A cost, benefit approach to understanding service loyalty

An executive summary for managers and executive readers can be found at the end of this article A cost/benefit approach to understanding service loyalty Moonkyu Lee Associate Professor of Marketing, College of Business and Economics, Yonsei University, Seoul, Korea Lawrence F Cunningham Professor of Marketing, College of Business and Administration, University of Colorado at Denver, Denver, Colorado, USA Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Keywords Service quality, Customer loyalty, Marketing strategy, Cost/benefit analysis Abstract Examines determinants of service loyalty under the assumption that consumers perform a cost/benefit analysis when deciding whether or not they want to be ``regular customers'' It develops potential determinants of service loyalty based on the service quality, transaction cost, and switching cost literature, and estimates their relative influences with survey data from customers currently using banks and travel agencies The results indicate that, in addition to service quality perceptions, transaction/switching cost factors have a significant impact on service loyalty Implications of the results are discussed Sustainable competitive advantage Potential determinants of customer loyalty Introduction Customer loyalty is one of the major sources of sustainable competitive advantage for service firms (Bharadwaj et al., 1993) Consistently high levels of customer loyalty can not only create tremendous competitive advantage, but also boost employee morale and productivity On the other hand, persistent customer defection has a devastating impact on a service company's performance Reichheld and Sasser (1990), for instance, demonstrated that a percent decrease in customer attrition could translate into a 25 to 85 percent increase in profits, depending on the service industry Therefore, developing and maintaining customer loyalty, or creating longterm relationship with customers is the key to the survival and growth of service firms (e.g Duffy, 1998; Griffin, 1995; Kandampully, 1998; Reichheld, 1996) This paper identifies potential determinants of customer loyalty to service providers (called ``service loyalty'' hereafter) and examines their relative influences While a considerable amount of literature has been devoted to the customer loyalty issues in the product domain (e.g Jacoby and Chestnut, 1978; LaBarbera and Mazursky, 1983; Mazursky et al., 1987; Newman and Werbel, 1973), little empirical research has been conducted to deal with these issues in the services area to date The present study takes a cost/ benefit approach to understanding service loyalty The basic assumption underlying the approach is that customers' intention to repatronize their current service provider is determined by the comparison analysis between costs and benefits associated with the customer/service provider relationship The authors wish to express their appreciation for the support of the Graduate School of Business and Administration and the Institute for International Business at the University of Colorado at Denver The research register for this journal is available at http://www.mcbup.com/research_registers The current issue and full text archive of this journal is available at http://www.emerald-library.com/ft JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001, pp 113-130, # MCB UNIVERSITY PRESS, 0887-6045 113 Cost/benefit variables Although the measurement and management issues of the benefit component in this assumption have been extensively studied over the past years under the rubric of service quality (Bitner, 1990; Bolton and Drew, 1991a, 1991b; Cronin and Taylor, 1992; Brown and Swartz, 1989; Parasuraman et al., 1985, 1988; 1991; also see Fisk et al., 1993 for a review), those of the cost component have been relatively overlooked This study conceptualizes several types of costs related to service loyalty based on existing literature including the transaction cost analysis (Williamson, 1975, 1979, 1981, 1985) and the switching cost approach (Heide and John, 1988; Porter, 1980, 1985; Weiss and Anderson, 1992) It is believed that by examining the relative importance of these cost/benefit variables in determining service loyalty, this research would contribute not only to better understanding how service loyalty is formed, but also to effectively managing it from a marketer's standpoint Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Research hypotheses In this section, the major constructs of the study including service loyalty and various cost/benefit factors are discussed In addition, specific hypotheses are developed based on the existing literature Service loyalty (LOYALTY) Service loyalty is the dependent variable of this study Czepiel and Gilmore (1987) define service loyalty as a specific attitude to continue in an exchange relationship based on past experiences Their definition implies that levels of service loyalty can be assessed by attitudinal measures such as the ones based on intentions to repatronize a service provider Such attitudinal