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The impact of switching costs on the customer satisfaction-loyalty link: Mobile

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Article  in  Journal of Services Marketing · February 2001

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 An executive summary for
managers and executive The impact of switching costs
readers can be found at the
end of this article on the customer
satisfaction-loyalty link:
mobile phone service in France
Jonathan Lee
Assistant Professor, Kelley School of Business, Indiana University,
Indianapolis, Indiana, USA
Janghyuk Lee
Lecturer, Department of Economics, University of Reading,
Reading, UK
Lawrence Feick
Professor of Business Administration, Joseph M. Katz Graduate
School of Business, University of Pittsburgh, Pittsburgh, USA

Keywords Customer satisfaction, Customer loyalty, Telecommunications,

Services marketing, France
Abstract The main objective of customer satisfaction programs is to increase customer
retention rates. In explaining the link between customer satisfaction and loyalty,
switching costs play an important role and provide useful insight. For example, the
presence of switching costs can mean that some seemingly loyal customers are actually
dissatisfied but do not defect because of high switching costs. Thus, the level of switching
costs moderates the link between satisfaction and loyalty. The purposes of this paper are:
to examine the moderating role of switching costs in the customer satisfaction-loyalty
link; and to identify customer segments and then analyze the heterogeneity in the
satisfaction-loyalty link among the different segments. An empirical example based on the
mobile phone service market in France indicates support for the moderating role of
switching costs. Managerial implications of the results are discussed.

Market growth As market growth slows or as markets become more competitive, firms are
more likely to attempt to maintain their market share by focusing on
retaining current customers. Customer retention has been advocated as an
easier and more reliable source of superior performance (Fornell and
Wernerfelt, 1987; Peters, 1988; Reichheld and Sasser, 1990). To improve
customer retention, firms initiate a variety of activities, including programs
on customer satisfaction (Anderson and Sullivan, 1993; Rust and Zahorik,
1993; Anderson et al., 1994; Jones and Sasser, 1995), complaint
management (Hirschman, 1970; Fornell and Wernerfelt, 1987), and loyalty
(Reichheld, 1996; Dowling and Uncles, 1997). In understanding customer
satisfaction, researchers have paid particular attention to the management of
service quality: developing strategies to meet customer expectations
(Parasuraman et al., 1988), and explaining the impact of service quality on
profit (Rust et al., 1995; Zeithaml et al., 1996). They have focused on the
process in which customers form expectations of service, perceive service
performance, and then decide to remain with or switch providers. In addition,
researchers have examined the performance implications of investments in
improving service quality and customer retention.
In explaining the link between customer satisfaction and loyalty, only a few
studies in marketing have examined the role of switching costs. Switching

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JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001, pp. 35-48, # MCB UNIVERSITY PRESS, 0887-6045 35
 costs are costs that the consumer incurs by changing providers that they
would not incur if they stayed with their current provider. In marketing,
Fornell (1992) was one of the first writers to consider switching costs: adding
them to customer satisfaction in the customer loyalty function. Recently,
Jones and Sasser (1995) mentioned switching costs as one factor that
determines the competitiveness of market environment, since high switching
costs discourage changing from a current provider, thereby yielding less
incentive for firms actively to compete.
Switching costs In the presence of switching costs, ex ante homogeneous products or
services, that is, functionally identical services, become ex post
heterogeneous (Klemperer, 1987). Consequently, observed customer loyalty
may be due to satisfaction or it may be due to dissatisfaction in a product
category in which relatively high switching costs make it difficult for
consumers to change providers. Similarly, observed customer disloyalty can
be due to dissatisfaction or linked to satisfaction in a market in which low
switching costs make it easy to change providers. The purposes of this paper
are to:
(1) examine the moderating role of switching costs in the customer
satisfaction-loyalty link;
(2) identify customer segments and then examine heterogeneity in the
satisfaction-loyalty link among different segments.
We provide an empirical illustration of our approach using recent data from
the mobile phone market in France.

