The Effect of Switching Barriers on Customer Retention in Korean Mobile Telecommunication Services

The Effect of Switching Barriers on Customer Retention in Korean Mobile Telecommunication Services Moon-Koo Kim*, Jong-Hyun Park*, Myeong-Cheol Park** *Electronics and Telecommunications Research Institute, Korea **Information and Communication University E-mail: mkkim@etri.re.kr, pjh63444@etri.re.kr, mcpark@icu.ac.kr Abstract This paper aims to investigate the influence of the interaction between customer satisfaction and switching barriers on customer retention in mobile telecommunication services. The detailed factors regarding switching barriers are classified based on the related literatures. Furthermore, the hierarchical regression analysis is used to analyze the extent to which the factors affect customer retention. The results are as follows: First, among the factors of switching barriers, switching costs, such as continuity cost and contractual cost, interpersonal relationship, and attractiveness of alternatives are key factors in determining customer retention. Second, continuity cost and interpersonal relationship have an adjustment effect between customer satisfaction and customer retention. The findings can help the mobile operators establish a customer-oriented strategy by identifying a few key factors strengthening the linkage with customers?. Introduction Mobile communication service in Korea is said to enter the mature market in the aspect of diffusion rate compared with the population, stagnation of subscription increasing rate and slowdown of sales revenue. In this mature market, where the growth is slowdown, profitability 1

gets lower and lower, and the market competitoin is very intense, the core strategy of the company is the customer retention strategy, not the customer acquisition strategy. This is because it costs too much money to aquire a new customer in the mature market and the firm can obtain profit resource by retaining the existing customers with reduced marketing cost. therefore, it is the main strategy for the mobile service providers in the mature market to concentrate their resource and effort to retaining the customers. Now we can see many domestic and foreign mobile communication service providers intensifying loyalty program and adopting CRM(Customer Relation Management) actively. Customers tend to keep using current service as the level of the customer satisfaction is high. In other word, the customer satisfaction is the first factor for the customer retention. In the recent research[jones et al. 2000], however, the customer retention and the churning rate of them were identified to be different in the same level of the customer satisfaction according to the level of the switching barrier, which affects the customer retention as well as adjustments the relationship between the customer satisfaction and the customer retention. By analyzing the effect of the switching barrier as the adjustment variable which increases or reduces the effect of the customer satisfaction on the customer retention, we can understand the relationship among factors affecting the customer retention and the mechanism, and suggest the implication and the strategy to leverage the customer retention rate effectively for the service provider. These are the valuable works both in the theoretic aspect and the practical aspect. In this paper, we plan to anlayze the specific factors and the relationship between them those build the switching barrier with the adjustment effect in the mobile communication industry. Objectives of this paper are like the following: first, to analyze the the concept and the importance of the customer retention in the mobile communication service, secondly, to identify factors establishing the switching barriers, thirdly, to anlayze the structure and the effect of the switching barrier empirically. Finally, we are going to suggest the strategic implication to increase the customer retention rate based on the result of study. 2

?. Literature Survey Existing studies on the customer retention in the service are mainly focusing on the customer satisfaction and the switching barrier[dick & Basu, 1994; Gerportt, et al., 2001; Lee & Cunningham, 2001]. Generally speaking, the customer with higher satisfaction tends to use that service continuously. However, the necessity for the analysis on the other factors as other studies shows that the customer satisfaction is not always significant to explain the customer retention even it is an important factor having positive effect on the customer retention[anderson, 1994; Jones et al. 2002]. Recent studies identify that the switching cost, the interpersonal relationship, the attractiveness of the alternatives and the recovery of the service are establishing the switching barrier and have a large effect on the customer retention[gwinner et al., 1998; Maute & Forrester, 1993; Smith & Bolton, 1998]. As the switching barrier gets higher and higher, the possibility of sustaining the current service provider gets higher and higher, and the switching barrier acts the adjustment variable between the customer satisfaction and the customer retention. Namely, the customer retention rate can be different in the same level of the customer satisfaction when the switching barriers are different. Whereas accumulated result of the studies on the main effect and the adjustment effect of the switching barrier are not sufficient[ Colgate & Lang, 2001; Jones et al., 2000; Lee & Cunningham, 2001].?. A Model and Hypothesis 3.1 A Model We establish the model <Figure 1> to analyze the conceptual relationshp among customer retention, the customer satisfaction and the switching barrier in the domestic mobile 3