measures have an advantage over behavioral measures (e.g repeat patronage) in that they can provide greater understanding of the factors associated with the development and modification of loyalty (Oliva et al., 1992); (also see Dick and Basu (1994) and Jacoby and Chestnut (1978) for the comparison between behavioral and attitudinal measures of customer loyalty) While Czepiel and Gilmore (1987) propose that service loyalty is formed based solely on past experience, research evidence shows that consumers tend to adopt loyalty as a tool to reduce risk and uncertainty when finding a new service provider (Guseman, 1981) In other words, future expectations can be another important basis for the loyalty formation Thus, service loyalty in this study is defined as: customers' intention to repatronize their current service provider (or company) based on past experiences and future expectations Antecedents of service loyalty are identified below based on the literature As mentioned earlier, there are two sets of factors, one concerned with service quality as the benefit component of the model and another related to the present and future costs of services, which are further categorized into economic, transaction, and switching costs Overall quality of services as perceived by customers 114 The benefit component: overall service quality (QUALITY) One of the critical determinants of service loyalty would be the overall quality of services as perceived by customers Perceived service quality has been conceptualized and measured as a form of attitude (Bolton and Drew, 1991a; Parasuraman et al., 1988) Recently, researchers have demonstrated that service quality is determined by customer satisfaction/dissatisfaction with service experiences (Bitner, 1990; Bolton and Drew, 1991a, 1991b) and that service quality, in turn, affects service loyalty (Bitner, 1990) Therefore, it is expected that: JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 H1: The better the perceived quality of services, the higher customers' intention to repatronize their service provider Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) How to measure perceived service quality An important issue in testing this hypothesis is how to measure perceived service quality Parasuraman et al (1985, 1988, 1991) have developed a service quality measure, SERVQUAL, on the basis of their gap theory, which states that customers' assessment of overall service quality is determined by the degree and direction of the gap between their expectations and perceptions of actual performance levels They have also identified five dimensions underlying overall service quality, namely tangibles, reliability, responsiveness, assurance, and empathy In addition, they have proposed that perceived service quality could be estimated by calculating the difference between expectations and perceptions of actual service performance This measurement paradigm is adopted in the present study In the following sections, the cost component of the model is dimensionalized and discussed Economic costs Economic costs are basically what consumers have to give up or sacrifice to obtain a product or a service Two types of economic costs are conceptualized, monetary and nonmonetary costs Service cost (SERVCOST) The effect of monetary cost or price on consumer behavior has been extensively dealt with in the product domain The literature, applied in the service context, suggests that the cost in combination with the benefit of using a service determines overall service value, which influences customers' purchase intention and behavior (Dodds and Monroe, 1985; Dodds et al., 1991; Monroe, 1990; Zeithaml, 1988) Since the cost has a negative impact on customers' budgets, it would have a negative impact on their intention to patronize or repatronize the service provider, ceteris paribus Therefore, H2: The higher the perceived service cost, the lower customers' intention to repatronize their service provider An important assumption underlying this hypothesis is that it is not actual or objective, but rather, it is perceived cost that would affect consumer judgment and behavior (Jacoby and Olson, 1977; Monroe, 1990; Zeithaml, 1988) This assumption underlies all the cost-related hypotheses in the paper Recognition that faster services are important to large market segments Service time (SERVTIME) The concept of economic costs can be extended to include nonmonetary costs such as service time, i.e the amount of time during which a service is provided (see Murphy and Enis, 1986 for a review of time prices) Service time would affect repatronage intention in the same way as service cost would Many customers would like to have faster services, although there may be some individual or situational differences in the value of time Fast-food services and express check-out services in grocery stores are a few of the many examples of firms' recognition that faster services are important to large segments in their market Thus, H3: The longer the service time, the lower customers' intention to repatronize their service provider Transaction costs Another type