Customer Switching Behaviour for Mobile Networks
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Consumers use services everyday, these ranges from taking the train or opening a bank account to talking on a mobile phone. Businesses also rely on a wide range of services on a daily basis, but on a much larger scale compared to consumers. However, customers are not always satisfied with a particular service that they maybe using and often resort to switching their service provider in order to resolve the issue or pursue better value from a less expensive service.
The objective of this study is to investigate customer-switching behaviour in the mobile industry, why it takes place and what factors influence it. This topic area has been chosen, as customer switching and the mobile phone industry are contemporary and relevant to the present day and will continue to evolve overtime.
Research has been undertaken using secondary and primary data collection methods. Secondary data provided a background to the mobile phone industry and an overview of customer switching behaviour in services. Primary data consisted of self administered questionnaires to a convenient sample of university students, this enabled data to be collected which would provide an idea of mobile phone users' contemplation of switching and their understanding of why they believe they would switch from one service to another.
Findings revealed that a majority of customer switching is due to high call and monthly charges and consumers trying to obtain more free minutes and texts. This contrasts with the literature and precious studies, which have found other reasons to cause customer switching, which illustrates how causes of switching differ in every industry according to the nature of the service.
CHAPTER 1: INTRODUCTION
1.1 Project Aims
The aim of this project is to determine the reasons as to why consumers switch from one mobile phone network to another?
The research objectives that arise from the aim will therefore be:
1 To evaluate whether competitor's offerings are causing consumers to switch from one network to another
2 To evaluate whether retail offerings are causing consumers to switch to gain a better deal
3 What actions of the service firms or their employees cause customers to switch from one service provider to another
The research will be UK based geographically using a convenient sample of university students and will be done using both primary and secondary research methods. The research may help managers and researchers understand service switching from a customers perspective in the mobile phone industry and the switching drivers may provides answers as to what has influenced customer behaviour. The results of the research will be analysed to provide recommendations.
The reason for choosing this topic area is that there appears to be a lack of research on customer switching behaviour in the mobile phone industry. This study aims to explore this topic are further.
1.2 Background on Mobile Phones Service
Mobile phones service refers to a service whose customer base includes firms using mobile phones for business and customers using it for their personal use. Mobile phones have become substitutes for fixed telephone lines and have led to the decline in calls made from fixed telephone lines.
The take up rate of mobile phones is constantly increasing and over the years the growth in the use of mobile phones has been dramatic. According to EMC mobile user numbers reached the 1.5 billion mark in June 2004 and is set to reach 2 billion by July 2006 and 2.45 billion by the end of 2009. (http://www.cellular.co.za, 2005)
Mobile phones today are not solely used to make calls, additional value added services such as Short Messaging Service (SMS), Multimedia Messaging Service (MMS), radio, internet access and so on. This means that the benefits and use of mobile phones is also expanding, which is also contributing to industry growth. This has become a focus point for the various operators as intense competition has led to increasingly lower voice call prices. SMS was first used in 1992 and is currently the fastest growing communications technology in history. Worldwide, 135 billion text messages were sent person to person in the first quarter in 2004 (http://www.cellular.co.za, 2005). Retail revenues from voice and data services (including MMS, SMS) account for 79% of the total revenue of the four main UK mobile operators (Vodafone, O2, Orange and T-Mobile), which accounted for £13.6 billion in revenues in 2003, (see appendix 1).
CEPG Research Company conducted a study of the mobile telecommunications industry in 2002, in which findings showed that turnover had reached £32 billion a year, with the sector contribution to GDP being £19.4 billion (2.2%), (ofcom.org.uk/research/telecoms, 2005).
The demand for mobile phones has never been so great as it has become a must have for people of all ages; consumers are constantly exchanging their outdated phones for the latest colour handsets. The popularity of mobile phones is immense and it is perceived that this interest in mobile phones will continue to grow over the next decade or so, as demand increases and new models and technology is introduced to mobile phones.
1.3 Mobile Phone Service Industry
The mobile phone industry is one of the fastest growing sectors of the British economy, with the UK making up the second largest mobile market in Europe, with a share of 18% (Datamonitor, Nov 2004). This growth is due to factors such as changes in government policies towards communication (deregulation), economic growth and developments in information technology. The more recent growth has come from existing mobile phone users upgrading their handsets, which have led to mobile phone companies and network operators targeting first time buyers (Datamonitor, Nov 2004). Mobile phones are not only seen as a vital element for success in business but also as a much wanted item for social use. This is evident in the increasing number of individuals both young and old who now have at least one mobile phone.
As indicated by an Oftel report, in Britain over one million people own a mobile phone instead of a fixed telephone line. 2.3 million UK residents live without a fixed line telephone at home. The popularity of the fixed line phone drastically declined after the mass introduction of mobile phones to the UK. It is worth noting however, that fixed phone line companies have not taken this lightly and have retaliated by introducing mobile phones linked to fixed home lines and companies such as BT setting up their own mobile networks i.e. BT until recently owned O2 and also offering special discounted rates to encourage customers to use their fixed lines.
There are four main network providers in the UK; they are T-mobile, O2, Vodafone and Orange. In 2004 there were 342.43 million mobile subscribers, which is an increase of 8.54 percent from the previous year and a penetration rate of 87.63 percent. T-mobile UK accounted for 15.06 million subscribers, Orange UK had 13.75 million, O2 UK had 13.06 million and Vodafone UK had 12.98 million (mobile communications).
Recently there have been changes in terms of ownership of the major mobile phone networks. T-mobile is now one of the three strategic growth areas of Deutsche Telekom, a German network provider and O2 is now owned by Spanish firm Telefonica. Orange was sold to German mobile phone network Mannesman, which was then taken over by Vodafone, who sold Orange to France Telecom. Orange has a strong network in the UK and overseas but recent management decisions by France Telecom have reversed their user growth and subscriber numbers, which has been partly due to customers switching to other networks. Customers can become concerned that, if their chosen network provider is owned by a firm overseas, their needs will not be met as well as they could by a UK owned provider. Additionally events such as these can contribute to switching behaviour through customer confusion, as found by Oftel (2003), where many consumers switched due to confusion over re-branding of the network.
