Idiosyncratic Consumers as Social Operant Resources: A Loyalty Program Perspective

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1 Idiosyncratic Consumers as Social Operant Resources: A Loyalty Program Perspective Denton D. Anthony 1 This article examines the theoretical argument that customers co-create value and as such are considered operant resources resources that produce effects. Customer loyalty programs are selected to validate the changing role of the customer one from independence to interdependence with the firm and other customers. As a lens for inquiry, the framework of service dominant logic (Vargo and Lusch, 2008a) was adopted, with guidance from several different bodies of academic literature. The findings suggest that given the appropriate resources and value propositions from an organization, customers will accept and flourish in their role as a co-creator of value. However some research results challenge the assertions of Vargo and Lusch (2008a), that the customer is always a co-creator of value. Key Words: Service-dominant logic, co-creation of value, operant resources, customer experiences, customer loyalty programs 1. Introduction In this study we draw on service dominant logic (S-D logic) to examine the roles the consumer assumes in the co-creation of value. By co-creating value the consumer assumes the role of an operant resource a resource that produces affects (Constantin and Lusch, 1994). Vargo and Lusch (2004), in their seminal paper on S- D logic point out that a customer-centric approach to marketing, means more than simply being consumer oriented; it means collaborating with and learning from customers and being adaptive to their individual and dynamic needs. A Service- Dominant Logic implies that value is defined by and co-created with the consumer rather than imbedded in output (p.6). S-D Logic is used to explore the concept that consumers individually and dynamically can fulfill the role of an operant resource. This article looks to explore the specific roles that customers occupy in the cocreation of value. The setting for the study is the Canadian loyalty program market. The empirical context of the research was selected as the popularity of customer loyalty programs continues to grow not only in Canada, but worldwide amongst both consumers and organizations. Despite the large quantity of customer loyalty program research, no published study to date has examined the consumer in a loyalty program as a cocreator of value. Customer loyalty programs present an appropriate medium for examining the co-creation experience since they represent a value-sharing instrument between the customer and organization (Liu, 2007). There continues to be growing interest on the importance of value for the customer in the service and relationship marketing literature, yet little is known about how customers engage in 1 Denton D. Anthony, PhD, Gerald Schwartz School of Business, St. Francis Xavier University, Antigonish, Nova Scotia Canada B2G 2L2, danthony@stfx.ca 1

2 the co-creation of value (Payne et al., 2008). This research extends our understanding of value by addressing some of these concerns. The structure of the paper is as follows. We first review the relevant literature from several academic disciplines including value creation and customer loyalty programs. S-D logic is given a separate review as the theoretical framework for the study. We then explain our methodological approach and reasoning within the study. Results are then presented, with an empirically derived conceptual framework for further studying the co-creation of value. Finally we discuss implications for management practice. 2. Review of Literature The idea of involving customers through their own participation in the value creating process is not a new phenomenon. Technology in particular the internet has given consumers a voice to represent and create value for themselves (Cova and Dalli, 2009). For example, customers engage in online auctions and book their own travel reservations. The general thought that value can be co-created has been proposed by many different authors in a variety of different contexts (see for example, Auh et al., 2007; Bendapudi and Leone, 2003; Gröonroos, 2000; Normann and Ramirez, 1993; Prahalad and Ramaswamy, 2004; Lessem and Palsule, 1997). However there is still little knowledge on how or if possibly customers can engage in the co-creation of value with organizations (Payne et al, 2008; Woodruff and Flint, 2006). The co-creation of value can be summarized as the development of customersupplier relationships through interaction and dialog (Payne et al, 2008). The literature supports customers have a wealth of personal resources which they actively use in value creation (Bowen, 1986; Johnston and Jones, 2003; Rodie and Kleine, 2000). Rodie and Kleine (2003), classify these resources as mental, physical and emotional. In addition these resources are also used between customers. A growing thread of research is now concerned about how customers help customers (Gruen et al, 2007; Harris and Baron, 2004; Nicholls, 2010). For example, research in various retail environments has shown that customers frequently turn to other customers (even total