Theoretical background
Antecedents and consequences of service quality
Key strategic factor for During the 1980s, service quality received a great deal of attention as a key
product differentiation strategic factor for product differentiation to increase market share and boost
profits (Phillips et al., 1983; Buzzell and Gale, 1987). Thus, researchers
focused on the process in which consumers evaluate service quality.
Consumer expectations and perceived performance of services were found to
be the main antecedents of perceived service quality. Measures of service
quality focused on a variety of dimensions such as tangibles, reliability,
responsiveness, assurance, and empathy (Parasuraman et al., 1985). Also,
researchers found support for the impact of disconfirmation on service
quality, defined as the difference between expected and perceived
performance (Tse and Wilton, 1988; Bolton and Drew, 1991; Cronin and
Taylor, 1992). Later, researchers developed a dynamic model that traced the
way customers form and update their perception of service quality and then
identified the consequences of these perceptions on individual-level
behavioral intention variables (Boulding et al., 1993). Customer retention
has been viewed as one of the various behavioral consequences of service
quality, since it produces a direct and immediate impact on the market share
of firms (Steenkamp, 1989). The analysis of effects of service quality on
profits completed the structure of the service quality process, moving from
expectations to financial consequences (Koska, 1990; Rust et al., 1995;
Zeithaml et al., 1996).

Customer satisfaction and loyalty

While both service quality and customer satisfaction have certain things in
common, satisfaction is generally viewed as a broader concept than service
quality assessment; thus, perceived service quality is a component of
customer satisfaction (Zeithaml and Bitner, 1996). Attempts to understand

36 JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001


High level of satisfaction
Industries vary
JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001
customer satisfaction formation have yielded several important insights. For
example, disconfirmation and perceived quality were found to affect
customer satisfaction more than expectations (Churchill and Surprenant,
1982) and expectancy-disconfirmation (Oliver and DeSarbo, 1988; Yi,
1990). Anderson and Sullivan (1993) also showed satisfaction to be a
function of disconfirmation and perceived quality in an analysis of Swedish
customer satisfaction survey data. Consequently, customer satisfaction
programs were touted as important tools that can increase profits by
preventing customers from defecting (Reichheld and Sasser, 1990). One of
the principal behavioral objectives of customer satisfaction programs is to
increase customer retention rates (Fornell, 1992). Reichheld (1996)
demonstrated why customer retention is so important. For example, he
estimated that, with an increase in customer retention rates of just 5 per cent,
the average net present value of a customer increases by 35 per cent for
software companies and 95 per cent for advertising agencies. In addition, a
consistently high satisfaction level may generate a long-run reputation effect,
thereby insulating firms by reducing customers' price sensitivity (Anderson
and Sullivan, 1993).
Although it is assumed that a high level of satisfaction is strongly correlated
with increased customer loyalty, researchers have tried to separately measure
customer loyalty. Customer loyalty sometimes has been operationalized as a
behavior (hard-core loyalty, repeat purchase probability, etc.) and at other
times as an attitude (brand preference, commitment, intention-to-buy). As a
behavior, customer loyalty has been measured as the long-term choice
probability for a brand (Jeuland, 1979; Carpenter and Lehmann, 1985;
Colombo and Morrison, 1989; Dekimpe et al., 1997), or as a minimum
differential needed for switching (Raju et al., 1990). Attitudinal approaches
focused mainly on brand recommendations (Boulding et al., 1993),
resistance to superior products (Narayandas, 1996), repurchase intention
(Cronin and Taylor, 1992; Anderson and Sullivan, 1993), and willingness to
pay a price premium (Zeithaml et al., 1996; Narayandas, 1996). Jones and
Sasser (1995) present a very intuitive classification of an individual's link
between satisfaction and loyalty. Customers were classified into four
different groups: loyalist/apostle (high satisfaction ± high loyalty), defector/
terrorist (low satisfaction ± low loyalty), mercenary (high satisfaction ± low
loyalty), and hostage (low satisfaction ± high loyalty).
Satisfaction-loyalty linkage and switching costs
Fornell (1992) has noted that industries vary in how customer satisfaction
affects repeat business and customer loyalty. He noted that the connection
between customer satisfaction and loyalty depends on factors such as market
regulation, switching costs, brand equity, existence of loyalty programs,
proprietary technology, and product differentiation at the industry level.
Hauser et al. (1994) also pointed out that consumers become less sensitive to
satisfaction level as switching costs increase. Switching costs play a crucial
role by making it costly for customers to change service providers (Fornell,
1992). The results of Anderson and Sullivan (1993) similarly support the role
of switching costs by observing the average satisfaction and retention
elasticities for selected firms in 1989. They argue that quality elasticity
should increase as average satisfaction decreases. They found empirical
support for this relationship in airlines and the banking industry, but not for
supermarkets. One explanation is that in airlines and banking there are high
switching costs but in supermarkets switching costs are very low. The result
supports the importance of switching costs on customers' quality elasticity.
37
 In our context, this finding suggests that switching costs affect the link
between satisfaction and loyalty.
Relationship between The impact of switching costs on the relationship between satisfaction and
satisfaction and loyalty loyalty is affected by market structure. If the market has a single or
overwhelmingly large share provider (for example, a monopoly provider of
local telephone service), there should be little effect of switching costs on the
relationship between satisfaction and brand loyalty. That is, a dissatisfied
customer with high switching costs will not switch; nor, however, will a
dissatisfied customer with low switching costs, since there is no alternative.
Switching costs become important when there are at least a few viable
alternative providers in a market. If this criterion is met, switching costs will
affect the existence of the off-diagonal groups in the Jones and Sasser (1995)
matrix. Thus, if switching costs are low, we should find very few false loyals
(hostages), since dissatisfaction should result in changing providers. But we
are likely to find many mercenary customers who are satisfied but disloyal
because low switching costs make change so easy. In contrast, if switching
costs are high, we are likely to see many false loyal customers; even though
they are dissatisfied, switching costs make them less likely to change. But we
are unlikely to see mercenaries, since the high switching costs make them
less likely to change providers when they are satisfied. Figure 1 illustrates
the relationship between satisfaction and loyalty linkage adapted from Jones
and Sasser (1995) with the inclusion of switching costs.