1.4 Customer Switching Behaviour in the Mobile Phone Industry
According to research by TNS Telecom Trak, consumers tend to use their handsets for about twenty months before upgrading to a new one. Telecommunications regulator OFTEL found that this is also the average amount of time that a majority of mobile phone users will stay with the same mobile provider for. Oftel's research ascertained that 90% of consumers thought about changing their network when changing handsets.
Oftel published a report in April 2003, which provided an overview of the key findings of trends in consumer behaviour in the mobile market based on a residential consumer survey conducted in February 2003. Research was carried out by Recom (Research in Communications) amongst a representative sample of 2,289 UK adults, 75% of who claimed to have a mobile. Findings revealed that 26% of mobile customers have switched network/ supplier. There was a strong indication that the rise in switching in the last quarter was a reflection of confusion over re-branding and rise in mobile penetration. One in ten (9%) of mobile customers were found to have switched network at least twice since owning a mobile, including customers switching back to a previous operator.
Men (37%) and younger mobile users, 15-34 (38%) were found to be most likely to switch multiple times, which included returning to a previously used network. Although the switching differed according to type of package, 36% of contract customers had switched multiple times compared to those on prepay (33%).
24% of customers had switched once in the last 6 months, compared to three in ten (28%) of those that had switched twice and 43% that had switched more than 3 times.
The same survey also revealed that in November 2002, 34% of consumers stated that they had switched mobile network, which was believed to have a result of customer confusion caused by the re-branding of O2 (formally BTCellent) and T-mobile (One2One). Yet this rise was temporary and soon returned to the previous level of 27%.
In February 2003, 7% of T-mobile customers said that they had switched network having previously being with One2One, this was the same for O2 customers who had switched from BTCellnet. This accounted for 3% of all switchers who were confused by the re-branding during February. The current percentage of mobile consumers that have switched mobile network remains at 26%.
When looking at multiple switching, two in ten (18%) of mobile customers had changed their network once, and seven out of ten claimed to have never switched network.
CHAPTER 2: LITERATURE REVIEW
This chapter will review all existing literature related to the mobile phone industry with a focus on customer switching habits and their surrounding elements such as consumer lifestyles, services themselves, competitor offerings and loyalty to help understand the research problem.
This chapter will also review the contributions other researchers have made to the concepts of switching behaviour, yet it should be noted that literature on mobile phone choice is sparse and issues relating to why customers actually switch services remains unexplored in marketing literature which will be explored through this study.
2.1 Classification of Services
There is no one single definition of services that is universally accepted, although many authors have attempted to define it. Yet very few products are 100% service or 100% tangible, they usually consist of a combination of both.
Gronroos (1990) defines services as:
“A service is an activity or series of activities of more or less intangible nature that normally, but not necessarily, takes place in interactions between the customers and the service employee and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customer problems”.
This illustrates the fact that services can take place through physical form, for example this project is concerned with customers switching network provider service (which is intangible) but to have that service to begin with, customers need to purchase a mobile phone, which is a tangible product. Therefore switching behaviour in such a situation may differ from switching a service, which is not integrated with hardware; this may be due to the fact that when physical products are also involved, the costs and risk of switching is different to when there is just a service alone. Brassington (2003) acknowledged that most products tend to have a combination of both physical goods and service e.g. purchasing a gas appliance; this would require the professional fitting service as well as purchasing of the appliance itself.
Kotler (1997) also recognised that some services are a combination of both a service and a product and has incorporated this in his definition of services:
“Any act or performance that one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product.”
This emphasises two key elements:
1. Intangibility - A Service cannot be experience before it is purchased,
2. Lack of ownership - there is no ownership in a pure service as there is no physical product involved.
This is further illustrated in the Figure 1 below which illustrates Kotler's (1997) four categories of products, which are:
1. A pure service
2. A major service with accompanying minor goods/services
3. A tangible good with accompanying service
4. A pure tangible product
New services are being introduced on a daily basis to satisfy and meet all customer needs from individual consumers to business consumers. The service industry comprises the majority of today's economy. In 2001, it represented 80 percent of the GDP of the USA (U.S Bureau of Economic Analysis).
Keiningham et al (2003) said “there is a growing recognition among managers of the importance of measuring the share of business a customer conducts with a particular service provider (share-of-wallet) as opposed to simply repurchasing a product or service at some point in the future or continuing to keep a business relationship with a service provider”. This indicates the importance of retaining and maintaining customers and the importance of the relationship with them.
Research carried out by Bitner (1990); Boulding at al, (1993) looked at service quality in service organisations, Crosby Evans and Cowles (1990); Crosby and Stephens (1987) researched relationship quality and Cronin and Taylor (1992) looked at overall satisfaction with regards to the issue of customer retention in service organisations. These researchers all agreed that service organisations could improve the likelihood of customers' intention to remain with a particular service organisation, as it is these features that contribute to customer satisfaction and the growth of the organisation. The above studies all illustrated strategies relating to customer retention in services. Yet issues relating to why customers actually switch services remain unexplored in marketing literature.
2.2 Characteristics of Services
When describing the main characteristics of a service, it can be depicted as being intangible, as a service has no physical dimension but can take place through a tangible product as is the case with mobile phones and network providers, as discussed earlier. A service can also be described using a tangible noun as Shostack (1987) exemplified that an ‘airline' means transportation and a ‘hotel' means lodging rental. Berry (1980) described a good as ‘an object, a device, a thing' in comparison to a service which is ‘a deed, a performance, an effort'. This further illustrates the fact that consumers cannot see, touch, hear, taste or smell a service; all they can do is experience the performance of the service as said by Carman and Uhl, (1973) and Sasser et. al, (1978) but, the experience may not be possible in all cases without some form of hardware in addition.