strangers) for advice on product selection (Harris and Baron, 2004). The co-creation experience (not the offering) is the basis of unique value for each individual (Prahalad and Ramaswamy, 2004a; 2004b). Payne et al, (2008), extend this view by adding that the primary premise behind value co-creation is experience, input, and interaction will define what is valuable to the customer. When value is created through a customer s experiences, this perspective is sometimes referred to as the experiential approach. For the organization the co-creation of value is an attractive aim as it allows a customer s opinions to be expressed whilst improving product and service processes through identifying customer s needs and wants (Lusch and Vargo, 2006). For the customer the co-creation of value can result in benefits that include higher levels of satisfaction, enhanced loyalty to products and services from the organization and a positive word of mouth about the firm s products and services (Payne et al, 2008; Prahalad and Ramaswamy, 2004a). The transition toward joint value creation between the customer and the organization seems entirely rational given the view that customers creating value with the organization as opposed to the organization creating value for customers (Prahalad and Ramaswamy, 2004a; Vargo and Lusch, 2004, 2008), appears consistent with the market-orientated organization (Auh et al., 2007). 2

3 This research reasons that customer participation is critical to co-creating value. Customer loyalty programs offer a value-sharing instrument between the customer and organization (Liu, 2007). Customer loyalty programs can be defined as planned membership efforts and activities by an organization that rewards existing and prospective customers for their patronage (Arantola, 2002; Lacey, 2003; Palmer et al., 2000). Rewards usually come in the form of some kind of promotional currency 2. Despite the exponential growth of these programs, not all customers seem to be satisfied with their various memberships in customer loyalty programs. Recent research by Gustafsson et al. (2004), Noble and Philips (2004), Stauss et al. (2005), and by Wendlandt and Schrader (2007), have all cited customers lack of satisfaction and frustration with various loyalty program structures, in part to, but not exclusive to effort and time to maintain their individual program, lack of benefits and concerns over privacy. In practice, consumers have been critical of loyalty programs through Internet chat rooms (epionions.com and ciao.com are two examples), and have voiced concerns over the value of promised rewards and concerns that some programs did not seem overly fair (Lacey and Sneath 2006; Stauss et al, 2005). Given the scope and apparent importance of customer loyalty programs in consumer markets, very little research to date has specifically looked at elements of value including the co-creation of value from a customer s perspective. Consumer s use of their loyalty programs has generally been associated with the concept of participation (see for example, Allaway, et al., 2006; Bolton et al., 2000; Ferguson and Hlavinka, 2008). De Wulf et al., (2003) perhaps offer the most comprehensive breakdown of the participation concept in the loyalty program literature. The author s distinguish between three types of participation which they consider to be customer inputs attributes that potentially affect a consumer s willingness to participate in a customer loyalty program. Participation costs are related to any membership fees that may be required for the member to pay. Participation exclusivity is the extent to which participation to the loyalty program is restricted to a specific group of consumers (p. 74). Finally, participation efforts are the activities required by consumers to get the promised rewards. De Wulf s et al. (2003), classification is relevant because it involves elements of use and experience which are criterion for co-creating value. Therefore what is proposed are alternative ways to both view value for the customer and to design effective customer loyalty programs that enhance the sponsoring firm s value proposition. Liu (2007), suggests that due to the diverse responses from consumers in her research, there exists, a need to consider consumer idiosyncrasies when assessing the impact of loyalty programs. By their very nature, loyalty programs are one-to-one programs (p. 31). This statement and revelation by Liu (2007), provides additional support that approaching and viewing customer loyalty programs from a one-to-one perspective has not been thoroughly examined in existing research. 3. Theoretical Framework The theory and concepts behind S-D logic are still emerging. Since their influential article, Vargo and Lusch (2004), have made several revisions to the logic including the addition of two new foundational premises 3 and changes to specific language 2 Points or miles collected from a customer s participation or purchase(s) for being part of a customer loyalty program. 3 Originally, Vargo and Lusch (2004a),S-D logic was based on eight foundational premises. In 2008, Vargo and Lusch revised the logic to include ten foundational premises. 3

