information on customers relationships with their main distributor and main dental burr manufacturer. This specic industrycountry combination is an appropriate setting for research on different forms of customer loyalty as the market structure does not restrict customers in their choices, in that all the brands are available at alternative distributors, and every distributor offers different brands. The industry is characterized as detail intensive (Spiteri and Dion 2004), which indicates that distributors explain and sell their products at the customers site; thereby making geographical proximity an irrelevant factor from a customer loyalty perspective. The focal product, a dental burr, was substitutable and customers were not in a lock-in situation created by some form of asset specicity. In our sample, customers named 21 different primary suppliers and 15 different primary brands, which strongly implies they have the

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means to be disloyal (Jacoby and Chestnut 1978). Therefore, we are researching a situation of active loyalty in which customers remain loyal to their distributors or brands because they want to (Bloemer and Kasper 1995). The survey instrument consists of four parts. In the rst part, participants named their primary supplier when they purchased medical instruments, then assessed their levels of distributor loyalty and satisfaction. In the second part, these respondents named their primary brand in a given product category and indicated at which distributor they purchase this brand. Next, they reported their levels of brand loyalty and satisfaction. In the third part, we asked for information about their channel switching intention. Finally, the participants described themselves and their companies. We adapted existing scales to measure our constructs. All measures employed a 7-point Likert-type scale ranging from strongly agree to strongly disagree unless otherwise noted. We used three-item scales to capture distributor loyalty and brand loyalty, borrowing indicators from Chaudhuri and Holbrook (2001) as well as Palmatier et al. (2007b). The indicators for distributor satisfaction and brand satisfaction were previously used by Cannon and Perreault (1999) and Fornell, Johnson, Anderson, Jaesung and Bryant (1996). Finally, we measured channel switching with a seven-point semantic differential scale that consisted of three questions presenting scenarios in which the customer had to decide between staying loyal to the distributor or to the brand (Verbeke, Farris and Thurik 1998; Sloot and Verhoef 2008). The scenario questions had the anchors I would rather buy our primary burr brand from a different supplier and I would rather buy a different burr brand from our current supplier. Together, these questions form a reective multi-item measure for our channel switching construct. We list all item formulations in Appendix A. We pretested the survey instrument with 10 potential respondents using a think-aloud technique, which demonstrated that the respondents could distinguish between the two loyalty objects while completing the questionnaire. It also led to some minor changes in wording. As we adapted existing scales to our research setting, we also conducted a quantitative pilot test with 48 respondents. Reliability and exploratory factor analysis demonstrated good psychometric properties of the adapted scales. All items loaded on a single factor, which explained more than 50 percent of the variance, and Cronbachs alpha was consistently above the 0.7 threshold (Nunnally 1978). We sent the nal survey packages to 1,982 dental practices, which were randomly selected from a database provided by a commercial list broker. The survey packages contained a cover letter, addressed to

the purchasing decision maker of the company, requesting that he or she ll out the survey and offering a summary report as an incentive. We identied the purchasing decision maker for dental burrs by means of individual telephone calls prior to sending out the survey package in order to increase the quality and quantity of responses. Three weeks later, we sent a follow-up letter and a copy of the initial survey. This procedure resulted in 500 responses (overall response rate: 25.2 percent). To ensure a comparable perspective on the distribution channel, we selected 339 questionnaires for our empirical analysis that were answered by companies that purchase their main dental burr brand from their main distributor. On average, the responding rms had been buying from their primary supplier for 15.8 years (SD = 9.1 years) and purchasing their primary brand for 17.2 years (SD = 9.0 years). As these gures indicate, our focal industry relies heavily on long-term customer relationships. In total, 89 percent of the dental practices were run by one dentist, and 11 percent by multiple dentists employing up to 30 assistants. A total of 15.7 percent served up to 2,000, 61.1 percent up to 4,000, 15.9 percent up to 6,000 and 7.3 percent more than 6,000 patients. Among the respondents, 79.6 percent were men, 16.2 percent were women, and 4.1 percent did not specify a gender. In total, 92.1 percent of the respondents had been working at their current practice for more than 5 years. Comparisons between early (rst third) and late (last third) respondents on all constructs used in the model show no statistically signicant mean differences (p > 0.05), which indicates that nonresponse bias is not a concern for our data (Armstrong and Overton 1977).