Because services are delivered by individuals, each service experience will differ from another; as a result each purchaser will receive a different service experience. Additionally, when a consumer purchases a good, they own it, yet with a service the consumer only has temporary access or use of it, as the service is not owned, only the benefit of it is. Wyckham et al (1975) and Kotler (1986) defined this concept as ownership.
2.3 The Services Marketing Mix
As previously discussed above, many features separate services from tangible products, yet the marketing principles remain the same for both. One particular difference is that there is close contact between individual employees from the supplier organisation and the customer themselves. Because of this, the traditional marketing mix needs to be re-evaluated in terms of the 7p's.
Product: This refers to the features of the product or surrounding it, which in this case would be a good service or supplementary services surrounding it. These features should be benefits, which the customer would desire, and the surrounding features would be competing products performance. (Lovelock and Wirtz, 2004).
Place and Time: Delivering a service to customers involves place, time of delivery and distribution channels used. Delivery can be done both physically and through electronic distribution channels according to the nature of the service being provided. Services can be delivered directly to customers or through intermediary firms, e.g. rental outlets. (Lovelock and Wirtz, 2004).
Promotion and Education: these are three fold, firstly information and advice needs to be provided to customers, target customers need to be persuaded towards a product, and they need to be encouraged to take action. Service promotional communication are usually educational, informing potential customers of the benefits of the service, where and when to obtain it and how. These communications are delivered through individuals (sales people) or media (TV, radio, newspapers etc.). (Lovelock and Wirtz, 2004).
Price and Other User Outlays: In services monetary values refer to rates, fees, admissions, charges, tuition, contributions, interest etc. (Gabbott and Hogg, 1997).
Physical Environment: A firm's service quality can be perceived through the appearance of buildings, landscaping, vehicles, interior furnishing, equipment, staff members, signs, printed materials and other visible cues. These are physical evidence and impact customer impressions. (Lovelock and Wirtz, 2004).
Process: A service is delivered to a customer through a process, which is the method and actions in the service performance. Poor processes can result in slow and ineffective service and unsatisfied customers. Front line staff may also find it difficult to do their jobs well as a result of poor process, which can again lead to service failure. (Lovelock and Wirtz, 2004).
People: Services tend to involve direct interaction between customers and firms employees. The experience of the interaction, for example talking to call centre staff, can influence the customer's perceptions of service quality. The implication is that firms need to train and motivate their employees to ensure good service quality. (Lovelock and Wirtz, 2004).
2.4 Marketing in Services
Image is often a key factor in differentiating a service from its competitors. Marketing is therefore important in service because it enables the customer to link an image with a brand. Examples of these can be seen on delivery vehicles, which are painted, hotel soap and shampoos etc.
When consumers have no experience with a product, they tend to ‘trust' a favoured or well-known brand name; therefore service marketers need to build a favourable brand image.
Some consumer theorists have linked service quality with consumer behaviour intentions, in that the quality of the service will determine whether the consumer remains with that particular provider or defects to a competitor. When consumers perceive high service quality, the behavioural intentions will be positive, as they will remain with the service provider. In contrast, poor service quality will lead to the relationship with the customer weakening resulting in defection to a competitor.
Financially the firm will benefit more by retaining customers through increasing service quality; this is demonstrated in the figure 2 below.
The figure above shows that the more favourable a firm's service quality is, the more likely the customer is to remain with the firm, benefiting the firm. But when the service quality is poor, the customer will show unfavourable behavioural intentions, which will result in defecting/ switching. This highlights that in order to prevent customers from switching and to enable the firm to continue making profits, the firm needs to retain customers through good service quality.
Service firms and service marketers need to recognise the significance of these reasons as they can lead to negative effects on share and profitability as noted by Rust and Zahorik (1993). This can arise from negative word of mouth, which will in turn deter potential customers. These reasons can also help markets to plan their promotional campaigns according to the aspects that are causing customers to switch. As maintained by Reichheld and Sasser (1990) companies can boost profits by almost 100% by retaining just 5% more of their customers.
2.5 Marketing in the Mobile Phone Industry
As the market becomes more competitive, firms will endeavour to maintain their market share by focusing on retaining their current customers. It can be said that recent competition amongst mobile phone networks has become aggressive, especially with all the competitive price plans and handsets on offer, which are being promoted by the networks. More recently a ‘camera wars' are taking place between mobile brands as consumers are considering this an important feature when purchasing mobile phones, Marketing magazine (2004).
When network 3 entered the market, they were able to encourage many consumers to switch mobile networks from their existing providers to 3. this was done using challenging and direct advertising comparing brand and product features with those of competing networks. Marketing magazine (2004). As a result of this, 3 were able to reach the one million-customer mark faster than any other network since launching.
It is evident that mobile phone networks are being innovative in their marketing tactics in the aim of securing higher customer bases. Much of the marketing the mobile networks today to do this are directed towards consumer confusion tactics. Consumer confusion tactics are where consumers are provided with large amounts of decision-relevant information, in regards to mobiles, this is seen in the form of deals, discounts, leaflets, newspaper adds and television advertising line rentals from as little as 99p per month. Confusion marketing and overload aims to confuse consumers into a state of stress and frustration, resulting in information overload and sub-optimal decisions. Price confusion is the most common confusion marketing tactic used in the mobile telephone market today in order to assist companies to gain a competitive advantage. It has been found that this tactic of confusion marketing appears to work and confuses customers to such an extent that they end up being persuaded by this marketing literature and the information overload that they are provided with that they purchase the plan that is sold to them without investigating it further as they feel that they have all the information that they need and have made an informed choice.