4 and terminology. Table 1 provides the ten foundational premises with a brief explanation of their individual meaning. S-D logic extends relationship marketing thought, by viewing value as not something added to a product or service, but by placing an increased focus on involving the customer in creating and defining value in union with the organization. This approach to customer value is resource based, where the customer is an active participant in creating value and seen as a resource for the provider (Korkman, 2006). In S-D logic value pertains to the investigation of customer-provider experience or as Vargo and Lusch (2008a), put forth something that is phenomenologically determined (p. 3) and this is reflected in the terminology used in the logic and marketing literature, such as consumer s perceptions, customer determination, experience economy, coproduction and co-creation (Vargo and Lusch, 2004; 2008b). Table 1: Service-dominant logic Foundational Premises FPs Foundational premise Comment/explanation FP1 Service is the fundamental basis of exchange FP2 Indirect exchange masks the fundamental basis of exchange FP3 Goods are a distribution mechanism for service provision The application of operant resources (knowledge and skills), service, as defined in S-D logic, is the basis for all exchange. Service is exchanged for service. Because service is provided through complex combinations of goods, money, and institutions, the service basis of exchange is not always apparent. Goods (both durable and non-durable) derive their value through use the service they provide. The comparative ability to cause desired change drives competition. FP4 Operant resources are the fundamental source of competitive advantage FP5 All economies are service economies Service (singular) is only now becoming more apparent with increased specialization and outsourcing. FP6 FP7 FP8 FP9 The customer is always a co-creator of value The enterprise cannot deliver value, but only offer value propositions A service-centered view is inherently customer oriented and relational All social and economic actors are resource integrators FP10 Value is always uniquely and phenomenologically determined by the beneficiary Source: Vargo and Lusch, 2008a. Implies value creation is interactional Enterprises can offer their applied resources for value creation and collaboratively (interactively) create value following acceptance of value propositions, but cannot create and/or deliver value independently. Because service is defined in terms of customer-determined benefit and cocreated it is inherently customer oriented and relational. Implies the context of value creation is networks of networks (resource integrators). Value is idiosyncratic, experiential, contextual, and meaning laden. 4

5 In the context of customer loyalty programs, it is believed that foundational premises six, The customer is always a co-creator of value; foundational premise seven, The enterprise cannot deliver value, but only offer value propositions and foundational premise 10, Value is always uniquely and phenomenologically determined by the beneficiary, meaning value is determined individually and influenced by the end user, are directly relevant to this research. This final foundational premise would seem to suggest that value in the lens of S-D logic could also be determined through experiential approaches. One core underpinning behind S-D logic is that it makes the customer a partner in the co-creation of value (Vargo and Lusch, 2008b). The notion of value co-creation suggests that there is no value until an offering is used experience and perception are essential to value determination (Lusch and Vargo, 2006, p. 44). Value is seen as value-in-use, and consumer experiences are significant to the process of creating value. In S-D logic the role of the customer is viewed as an operant resource a resource that produces effects (Constantin and Lusch, 1994). Operant resources, are often invisible and intangible and likely to be dynamic and infinite (Vargo and Lusch, 2004, p. 3). How consumers co-create value as operant resources requires further research. One classification of consumer operant resources has been classified by Arnould et al. (2006), as physical, social and cultural resources. Physical resources include physical and mental endowments like energy, emotion and strength. Social resources include family relationships, consumer communities and commercial relationships. Cultural relationships include specialized knowledge and skills, history and imagination. Arnould et al. (2006), contend, we know relatively little about the interaction among various types of consumer operant resources in what contexts do consumers expend relatively greater operant resources and on what do the expend them? (p.98). It is believed that through the theoretical lens of S-D logic a deeper understanding and narrowing of the value gap between the organization and customer can be reduced. 