Methodology and results

Market illustration
Mobile phone market in An empirical illustration is based on data from the mobile phone market in
France France. As of April 1999, the number of cell phone users in France had
reached 12.9 million, or more than 22 per cent of the population[1]. The
market was growing explosively, recording a 37 per cent growth rate for a
six-month period. There are three major providers of cellular phone service
(France Telecom Mobile, SFR, Bouygues Telecom), with 50.7 per cent,
38.1 per cent and 11.2 per cent market shares, respectively; thus, the market
can be considered reasonably competitive. The mobile phone market
inherently presents various types of switching costs. These include
transaction costs (the costs in time and effort of filling out forms, having a
phone switched to a different provider, etc.) and search costs (the costs in

Figure 1. Satisfaction-loyalty link related to market competition and switching

costs

38 JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001


Face-to-face questions
Attitudinal measures of
loyalty
JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001
time of seeking information on prices, benefits, service, etc. from the various
providers). On the other hand, the importance of these costs can be expected
to vary by individual. Therefore, we expect variation in the importance
consumers place on the expected costs of switching in the cell phone market.
Sample
Participants in the study included 256 respondents who responded to face-to-
face questions asked by an interviewer. Interviewers with a survey guideline
randomly contacted current service subscribers of three aforementioned
service providers. Respondents were drawn from the Paris metropolitan area:
the districts of Cergy-Pontoise and La DeÂfense. We sampled private users
only because professional users have different switching costs, that is, it is
the firm, not the individual who chooses the operator and pays the bill.
Participation rate in the survey was about 60 per cent. Sample characteristics
appear to be representative of adult mobile phone users in France. A total of
64 per cent of the sample is male. In age, 60 per cent were under the age of
30, 24 per cent were 31-40 years old, and 16 per cent were over 40. Just over
50 per cent were employed full-time. A total of 35 per cent had a high school
degree or less, while 65 per cent had at least some college or higher
education. The average interview length was 12 minutes.
Measurement of loyalty, satisfaction, and switching costs
Using the aforementioned literature, we developed the three measures used
in this study. To measure customer loyalty, we use a subset of the original
measures developed in Narayandas (1996). They are:
. repurchase intent;
. resistance to switching to a competitor's product that is superior to the
preferred vendor's product; and
. willingness to recommend preferred vendor's product to friends and
associates.
These can be viewed as attitudinal measures of loyalty (Uncles and Laurent,
1997). For customer satisfaction, we selected the relevant attributes based on
the performance ratings for cellular phones reported in Consumer Reports
(1998). We categorized these measures into three areas of customer
satisfaction that are appropriate for mobile phone users. Satisfaction with:
(1) pricing plan;
(2) core services (coverage of the calling area and clarity of sound); and
(3) value-added services (precision of billing service and easy access to
provider).
Finally, switching costs are measured as the consumer's perceived difficulty
in switching, consistent with other attitudinal measures. Although a
behavioral measure of switching costs (such as calling time, related to
transaction costs in Klemperer (1987)) can be used as a proxy, subjects need
to recall accurately not only the total calling time but also the number of
people to be informed of a new phone number in case of switching. Table I
