Loyalty and switching behavior among corporate energy customers: A study in the Italian context

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1 Loyalty and switching behavior among corporate energy customers: A study in the Italian context Vania Vigolo, Università degli Studi di Verona, vania.vigolo@univr.it Fabio Cassia, Università degli Studi di Verona, fabio.cassia@univr.it Abstract Energy costs represent one of the most significant cost drivers for companies. In Italy, these costs are markedly rising: a recent study among Italian SMEs shows that the costs for electric energy and for natural gas have increased respectively on average by 18% and 47% in the last three years. Thanks to the recent liberalization process, firms have now the opportunity to evaluate alternative energy providers and try to reduce their energy expenses. Nonetheless, the switching rate among corporate customers is as low as 6.3%. Whilst a few studies have explored switching behavior and loyalty among private energy customers, there is a lack of knowledge about corporate energy customers. The purpose of this paper is to fill this gap, by exploring the switching behavior of a sample of 110 Italian small and medium firms that purchase natural gas from a middle-sized natural gas supplier. The analysis emphasizes the role of price convenience (but not of dissatisfaction with the service provision) as a driver of the intention to switch to a new supplier. The negative impact of procedural and relational switching costs on the intention to switch emerges, as well. The findings highlight the need for gas service providers to focus on customer orientation and loyalty to stimulate customer loyalty and not just customer repurchases. Keywords: Natural gas provider, switching intentions, B2B, energy, satisfaction, trust, value-formoney. Introduction Reliable energy supplies at reasonable prices are crucial to both consumers and businesses. In particular, energy costs represent one of the most significant cost drivers for companies (Aranda- Usón et al., 2012), thus influencing firms efficiency and competitiveness (Trianni & Cagno, 2012). In Italy, these costs are markedly rising: a recent study among Italian small and medium enterprises

2 (SMEs) shows that the costs for electric energy and for natural gas have increased respectively on average by 18% and 47% in the last three years (Confcommercio & Ref., 2013). In addition, it should be noted that for Italian firms the cost of gas is 17% higher than in other European countries (AAEG, 2012). As a result of the recent liberalization process promoted by the European Union, Italian firms have now the opportunity to select among alternative energy providers, thus reducing their energy expenses. However, in Italy competition is far from being effective and switching rate is still low among both private (or domestic) and corporate (or business) customers. While a few studies have explored switching behavior and loyalty among private energy customers (Hartmann & Apaolaza Ibánez, 2007; Walsh, Dinnie & Wiedmann, 2006), there is a lack of knowledge about corporate energy customers. Filling this gap seems particularly interesting from both the academic and the managerial perspectives. Given these premises, the aim of this paper is to investigate switching behaviors of Italian SMEs that purchase natural gas from a middle-sized natural gas supplier. Hence the next section will review studies about brand switching in business-to-business markets (B2B). After that the context of the research will be outlined and the methodology will be described. The description and the discussion of the findings will follow, and managerial implications and conclusions will complete the paper. Literature review: brand switching in B2B markets Knowledge about brand switching in B2B markets is limited, as most of the research on this issue has been conducted in B2C markets. Nonetheless understanding why B2B customers would switch to a new brand is fundamental, in particular in those markets that are close to maturity and where the only way to increase the markets share is through encouraging users to switch from a competitor (Al-Kwifi, S. O & McNaughton, 2013). In general, customers switch to secure higher benefits from a new supplier (Wathne, Biong & Heide, 2001) and do not switch when they perceive a high value and strong satisfaction from the relation with the current supplier (Geiger, Durand, Saab, Kleinaltenkamp, Baxter & Lee, 2012). Nonetheless repeated purchase from the same supplier may be motivated both by loyalty, i.e. repeated purchase combined with a favorable attitude (Zeithaml et al., 1996; Chaudhuri & Holbrook, 2001), or by costs to switch or other situational factors. In addition, studies about B2B customers switching behavior show that there is a status quo bias, i.e. an inertial force making the customers being tied to the incumbent (Ganesan, Brown & Mariadoss, 2010). Such status quo bias is the result of both a calculative commitment and an affective commitment. Calculative commitment is based on rationality and economic concerns, whilst affective commitment is resulting from the sense of identification, loyalty and obligation linking the customer to the seller (Ganesan, Brown & Mariadoss, 2010). When switching to a new supplier, the customer has to face switching costs, i.e. the onetime costs that customers associate with the process of switching from one provider to another (Burnham, Frels & Mahajan, 2003, p. 110). Research on this issue has identified several types and facets of switching costs, reflecting both calculative and affective commitment (Heide & Weiss, 1995; Burnham, Frels & Mahajan, 2003): a) Procedural switching costs, related to the expenditure of time and efforts required to evaluate alternative offerings and to start the relation with the new supplier. These costs include: -Economic risk costs: costs due to the uncertainty about the performance of the new provider;