of nonmonetary costs is considered based on the transaction cost analysis (Williamson, 1975, 1979, 1981, 1985) Williamson postulates that transaction difficulties or ``transaction costs'' are present in exchange processes as a consequence of the interaction among various factors He posits that the organizational structures and boundaries are determined by the JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 115 efforts to minimize transaction costs The transaction cost analysis has been widely employed to understand many marketing phenomena such as distribution channel relationships (e.g Anderson and Coughlan, 1987; Dwyer and Oh, 1988; Heide and John, 1988; Klein et al., 1990) and customer/service provider relationships (e.g Bowen and Jones, 1986; Oliva et al., 1992) To the service context, the following factors have been particularly pertinent Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Evaluating service performance Difficulty of assessing service performance (DIFFICULT) From a customer's standpoint in the exchange process, one major source of transaction costs is the difficulty of evaluating service performance (Alchian and Demsetz, 1972; Bowen and Jones, 1986; Williamson, 1975, 1981) Such difficulty is prevalent with services primarily because they are generally intangible Zeithaml (1981), based on the classification system developed by Darby and Karni (1973), proposes that most services are high in experience qualities or credence qualities since their quality can hardly be assessed until or even after they are consumed It should be noted here that the intangibility of services is a matter of degree (McDougall and Snetsinger, 1990) Thus, varying degrees of intangibility would give rise to differences in the transaction costs The difficulty of assessing a service provider's performance puts a burden on customers because they would have to closely monitor the services Even if they would so, they would not often be sure if they were paying a fair price (Bowen and Jones, 1986) Therefore, such transaction difficulty would eventually have a negative impact on service loyalty This leads to the following hypothesis: H4: The greater the difficulty of assessing the performance of the current service provider, the lower consumers' intention to repatronize their service provider Specific knowledge about individual customers' idiosyncrasies Service provider's specific knowledge about customers (SPECIFIC) Another factor related to transaction costs is a service provider's specific knowledge about individual customers' idiosyncrasies and their needs and wants (Williamson, 1979, 1985) This concept is different from the ambiguity of service performance described above in that it reduces transaction difficulty and works positively on service loyalty Services are typically produced and consumed in the same time period, involving a high level of client/provider interaction (Lovelock, 1981; Shostack, 1977; Zeithaml et al., 1985) Thus, the service provider's intimate understanding of customers' tastes and preferences would not only speed up the transaction process, but also bring about customer satisfaction and loyalty through service customization Therefore: H5: As the service provider's knowledge about customers' needs and wants increases, customer loyalty increases Switching costs Switching costs have been examined in the context of micro-economics (e.g Ferrell and Shapiro, 1988; Klemperer, 1987a, 1987b), interfirm relationships (e.g Caves and Porter, 1977; Porter, 1980, 1985), and distribution channel relationships (e.g Heide and John, 1988; Weiss and Anderson, 1992) Although they have been dealt with in different areas, the basic idea that has inspired the research is essentially similar That is, once a transaction relationship is established, one party becomes more dependent on the other as the cost of switching transaction partners gets higher Applied in the 116 JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 current research context, this means that customers often become ``locked into'' their current service provider due to high switching costs Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Switching costs Switching costs are the costs it is anticipated will be incurred in the future, whereas economic and transaction costs are those incurred in the present transaction As mentioned earlier, service loyalty is formed based on future anticipations as well as past experiences Thus, switching costs should be explored here as an important determinant of customer loyalty The cost of switching service providers should depend on the levels of the following factors Information search cost (INFOCOST) When customers consider switching to a new service provider, one of the first difficulties they face involves gathering information about substitutes (Porter, 1985) Such difficulties are termed ``information search cost.'' Although the cost can be high or low depending on the service, it would affect the overall level of switching costs Specifically, the higher the information search cost, the higher the overall switching costs, and thus, the