communication market based on the precedented studies for the customer retention. The model is developed with the focus on the main and adjustment effect of the switching barrier influencing the customer retention. This paper focuses on the analysis the mutual reaction and the level of the mutual effects of components of the switching barrier, such as switching cost, interpersonal relationship, the attractiveness of the alternatives and the recovery of service, among the customer satisfaction and the customer retention. Customer Satisfaction H 1 Customer Retention H 3 Switching Barrier switching Costs interpersonal Relationship attractiveness of alternatives service recovery H 2 (Figure. 1) The research model 3.2 Hypothesis 3.2.1 The relationship between the customer satisfaction and the customer retention There are many studies on the relationshp between the customer satisfaction and the customer retention[bolton, 1998]. Precedent studies say that the customer satisfaction is the factor affecting the customer retention in some different level [Anderson & Sullivan, 1993; Dick & Basu, 1994; Oliva et al., 1996; Oliver & Swan, 1989]. Based on those studies, this paper establish hypothesises like the following. Hypothesis 1. The customer satisfaction has positive effect(+) on the customer retention. 4

3.2.2 The relationship between the switching barrier and the customer retention (1) Switching cost The switching cost is a main factor having effect on the customer retention. As the switching cost increases, risk and burden on consumers are increased in the customer side and dependency on the service provider gets increased as a result[jones et al., 2000; Morgan & Hunt, 1994]. In other words, the more consumer recognize the switching cost, the higher retention rate even though customers have dissatisfaction on the service. (2) The interpersonal relationship The long term interpersonal relationship between the company and customers offers a lot of benefits to the customers: social benefits such as fellowship and personal recognition, psycological benefits such as reducing anxiety and credit, economic benefits such as discount and time-saving, and finallly customization benefits such as customer management and etc[berry, 1995; Peterson 1995]. Therefore the interpersonal relationshpi between the company and the customers can be an important factor as a switching barrier. The continuous interpersonal relationship becomes a relationship-specific asset which aquires customer to pay cost to be out of the relationship and therefore protects customer from being aprt from the relationship with the company. (3) The attractiveness of alternatives When consumers does not think that they have various alternatives or the service level, distinguished image of the alternatives is better than the current service provider, the possibility the customers switch the service provider is very low[anderson & Narus, 1990; Jones et al., 2000]. Therefore, the attractiveness of the alternatives would be a component buildling the switching barrier. 5

(4) The service recovery The service recovery means the ability of the service provider to solve the problem such as the customer dissatisfacton and the service failure[gronoss, 1988]. This paper adopts the definiton of the service recovery as described. The active effort of the company to solve the problem helps customer have credit on the service provider[zemke, 1993; Smith & Bolton, 1998]. And appropriate effort for the service recovery can protect customers from switching the service provider[colgate & Lang, 2001]. The service recovery at the service encounter is a foundation to develop the customer relationship into a longterm friednship. Therefore the service recovery can be a component for the switching barrier. Based on precedent studies from (1) to (4) for factors composing the switching barrier, we establish following hypothesises. Hypothesis 2. The switching barrier will have an effect on the customer retention. Hypothesis 2-1. The switching cost will have an effect on the customer retention. Hypothesis 2-1a. The continuous cost will have a positive(+) effect on the customer retention. Hypothesis 2-1b. The contractual cost will have a positive(+) effect on the customer retention. Hypothesis 2-1c. The searching cost will have a positive(+) effect on the customer retention. Hypothesis 2-1d. The learning cost will have a positive(+) effect on the customer retention. Hypothesis 2-1e. The initial cost will have a positive(+) effect on the customer retention. Hypothesis 2-2. The interpersonal relationship will have a positive(+) effect on the customer retention. Hypothesis 2-3. The attractiveness of the alternatives will have a negative(-) effect on the customer retention. Hypothesis 2-4. The service recovery will have apositive(+) effect on the customer retention. 3.2.3 The adjustment effect of the switching barrier in between of the customer satisfaction and the customer relationship. 6