Reliability and Validity of Measurement We assessed the multi-item scales in terms of their reliability and validity. Cronbachs alpha values are well above the threshold of 0.7 (Nunnally 1978), indicating a satisfactory level of internal consistency reliability. Since the wording of the scale items distributor loyalty, brand loyalty, customer distributor satisfaction and customer brand satisfaction is relatively similar, Cronbachs alpha might be inated. This would be the case if the interitem correlations were not purely caused by substantial covariation but also by a commonly applied method, such as wording. To exclude this possibility, in Appendix B we provide a sensitivity analysis illustrating how the model estimates would have changed if the reliability had in fact been smaller than reported above. Using conrmatory factor analysis (CFA), we evaluated additional psychometric properties of our constructs. The scale properties are reported in Appendix C. We estimated two conrmatory factor models: 81

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In addition to the standard model, we estimated a model with an orthogonal general factor capturing (and thereby controlling) potential common method variance (Podsakoff, MacKenzie, Lee and Podsakoff 2003). As Table 2 shows, both CFA models yield an acceptable and relatively similar model t. However, the majority of t measures are in favor of the model containing the general factor (except for the parsimony-adjusted goodness-of-t). Moreover, the t of the CFA Model 2 is signicantly better than the t of the standard CFA Model 1. Thus, our indicators share a signicant amount of common variance, which potentially (but not necessarily) signies common method variance. However, the common variance accounts for only 13.8 percent of the total variance in the data, which is clearly below the average of comparable studies (Lance, Dawson, Birkelbach and Hoffman 2010). For both CFA models, the standardized factor loadings and the average variance extracted (AVE) indicate high levels of indicator reliability and convergent validity. For one out of the 38 error correlations, a modication index slightly larger than 10 was observed. Since unconstraining this error variance would alter the error correlation between a brand satisfaction and a brand loyalty indicator by only 0.077, and since both indicators formed part of well-established scales, we did not alter the measurement model. Apart from the mentioned error correlation, the modication indices did not suggest dropping any particular variable (Schreiber, Nora, Stage, Barlow and King 2006). To examine discriminant validity, we used Fornell and Larckers (1981) criterion; the smallest square root of an AVE exceeds the absolute correlation of every pair of our variables. The construct correlations and descriptive statistics are

reported in Table 3, which is based on the results of both CFA models. In addition, we ran a series of nested CFA model comparisons in which we constrained the covariance between each pair of constructs to one (Anderson and Gerbing 1988; Bagozzi and Yi 1988). As the chi-square difference was signicant for all the pairs of constructs (Dv2 > 5.8 at Ddf = 1), we had further support for discriminant validity among the constructs. This support for discriminant validity is particularly important in our study context, because it empirically conrms that customers distinguish between brand and distributor loyalty. Overall, we can conclude that our measurement models exhibit acceptable levels of reliability and validity.

RESULTS AND DISCUSSION

Results We employed covariance-based structural equation modeling (AMOS 19) and used maximum likelihood as the estimation method for testing our hypotheses. First, we use the implied variancecovariance matrix resulting from the rst CFA model. To model the reciprocal path between customers brand and distributor loyalty, we adopted an approach suggested by Sirdeshmukh et al. (2002) and rened it for use in a structural equation modeling setting (Kenny, Kashy and Bolger 1998). Two measures were taken to ensure correct model estimation. First, to address the danger of nonunique parameters when modeling reciprocal paths in cross-sectional research, we used instrumental variables (Kenny 1979). Second, we allowed the disturbances of the reciprocally related constructs to covary (Wong and Law 1999).