Confusion usually arises from 3 main sources:
i) Over choice of products and stores - there are independent mobile phone shops opening up regularly, and new mobile phones are being introduced to the market every month.
ii) Similarity of products - all the price plans available are very similar in terms of price as well as network call charges.
iii) Ambiguous, misleading or inadequate information conveyed through marketing communications - For example, many retailers are offering line rental for 99p per month, what consumers are not aware of is that they have to pay the full line rental for the first six months and then they claim their cash back.
But using confusion marketing can have adverse effects on consumers. The ‘information overload' can cause consumers to shop around, which can reduce brand loyalty towards the firm.
2.6 Decision Making Process for Mobile Phones
When customers purchase a product or service they go through a complex process of three stages: the pre purchase stage (decision to buy), the service encounter stage and the post purchase stage. This can be applied to the purchasing of mobile phones.
The post purchase stage will determine the customers' future intentions on whether or not to remain loyal to that service provider or to switch service. During the post purchase stage, customers evaluate service quality and their satisfaction/dissatisfaction with the service experience. This is done by comparing what was initially expected with what they perceived they received from a particular provider. If expectations are met, customers are likely to be satisfied and therefore more likely to make repeat purchases and remain loyal. If customer expectations are not met, customers may complain about poor service quality, suffer in silence or resort to switching service provider. It has become evident in recent years that customers no longer “suffer in silence” with bad service to the extent that they previously and if they experience service that they are not satisfied with then are more likely to switch in order to receive a better service/better value for their money.
When considering the purchase process of mobile phones, again there are complex factors, which influence the decision the decision process which include both macro and microeconomic conditions, but it generally tends to follow the traditional buying process. When faced with the problem of whether or not to purchase a mobile phone, consumers will initially take part in an information search before choosing which one to buy. The consumers' decision-making process is directed by preferences that the consumer has already formed regarding a particular brand. Beatty and Smith (1987) and Moorthy et al (1997) argue that this means the consumer is most likely to make a choice based on a limited information search and without evaluating fully all the alternative brands available. As indicated by Dhar and Wertenbroach (2000), limited information search and evaluation of alternatives can result in a situation where the consumer's choice is driven by hedonic considerations. Utilitarian goods are considered to be instrumental and functional whereas hedonic good are seen as being fun and exciting, but some goods can have both features, as stated by Barta and Ahtola (1990). With relation to mobile phones the choice has both utilitarian (e.g. communication, SMS, planning) and hedonic (e.g. games, music, camera) features. Wilska (2003) believes the younger the consumer gets, the more they value the hedonistic features in their mobile phones. The mobile phone market is a technology driven market, therefore products are created based on consumers' possible future needs which tend to be hedonistic features.
Riquelme (2001) explored the level of knowledge consumers have when choosing between different mobile phone brands. The study focused on main factors, which were: telephone features, connection fee, access cost, mobile-to-mobile phone rates, call rates and free calls), which respondents had to rate according to importance. Findings revealed that respondents with previous experience about products predicted their choices well, although they over-estimate the importance of features, cal rates and free calls and under-estimated the importance of the monthly access fee, mobile-to-mobile phone rates and the connection fee.
2.7 Customer Switching Behaviour
There is no one clear definition of customer switching, due to the lack of research into this area, although very few authors have attempted to define it. According to Brassington (2003) customer switching refers to “consumers who are not loyal to any one brand of a particular product and switch between two or more brands within the category”.
Switching behaviour has also been referred to as defection or customer exit (Hirschman, 1970; Stewart, 1994) and refers to a customer's decision to stop purchasing a particular service or patronising the service firm completely as agued by Bolton and Bronkhurst (1995) and Boote, (1998). Yet it can be argued that this is not a valid definition of customer switching as this definition refers to the consumers behaviour as abandonment of the use of a product/service although, whereas switching is concerned with consumers using one product/service provider and then deciding to switch to another.
Many models have attempted to portray customer switching behaviour in services yet they all imply that switching derives from a gradual dissolution of relationships as a result of multiple problems encountered over time as found by Bejou and Palmer (1998) and Hocutt (1998).
2.8 Causes for Dissatisfied Service and Switching
Bitner et al (1994) has looked at the events that lead to satisfying and dissatisfying service encounters for customers from an employee's point of view. Bitner et al's (1994) study found that employees were inclined to describe the customer's problems with external causes such as delivery system failures as the most prominent followed by problem customers. A small percentage of dissatisfactory incidents were classified as spontaneous negative employee behaviours such as rudeness or lack of attention. It was evident that the employees were biased in terms of not blaming themselves for failures.
Past research associating customer and employee views on critical factors compelling customers to switch offers assorted assumptions. Schneider and Bowen (1985) and Schneider, Parkington, and Buxton (1980) found a strong relationship between employee and customer attitudes regarding service quality on the whole in the banking service. The results from their study contradicted those of a study carried out by Brown and Swartz (1989). Data was collected from patients based on experiences with their physicians and were compared to what physicians' perceived of the experiences of their patients. Results showed large differences inversely associated to patient satisfaction in general. Thus researchers have different views regarding customer and employee attitudes on service quality. When considering switching in the financial service, Mintel International Group believes the critical factor causing consumers to switch providers is price. Price is a sensitive issue and one that is close to the heart of customers so it is perceived that they may consider switching on the basis of this if they are not satisfied with the service they are receiving. But it can be concluded that the customers view holds greater value, as it is their opinion that brings in business for a firm.
Bolton & Brankhurst (1995) and McDougal (1996) have looked at customer switching behaviour in relation to complaints, which they believe leads up to the defection. They suggested, that this field should be further explored, as there is a lack of research that tries to investigate the correlations between the factors that influence service switching and those that influence complaints before switching. Complains are again another major area of concern. The first point of call for dissatisfied customers would be to complain, on complaining they would expect their complaint to be dealt with effectively, efficiently and to their satisfaction. If this does not occur this is likely to reflect very negatively upon a company and customers are encouraged to switch based on the fact that their complaints and dissatisfaction is not taken seriously.