less likely customers are to switch to a new provider This leads to: H6: As the cost of searching for information about a substitute increases, service loyalty increases Perceptions of risk in selecting a new provider Perceived risk (RISK) Another factor related to service provider switching is customers' perceptions of risk in selecting a new provider Perceived risk has been extensively dealt with in the literature since it accompanies all purchases to some extent and affects various aspects of purchasing behavior (e.g Bettman, 1973; Cox, 1967) It has been suggested that consumers try to handle the risks by deliberately searching for prepurchase information (Locander and Hermann, 1979; Lutz and Reilly, 1973; Murray, 1991), resulting in increased brand/store loyalty once a good choice is made (Cunningham, 1967; Guseman, 1981; Roselius, 1971; Sheth and Venkatesan, 1968) Thus, applied in the service context, this implies that perceived risk functions as an important deterrent to service switching Hence, H7: As perceived risk increases in selecting a new service provider, service loyalty increases Inverse relationship Substitutability of the service provider (SUBSTITUTE) Substitutability is defined in this study as the extent to which the service activities the current service provider performs are available from alternative sources (Bagozzi and Phillips, 1982) The literature in interorganizational relationships suggests that there is an inverse relationship between the substitutability and dependence of one organization on another (e.g Bagozzi and Phillips, 1982; Heide and John, 1988; Pfeffer and Salancik, 1978) Although substitutability might vary across service industries, it is expected to lower switching barriers, and thus decrease service loyalty Therefore, H8: The higher the substitutability of the current service provider, the lower consumers' intention to repatronize the provider Geographical proximity to the service provider (PROXIMITY) Since services are generally consumed in the same place where they are produced, a service provider's location is a critical factor For most services, consumers prefer convenient locations When they move, they tend to switch to a new service provider in their areas Thus, inconvenient location would encourage switching tendency and discourage service loyalty This leads to: JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 117 H9: The less convenient the location of the current service provider, the lower consumers' intention to repatronize the provider (or the higher customers' intention to switch to a new provider) Figure shows the potential determinants of service loyalty discussed thus far Taxonomic dimensions Research method Selection of services Two service categories, banks and travel agencies, were selected for the study based on the expectation that the characteristics of these services would cover a wide range of variations on the taxonomic dimensions proposed by Lovelock (1983) and Bowen (1990) Specifically, for many consumers, banking services are directed at intangible assets, delivered on a continuing basis, and more importantly, involve formal ``membership'' relations, thereby reducing customers' abilities to switch On the other hand, the services provided by travel agencies generally produce physical products (i.e airline tickets), involve discrete transactions with no formal membership, and thus impose little restriction to service switching Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Measure development By the procedure suggested by Churchill (1979) and Nunnally (1978), multiple items were developed for the major constructs in the study on the basis of relevant literature However, some straightforward constructs were measured by single items For instance, information search cost was measured by the extent to which respondents agreed or disagreed with the statement, ``It would be extremely costly to search for information about good banks [travel agencies].'' Past studies Perceived service quality and risk were measured in the following way First, past studies indicate that overall service quality is composed of five dimensions, which can be assessed by 22 service performance items paired with as many expectation items (Parasuraman et al., 1988, 1991) However, including all these items in this study would have made the survey task too onerous for respondents, considering the number of questions used for measuring the other constructs Thus, in addition to the overall service quality measure, five service performance items paired with expectation items were included to capture the corresponding dimensions extracted from Figure Potential determinants of service loyalty 118 JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 factor analyses in previous studies (i.e tangibles, reliability, responsiveness, assurance, and empathy) Second, past literature also suggests that perceived risk is a multi-dimensional construct (Kaplan et al., 1974; Roselius, 1971) Therefore, in this study, overall perceived risk was measured as well as perceptions of five risk dimensions: (1) financial, (2) performance, (3) physical, (4) psychological, and (5) social risks (Murray and Schlacter, 1990) Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) The purpose of including such measures of individual dimensions was to determine their relative impact on the overall service quality and risk perceptions, in case these overall perceptions would prove to be significant in determining service loyalty Face validity Questionnaire Two sets of questionnaires were prepared, one for banks and the other for travel agencies The constructs and their corresponding items covered by the questionnaire were essentially the same Most items were measured on ninepoint Likert scales ranging from ±4 = ``strongly disagree'' to +4 = ``strongly agree.'' The face validity of these items was then established through a pretest with several marketing professionals Some items were revised to deliver clear meanings; several others were deleted due to unclear interpretations Data collection Data were collected through personal interviews with people working in offices in a large metropolitan area Interviewers were graduate students who were trained about the survey procedure They visited the offices and asked people whether they were currently using either banking or travel agency services They contacted only those who were using either one of the services They presented them with the purpose of the study and the questionnaire titled ``Customer evaluations of service quality'' Each respondent filled out either the bank or travel agency questionnaire At the beginning of each questionnaire, respondents were asked to consider the service provider (bank or travel agency) that they were using If they used multiple providers, they were asked to consider the one they used most often They then filled in measures of service quality, transaction and switching costs, and service loyalty They also provided their demographic and background information A total of 165 usable questionnaires were collected, which consisted of 84 for banks and 81 for travel agencies Unidimensionality Measure validation The multiple items measuring single constructs were factor-analyzed to determine unidimensionality (Churchill, 1979) As expected, all the measures showed unidimensionality The items were then submitted to reliability analyses via Cronbach alpha The reliability values of all the constructs were either close to or greater than 0.7, the threshold Nunnally (1978) recommended for basic research The items and their Cronbach alphas are shown in the Appendix The correlation matrix, shown in Table I, indicates that few of the constructs are correlated at high levels, suggesting some evidence of discriminant validity JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 119 A B C D E F G H I J A B C D E F G H I J 1.00 0.17 1.00 ±0.13 ±0.31 1.00 ±0.13 ±0.46 0.32 1.00 ±0.05 ±0.28 0.28 0.24 1.00 0.23 ±0.41 0.22 0.30 0.32 1.00 ±0.37 ±0.21 0.29 0.24 0.24 0.04 1.00 ±0.02 ±0.03 0.11 ±0.07 ±0.19 ±0.22 ±0.02 1.00 ±0.25 0.10 ±0.12 ±0.01 ±0.23 ±0.32 ±0.04 ±0.01 1.00 0.34 0.17 ±0.09 ±0.33 ±0.23 0.01 ±0.28 0.08 ±0.01 1.00 Notes: A = customer loyalty to the service provider (LOYALTY); B = overall service quality (QUALITY); C = service cost (SERVCOST); D = service time (SERVTIME); E = difficulty of assessing service performance (DIFFICULT); F = service provider's specific knowledge about customers (SPECIFIC); G = information search cost (INFOCOST); H = perceived risk (RISK); I = substitutability of the service provider (SUBSTITUTE); J = geographic proximity to the service provider (PROXIMITY) Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Table I Correlation matrix of measures Results Sample characteristics Table II shows the demographic profile of the respondents In addition, it indicates the respondents' usage, familiarity, and involvement differences between banks and travel agencies, e.g the respondents used banks more frequently and knew better about banks compared to travel agencies Overall (N = 165) Bank (n = 84) Travel agency (n = 81) Sex Male (%) Female (%) 56.2 43.8 57.8 42.2 54.4 45.6 Age Under 30 (%) 30-39 (%) Over 39 (%) 41.3 34.6 24.1 39.7 38.6 21.7 43.0 30.4 26.6 Family income Under $30K (%) $30K-$50K (%) $50K-$70K (%) Over $70K (%) 20.7 30.3 24.5 24.5 16.3 29.4 28.8 23.6 25.4 31.3 20.0 25.2 Age of relationship (in months) 41.8 (51.7)a 68.1 (58.0) 13.5 (20.1) Frequency of usage (times per month) 6.2 (7.9) 7.8 (7.0) 4.6 (8.5) Service Familiarityb 0.4 (2.0) 0.8 (1.9) 0.0 (2.2) Service Involvementc 1.2 (1.7) 1.7 (1.4) 0.6 (1.8) Variable Notes: a standard deviation; b measured on a nine-point bipolar scale ranging from ±4 to +4, where +4 = very familiar with the service; c simple average ratings on three nine-point bipolar scales ranging from ±4 to +4, where +4 = very important, very useful, and very relevant to me and my life Table II Sample characteristics 120 JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 Regression analysis Multiple regression analysis was performed to determine differential effects of the service quality, transaction cost, and switching cost variables on service