TABLE 2 Results of the Conrmatory Factor Analyses Statistic v2 df p-value GFI AGFI PGFI NFI NNFI IFI CFI AIC CAIC CFA Model 1 No General Factor 216.079 100.000 0.000 0.931 0.894 0.608 0.943 0.957 0.969 0.968 322.079 577.857 CFA Model 2 General Factor Affecting All Indicators Equally 206.408 99.000 0.000 0.934 0.898 0.604 0.946 0.960 0.971 0.971 314.408 575.012

Comparison: Dv2 = 9.671, Ddf = 1, p = 0.002

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TABLE 3 Descriptive Statistics and Construct Correlations SD 1 1.84 1.01 1.18 0.91 0.09 (1.66) 0.73 (19.71) 0.86 0.11 (2.03) 0.32 (6.20) 0.68 (17.03) 0.28 (5.35) 0.77 0.90 0.23 (4.34) 0.04 (0.73) 0.59 (13.41) 0.01 (0.18) 0.80 0.93 0.10 (1.85) 0.01 (0.18) 0.13 (2.41) 0.65 (15.70) 0.12 (2.22) 0.36 (7.08) 0.14 (2.60) 0.27 (5.15) 0.02 (0.37) 2 3 4 5 6 0.16 (2.98) 0.40 (8.01) 0.30 (5.77) 0.35 (6.86) 0.28 (5.35) Construct Correlations (t-Values) 7 0.16 (2.98) 0.30 (5.77) 0.26 (4.94) 0.21 (3.94) 0.16 (2.98) 0.17 (3.17) 0.94 1.00

Construct

Mean

4.20

5.83

0.77 0.79 0.20 (3.75) 0.73 0.82 0.30 (5.77) 0.68 0.75 0.20 (3.75)

Channel switching Distributor loyalty Brand loyalty

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Disentangling Customer Loyalty in Indirect Distribution Channels

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5.81

5.84

6 1.31 0.22 (4.14) 0.13 (2.41) 0.10 (1.85)

3.36

1.63

0.21 (3.94)

0.24 (4.54)

0.15 (2.79)

0.15 (2.79) 0.02 (0.37)

Customer distributor satisfaction Customer brand satisfaction Number of distributors Number of brands

3.13

0.96 1.00 0.23 (4.34)

Numbers below the diagonal represent construct correlations when no general factor is modeled; italic numbers in the upper triangle represent construct correlations when a general factor is included in the model. Bold numbers on the diagonal show the square root of the average variance extracted. The t-values are printed in parantheses.

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To explore H1H4, we estimate our conceptual model and nd a chi-square tting function with a value of 10.22 at 4 degrees of freedom (p = 0.037). The relative t indices (comparative t index = 0.990; normed t index = 0.984, non-normed t index = 0.948, incremental t index = 0.990) and the absolute indicators of t (goodness-of-t index = 0.991, standardized root mean residual = 0.021, root mean squared error of approximation = 0.068) show that the proposed model allows for an adequate representation of our empirical data. In particular, the stability index value of 0.005 suggests a robust estimation of the reciprocal paths (Bentler and Freeman 1983; Kaplan, Harik and Hotchkiss 2001). Accounting for different constellations of the links between customers brand and distributor loyalty, we nd a dominant link, such that brand loyalty has a positive effect on distributor loyalty. Although we allow for a reciprocal effect, distributor loyalty has no signicant inuence on brand loyalty. Thus, we can conrm H1 but nd no support for H2. As hypothesized, distributor and brand loyalty have opposite effects on channel switching intention. Brand loyalty positively affects it (path coefcient estimate = 0.35), whereas distributor loyalty negatively inuences channel switching intentions (path coefcient estimate = 0.24), thereby supporting H3 and H4. Our model explains 19 percent of the observed variance in channel switching. This modest amount of

variance explanation is not surprising given the wealth of situational variables that might impact channel switching (Dick and Basu 1994). As this research focuses on explaining the interdependence of distributor loyalty, brand loyalty and channel switching rather than predicting channel switching, signicant path parameters are more important than R2 values for assessing our results. Parameter estimates, corresponding levels of signicance and R2 values are reported in Table 4. The rightmost column of Table 4 shows the results if the implied variancecovariance matrix resulting from the second CFA model (including a general factor) was used. Obviously, all hypothesis tests remain unaffected. Consequently, the ndings of our study remain valid even if the construct measurement was affected by some common method variance. Before testing the remaining hypothesis, H5, we transform it so that it is more accessible for conventional statistical tests. The following equation is a mathematical notation for H5 and expresses that channel switching depends on how brand loyalty and distributor loyalty are perceived: channel switching b brand loyalty distributor loyalty f b brand loyalty b distributor loyalty f |{z} |{z} H4 H3