4. Methodology The primary aim of this study is to examine how the co-creation of value emerges, develops, and what if any are the prerequisites for value creation. Qualitative research methodology was employed as the goals of the research were to understand the meaning people have constructed from their experiences. Further, S-D logic is considered an emergent area of marketing with limited empirical support. Thus the selected research paradigm was chosen largely for its investigative processes that allow a researcher to make sense of a social phenomenon (Miles and Huberman, 1994). This particular study builds upon an earlier exploratory study that was exploring the value construct within customer loyalty programs. That initial study using focus group methodology provided a solid understanding of the meaning of value in the context of a customer loyalty program. This meaning was instrumental in the direction of this current study. This current study consisted of 22 in-depth personal interviews, (17 face to face and 5 telephone interviews) of participants who were members of various, non-specified customer loyalty programs, even though I did try to seek specific information on multiple types of customer loyalty program initially, it was important to allow the participants to drive the interview. Interview design for this study integrated both McCracken s (1988) long interview technique and the responsive interviewing techniques by Rubin and Rubin (2005) as 5

6 methods and guidelines for interviewing. Due to the interview design techniques selected, a thematic guide covering four areas was developed. These four themes were membership affiliations, participation, communications and customer value. Each of these areas had several initial questions that were pre-tested and then queried to participants. As an additional measure, all participants were asked basic demographic questions (age, approximate household income, highest level of education and family size and number of customer loyalty programs that they belonged to). In terms of data analysis, the individual interviews were in part structured using themes and areas from the focus group study, and cues from the S-D logic theoretical lens. A constructionist approach to grounded theory was adopted. The constructionist grounded theory approach emphasizes respondents lived experiences and stories and is part of the interpretative tradition (Bernard and Ryan, 2010; Hallberg, 2006). The constructivist approach to grounded theory assumes the interaction between the researcher and participants produces the data, and therefore the meanings that the researcher observes and defines (Charmaz, 1995, p.663). The selected methods of interviewing made the overall analysis of the data a bit more complicated in large part to the different topics and ideas that did arise (i.e., different types of customer loyalty programs, different experiences, etc.). A more abductive approach was taken to identify themes due to the theoretical lens of S-D logic partially framing and assisting in the design of the thematic interview guide. The interviews were recorded and transcribed into word documents and the content coded and later analyzed. This process was supported by the use of NVivo9 computer software. Even though NVivo does not analyze qualitative data, it aids in the management of data and can greatly assist in data storage, coding, retrieval, comparing and linking the data together (Patton, 2002). 5. Findings and Discussion The results of this research make a contribution in several different ways. First this research provides empirical support and new directions for S-D logic. Secondly, new directions were uncovered for future customer loyalty program research. The findings demonstrate the unique manner in which some of the participants cocreated value from their loyalty program affiliations. The subjective nature of value produced results that highlight the complexity of the value construct. The ability of a consumer to be creative at different stages within loyalty programs (collection of promotional currency, redemption of promotional currency, etc.) illustrated the idiosyncratic and experiential approach to value creation. A dialog with respondent (LA) ended with the comment, So, it becomes an art. ; after giving her account to why she bought $25.00 worth of salad dressing to claim a higher level of promotional currency suggesting a special talent or skill. The creativity shown by (LA), illustrates her unique decision making ability and how value is uniquely and phenomenologically determined by the beneficiary (Vargo and Lusch, 2008a, p.7). The above example further illustrates the explanation of value formation provided by Vargo and Lusch (2008a), who suggest that value is just not idiosyncratic, but also experiential, contextual, and meaning laden (p.7). The results of this research offer support to the notion that consumers do use experiential approaches to determining value in the framework of customer loyalty programs. As co-creators of value, consumers used both mental and emotional resources, which is in agreement with Rodie and Kleine (2003) classification. 6