loyalty The results are summarized in Table III As can be seen, the overall regression model was highly significant (F = 8.55, p < 0.001), with 35 percent of the variance in service loyalty explained by those independent variables Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Effects on service loyalty As expected, overall service quality (QUALITY) had a strong impact on service loyalty (coefficient = 0.24), supporting H1; its impact was consistently strong across the two service categories A further analysis was conducted to determine the relative importance of the five SERVQUAL dimensions in influencing customers' overall quality perceptions This was done by regressing the overall QUALITY ratings on the scores for the individual dimensions, which was calculated by the procedure suggested by the gap theory (Parasuraman et al., 1985, 1988, 1991; see Appendix for those measures) As shown in Table IV, the results indicate that QUALITY was influenced by all the five dimensions except tangibles (±0.04), implying that customers did not consider up-to-date facilities and equipments to be as important as the actual service outcomes from these tangibles The results also point out the industry-specific nature of the relative importance of Independent variable Overall coeff t-value Overall service quality QUALITY 0.24 Economic costs SERVCOST SERVTIME ±0.07 0.08 Bank coeff t-value 2.89** 0.24 ±0.95 0.96 2.12* ±0.17 0.09 ±1.46 0.72 Travel agency coeff t-value 0.39 3.08** ±0.13 0.22 ±1.21 1.79 Transaction costs DIFFICULT SPECIFIC 0.04 0.23 0.48 ±0.01 2.84** 0.30 ±0.04 ±0.03 2.63* 0.19 ±0.27 1.52 Switching costs INFOCOST RISK SUBSTITUTE PROXIMITY 0.29 0.07 ±0.21 0.26 3.95*** 0.27 0.95 0.17 ±2.94** ±0.11 3.39** 0.27 2.53* 0.28 1.59 0.14 ±1.13 ±0.41 2.49* 0.07 2.68** 1.25 ±3.47*** 0.59 R2 F-statistic 0.35 8.55*** 0.38 4.88*** 0.44 5.33*** Notes: * p < 0.05; ** p < 0.01; *** p < 0.001 (two-tailed test) Table III Regression results: service loyalty (LOYALTY) Independent variable Overall coeff Tangibles Reliability Responsiveness Assurance Empathy R2 F-statistic t-value Bank coeff ±0.04 ±0.64 0.03 0.20 2.36* 0.23 0.29 2.91** 0.38 0.17 1.90* 0.13 0.16 2.00* 0.06 0.50 0.53 31.15*** 17.99*** Travel agency t-value coeff t-value 0.36 1.89* 2.76** 1.07 0.50 ±0.13 0.20 0.23 0.20 0.25 0.50 14.55*** ±1.33 1.64 1.54 1.45 2.10* Notes: * p < 0.05; ** p < 0.01; *** p < 0.001 (two-tailed test) Table IV Regression results: overall service quality (QUALITY) JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 121 SERVQUAL dimensions (see Parasuraman et al., 1988, 1991, for similar findings); while reliability and responsiveness were the most important in the bank case (0.23 and 0.17, respectively), empathy was the most critical in the travel agency case (0.25) Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Two economic cost variables Two economic cost variables, SERVCOST and SERVTIME, were not significant in either cases One possible reason for this finding would be that the economic cost factors involved in receiving banking or travel agency services are generally not so high or well-differentiated across service providers (overall means = ±1.43 for SERVCOST and ±1.73 for SERVTIME, respectively) that customers not consider them to be extremely important in determining service loyalty Consequently, H2 and H3 were not supported The impact of the transaction difficulty involved in assessing the service provider's performance, DIFFICULT, did not reach significance, either, contrary to H4 An explanation for this would be that banking or travel agency services are not so complicated (overall mean = ±0.46) that customers can monitor service performance relatively easily, and thus not consider DIFFICULT to be critical However, another transaction cost variable, SPECIFIC, or the service provider's specific knowledge about customers, proved to be an important factor contributing to service loyalty (0.23), supporting H5 Its importance was greater for banks than for travel agencies (0.30 and 0.19, respectively) The effects of three switching cost variables on service loyalty were highly significant overall ± information search cost (INFOCOST; 0.29), substitutability (SUBSTITUTE; ±0.21), and geographic proximity (PROXIMITY; 0.26), supporting H6, H8, and H9 A close examination, however, revealed some industry differences in the magnitude, if not in the direction, of the effects of these variables Specifically, SUBSTITUTE in the bank case (±0.11) was not as important as that in the travel agency case (± 0.41), and the importance of PROXIMITY in the travel agency case (0.07) was substantially lower than that in the bank case (0.27) Finally, perceived risk, or RISK, did not reach significance, contrary to H7 Since this hypothesis was not supported, no further analysis was conducted for the individual dimensions of perceived risk One possible interpretation of this would be that the level of risk generally perceived by consumers in selecting a bank or a travel agency is not so high (mean = ±1.00) that they not regard risk as a critical determinant of service loyalty Discussion The