In Equation (1), b represents the strength of the effect of the difference between brand and distributor

TABLE 4 Parameter Estimates Dependent Variable Independent Variable Standardized Estimates Without General Factor Distributor loyalty Brand loyalty Customer distributor satisfaction Number of distributors Brand loyalty Distributor loyalty Customer brand satisfaction Number of brands Channel switching Brand loyalty Distributor loyalty Number of distributors Number of brands

Result

With General Factor R2 = 0.46 0.18** 0.61*** 0.14** R = 0.37 0.08 n.s. 0.57***
2

R2 = 0.57 0.20*** 0.68*** 0.11** R = 0.48 0.03 n.s. 0.67***

2

H1 supported

H2 not supported

0.12** R = 0.19 0.35*** 0.24*** 0.16** 0.19***

2

0.18*** R = 0.17 0.23*** 0.34*** 0.06 n.s. 0.10

2

H3 supported H4 supported

p < 0.10; **p < 0.01; ***p < 0.001; n.s. not signicant.

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loyalty when everything else remains equal. The disturbance term stands for the proportion of variance in channel switching that cannot be explained by this difference. Essentially, Equation (1) states that the coefcients of brand loyalty (hypothesized in H3) and distributor loyalty (hypothesized in H4) are equal in absolute magnitude. An alternative way of expressing H5 is thus: The effects of distributor loyalty and brand loyalty on channel switching are equal in absolute magnitude but differ with respect to their sign. To test whether the coefcients of the effects of brand loyalty and distributor loyalty on channel switching differ in absolute magnitude, we conduct a Lagrange multiplier test. The test shows that a model that constrains the two effects so that they sum up to zero (b3 + b4 = 0) does not differ signicantly from an unconstrained model in terms of t (Dv2 = 2.93 at Ddf = 1), which means that H5 cannot be rejected. Put together, these empirical results support the theory that channel switching depends on the difference between brand loyalty and distributor loyalty. Finally, we assess the indirect effect of brand loyalty on channel switching. The standardized coefcient of the indirect effect is 0.046. According to Preacher and Hayes (2008), statistical inference of indirect effects should be based on bootstrapping (Efron and Tibshirani 1993) in order to cope with the nonnormal distribution underlying indirect effects. We performed bootstrapping with 1,000 bootstrap samples and obtained a bias-corrected condence interval of the indirect effect of [0.091; 0.019]. The indirect effect is signicantly different from zero at p = 0.001.

Discussion In the modern competitive environment, channel partners often need to collaborate to build strong bonds with end customers (Anderson et al. 2009; Ganesan et al. 2009), even as they compete for customers loyalty (Grewal et al. 2004). When it comes to the contest between a brand manufacturer and its distributor, the channel partner that primarily owns customers loyalty may reap most of the benets of their common relationship-building efforts. Brand manufacturers may establish direct sales, and distributors can develop private-label brands; in these settings, understanding the interactions between brand loyalty and distributor loyalty has great signicance for channel partners facing increasing vertical competition. To date, however, theoretical insights into the interplay between these forms of customer loyalty have been surprisingly limited, and the empirical results have remained contradictory. Against this background, our research provides several important insights. First, it demonstrates that customers brand and distributor loyalty can be conceptualized and measured as two distinct constructs in an industrial

