Understanding brand and dealer retention in the new car market: The moderating role of brand tier

https://doi.org/10.1016/j.jretai.2006.10.007Get rights and content

Abstract

Dealers may contribute to brand retention through their sales and service efforts. In this study we investigate the degree to which dealers contribute to brand retention and how this contribution is moderated by brand tier. To this end we distinguish between economy, volume and prestige brands. We also investigate how the effectiveness of dealer instruments to increase dealer retention differs across these brand tiers. We collected data on brand retention and dealer retention among consumers who recently purchased a new car. Our findings show that dealers selling volume brands are able to improve brand retention rates. In contrast, dealers of prestige and economy brands are unable to affect brand retention. In line with the notion of brand-dealer fit we also find that the effects of dealer extrinsic service quality and dealer payment equity on dealer retention differ between prestige, volume, and economy brands. Extrinsic dealer service quality has the smallest effect for dealers selling economy brands, while dealer payment equity is the most important determinant of dealer retention for these dealers.

Introduction

In many markets manufacturers sell products using dealers as intermediaries. Both the brand manufacturer and the dealer strive to enhance their respective retention rates. Dealer and brand retention decisions are often interrelated because consumers’ brand retention decisions may be dependent upon the dealers’ performance. This especially holds in markets where dealers are expected to add substantial value to the brand they sell, such as the new car market. Most manufacturers therefore strive after close ties with their dealers to assure high levels of service quality to increase brand retention rates (Anderson and Narus 1995; Chu and Desai 1995).

The interplay between brand retention and dealer loyalty has received little attention in the literature. Past research has mostly examined how dyadic relationships (i.e., consumer–manufacturer or consumer–dealer) impact consumers’ intentional loyalty (e.g., Anderson and Sullivan 1993; Garbarino and Johnson 1999; Zeithaml et al. 1996). More recent studies have focused on explaining actual customer retention over time in these dyadic relationships. These studies generally reveal a positive effect of customer satisfaction on retention, although this effect might be nonlinear and/or moderated by customer characteristics (e.g., Bolton 1998; Mittal and Kamakura 2001).

A notable exception is the study of Mittal et al. (1999), which we will refer to as MKT hereafter. MKT draw on the theory of consumption systems to distinguish between a product system (i.e., car brand) and service system (i.e., dealer). Subsequently they investigate how consumers’ satisfaction with the brand and the dealer impacts brand and dealer repurchase-intentions over time. They conclude that consumers’ satisfaction with dealers positively affects brand repurchase intentions, but that this effect declines over time.

The present study extends the study of MKT in four ways. First, our study adopts the now dominant notion in marketing research that one should study actual switching behaviour instead of repurchase intentions (e.g., Bolton 1998; Mittal and Kamakura 2001). Therefore this study uses actual data on brand and dealer retention instead of repurchase intentions as MKT did.

Second, we investigate the moderating effect of brand tier. We include brand tier because the channel literature suggests that brand tier impacts the opportunities that dealers have to add value to the brand (Coughlan et al. 2001; Steiner 2004). For example, the high-tier (prestige) Mercedes brand is likely to reduce the dealer's contribution to brand loyalty, because Mercedes buyers value the brand's impact on their social network (Fournier 1998). With a low-tier (i.e., economy) brand, like Seat, the dealer is likely to play a more prominent role in shaping brand loyalty. This raises the question whether dealers selling different brands are uniformly successful in contributing to brand retention or that their influence varies across different brands. To accommodate the differential effects of dealers for different brands, we include brand tier as a moderator, building on previous literature that suggested that the effectiveness of marketing instruments may differ between brand or price tiers (e.g., Lemon and Nowlis 2002; Russell and Bolton 1988). To date no studies have empirically investigated this moderating role of brand tier.

Third, we emphasize the importance of strategic fit between the product (i.e., car brand) and the service (i.e., dealer) systems. As such we extend the strategy literature that has emphasized the importance of fit between strategy and governance structure in a retail setting (Yin and Zajac 2004). Likewise brand manufacturers seek a strategic fit between their brand and their dealers. Lexus dealers, for instance, have luxurious showrooms while Suzuki dealers have rather sober showrooms. The question arises whether this brand–dealer fit is also considered important by customers. To this end we will investigate whether brand tier moderates the effect that dealer quality and dealer payment equity have on dealer retention. In doing so we broaden the loyalty literature which has looked at the moderating effects of socio-demographics, consumer knowledge, switching costs, market characteristics and prior relationship duration (e.g., Bolton 1998; Mittal and Kamakura 2001; Seiders et al. 2005), but not at brand characteristics within a given market.

Fourth, we study a different institutional environment. The Dutch dealer system is, in comparison to the US, characterized by exclusive distribution (i.e., a dealer only sells one brand). This means that brand-disloyal customers are forced to switch to another dealer. Only brand-loyal customers have a real option to switch dealer. This typical European dealership structure may impact how dealers add value to consumers’ brand retention decisions.