2.9 Service Firm Management Impact on Consumer Switching
Literature on customer switching has found different reasons for switching depending on the industry. In the Banking industry it has been related to perceptions of quality (Rust and Zahorik 1993), in the insurance industry it has been associated with overall dissatisfaction (Crosby and Stephens 1987), and in retail stores it has been related to service encounter failures (Kelly, Hoffman, and Davis 1993).
These are just some of the reasons found for customer switching. Bitner (1990) believed that time or money constraints, lack of alternatives, switching costs and habit may also affect service loyalty. Loyalty is highly necessary amongst customers to ensure that they do not switch.
Keaveny (1995) conducted an exploratory research into customer switching in the service industry, which provided a classification of the factors that provoke service switching. Keaveny's (1995) study was based on a model of customers' switching behaviour, which was produced, by Strong C and Llyod HS (1997), (see appendix 2). Keaveny conducted qualitative research to help managers in service industries and researchers understand service switching from the customer's perspective. Data was collected through 50 trained graduate students who each contacted ten individuals to participate by recording incidents, which caused them to switch providers. In total 526 responses were collected over the period of a six-month timeframe. The study found that overall 45 different service industries were cited in critical switching incidents including phone service providers.
Emphasis was placed on five major causal factors that were found to influence a customer's decision to exit a service. Results found that core service failures was the largest category cited as to the reason for service switching, cited by 44% of respondents. The second largest category for switching was due to service encounter failures (between customers and employees), mentioned by 34% of respondents. Price was the third largest category, mentioned by 30% of respondents and more than 20% of respondents said inconvenience was one of their reasons for switching. 17% of switching was due to unsatisfactory employee responses to service failures ad 10% was caused by attraction to competitors.
Implications and recommendations of Keaveney's research draws attention to the costs of customer switching for managers of service industries and suggests the development of customer retention strategies to reduce the level of switching, as these causal factors could be controlled by the service firm. In contrast, although Keaveney's study attempts to classify the problems and incidents that lead to customer switching, her model cannot be applied to every sector as it is very general of all services and only identifies behaviours of the service firm as causes for customer switching.
Research by Reicheld & Sassar (1990) found that when a customer switches a particular service provider, the potential for additional profits are lost too. This was agreed by Colgate et al (1996) who added that all the costs are invested into the customer are then wasted. Fornell and Wenerfelt (1987) believed that by replacing the lost customer, the firm would incur additional cost. Therefore it can be argued that a provider needs to do all that they can to retain the customer, as the costs to replace the customer can be lengthy and expensive.
When research was conducted on switching behaviour in retail banking services by Colgate and Hedge (2001), 694 mail surveys were collected from banking customers in Australia and New Zeeland. The results challenged Keaveney's 1995 model, stating that the five major causal factors did not explain the problems that banking customers experienced influencing their decision to switch. Colgate and Hedge (2001) found that there were three general categories of problems that influenced switching behaviour as well as service recovery, which was measured separately. Customers were found to perceive and evaluate core service failures, service encounter failures and inconvenience issues as equivalent when deciding to switch banks. Their study concluded that switching behaviour in retail banking differed from switching in other services.
When researching into the events that lead up to customers switching, studies by researchers such as Bejour & Palmer (1998), Hocutt (1998) and Steward (1998) suggest that switching doesn't arise from a clear-cut decision made by the customer, but results from a number of events which lead to the exist. This view is supported by Holmund and Kock (1996) and Rust and Zahorik (1996) in that they also saw switching behaviour as a complex process but they believed that it is more complex in retail banking services because of contractual bonds and relational bonds the firm has with the customer. In the first instance customers do not wish to switch due to the ‘hassle' and time consumption involved in this process but if a number of negative events have taken place then this may lead to a switching decision taking place.
2.10 Changes in Consumer Lives
Switching does not necessarily have to take place because of reasons caused by the firm or service; changes within the consumers' lives can also impact switching.
In Karajuloto's (2002) study of four focus groups consisting of graduate students in the age group of 21-25, it was hypothesised that ‘demographic factors have an influence on the evaluations of different attributes related to mobile phone choice. Specifically, gender and social class will impact on the evaluations of the attributes as men belonging to higher social class seem to be more technology savvy'. Results showed that women mainly seemed to use their phone for voice services thus considering the brand of the phone as the main decision variable, whereas men utilised the enhanced features and network services such as email, making those the important decision variable. When comparing white collar to blue collar students it was found that white collar students gave more importance to data and networking features than blue collar students, although design was seen as equally important between the two. Thus the findings of the study verified the hypothesis by showing that demographic factors such as gender and occupation do affect choice of mobile phone. In contrast, Pei-Yu et al (2001) researched switching costs in online services and found that customer demographic characteristics have little effect on switching.
2.11 Competitor and Retail Offerings
According to Karjaluoto et al (2005), while the market for mobile phone handsets is growing at 5-10% year on year and the network subscriber is also increasing, the average revenue per user (ARPU) is falling and price competition is increasing as has been found by Hansen (2003).
The British market for mobiles is fierce and very competitive between not only the network providers but also the mobile phone brands. According to Marketing magazine (2004) each of the four major networks - Vodafone, T-Mobile, O2 and Orange - holding a share of at least 25%. There are a lot of competitor and retail offerings in relation to mobile phones and networks, as the number of free calls and text messages on offer is greater than before. It is because of these factors that within the mobile phone industry, buyer power is high because there are alternative sources of supply therefore customers are able to ‘shop around' to get the best deal. Competitive rivalry is always increasing as the network companies attempt to differentiate themselves in terms of the mobile phones and packages available on their network. As there are high fixed cost barriers to enter the market competitors are able to compete on a price basis, lowering their prices to obtain a better customer base, which has created price competition and price wars. Customers are aware that as the buyer they have power and are able to use this to their advantage to gain the best deal possible.