channel context. This approach contributes to growing literature that works to disentangle central marketing constructs, including trust (Fang, Palmatier, Scheer and Li 2008) and loyalty (Palmatier, Scheer, Houston, Evans and Gopalakrishna 2007a; Palmatier et al. 2007b). To deepen our understanding of relationship marketing approaches in a channel setting, we must embrace its complexity (Scheer 2008) and demarcate different objects pertaining to focal variables. Confounding the true objects of customer loyalty by including them within a single measurement model can lead to erroneous implications for marketing theory and marketing practice (Palmatier et al. 2007b). We pursue a more ne-grained perspective on relationship variables and recommend that channel research applications continue to do so. Second, to the best of our knowledge, this study offers the rst theoretical framework for the spillover effects of customer loyalty in a channel context. Former studies have relied on ad hoc rationales and conventional wisdom to hypothesize patterns of interaction among different forms of loyalty (e.g., Corstjens and Lal 2000; Verhoef et al. 2007; Hansen and Singh 2008), whereas we use information integration theory and balance theory as conceptual bases for our hypothesis development. All-in-all, these theories predict that brand and distributor loyalty are not independent from each other and jointly drive channel switching. Our empirical study conrms a relationship between both forms of customer loyalty and demonstrates that brand and distributor loyalty should be considered two distinct yet interrelated constructs in channel research. Third, our study reveals that both forms of loyalty have approximately the same direct impact on customers channel switching intention. This point may seem initially like a counterargument against disentangling brand loyalty from distributor loyalty, but a closer look at their total impact reveals more subtle differences. In addition to its direct impact, customer brand loyalty exhibits a negative indirect effect on channel switching through its positive spillover on distributor loyalty. As it strengthens the overall bond with the nal customer, this spillover effect also increases distributor-owned loyalty and therefore weakens the relative position of brand manufacturers in the ongoing competition for customers loyalty. Thus, we must account for spillover effects to grasp the whole picture and better understand the total impact of brand and distributor loyalty on customers channel switching intention.

CONCLUSIONS
Implications Distributors must recognize that customers develop two distinct forms of loyalty. When they conduct 85

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customer loyalty tracking studies, these distributors need to monitor not only customers loyalty to their own company but also their loyalty to primary brands in different product categories. As our results indicate, brand and distributor loyalty have an evenly strong impact on channel switching, which means that distributors can assess customer proneness to vertical competition by comparing the absolute levels of brand loyalty and distributor loyalty for each customer or segment. Customers who exhibit higher brand loyalty than distributor loyalty represent those most at risk for the distributor. In many cases, distributors pursue efciency gains through brand delisting (Sloot, Fok and Verhoef 2006), but such actions involve the risk of losing brand-loyal customers. As our ndings show, when customers must decide between two mutually exclusive relationships, they retain the relationship partner to which they are more loyal. For brand manufacturers, we offer three important implications. First, brand manufacturers should not delegate customer relationship maintenance to distributors. Instead, they need to establish and foster their own relational bonds with customers, because investing in brand loyalty enhancements can effectively protect them against vertical competition. Second, brand manufacturers need a ne-grained understanding of who benets from investments in brand loyalty. That is, we nd an unidirectional spillover effect from brand loyalty to distributor loyalty, such that investments in brand loyalty do not only serve the brand manufacturers best interest but also enhance the distributors. Distributors benet from manufacturers investments to increase brand loyalty, but the reverse is not true. For manufacturers, this important insight should help them balance the benets and costs of building customer loyalty across channel partners and (re)negotiate appropriate channel contracts. Third, manufacturers should evaluate investments in customer loyalty according to the character of their distribution channel. Channel partners may have either a cooperative or a competitive relationship (Heide and John 1990; Ellram and Edis 1996; Cannon and Perreault 1999; Choi et al. 2001). If the distribution channel is mainly characterized by cooperation, the spillover effect makes the entire distribution channel stronger than competing distribution channels. When it comes to contracts and prot sharing, distributors should acknowledge the brand manufacturers investments in customer loyalty, because the distributor will benet from them in the long run. However, if the distribution channel is characterized by intrachannel competition, the spillover effect is less desirable for the brand manufacturer, because it decreases its total impact on customers channel switching intentions. Distributors can free ride on the

manufacturers investments in customer loyalty, which makes it crucial for brand manufacturers to establish a compensation scheme for their brand loyalty efforts before implementing them. In summary, customers do not automatically belong to the brand manufacturer or distributor; rather, both channel partners can earn customers loyalty and strengthen their position, even in conditions of increasing vertical competition.