shows the summary of measures used in this study.
The two component items for satisfaction with core services were combined
to form the average measure used in the analysis (the correlation between
these measures is 0.33). Similarly, the two items for satisfaction with value-
added services were combined and the average score was used (correlation is
0.32). Thus, for customer satisfaction, we used:
39
 Standard Factor
Mean deviation loadings
Customer satisfaction
Overall satisfaction 3.37 0.88
Pricing 2.96 1.03
Overall core services 3.30 0.91
Area coverage 3.43 1.14
Clarity of sound 3.17 1.10
Overall value-added services 3.06 0.98
Access to provider 3.24 1.17
Precision of billing service 2.88 1.23
Loyaltya
Repurchase intent 3.62 1.32 0.896
Reluctance to switch to a better offer 2.53 1.33 0.591
Willingness to recommend to others 3.59 1.14 0.840
Switching costb
Perceived difficulty to switch 2.58 1.27
Notes:
a
Cronbach's alpha = 0.68
b
All items measured by five-point scale

Table I. Description of measures and factor analysis results

. the satisfaction rating of the pricing plan;

. the average score for core services; and
. the average score for value-added services.
Customer loyalty For the dependent variable: customer loyalty, we ran a principal component
analysis on the three loyalty measures. These loyalty measures loaded on a
single factor that explained 62 per cent of the variance in these items. The
factor loadings are included in Table I. In our analyses, we use a loyalty
measure computed using factor scores.

Moderating role of switching costs in satisfaction-loyalty link

To analyze the moderating role of switching costs, we ran a regression that
tested the main effect of satisfaction and the interaction of satisfaction and
perceived switching costs on customer loyalty. Baron and Kenny (1986)
show that a moderator effect can be represented as the product of an
independent variable and a factor that specifies a condition for its operation.
A significant regression coefficient on the product term would confirm the
interaction of satisfaction and switching costs on customer loyalty. The
direction of the interaction effect explains how customers with the same
level of satisfaction become more loyal, maybe unwillingly, as it becomes
more difficult to switch. Figure 2 illustrates one possible moderating role of
switching costs in the satisfaction-loyalty link.
Two different levels of For a given level of satisfaction (S*), customers may have two different
loyalty levels of loyalty, L1 and L2, depending on the level of switching costs. The
difference between L1 and L2 is due to the moderating effect of switching
costs on the satisfaction-loyalty link.
Regression results are reported in Table II. All parameter estimates of the
satisfaction components and the interaction effect are positive and significant
at the 5 per cent significance level. The significant interaction effect implies
that customers with high switching costs are more loyal, since high switching
costs make them less likely to switch. This forced loyalty is analogous to the

40 JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001

 Figure 2. Moderating role of switching costs in the satisfaction-loyalty link

Model Estimate Standard error Significance

Intercept ±1.15 0.16 0.000
Satisfaction
Price 0.23 0.05 0.000
Core services 0.27 0.05 0.000
Value-added services 0.11 0.05 0.027
Switching costs by satisfaction 0.05 0.01 0.000
ANOVA Sum of squares F Significance
Regression 108.68 40.52 0.000
Residual 205.84
Total 314.52

Note: R2 = 0.345

Table II. Results: moderating effect of switching costs in satisfaction-loyalty link

false loyalty described in Jones and Sasser (1995). While Jones and Sasser
(1995) identify different false loyal groups such as defectors, mercenaries, or
hostages based on the level of satisfaction and loyalty, we believe the
satisfaction-loyalty link can be better characterized by explicitly accounting
for the impact of switching costs.