overall pattern of the study results supports the notion that service loyalty is determined not only by perceived service quality, but also by cost considerations that arise from present transactions and future switching possibilities The implications and limitations of the study are discussed in this section Idiosyncrasies 122 Research implications Since Shostack (1977) proposed the idea of ``breaking free from product marketing,'' a considerable amount of research has been accumulated in the domain of services marketing A significant portion of the research has been devoted to developing and improving methodological tools to measure the concept of service quality (Fisk et al., 1993) For consumers, however, service quality evaluations represent only one stage in the process of determining patronage or repatronage of the service provider; service quality is compared with service cost, and on the basis of the comparison, service value and patronage intentions are determined (Bolton and Drew, 1991b; JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 Zeithaml, 1988) For marketers, it is the outcomes of the comparison process that count, i.e patronage or repatronage intentions In this sense, this study extends the service quality research framework and sheds light on the areas that have been relatively neglected In particular, the study demonstrates that consumers factor service-related costs into their patronage decisions, and it identifies several types of such costs It is believed that the conceptual and methodological framework suggested in the study contributes to understanding service provider/customer relationships, and can be used for investigating the idiosyncrasies of these relationships in a wider spectrum of service industries Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Implications for service marketers Managerial implications The study results have several implications for service marketers First, the research shows that the service provider's specific knowledge about customers (SPECIFIC) has a significant positive impact on customer loyalty This finding underscores the importance of service customization as a viable strategy at least for the two service categories examined in the study In fact, some travel agencies are very successful through service customization They assign frequent travelers to a specific travel agent to coordinate all travel arrangements The travel agent develops a personal file for each traveler with such information as seating preference and preferred form of payment, and uses the information to custom-design services Travelers, in this situation, would like to become ``regular customers,'' expecting that they can get better services and higher satisfaction from these types of travel agencies Second, the results show that the cost involved in finding a new service provider (INFOCOST) and the geographic proximity to the current service provider (PROXIMITY) have significant positive influences on customer loyalty These results imply that not all customers are loyal to their service provider because they are truly satisfied with the service; instead some might be loyal simply because they not want to go through the inconvenience of switching, or they might prefer the convenient locations Such customers are ready to switch whenever possible, e.g when they find a better alternative that can eliminate or reduce switching costs Significant negative impact on customer loyalty Finally, it is revealed that the substitutability of the current service provider (SUBSTITUTE) has a significant negative impact on customer loyalty, suggesting that customers may switch if offered a more convenient alternate service Service firms, especially those operating in marginally differentiated industries such as banking and travel, should be cognizant that the quality of the services they provide may be easily duplicated by competitors Since the success and profitability of service companies depend upon satisfied repeat customers, marketers must identify dissatisfied customers, listen to their problems, and develop effective programs which satisfy their needs and wants and eliminate expectation gaps Only in doing so can marketers be proactive toward future competitive threats Customer loyalty is a vital element for survival and growth for many service firms To develop customer loyalty and maintain a long-term relationship with customers, service firms should continually improve and differentiate service quality, thus positively influencing customers' perceptions and ensuring positive outcomes to their cost/benefit analysis Limitations and future research Interpretation of the results should be tempered by the recognition of the methodological limitation of the study The limitation pertains to the use of JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 123 cross-sectional design to explore customer loyalty Customer loyalty is basically a dynamic phenomenon that evolves over time The methodology used in the study does not fully capture such dynamics Additionally, it does not permit the researcher to impute cause and effect