3 -Evaluation costs: costs due to the time and effort costs to search for and analyze alternative offerings and to make the decision; -Learning costs: costs due to the time and effort needed to learn how to use the new product or service effectively; -Setup costs: costs due to the time and effort to start the relationship with the new provider. b) Financial switching costs, that measure the loss of financially quantifiable resources caused by to the switching decision. These costs include: -Benefit loss costs: costs due to the loss of discounts or similar benefits, that are afforded to the customer by the current provider but will not be guaranteed by the new provider; -Monetary loss costs: costs due to the onetime financial expenses needed to start working with the new supplier, such as the replacement of transaction specific assets (Williamson, 1979). c) Relational switching costs, related to the psychological or emotional discomfort related to the breaking of the established bonds with the current provider. These costs include: -Personal relationship loss: costs due to the affective losses deriving from breaking the bonds with the people of the supplying firm; -Brand relationship loss: costs due to the affective losses deriving from breaking the bonds with the provider s brand. Available studies demonstrate that all these types of costs have a direct impact on the customer s willingness to stay with the current supplier: hence the higher the switching costs the lower the intention to switch to other providers (Burnham, Frels & Mahajan, 2003; Lam, Shankar. Erramilli & Murthy, 2004). Of course the impact of procedural, financial and relational switching costs on the intention to stay with the current provider will be different depending on the specific relation linking the customer to the supplier. For example, if the relation with the current supplier is based on high relation-specific investment, (i.e. long-term investment in the people, assets, and procedures of the partnership) (Chiou & Droge, 2006; Lui, Wong & Liu, 2009), financial switching costs will have a particularly strong impact on the intention to stay with the current supplier. In a similar way, the presence of trust between the customer and his current supplier will emphasized the importance of relational switching costs in influencing customers evaluations about the opportunity of switching to a new provider. As regards the specific market analyzed in this paper (the market for natural gas sold to SMEs) it should be noted that the relation between the customer and his energy provider is characterized by no or very low relation-specific investments. Moreover the offerings are mainly standardized and do not require frequent interactions between the two parties. Drawing on these premises, it can be hypothesized that customer s decision to switch to a new provider will be influenced only by some of the mentioned types of switching costs, and mainly by some procedural costs. Studies on corporate customers switching in the gas market are not available, but research conducted on final consumers in the same market show that both switching costs and satisfaction act as strong driver for the intention to stay with the current gas service provider (Hartmann & Apaolaza Ibáñez, 2007; Walsh, Dinnie & Wiedmann, 2006). The following research will address this gap, by studying corporate customer switching behavior in the gas market.