Segment-level analysis based on plan type

Variety of calling plans
Mobile phone service providers design and offer a variety of calling plans
with different rates and calling times. Consumers choose the plan appropriate
for their expected usage given available payment plans. Customers generally
pay a fixed fee for a contracted number of minutes corresponding to the plan
type and pay for extra minutes beyond the flat fee. We classified subjects
into three levels of plan type according to the amount of calling time that the
customer chose at the time of the contract: economy (less than two hours),
standard (from two to four hours), and mobile-lovers (more than four hours).
We find this segmentation most relevant because, in practice, service
providers implement such product differentiation wherein customers have an
incentive to choose a calling plan that best corresponds to their expected
needs. Analyzing the data by segment allows us to examine the moderating
role of switching costs on the across-segment differences in the satisfaction-
loyalty link. Table III shows the regression results by plan type segment.
The results are interesting. First, switching costs play a significant
moderating role in the satisfaction-loyalty link only for the economy and

JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001 41

 Plan type
Economy Standard Mobile lover
Model ( 2 hours) (2  4 hours) ( 4 hours)
Intercept ±1.025* ±1.227* ±1.054*
(0.234) (0.271) (0.472)
Satisfaction:
Price 0.159* 0.259* 0.255**
(0.070) (0.088) (0.150)
Core services 0.309* 0.273* 0.194
(0.068) (0.079) (0.194)
Value-added services 0.106 0.037 ±0.306*
(0.070) (0.097) (0.149)
Switching costs by satisfaction 0.063* 0.055* 0.022
(0.014) (0.018) (0.033)
Group size n = 137 n = 110 n = 37
ANOVA
Model F 21.24* 14.26* 4.89*
R2 0.39 0.36 0.37
Notes
Standard error is shown in parentheses
* Significant at the 5 per cent significance level
** Significant at the 10 per cent significance level

Table III. Regression results: analysis by plan type

standard groups. For mobile lovers, switching costs do not affect loyalty.
Thus, it seems that, as the number of calling hours exceeds a certain level,
switching becomes difficult and users accept whatever the company has to
offer. Consumers in this group can be thought of either as true loyalists or as
hostages, depending on their satisfaction level. Another interpretation is that
there is a threshold of transaction costs related to the amount of usage that
can deter consumers from switching so that the satisfaction-loyalty
relationship becomes almost flat over the threshold.
Variance in customer Second, the results indicate that the overall satisfaction-loyalty link is
retention significant for all plan types. This result is consistent with the finding of
Bolton (1998) that satisfaction levels explain a substantial portion of
variance in customer retention. We find, however, that consumers react
differently to satisfaction components across plan types. While consumers in
the economy and standard groups consider the quality of core services most
important, mobile-lovers show their strong attachment to value-added
services. A managerial implication is that firms are better off implementing a
feature-based differentiation of service products than using a typical price
discrimination scheme. It was also interesting to find that mobile-lovers are
less sensitive to the pricing aspects of services. In other words, the level of
satisfaction on pricing was much less significant for heavy users than for
regular users. They seem to look for a good range of supporting services and
are willing to pay for them.

Discussion and managerial implications

Developing and maintaining a loyal customer base is viewed as the single
most important driver of long-term financial performance (Reichheld and
Sasser, 1990). A recent wave of mergers and acquisitions in the mobile
phone service industry clearly illustrates how much value firms put on
acquiring new customers. Based on the number of subscribers, UK operator
Vodafone paid £2,928 per subscriber in its merger with US operator