The service offerings of the mobile phone networks today are very competitive as they are all attempting to tempt customers from one network to another. Many networks are offering a wide variety of packages with text messages and free calls.
Competitors are competing on the bases of marketing the benefits of third generation (3G) mobile phones along with pricing policies on packages with regards to line rental, free time and text messages. As consumers make the change from 2G to 3G technologies they need to obtain new mobile handsets equipped with the latest features such as camera, Internet, games, music and so forth. The challenge to enhance mobiles phone features is continuous and research institutes in Finland are anticipating that overtime features such as built-in cameras and calendar will become standard in all phones.
2.12 Reasons for Switching
Many researchers have provided reasons as to why consumers switch between services. Kennedy (2000) proposed the following reasons for businesses loosing customers:
1 1% die.
2 3% move geographical location (also referred to as involuntary switching).
3 5% follow a friend or relative's advice and switch to their service provider (word of mouth).
4 9% switch due to pricing issues or a better product from competitors.
5 14% switch because of core service failures: product or service dissatisfaction.
6 And 68% switch due to what they perceive and describe as indifference from the merchant or someone in the merchant's organisation (failed service encounters).
When comparing Kennedy's reasons for switching to Keaveney they are different in the sense that Keaveney provided her results into two categories:
1 Respondents who opted for just that reason as the sole reason for switching.
2 Percentage of people who chose that reason along with other reasons.
This is illustrated in table 1 below along with the eight core reasons, thus illustrating that the reasons for switching provided differ by researcher.
Table 1. Keaveney's (1995) study switching reasons
Respondents who opted for just that reason as the sole reason for switching.
Percentage of people who chose that reason along with other reasons
Core service failures
Failed service encounters
Response to failed services
Attraction by competitors
Source: Keaveney (1995)
Karjaluoto et al (conducted two studies in Finland using focus group interviews and surveys of 192 graduate students to investigate factors affecting consumer choice of mobile phones when purchasing and switching. The results of these studies found that the main reason students offered for changing their mobile phones was due to technical problems and the decision of which brand of phone to purchase was influenced by a number of factors such as price, brand, interface and properties. this study addressed both the service aspect (switching service) and the physical aspect (purchasing the phone), it is evident that one cannot be done without the other.
2.13 Costs/ Risk of Switching
Switching costs relate to the costs a buyer would face, which would be more than the purchase price, when switching from one brand/supplier to another, M Baker (2000). Porter (1980) defines switching costs as “the costs involved in changing from one service provider to another”. Gremler and Brown (1996) argue that the switching costs are higher when concerning service providers as opposed to goods.
Switching costs involve time and money, which reduces the ability of customers to switch easily between providers and discourages them (Jones and Sasser 1995). Switching costs can make it expensive for customers to switch to another service provider as suggested by Fornell (1992), such situations can occur when developing relationships with suppliers or learning to use a particular product. This can lead to the buyer becoming ‘locked' to a particular supplier or product, M Baker (2000). For example in the mobile phone industry providers often require one-or-two year contracts from subscribers, in some cases a customer may incur financial penalties for early cancellation of their service. B But for consumers who are on pay-as-you-go contracts, switching costs are low as there is no contract. Additional cost can be time as cancelling one contract to start another can be a long and frustrating process.
The risk of switching is higher when there is competitiveness of competitor offerings. For example when a new mobile phone is released with enhanced features and technology which may only be available on a particular network, consumers may desire to switch to that network to purchase that phone. This is supported by Karjaluoto et al (2002) study, which found that the main factors that characterised mobile phone choice were: innovative services, multimedia, design and brand. The study also found that new technical properties increased consumer willingness to attain new phone models. It could be argued that in the mobile phone industry there are only four main network providers providing alternatives, but each network provider provides a range of phones, some of which may not be available on other networks, which may have feature that the consumer desires and can only be obtained by switching to that network. in a situation such as this the risk of switching is high.
As Keveaney's 1995 study of customer switching behaviour in services found that 60% of supplier switching occurred because of service failure. Of this 60%, 25% said it was due to failures in the core service, 19% had an unsatisfactory encounter with an employee, and 10% received an unsatisfactory response to a service failure and 48% believed their provider to be behaving unethically. Yet there is a risk of consumers becoming less sensitive to satisfaction levels as switching cost increases (Hauser et al 1994).
When Nokia lost profits, due to the fact that they believed that consumers did not want clamshell design phones, which become one of the most popular handsets in demand, many of their customers in Finland remained loyal to the brand. One of the factors that influenced this loyalty was the fact that they had become familiar with the menu system used by Nokia phones and this proved to be a switching cost for consumers.
As far as the overall mobile communication service industry is concerned, the cost and risk of switching is generally low, in terms of the price packages available. Competition has become so intense that every service provider is trying its best to meet customers' expectations, whether it is related to the availability of new models of the mobile phone or the network service. On the other hand, one cannot neglect that fact that customers may not actually get the same standards of the service as promised. This will create a gap between the customers' expectations from a specific service provider and the brand offerings, which can dissatisfy customers and lead to negative word-of-mouth communication for that brand.
2.14 Customer Loyalty
In business terms loyalty refers to ‘a customer's willingness to continue patronising a firm over the long term, purchasing and using its goods and services on a repeated and preferably exclusive basis, and recommending the firm's products to friends and associates', (Lovelock and Wirtz 2004).