The customer satisfaction is an important factor for the customer retention but not a sufficient[anderson& Sullivan, 1993; Jones & Saaer, 1995; Jones et al., 2000]. The switching barrier has a direct effect on the customer retention and performs to adjustment the relationship between the customer satisfaction and the customer retention[lee et al., 2001; Ruyter et al., 1997; Jones et al., 2001]. Therefore the switching barrier can have an influence on the customer retention with the interaction with the customer satisfaction. The level of the customer retention can be different according to the level of the switching barrier in the same level of the customer satisfaction. Therefore, this paper establishes following hypothesises based on the previous studies. Hypothesis 3. The switching barrier will have an adjustment effect on the relationship between the customer satisfactionand the customer retention. Hypothesis 3-1. The switching cost will adjustment the effect of the customer satisfaction on the customer retention. Hypothesis 3-1a. The continous cost will adjustment the effect of the customer satisfaction on the customer retention. Hypothesis 3-1b. The contractual cost will adjustment the effect of the customer satisfaction on the customer retention. Hypothesis 3-1c. The searching cost will adjustment the effect of the customer satisfaction on the customer retention. Hypothesis 3-1d. The learning cost will adjustment the effect of the customer satisfaction on the customer retention. Hypothesis 3-1e. The initial cost will adjustment the effect of the customer satisfaction on the customer retention. Hypothesis 3-2. The interpersonal relationshpi will adjustment the effect of the customer satisfaction on the customer retention. Hypothesis 3-3. The attactiveness of the alternatives will adjustment the effect of the customer satisfaction on the customer retention. Hypothesis 3-4. The service recovery will adjustment the effect of the customer satisfaction on the customer retention. 7

?. Methodology 4.1 Definition and estimation of variables The operational definition of each variable to verify the hypothesises are made based on the precedent studies described above. The independent variable, the customer satisfaction, is about the overall satisfaction level for the service and the provider. The dependent variable, the customer retention, is measured in two items in the aspect of the intention. The adjustment variable, the switching costs, reflects the characteristics of the mobile communication service. The continuous cost means the inconvenience resulted from the switching from old to new service provider. The contractual cost means the loss of the economic benefits like mileage due to the switching. The searching cost means the effort to find new service provider. The learning cost means the inconvenience to learn how to use the new service. The initial cost means the subscription fee and terminal fee. The interpersonal relationship means the social and psychological relationship between the customer and the service provider. The attractiveness of the alternatives means the recognition of the customer about the difference of the services between the current one and the alternatives. The service recovery is measured mainly in the aspect of solving the problem of service failure. The switching barrier is composed of 24 items, 3 items per each variable. 4.2 Data gathering and analysis The population of this study is a subscriber currently using the mobile communication service. 5 staffs visited schools and companies to have general survey with high school students, 8

college and graduate students, and workers of 3 groups. From 350 copies of questions, 323 are returned. Among those, 306 copies are relevant excepting omitted answer and same answers for the continuous questions. SPSS10.0 is used for the statistical analysis, factor analysis, confidence analysis and regression analysis.?. Result To verify the hypothesis that the customer retention is determined by the interaction between the customer satisfaction and the switching barrier, the study should reflect the moderate type. Therefore, this paper estimated the variables by using the moderate regression analysis and it is expressed as follows. Y = a + t IN(T) + ß X +? Z + d X Z + e (Y: the customer retention, T: duration, X: the customer satisfaction, Z: switching costs) Hypothesizes are verified by using the regression analysis as shown in the table 1, and the result is shown in the table 2. <Table 1> Result of the hierarchical multi-regression analysis a Main Effect Interactive Effect Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model10 Stage1 (independent) duration.007.016.011.016.013 0.016.019.030.016.013 Customer satisfaction.731**.470**.443**.469**.464*.473**.475.461**.474**.474** Stage 2 (Adjustment) Continuous Cost(A).238**.246**.237**.241**.237**.230**.219**.249**.245** Contractual Cost(B).131**.120**.131**.130**.131**.138**.156**.127**.138** Searching Cost(C).017.030.017.034 0.016.010.028.017.018 Learning Cost(D).007.006.007.008 0.007.008.014.018.008 Initial Cost(E).073+.092*.071+.079+.073+.069+.094*.066.081* Interpersonal Relationship(F).077+.098*.075+.075+.078+.082+.089*.065.075+ 9

