Switching Behaviour in the Offline and Online Service Industry

Table of contents:

1. Introduction:

2. The offline service industry
2.1 Switching behaviour in the offline service industry
2.1.1 Factors influencing switching
2.1.2 Switching barriers
2.2 Relationship marketing (offline)

3. The online service industry
3.1 Switching behaviour

4. Offline and Online switching behaviour: Similarities and Differences
4.1 Similarities in switching behaviour: Online and Offline
4.1.1 Factors influencing switching behaviour (Similarities: online and offline)
4.1.2 Switching barriers (offline and online)
4.2.1 Factors influencing switching behaviour (Differences: online and offline)
4.2.2 Switching barriers (online and offline)

5. Future outlook
5.1 Outlook for the offline service industry
5.2 Outlook for the online service industry

6. Conclusion

Bibliography

1. Introduction:

When in the early 90s the internet became a mass medium, the service industry recognized the potential of this new media. Quickly, several online service providers like Yahoo or AOL were established. These new internet companies tried to take advantage of being the first mover, by acquiring new customers. In the beginning this was fine, since more and more people obtained access and became potential costumers. Following a typical situation of excess demand and hence, the established online service provider could afford to focus more on gaining new customers than on retaining existing ones. However, this picture turned completely the more popular the internet became and the more new start-ups saw their opportunities to penetrate the e-commerce arena. This led to a shift from excess demand to excess supply in the online service industry. Consequently, the situation of increased competition was followed by a loss of market share and lower profit margins and the strategy of steadily acquiring new customers became ever harder to pursue, so that the companies had to rethink their. In order to stay competitive the companies have to focus more on the retention of existing customers rather than on searching for new ones. This situation is comparable to the offline service industry. The offline service industry also experienced decades of prospering growth and now faces a situation of a saturated market. The acquiring of new customers has become extremely difficult and costly and retaining existing ones has become harder and harder due to an increased customer willingness to switch the service provider.

With respect to today’s rapidly changing economy, it becomes increasingly important for managers in both the offline and online service industry to explicitly identify the reasons that drive customers to switch their service provider. Additionally, it is also extremely important for the online industry, whether they can build on the experiences made in the offline service industry or whether these experiences and approaches are not valid in the internet world. Each of these facets will be illuminated, focusing the analysis on the following core question:

Is the customer switching behaviour substantially different in the online service industry as compared to the offline industry?

In order to provide an answer to this generic question, a set of related questions will be formulated and investigated. The paper starts with a detailed description of switching behaviour in the online and offline service industry. This forms the basis for identifying the similarities and differences of switching behaviour in each industry. The two different switching behaviours will be compared with respect to similarities and differences concerning factors for switching and switching barriers. Furthermore, it will provide a discussion about the future outlook before the final conclusion summarises the main insights of this study.

2. The offline service industry

Before a thorough discussion about the similarities and differences between the offline and online service industry is possible, it is absolutely vital to understand the distinct characteristics of each industry. This section tries to answer the following questions: Why do offline customers switch their service provider and how to keep them?

2.1 Switching behaviour in the offline service industry

The switching behaviour in the offline service industry can be separated into two parts. Firstly, the general switching behaviour of service customers and secondly, the switching barriers that customers have to face.

2.1.1 Factors influencing switching

For a service provider customer switching is a very serious matter, because it not only means that the company loses a customer and consequently revenue, simultaneously it also strengthens the position of a competitor. Hence, it is crucial for companies to identify possible points that might drive a customer to switch its service provider. A study conducted by Keaveney’s (1995), found that eight factors might have a causal impact on customer switching behaviour, namely price, inconvenience, core service failure, service encounter failure, response to service failure, competition, ethical problems, and involuntary switching. These eight points are supposed to indicate reasons why customers engage in switching. Keaveney also found that in 55 per cent of critical switching incidents were complex. Complex service switching means, that the switching behaviour was influenced by more than one of the above mentioned factors. Thus, if customers are not satisfied in one of these categories, the likelihood increases that the customers will switch to another service provider.

Another key variable in the switching behaviour of customers is their attitude towards switching. According to Bansal and Taylor (1999, p.214) “… attitude toward switching is the most influential determinant of switching intentions.” Bansal and Taylor (1999) also found that a close positive relation between service quality and satisfaction exists and that a higher attitude towards switching leads to higher propensity to switch service providers.

Summarizing it can be said that the switching behaviour in the service industry is mainly influenced by the degree of satisfaction, quality and the general attitude towards switching.

2.1.2 Switching barriers

Another powerful tool to retain customers are switching barriers. Switching barriers are all factors that make the switching from one service provider to the other more difficult. Jones, Mothersbaugh, and Beatty (2000) identify three barriers relevant for the service industry, namely interpersonal relationships, perceived switching costs and the attractiveness of competing alternatives.

The first switching barrier is concerned with the interpersonal relationship between the service provider and the customer. Having established such a relationship makes the customer more reluctant to switch, because of psychological effects. It is especially important in the service industry, since the intangible character of the product requires a high degree of trust and experience. The notion “perceived switching costs” is defined by Jones et al. (2000, p.262) as:”… consumer perceptions of the time, money, and effort associated with changing service provider.” Lastly, the attractiveness of competing alternatives is concerned with the offering of competitors and whether customers believe that these products are superior over the others.

The study of Jones et al. (2000) also found that switching barriers can have two effects. On the one hand, there are switching barriers like the interpersonal bond that lead to a positive long run effect for the company. On the other hand, switching barriers can be used to retain dissatisfied customers. But this usually has the effect of a negative word of mouth and thus harms the company in the long run. The negative effect of switching costs is also highlighted by Bansal (1999, p.214):” In essence, increasing switching costs for current customer may translate into increasing entry barriers for potential customers.” Thus, using switching barriers can certainly retain customers, but at different costs. Using non-financial switching barriers leads to a positive relationship and may result in a positive future outcome, whereas using financial barriers can only be seen as a short term solution.

2.2 Relationship marketing (offline)

In order to decrease customers incentives to switch their service provider, marketing scholars and companies stress the importance of building good relationships between customers and companies. This practice is called relationship marketing. However, relationship marketing is a very broad topic with many influencing variables. According to Berry (1996, p.42);”the inherent nature of services, coupled with a abundant mistrust in America, positions trust as perhaps the single most powerful relationship marketing tool available to a company.” This relates to the view that relationships are build on trust. As Deepak, Singh and Sabol (2002, p.20) put it: “When providers act in a way that builds consumer trust, the perceived risk with the specific service provider is likely reduced, enabling the consumer to make confident predictions about the provider’s future behaviours.” Here, the significance of trust in relationship marketing becomes apparent.

[...]