Limitations and Avenues for Further Research As in any research project, the design of our empirical study creates certain limitations with regard to the interpretation of the results. In the following, we address the most relevant limitations and their consequences, as well as avenues for further research. First, we operationalized channel switching as an intention expressed by individual purchasers facing a what-if scenario. The high level of volitional and behavioral control in an industrial purchasing context, as expressed in the form of planning and deliberate decision making, should induce a strong link between behavioral intention and actual behavior (Ajzen 1985). However, we recognize the conceptual and empirical difference between these constructs; intention does not always lead to behavior. Managers especially need to know whether channel switching intention actually leads to channel switching behavior. Empirical studies using behavioral data therefore would be a valuable research addition for triangulation and parameter validation purposes. Second, we conducted our analysis in a single industry with its specic characteristics. Although this approach is typical in supply chain management and marketing research (Hansen, Singh and Chintagunta 2006) and we carefully selected the industry to avoid behavioral patterns evoked by particular distributor brand relationships (e.g., between retailers and private labels) or special legal norms (e.g., the European block exemption regulation in automobile selling), we cannot exclude industry-specic extraneous factors. As in the articles from which we draw, our focus on a single industry may impose constraints on the generalizability of our ndings. Our research setting is a detail-intensive industry (Spiteri and Dion 2004), making generalizations to fundamentally different industries a future research opportunity. Replications in other industries and subsequent meta-analyses are encouraged to increase external validity and provide a more complete picture of industry contingencies. Third, our study takes a relationship marketing perspective and thus departs from the idea that channel switching depends on customers joint evaluations of their relationships with both a brand and a distributor. We implicitly assume that customers practice relational exchanges, although customers might also

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exchange on a transactional basis, making brand and distributor loyalty less relevant. Consequently, our model is not able to predict channel switching in transactional exchanges. Channel switching in transactional exchanges therefore may not be well predicted by our model. We concentrate on the interplay between brand and distributor loyalty and their simultaneous effect on channel switching, but further studies could broaden the scope and devote more attention to explaining the antecedents of channel switching. If channel switching is the key explanandum, it would be worthwhile to include other brandand distributor-related variables, as well as additional extraneous factors, into a more holistic model of channel switching. Fourth, we focus on only one product category. As long as customers purchase in a single product category from the distributor, our model is unambiguous, but when they purchase across several product categories from one distributor, channel switching can become more complex: Do customers switch the channel only to purchase in the category of the delisted brand, or do they move all their business away from the distributor? If the distributors assortment is broader than the product line of the brand manufacturer, altering its distribution programs from indirect distribution to direct selling should encourage customers to limit their channel switching to specic product categories. However, if the distributor delists one or more brands, customers might be inclined to switch completely to another distributor. Our model cannot offer denite answers to these complex questions, so additional research is needed to address these issues.

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Andreas Eggert (Ph.D., University of Kaiserslautern) is Chaired Professor of Marketing at the University of Paderborn in Paderborn, Germany. His research interests focus on the creation and appropriation of value in business relationships. Dr. Eggerts work has appeared in many prestigious academic and professional journals, including the Journal of Marketing, the Journal of Service Research, the Journal of Business Research, the European Journal of Marketing, the Journal of Marketing Theory and Practice, Industrial Marketing Management and the Journal of Business-to-Business Marketing. Jrg Henseler (Ph.D., University of Kaiserslautern) is Associate Professor of Marketing in the Institute for Management Research at Radboud University Nijmegen, The Netherlands. He also has an appointment as Visiting Professor at ISEGI at the New University of Lisbon, Portugal. Dr. Henselers research interests include service management, relationship management and structural equation modeling. He has published his work in many scholarly journals, including the International Journal of Research in Marketing the Journal of the Academy of Marketing Science, and Structural Equation Modeling: A Multidisciplinary Journal. He also has edited two handbooks on partial least squares path modeling. Sabine Hollmann (Ph.D., University of Paderborn) is the Deputy Head of the Corporate Electronic Business Department at Phoenix Contact in Blomberg, Germany. Dr. Hollmanns research interests include the management of effective buyersupplier relationships and customer loyalty in supply chains. Her work has been published in the Journal of Business and Industrial Marketing and in the Proceedings of the 2007 and 2009 American Marketing Association Educators Conference.