4 The study context Since the Italian gas market was opened to free competition in 2003, horizontal and vertical mergers and acquisitions have taken place and news gas providers brands have entered the market (AAEG, 2012). In Italy there are currently about 300 gas providers operating in a highly concentrated market: the top three groups overall market share is equal to 49.5%. The majority of customers (92.5%) is represented by households, 1.2% by central heating, 5.1% by commercial customers and the services sector, 1.2% by industrial clients and less than 0.5% by power plants. However, in terms of volume, the proportions tend to be reversed (AAEG, 2012). Both households and firms can choose between free market prices and reference prices, i.e. the prices that gas suppliers are obliged to include among their commercial offers. For industries or service firms energy costs have a direct impact on economic performance (Trianni & Cagno, 2012), therefore choosing the best available offer is of strategic importance. In response to the increased competition following the liberalization process, gas providers need to become more customer-oriented, focusing on customer satisfaction and loyalty (Hartmann & Apaolaza Ibánez, 2007). Currently, the corporate customers average switching rate in the Italian gas market is as low as 6.3% in terms of customers, although the switching rates increase with higher volumes of gas consumption (AAEG, 2012). As repeated purchase may be motivated by both high customer s satisfaction and/or high switching costs, it is important for gas provider to investigate which of the two components prevails. In particular, to reinforce their corporate customer s satisfaction and brand loyalty, service providers should focus on quality, reliability, performance and service (Kuhn et al., 2008). Methodology Sample selection The gas service industry served as the context for this study. The business customer database of an Italian gas provider (whose customers are mainly located in the North of Italy) was used for randomly selecting the respondents. A total of 1,000 firms were contacted by . The consisted of an invitation letter explaining the aim of the research and a link to the questionnaire. The questionnaire was posted online using the web service provider SurveyMonkey ( Two weeks after the first , a recall was sent to the participants. Overall, 110 firms completed the questionnaire, with a response rate of 11%. Measurement Most of the items used in the present investigation were derived from previous studies (Keller, 2001; Hartmann & Apaolaza Ibáñez, 2007; Kuhn et al., 2008) and adapted to the specific research context. The questionnaire included measures of: overall customer satisfaction, trust in the service provider, perceived value-for-money with respect to competitors, and switching intentions. The items were measured on five-point Likert-type scales where 1 = completely agree and 5 = completely disagree. In addition, a question to measure the perceived easiness to compare competing natural gas service offerings was included in the questionnaire and measured with a dichotomous scale (yes/no). Respondents were also asked to provide information about the company profile (e.g. firm dimensions and industry).

5 The questionnaire was reviewed by a panel of experts including practitioners as well as academic experts in branding and public utilities. The preliminary questionnaire was revised and improved, mainly in the areas of item adequacy and relevance, as well as wording clarity. Next, a pretest among 10 business customers was conducted and no particular critical aspect emerged. The Statistical Package for the Social Science 17.0 (2008) was employed for descriptive statistics and regression analysis. Results The majority of the respondents were small firms (75.5%) and medium-sized firms (22.7%) operating in business-to-business (48.2%) or business-to-consumer (51.8%) contexts. Manufacturing firms represented 53.6% of the total sample. An overview of the demographic information is presented in table 1. Table 1 Respondents profile Frequency Percent. Size Small Medium Big Business B2C B2B Industry Manufacturing Trade and other services Firstly, in order to investigate the antecedents of switching intentions, a multiple regression analysis was conducted. More specifically, the intention to switch to another service provider in the next twelve months was deemed as the dependent variable. Overall satisfaction about the service, trust in the service provider, and perceived value-for-money with respect to other competitors were considered as predictors of switching behavior and hence included as the independent variables. More specifically, they were expected to inhibit switching intentions. A number of analyses were conducted to test for multicollinearity and heteroskedasticity and no problems were detected. Investigation of the residuals indicated that linear regression analysis was appropriate for the data. The results of the regression analyses are presented in Table 2. The overall regression model was significant (F= ; p= 0.000) and explained about 40.3% of the variance of switching intention. More specifically, standardized beta coefficients and p-values indicated that only overall trust and perceived value-for-money were statistically significant deterrents of switching intentions, whereas overall satisfaction was not a statistically significant predictor. In particular, value-for-money was the most relevant predictor (Beta= ; p<0.00).