7 The research identified many examples of how consumers co-created value that support the S-D logic lens. However personal interviews also provided a view that consumer negativity toward loyalty programs existed that facilitated consumers fulfilling the role of a non-creator of value, a resource unwilling to produce affects. Evidence of customers not always fulfilling their roles as a co-creator of value was manifested within the many resulting themes. Inappropriate value propositions inhibited customer participation within loyalty programs, which supports S-D logic foundational premise seven (The enterprise cannot deliver value, but only offer value propositions), but this finding given the empirical context does not support foundational premise six (The customer is always a co-creator of value). The idea of customers sharing information was introduced in the review of literature. Within this research, customers reported that they shared ideas, experiences and promotional currency between one another in order to obtain rewards. One excerpt from this research illustrates consumers performing the role as a social operant resource, I got Dale (husband) a new camera with my points and a coupon offer of $50.00 if I used my points, I also used my friend s coupon because she did not have enough points, so I doubled my savings and got a $ camera for free. (PB) The above passage illuminates the changing role of today s customer. Today customers are informed, connected and to a certain degree empowered (Prahalad and Ramaswamy, 2004a). This further supports the ideas of Cova and Dalli (2009), who suggest that even if consumers decide to participate in organizational offerings, their efforts would be pointless without their creative abilities. Findings from this research seem to support Arnould et al. (2006), classification of consumer operant resources. The study found consumers used physical resources like mental energy to create value and social resources to share meaning, experiences and to create value for and between others. Communication is usually not at the front and center of the loyalty literature, yet found to be very significant in this study. This noteworthy finding offers opportunities to improve and further assist in narrowing of this communication disconnect between consumer and organization. Interaction and dialog between firm and customer, as Payne et al. (2008) suggest is a necessary requirement for the co-creation of value. Equally significant was the role communication played between consumers. Some research (i.e., Harris and Baron, 2004), has already shown social connections between consumers in exchange processes. The findings of this research demonstrate that customers can arrange social ties with others affecting both macro and micro level word of mouth and value co-creating processes. This result within the study illustrates consumers as functioning as social operant resources, consistent with Arnould et al. (2006) classification of consumer resources. The findings from the research confirm the need for a process-based framework to better understand how consumers co-create value in different contexts. A conceptual framework when tested should also identify specific fail-points which may lead to the non-creation of value. The framework presented below illustrates the interrelated set of processes that are not necessarily linear but highlight the reciprocal nature of the co-creation of value between consumers and organizations. In support of this mutual relationship the arrows in Figure 1 are multi-directional, illustrating the dynamic nature of value co-creation. The process based view of the conceptual framework, considers interactions as being dynamic, and a set of interactive experiences (Payne et al, 2008). By processes we mean any actions, tasks, mechanisms, activities and interactions which support the co-creation of value for consumers. 7

8 Figure 1: Empirically Derived Conceptual Framework Communication Encounters Value Proposition Outcomes Co-creation of Value Non-creation of value Next we briefly describe the individual components and relationships of the conceptual framework derived from the empirical findings of this study. In the language of S-D logic, The enterprise cannot deliver value, but only offer value propositions, suggesting organizations can jointly create value given the acceptance of their value propositions by consumers, but cannot create value independently (Vargo and Lusch, 2008a, p. 7). The value proposition is at the center of the framework and has mutual relationships with all other areas of the model, communication efforts and the outcome(s) (creation/non-creation of value). Empirical results support the notion that the value proposition(s) of a customer loyalty program must be accepted by the customer in order for value to be cocreated for the organization and the customer. Therefore it is reasoned that other value propositions from a firm will be treated the same way. Communication encounters, especially between customers were an aspect that appeared to clarify consumers understanding of the value proposition offered by the organization. This form of communication further facilitated opportunities for consumers to co-create value. Finally, the specific value proposition (in this research the typology of loyalty program, i.e. single provider, multi-sponsor program) was also a contributing factor that influenced the value proposition of a customer loyalty program from the customer s prospective, and this framework provides a suitable avenue to test these assumptions. The current