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Disentangling Customer Loyalty in Indirect Distribution Channels

APPENDIX A Scale Items

Construct Channel switching Indicator CS1 Item Formulation Imagine your primary dental supplier experienced serious problems delivering your primary burr brand. How would you react? (1) I would rather buy our primary burr brand from a different supplier (7) I would rather buy a different burr brand from our current supplier Imagine your primary burr brand was no longer available from your current supplier any more. How would you react? (1) I would rather buy our primary burr brand from a different supplier(7) I would rather buy a different burr brand from our current supplier Imagine your primary burr brand was only available directly from the manufacturer. How would you react? (1) I would rather buy our primary burr brand directly from the manufacturer(7) I would rather buy a different burr brand from our current supplier I consider our primary dental supplier as rst choice when buying dental supply For my next purchases, I will consider our primary dental supplier as our rst choice I will use our primary supplier the very next time purchasing dental supply Our primary burr brand is my rst choice when buying dental burrs I am committed to our primary burr brand For my next purchases, I will consider our primary burr brand as my rst choice Overall, I am very satised with our primary supplier I am very pleased with what our primary dental supplier does for us Our primary dental supplier meets my expectations Overall, I am very satised with our primary burr brand I am very pleased with the performance of our primary burr brand Our primary burr brand meets my expectations Currently, with about how many dental suppliers does your practice have a purchasing relationship? Which of the following burr brands has your practice bought within the last year? [full enumeration of available brands in the market, multiple answer options possible]

CS2

CS3

Distributor loyalty

DL1 DL2 DL3

Brand loyalty

BL1 BL2 BL3 CDS1 CDS2 CDS3 CBS1 CBS2 CBS3 ND NB

Customer distributor satisfaction Customer brand satisfaction Number of distributors Number of brands

APPENDIX B Sensitivity Analysis of Estimates with Respect to a Potentially Overstated Internal Consistency Reliability
The measurement items of the four constructs customer brand satisfaction, customer distributor satisfaction, brand loyalty and distributor loyalty are relatively similar. There is a possibility that the inter-item correlation is partly due to common wording instead of substantial contents. This would imply that the reliability is overstated and that structural equation modeling would not sufciently correct for measurement error. To check for potential threats to the estimates validity, we explicitly model measurement item error correlations that are orthogonal to the substantial construct meaning. The gure below illustrates how an increase in item error correlations would affect the standardized path coefcients. Measurement error correlations of 0.05 or 0.10 would not substantially alter the ndings. For error correlations of 0.15 and above, two implausible results emerge: First, customer brand satisfaction and customer distributor satisfaction would explain more than 60 percent of the variance of brand loyalty and distributor loyalty, respectively. This is more than twice the amount typically found for this relationship (i.e., 28 percent, see Szymanski and Henard 2001). Second, the negative effect of distributor loyalty

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0.8

0.6 standardized path coefficient

Distributor Loyalty Customer Distributor Satisfaction

0.4

Brand Loyalty Customer Brand Satisfaction Channel Switching Brand Loyalty Distributor Loyalty Brand Loyalty

0.2

0 0.00 -0.2 0.05 0.10 0.15 0.20

Brand Loyalty Distributor Loyalty Channel Switching Distributor Loyalty

-0.4

-0.6

Inter-item correlation due to overly similar wording

on brand loyalty would become signicant a nding running counter to all previous ndings (cf. Table 1). Error correlations of 0.25 or larger would yield an explained variance of distributor loyalty larger than one, resulting in a Heywood case.

APPENDIX C Scale Characteristics

Construct Cronbachs a Indicator CFA Model 1 Loading Channel switching 0.82 CS1 CS2 CS3 DL1 DL2 DL3 BL1 BL2 BL3 CDS1 CDS2 CDS3 CBS1 CBS2 CBS3 ND NB 0.79 0.90 0.67 0.66 0.93 0.85 0.72 0.69 0.84 0.90 0.87 0.93 0.95 0.95 0.90 1.00 1.00 AVE 0.63 CFA Model 2 Loading 0.77 0.87 0.64 0.55 0.84 0.77 0.61 0.65 0.78 0.75 0.75 0.81 0.80 0.83 0.77 0.96 0.94 AVE 0.59

Distributor loyalty

0.84

0.67

0.53

Brand loyalty

0.77

0.56

0.46

Customer distributor satisfaction

0.93

0.81

0.60

Customer brand satisfaction

0.95

0.87

0.64

Number of distributors Number of brands

1.00 1.00

0.93 0.89

CFA Model 1 has the standard parameterization; CFA Model 2 includes an orthogonal general factor impacting all indicators equally.
.

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