To accomplish these extensions over MKT we review the literature about the role of brand tier in consumers’ brand and dealer retention decisions. We derive four hypotheses from theory and test them using behavioral and perceptual data of 922 new car buyers in The Netherlands. Brands are classified as prestige brands, volume brands or economy brands to investigate the moderating effect of brand tier. The estimation results of our nested logit model reveal that only volume brand dealers contribute to brand retention. The findings also show that the way in which dealers influence consumers’ dealer retention decisions varies across brand tiers. Together these findings indicate that the role of the dealer in improving retention is more complex than previously assumed.

The remainder of the article is structured as follows. The second section discusses the institutional context of our study. The third section presents the theoretical background and our hypotheses. In the fourth section we present our econometric model. The fifth section discusses our methodology and sixth section presents our results. The seventh section discusses the implications of our results. The final section presents our study's limitations and directions for further research.

Section snippets

Institutional context

In the market for new cars consumers use the car and the associated services during an extended time period. During this period both the dealer and the brand influence consumers’ brand and dealer perceptions. At the end of this period consumers decide whether to replace the car. The replacement of the product can result in the four outcomes: (1) brand retention and dealer retention, (2) brand retention and dealer defection, (3) brand defection and dealer retention, and (4) brand defection and

Theoretical background

Our study builds on the theory of consumption systems as developed by MKT. In the new car market the car provided by the manufacturer and the sales efforts and services offered by the dealer can be considered two subsystems of the car consumption system. In this system the pattern of consumption occurs in multiple episodes over time. Characteristic for the car consumption system is that product performance not only depends on consumers’ continuous experience with the manufacturers’ product

Moderating effect of brand tier on the contribution of the dealer to brand retention

The channel literature suggests that dealers contribute to brand retention through their value-adding channel activities (Coughlan et al. 2001). The rationale is that dealers contribute to brand loyalty because they add to the consumer's consumption experience through their marketing and service efforts. Along this line of reasoning MKT have shown that both car and service satisfaction positively affect consumers’ intentions to repurchase the car brand. The effect of service satisfaction is

Model formulation

Our model builds on the assumed hierarchy in consumers brand and dealer retention decisions in which the brand choice precedes the dealer loyalty decision (see Fig. 1). At the same time dealer performance affects brand retention through the unobserved dealer value. The nested logit model matches this hierarchical nature of consumers retention decisions and the contribution of the dealer to brand retention. Within the nested logit model, each decision is modeled as a regular binomial logit

Data collection

The Dutch Centre for Vehicle Technology and Information randomly provided the contact details of 4,291 consumers that privately bought a new car within the first 2 months of 2003. This centre issues and administers vehicle registration certificates of all cars in The Netherlands. Each consumer was contacted in the spring by telephone and asked to participate in the study. A total of 1,640 consumers were willing to cooperate (a response rate of 38.2 percent). To be eligible for participation

Brand and dealer retention rates

Of the consumers within our sample: (1) 47.3 percent is brand loyal and dealer loyal, (2) 13.3 percent is brand loyal and dealer disloyal, (3) 36.0 percent is brand disloyal and dealer disloyal, and (4) 3.4 percent is brand disloyal and dealer loyal. The small percentage of brand disloyal and dealer loyal consumers reflects the distribution structure in the Dutch car market. We decided to remove these consumers from the analysis. This resulted in a final sample of 922 consumers. The differences

Summary

In this study we aimed to understand the brand and dealer retention decisions in the new car market. To this end we investigated how brand tier moderates the contribution of the dealer to brand retention, and how brand tier moderates the impact of dealer quality and payment equity on dealer retention. Table 8 summarizes our results.

Discussion

This study contributes to different theories: (1) consumption and service systems, (2) customer retention, (3) channel, power and equity, and (4) strategic fit and

Limitations and future research

Our study has several limitations that provide avenues for future research. First, our sample is restricted to one country in Europe. Future research might use cross-country comparisons to study the impact of brand tier on consumers brand and dealer retention decisions and also the impact that the institutional context has on these decisions. Second, we collected data after the repurchase decision. Therefore, the responses may be biased towards the actual decision. However, as we interviewed

Acknowledgements

The authors are indebted to NDA, BOVAG, ICDP and RDW for providing data and for insights into the Dutch new car market. We benefited from the research assistance of Wildrik van der Plassche, Remco Prins and Richard Paap. We appreciate the comments of participants at Marketing Science Conference 2004 and seminar participants at Tuck School of Business at Dartmouth, Frankfurt University and Free University of Amsterdam. Thanks are also due to Katrijn Gielens, Jagdip Singh, Frank Verboven, and

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