literature on customer loyalty programs offers very little evidence on the impact and importance that communication encounters can have in the value creating process. However, this particular research clearly demonstrated the role that communication can play in facilitating the co-creation of value in the context of customer loyalty programs. This framework cites communication encounters to be a combination of many different forms of communication. Evidence from this research suggests that communication extends beyond what the organization communicates to the customer in terms of offers and propositions through traditional media. Customer driven communication (communication between customers) and uncontrolled communication (communication via social media) were found to have an influence on how consumers co-created value in this empirical context. Therefore in this framework, communication encounters by both consumers and organizations have an interactional relationship, which can be characterized as reciprocal. Outcomes in the framework as indicated in the earlier discussion both support and refute the assertion that The customer is always a co-creator of value, foundational premise six (Vargo and Lusch 2008a). Therefore the non-creation of value from the customer s perspective can also be explored within this framework, especially if the value proposition is not accepted by the customer. Ineffective value propositions where shown to lead to non-active customer participation, and could result in negative word of mouth communications from consumers through open, uncontrolled communication channels such as social media. Breakdown in effective 8

9 communication between the organization and the customer may also result in value not being co-created. The conceptual framework presented permits for the further discovery of the idiosyncratic consumer in terms of how they use, participate and co-create value as a social operant resource in relationship building programs. 6. Conclusions and Implications There continues to be growing interest in the importance of value for the customer in the service and relationship marketing literature, yet little is known about how customers engage in the co-creation of value (Payne et al., 2008). This research addressed this issue through the empirical context of customer loyalty programs and through the theoretical lens of S-D logic. The research perspective was further facilitated by concerns from researchers who questioned whether the value concept in the context of S-D logic had been adequately explored and defined (Woodruff and Flint, 2006). As a new lens to explore the value concept, the literature recommended that more theoretical and exploratory qualitative work needed to be conducted before proceeding with survey research (Woodruff and Flint, 2006). This work has accomplished this goal. The results of the research demonstrate the unique manner in which consumers determined and co-created value from their loyalty program affiliations. The ability of a consumer to be creative at different stages (point collection, redemption, etc.) within loyalty programs, illustrates the idiosyncratic and experiential approach to value creation. The co-creation of value process casts the customer in a different role one as an operant resource who uses their creative abilities to co-create value. When provided legitimate opportunities, customers were active co-creators of value, for themselves, the organization and for their fellow customers. The results suggest that a customers ability to co-create value is dependent on the resources (offer or value proposition) they are offered from the organization. However, consumers also assumed the role as deconstructors of value, functioning as resources that produce negative effects for organizational offerings. This finding challenges Vargo and Lusch (2008a) foundational premise six assertions that customers are always co-creators of value. The empirical context of the study was chosen for reasons indicated earlier. It is our hope that the generalized derived conceptual framework on the co-creation of value can and will be tested in different empirical contexts. In terms of its theoretical contribution, this research is one of the first academic efforts to examine customer loyalty programs through the S-D logic lens. From a management standpoint the results of the study could impact how an organization allocates their resources to attract, interact, and communicate with their customers. The empirical research offers great conceptual and practical insights with respect to the design, targeting and the application of customer loyalty programs in different industries and contexts. Given the independent samples selected, the results of this research have the increased potential to be applied to a wide variety of industries sectors. The results of this study also lend support to authors and researchers (e.g. Dowlings and Uncles, 1997; Johnson and Ledger 1999; Lacey, 2003; O Brien and Jones, 1995; Payne et al., 2008) who argue that that it takes more than economic value for customers to become dedicated in a marketing relationship with an organization. 9

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