6 Table 2: Multiple regression - Predicting switching intentions Determinants of switching intentions B Std error Standardized Beta t p Overall satisfaction Value-for-money with respect to competitors Trust in the service provider Constant F= (p= 0.000); R 2 = 0.421; Adjusted R 2 = In addition, with regard the transparency of market offers, the majority of respondents (83.6%) reported that it was not easy to compare the competing offerings, made available by natural gas providers (Table 3). Table 3: Easiness to compare the competing offerings Frequency Percent. No Yes Total ,0 Discussion and managerial implications The findings show that corporate customers intention to stay with their current gas provider or to switch to a new provider is first of all related to the perceived price convenience. In detail, the higher the customers perception that their current gas provider offers a better value for money than its competitors, the higher the intention to stay with the current supplier, and vice versa. On the contrary, the overall satisfaction with the current service provision is not significantly related to the corporate customers intention to be loyal to the current provider. In sum, these results seem to imply that, provided that the gas providers meet at least a minimum level of quality, the corporate customers are willing to select the one that offers the most competitive price. Whilst results suggest that participants were likely to switch to new suppliers to follow price convenience, switch rates in the corporate energy markets are as low as 6.3% (AEEG, 2012). This study provides some evidences to explain this phenomenon. In particular, the relevant role of both relational and procedural switching costs emerged. As regards relational switching costs, the findings emphasize that the presence of a trust relationship linking the customer to the current supplier reduces customer s willingness to switch to a new supplier. Switching to a new supplier will break a relation that is valuable for the customer, thus generating a cost. Moreover, the customer will incur in two kinds of procedural switching costs: evaluation costs to search for and analyze alternative offerings and setup costs to start the relationship with the new provider. The

7 findings of this study particularly emphasize the impact of evaluation costs: the vast majority of participants reported that it is very difficult to compare alternative offerings and prices in the gas market. Hence time and efforts are required to understand whether the competing offerings are more convenient than the current one. In sum, despite the opportunity to select among a high number of competing gas service offerings, we found a strong support for the status quo bias. It seems that SMEs tend to overestimate the efforts and underestimating the potential benefits of switching. It also emerges that the status quo bias is driven more by repurchase than by loyalty. These results are significantly different from those found among gas final consumers, where both satisfaction and switching costs contributed to the intention to stay with the current supplier (Hartmann & Apaolaza Ibáñez, 2007; Walsh, Dinnie & Wiedmann, 2006). The results of this study urge gas supplier to focus not only on customers repurchase due to high switching costs but also on their satisfaction and loyalty. While switching rates are still low among corporate customers, a slow but continuous increase can be observed: the switching rate was 4.3% in 2009, 5.1% in 2010 and 6.3% in Hence focusing only on defending the current position by leveraging on or emphasizing switching costs seems not to be sustainable. Conclusions and limitations The purpose of this paper was to explore switching behavior among corporate customers in the natural gas market. In particular, whist natural gas represents a significant cost driver for firms, switching rates are currently as low as 6.3%. The analysis conducted among a sample of SMEs has emphasized the role of both relational and procedural switching costs, which push SMEs to stay with their current supplier. On the contrary, satisfaction with the current supplier was not a significant reason for not switching. Overall the results show that significant efforts are required to gas providers to increase their customer orientation. Currently gas providers are mainly able to retain their customers thanks to the status quo bias and not to customer satisfaction. Enhancing customer orientation and satisfaction will stimulate customer loyalty and not just customer repurchase. Some limitation of this study must be mentioned. First, the sample size in quite limited and attention must be paid before generalizing the results. Moreover the sample size did not allow us to make comparison between the behaviors of different groups of customers (for example on the base of their consumption volumes). Filling this gap may represent an interesting issue for future studies. References AEEG, Autorità per l Energia Elettrica e il Gas (2012). Annual Report to the Agency for the Cooperation of Energy Regulators and to the European Commission of Regulatory Activities and the Fulfillment of Duties of the Italian Regulatory Authority for Electricity and Gas. Al-Kwifi, S. O., & McNaughton, R. B. (2013). The influence of product features on brand switching: the case of magnetic resonance imaging equipment. Journal of Business & Industrial Marketing, 28(5), Aranda-Usón, A., Ferreira, G., Mainar-Toledo, M. D., Scarpellini, S., & Llera Sastresa, E. (2012). Energy consumption analysis of Spanish food and drink, textile, chemical and non-metallic mineral products sectors. Energy, 42(1),

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