Despite this, brand loyalty involves customer behaviour and preference, liking and future intentions. According to Richard L. Oliver (1999), consumers begin their loyalty in a cognitive sense, as they perceive that one brand is preferable over another based on the brand attribute information they receive. The second stage is affective loyalty, in which consumers begin to like the brand due to satisfaction received from using it. Based on this, it can be said that this is the stage where the loyalty can start to ‘switch' from one mobile communication network to another. On the other hand, it is also possible that one brand ‘retains' it loyalty as the customer, if not satisfied by the service he is getting after switching to a new network is likely to return to the previous network. The third stage is cognitive loyalty; this is where the customer becomes committed to the brand through repeat purchases. Lastly the fourth stage is action loyalty in which the consumer displays coherent repurchase behaviour.
But loyalty can only continue if the customer feels that he or she is receiving better value (quality and price) than that which would be attained by switching to another supplier. Therefore in the mobile network industry, if the customer is dissatisfied by an action of the network service provider, or if the customer perceives there to be better value from a competitor, there is a risk that the customer may transfer their loyalty to another network.
Researchers Frederick F. Reicheld and W. Earl Scisser (1990) found that a customer's profitability increases with the length of time that they spend with a firm. This is due to factors such as customers growing larger and needing to purchase in greater quantities, as a customer becomes experienced, fewer demands are made reducing costs, positive word of mouth recommendations, and lastly where as new customers may be offered introductory prices, long term customers pay regular prices and would be willing to pay higher prices as they build trust with the suppliers. Therefore it is clear that loyal long-term customers are an important financial asset for the firm. In the mobile phones industry M-coupons are becoming a powerful method of boosting loyalty while obtaining customer data. This is done by sending vouchers to mobile phones, such as Orange have successfully done by offering free cinema tickets via vouchers sent to mobile phones.
The foundation of customer loyalty lies in customer satisfaction. Satisfied customers are more likely to become loyal to a service provider and spread positive word of mouth. On the other hand, customers who are dissatisfied can be driven away, which leads to switching behaviour. The figure below illustrates the satisfaction/loyalty relationship into three zones. The zone of defection is low satisfaction, this is where customers will switch unless switching costs are high or there are no alternatives. Those who are very dissatisfied can become ‘terrorists', spreading negative word of mouth about the service provider. The zone of indifference is where customers experience intermediate satisfaction but are willing to switch if they find a better alternative, the mobile service industry is best described at this stage as consumers will switch networks t get more free time, additional features such as a camera phone or to upgrade to a better phone which is not available on the present network. The zone of affection includes very satisfied customers who are very loyal and don't look for alternative service providers.
Customer loyalty is created by attracting and satisfying the right customers. But firms need to create strategies to ‘bond' with their customers and concurrently locate and eradicate factors that lead to “churn”, or loss of existing customers. This can be done through a number of ways, as identified in the diagram below.
But loyalty rewards are not always enough to retain customers. If customers are not satisfied or believe that they can get better value by switching, they may become disloyal and its true for mobile networks as well. Loyalty rewards are something customers are getting for being with a particular network over a long period of time. But companies need to think what are they doing differently to keep customers ‘locked' with their network service. Within the mobile phone industry recently many networks have focused on loyalty by rewarding existing customers with additional free time or text messages every month, as done by Orange. Most networks offers phone upgrades to contract customers who have been loyal to them for a year, but this reward of a free upgrade means consumers are then bound to that network for another year, with then contribute to the cost of switching.
It can be concluded that companies that manage to provide more value for money to its customers are most likely to have customer loyalty. If not, then the notion proves to be correct, as past researches have shown that there is no loyalty, but it is the competitors that are complacent.
2.15 Reducing Churn Rates
In order to eliminate and reduce churn drivers in the mobile phone industry, players regularly conduct “churn diagnostics” which is an analysis of data warehouse information on churned and declining customers, exit interviews (through call centre staff), and in depth interviews of former customers which is done through third party research agencies.
Susan Keveaney's 1995 study on why customers switch service providers emphasizes the significance of delivering service quality, effective complaint handling and service recovery, reducing inconvenience and costs and fair pricing. In addition to these churn drivers; there are churn drivers, which are specific to a particular service industry. For example, in the mobile phone industry handset replacement needs is a common reason why customer switching takes place, as customers want to be up to date with new handsets. To reduce handset related churn, many network providers offer upgrades, as mentioned earlier, so that customers can be up to date with the newest handset and remain loyal to the provider. Reactive retention methods are also in place, which consists of call centre staff that are especially trained to deal with customers who may be planning to cancel or switch accounts.
There are also churn-alert systems which monitor customers use patterns and attempt to retain customers by sending out vouchers or calling up the customer to check on the health of the customer relationship.
Churn rates can be reduced by increasing switching barriers. Switching costs generally occur in services, these can be time, cost related, but some providers have created additional contractual penalties for switching such as transfer fees for moving shares in financial institutions. But a firm that executes increased switching barriers and poor service quality has a risk or generating negative word of mouth.
2.16 Brand Loyalty
A consumer's commitment to a brand(s) of goods or service is dependant on various factors such as the cost of changing brands, the availability of substitutes, the perceived risk associated with the purchase and the satisfaction obtained in past experiences. These factors are more prominent in services therefore consumers may tend to be more brand loyal with services than with goods.
Monetary costs also tend to be higher when changing brand of service in comparison to goods, again because of the above factors, for example some services require membership fees to obtain long-term commitment from consumers.
Consumers, who perceive high risks with services, depend largely on brand loyalty when purchasing products. Bauer (in Cox, 1967) stated “brand loyalty is a means of economising decision effort by substituting habit for repeated, deliberate decisions”. Bauer implies that this works as a device to lower risks of consumer decisions. He saw a strong connection between the degree of perceived risk and brand loyalty.