42 JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001

 AirTouche, and Deutsche Telekom £2,585 for acquiring UK operator
One-2-One. Also, German operator Mannesmann paid a staggering £6,044
per subscriber in the acquisition of UK operator Orange[2]. Though the
monetary value per subscriber includes other financial assets of a firm, it
reflects the core understanding of how difficult it is to expand and maintain
the customer base in a rapidly growing market. Customer retention is critical
in the mobile phone market, since operators lose about 30 per cent or more of
their subscribers every year and have large customer acquisition
expenditures. Needless to say, it is important for mobile operators to develop
well-designed customer satisfaction programs for increased customer
retention. However, we believe that such a program should be accompanied
by switching cost management for early detection and prevention of
switching behavior. By understanding the role of switching costs in affecting
the connection between satisfaction and loyalty, firms can take advantage of
the structure of switching costs. By analyzing the changes in consumption
volume and usage patterns they can provide appropriate incentives at the
right time, thus inducing higher switching costs. Hauser et al. (1994) argued
that, if customers can be segmented by switching costs, a firm can improve
its profits by placing different weights on customers with different levels of
satisfaction with different switching costs, and satisfaction receives the
highest weight when the absolute values of the switching costs are small.
Firms providing continuing Though we used an attitudinal measure of switching costs in this study, firms
services providing continuing services such as mobile phone operators, cable and
satellite TV operators, the banking and insurance industry, and consulting
firms can fully utilize their customer database by tracking customers'
consumption behavior to infer behavioral switching costs. Figure 3 illustrates
various types of behavioral switching costs over time. While contractual or
learning costs are fixed and considered only at the time of contract,
transaction costs reflect the firm's long-term relationship with its customers.
Firms need to exercise great caution in managing contractual switching costs
in an attempt to attract customers in a single stroke. Some mobile phone
operators provide very attractive terms in the beginning but consumers end
up with less benefit because of higher cost per unit consumed. Such efforts
have been responded to negatively because they give the impression of
hassling customers through requiring a detailed knowledge of the contract
terms.
Reports of mobile phone customer complaints in many cases are rooted in
operators' efforts to lock-in customers through increasing contractual
switching costs. Since transaction costs can be a good indicator of

Figure 3. Types of behavioral switching costs

JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 1 2001 43

 improvement or deterioration of customer satisfaction; however, firms
should focus more on the management of transaction-related switching costs
over time. The changes in the numbers of transactions can help managers
detect customer defection early and help them design incentive schemes
using various promotions at the right time. Timing is an important issue,
since most mobile operators start acting only when their customers reach the
critical period near the end of their contract. To gradually increase
consumption, firms should be competitive in the quality of basic offerings
and also provide consumption-based incentives such as free hours, added-
value services, and lower rates. However, simply inducing current customers
to consume more products or services does not guarantee increased loyalty.
The design of proper incentives can be achieved by analyzing customers'
evaluation of different satisfaction components and usage patterns. Both can
help develop a marketing strategy that combines various promotional tools.
For example, in the mobile phone market, such tools might include more
attractive weekend pricing, a new handset with discounted price, and free
value-added services for heavy users.
Implications of our study Although the implications of our study can be generalized to other product
categories which involve continuing services, high switching costs
sometimes present a more complicated picture depending on the type of
product and service quality. In the office copier market, for example, a key
component of customer satisfaction is maintenance costs. In this market,
more usage increases switching costs but, at the same time, increases
maintenance costs that can be a major source of dissatisfaction. If not
satisfied with after-sales service quality, even customers with high switching
costs are more likely to consider changing service providers, so that they can
have a better long-term deal.
In sum, we believe that only loyalty programs accompanied by well-
designed customer satisfaction programs can be effective in increasing
customer retention. However, since switching costs are often proportional to
the volume of consumption or the purchase frequency, they indirectly
strengthen the satisfaction-loyalty link and in turn contribute to increased
loyalty and customer retention, as we have shown through the moderating
role of switching costs. As switching costs reach a threshold that can deter
switching, a reward program can be implemented to increase the benefits of
membership, which results in loyalty inertia. Moreover, the management of
switching costs can be directed towards both loyal and disloyal customers, so
that both groups' incentives to consume more products or services are
increased.

Notes
1. Other European countries show a similar trend in market penetration: Germany (23 per
cent); UK (32 per cent); and Spain (29 per cent) as of September 1999. Scandinavian
countries are also on the express rail for mobile communication: Sweden (53 per cent);
Norway (58 per cent); and Finland (62 per cent) (Financial Times, Mobile
Communications, 16 September 1999).
2. Financial Times, ``Mobile communications'', 28 October 1999, p. 12. This amount
includes debt.

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