Attractiveness of alternatives (G) -.252** -.250** -.253** -.255** -.256** -.246** -.238** -.271** -.251** Service Recovery(H).057.047.056.057 0.057.063.056.059.053 Stage 3 (Interaction) Customer Satisfaction X A.089* Customer Satisfaction X B.007 Customer Satisfaction X C.038 Customer Satisfaction X D.033 Customer Satisfaction X E.040 Customer Satisfaction X F.131** Customer Satisfaction X G -.069 Customer Satisfaction X H.061 Variation of R 2.064.006.001.000.001.001.015.004.003 R 2 of Total Model.533.597.603.598.597.598.598.612.601.600 R 2 after modification.530.581.586.581.580.581.581.595.584.583 F of Total Model 173.095** 38.356** 35.681** 34.904** 34.740** 34.888** 34.928** 36.692** 35.291** 35.243** a Input is standardized beta value. +: p<0.1, *: p<0.05, **: p<0.01 <Table 2> Overall Verification Result of Hypothesis No. of Result Hypothesis Hypothesis Sig. Level (10%) Hypothesis 1 Customer Satisfaction has a positive(+) effect on the customer retention. Accept Hypothesis 2-1a The continuous cost has a positive(+) effect on the customer retention. Accept Hypothesis 2-1b The contractual cost has a positive(+) effect on the customer retention. Accept Hypothesis 2-1c The searching cost has a positive(+) effect on the customer retention. Reject Hypothesis 2-1d The learning cost has a positive(+) effect on the customer retention. Reject Hypothesis 2-1e The initial cost has a positive(+) effect on the customer retention Accept Hypothesis 2-2 The interpersonal relationship has a positive(+) effect on the customer retention. Accept Hypothesis 2-3 The attractiveness of the alternatives has a negative(-) effect on the customer retention. Accept Hypothesis 2-4 The service recovery has a positive(+) effect on the customer retention. Reject Hypothesis 3-1a The continuous cost adjustments the effect of the customer satisfaction on the customer retention. Accept Hypothesis 3-1b The contractual cost adjustments the effect of the customer satisfaction on the customer retention. Reject Hypothesis 3-1c The searching cost adjustments the effect of the customer satisfaction on the customer retention. Reject Hypothesis 3-1d The searching cost adjustments the effect of the customer satisfaction on the customer retention. Reject Hypothesis 3-1e The initial cost adjustments the effect of the customer satisfaction on the customer retention. Reject Hypothesis 3-2 The interpersonal relationship adjustments the effect of the customer satisfaction on the customer retention. Accept Hypothesis 3-3 The attractiveness of the alternatives adjustments the effect of the customer satisfaction on the customer retention. Reject Hypothesis 3-4 The service recovery adjustments the effect of the customer satisfaction on the customer retention. Reject 10

?. Conclusion and Future Works This paper aimed to identify the role of the switching barrier on the customer retention by analyzing the relationship between them in the aspect of the customer satisfaction and the switching barrier in the mobile communication service industry. First, we focused on the analysis of the switching cost, the interpersonal relationship, the attractiveness of the alternatives and the service recovery those are mentioned in the precedent studies. And the hierarchical regression analysis was used to analyze the main effect and the adjustment effect of those switching barrier factors and the relative effect. The contribution of this paper is as follow: First is theoretical one and second is practical aspect. In the theoretical aspect, the contribution is that this paper review theoretically and verifies empirically the relationship and mechanism between the customer retention and the switching barrier. Recent studies are lack of the accumulated result regarding the role of the switching barrier. Only roles of partial factors of the switching barriers are examined. This paper proposed direction for the future work by verifying the model about the role of the switching barrier theoretically. Especially this is the first try to study the main and adjustment effect of specific factors composing the switching barrier in Korea. In the empirical aspect, this paper suggests the practical strategy in the sense of the switching barrier such as the continuous cost, the contractual cost, the interpersonal relationship and the attractiveness of the alternatives for the domestic mobile communication service providers those eager to maintain current growth and profitability in the mature market. This paper still has some limitations that lead the future studies. First, factors, such as the switching cost, the interpersonal relationship, the attractiveness of the alternatives and the service recovery, influencing the customer retention are reviewed in this paper, and other variables such as customer characteristics seem to have important influence on 11

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