Another reason consumers may wish to be brand loyal is that by becoming a ‘regular customer' the seller gains better knowledge of the consumer's tastes and preferences which encourages the seller's interest in satisfying the customer's needs. This can also contribute to a customer being brand loyal to promote a satisfying relationship with the seller. Brand loyalty is common with phones in the mobile industry, as consumer will remain loyal to the brand they are familiar with, yet if a new mobile enters the market, which is the consumers usual brand of phone, and is only available on another network, they may switch network to obtain their desired brand.
As stated in Marketing magazine (2004) Vodafone have become one of the largest single mobile phone brand in the world, this was achieved by the network provider purchasing a multitude of international mobile brands. Vodafone recognised that branding in mobiles is becoming important, and consumers are willing to change them several times a year, and took advantage of the opportunity, which has enabled them to achieve a high position within the market.
2.16 Decline in Brand Loyalty
Some marketing scholars have found a decline in brand loyalty. This could be down to a number of reasons including customer boredom, or dissatisfaction with the products/services they use, customer variety seeking, the constant availability or new product offerings and pricing issues.
Some marketers have begun using consistency of operation and convenience to combat switching. Other marketers have turned to sales promotions such as frequent user credits and loyalty rewards to promote brand loyalty. Descriptive promotional lines are also being used to reinforce brand imagery as this is strongly linked to brand loyalty. These are used in repetition to engrave them into the customer's memories, as was found in a research carried out by Scott A. et al (1992).
Relationship marketing programs are also used by many firms to develop relationships and commitment with customers and build trust. Relationship marketing creates long lasting relationships with customers; this is done by making them feel good about the company's interaction with them through “personal connection”.
Authors Mary Long, Leon Schiffman and Elaine Sherman of “Understanding the Relationships in Consumer Marketing Relationship Programs: A Content Analysis” in proceedings of the World Marketing Congress VII-II, ed and K. Grant and Walker Melbourne, Australia: Academy of Marketing Science, 1995), 10/27 - 10/32 - looked at 66 consumer Relationship marketing programs and found that over 50% of them had the same 3 fundamentals. These were:-
1) They all promote ongoing communications with customers (73%).
2) They encouraged loyalty through extras such upgrades and perks (68%).
3) They created a sense of belonging through “Club membership” programs (50%).
The above are tactics marketers of the firm may use to encourage loyalty in their customers. By offering customers special services, discounts, increased communications and extra attention in addition to the normal services, firms are hoping to benefit from it in the long run by sustaining increasing transactions with a core group of loyal costs.
The main advantage a firm may reap from developing effective relationship marketing programs it that by attaining a loyal customer, it becomes easier & less expensive for a firm to make an additional sale to an existing customer than making a new sale to a new customer (Sheth & Parvatiyar, 1995).
But before Marketers begin to introduce such programs, they need to look at the “lifetime value” of a customer to ensure that the cost of introducing the customer to a relationship marketing program will not exceed the potential profits to be gained as suggested by Dwyer (1989).
Research carried out by Steve Schiner (1997), “Customer Loyalty: Going Going….“ American demographics, found that consumers are less loyal today than compared to in the past. The increase in disloyal customers has been put down to 6 major forces:
1) The profusion of choice
2) Availability of information
3) Entitlement (consumer constantly asking” What have you done for me lately?”)
4) Commoditisation (most products/services are too similar)
5) Insecurity (financial problems reducing loyalty)
6) Time (consumers do not have enough time to be loyal).
The research concluded that these six forces can cause consumer defections, complaints, cynicism, reduced affiliation, greater price sensitivity & litigiousness. Therefore, in order to retain customers and encourage loyalty, it is crucial for a firm to incorporate relationship programs as part of their marketing program.
2.18 Customer Loyalty and Retention
Customer loyalty can be strengthened by effectively resolving customer complaints. Research conducted by TARP on consumer complaint handling found that the repurchasing intentions for different types of products were between 9-37% after customers had an unsatisfactory experience but did not complain. Retention rates increased from 9-19% when a major complaint was made and the company listened but were unable to resolve the problem. When the complaint was made and resolved to the customer's satisfaction, retention rates were higher at 54%. The highest retention rate was 82%, which was attained when customer complaints were resolved quickly and on the spot. It is evident from the research carried out that retention rates were highest when customers were satisfied through effective and fast customer complaint resolving.
Effective complaint handling can also contribute to company profits as it can increase customer retention rates and is not a cost to the company. When a customer switches service loses more than the value of the next transaction. Not only will they lose long-term profits from that customer but also from anyone else who has switched service provider because of negative word of mouth recommendations from a friend. Thus investing in an effective service recovery system can minimise loss of profits and retain customers.
The main aim of this research is to determine the reasons as to why consumers switch from one mobile network to another. Many researchers have attempted to investigate the underlying reasons for switching and their studies have mainly concluded that evaluation factors such, as service quality and satisfaction, are responsible for the occurrence of customer switching behaviour. More recently, researchers, such as Garninal at al (1996) and Levesque and McDougall (1996), have shifted their focus from the factors. Although Keaveney (1995) gives reasons for customer switching, it doesn't explain the impact of the factors to the customer's decision to switch. But more research is needed on this subject area, as literature is limited, this view is agreed by Boote (1998).
In conclusion the literature review presented above reflects all the aspects relevant to this research in investigating why customers switch services. It is evident that customer loyalty and retention is strongly linked to service quality and satisfaction of the service experience which can be strengthened through effective branding and relationship marketing. It is a combination of these factors that retain customers and therefore reduce switching behaviour. Following is the research methodology review from which a research method has been selected in order to carry out the research.
3.0 RESEARCH METHODOLOGY
3.1 Research Aim
The principle aim of the project is to prove or disprove the hypothesis which is: Customers are more inclined to switch a service when they perceive a poor quality service encounter with the service firm. The objectives are outlined in chapter 1, in order to pursue the research objectives, various research collection methods need to be reviewed so that a suitable method can be selected that is
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