relationships Future studies should be conducted to examine the present issue using different methods such as longitudinal approaches or experimentations Generalization of the results to other service categories should be made carefully because only two categories were examined in this study As reported, some differences were found between banks and travel agencies in terms of the hypothesized effects of service loyalty determinants The finding suggests that the effects of the determinants are service categoryspecific In other words, the variables (such as service cost and perceived risk) which were found to have only marginal effects in this study may exert significant influences on service loyalty in some other service categories Therefore, further research is needed to investigate how and why service loyalty determinants and their relative effects might vary across different service categories Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Future studies As explained above, the current regression model, although statistically significant, accounts only for 35 percent of the total variance in service loyalty Thus, future studies should examine other independent variables that are potentially important One of such 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Cronbach alpha = 0.70 I will definitely go back to my current [bank]b next time I use the same service I would find it extremely difficult to discontinue patronage of my current [bank] Overall service quality (QUALITY): alpha = 0.71 Overall, I am very satisfied with my current [bank] Overall, my current [bank] is performing well for me Service costs (SERVCOST) The service cost my current [bank] charges me is much higher than the average cost other [banks] charge Service time (SERVTIME) It takes a lot of time for me to get services from my current [bank] Difficulty of assessing service performance (DIFFICULT): alpha = 0.70 It is extremely difficult for me to determine how good or bad the services are that I am provided by my current [bank] I have no idea how good my current [bank]'s services are compared to other [banks] Service provider's specific knowledge about customers (SPECIFIC): alpha = 0.76 My [bank] has acquired a great deal of specialized information about what I require My [bank] uses a lot of specialized knowledge to customize services especially for me My [bank] has a lot of confidential information about me Information search cost (INFOCOST) It would be extremely costly to search for information about good [banks] Perceived risk (RISK) As you know, in choosing any type of service provider, there is always some degree of risk in the decision making For instance, if you make a bad decision in service provider selection, you might have to suffer a bad service Generally, the risk involved in service provider selection can be of several types as listed below: Financial risk: Performance risk: JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 risk of spending your money unwisely by choosing the wrong provider risk of receiving bad services 127 Physical risk: Psychological risk: Social risk: risk of injury or loss of life risk of being disappointed by the services provided risk of embarrassment in front of friends and/or family Keeping these in mind, please answer the following questions by circling the appropriate number Overall, what level of risk is involved in selecting a [bank]? What level of financial (performance, physical, psychological, or social) risk is involved in selecting a [bank]? (0 = ``no risk''; = ``high risk'') Substitutability of the service provider (SUBSTITUTE): alpha = 0.68 The services that I am provided by my current [bank] can not be easily replaced by other [banks] Most [banks] provide the same quality and the same type of services There are many capable [banks] I can choose one from Geographic proximity to the service provider (PROXIMITY) I have to make a very long trip to access my current [bank] Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) Service quality performance measures Tangibles: My current [bank] has up-to-date facilities and equipments Reliability: [People at my current bank]c are able to perform the promised service dependably and accurately Responsiveness: [People at my bank] are willing to help me and provide prompt service Assurance: [People at my bank] are knowledgeable and kind Empathy: [People at my bank] give me individual attention Service quality expectation measures Tangibles: [Banks] should have up-to-date facilities and equipments Reliability: [People at banks]d should be able to perform the promised service dependably and accurately Responsiveness: [People at banks] should be willing to help me and provide prompt service Assurance: [People at banks] should be knowledgeable and kind Empathy: [People at banks] should give me individual attention Notes: a measured on nine-point Likert scales ranging from ±4 = strongly disagree to +4 = strongly agree, unless otherwise specified; b,c,d b is replaced by ``travel agency'' or ``travel agencies'', c is by ``my current travel agent,'' and d is by ``travel agents'' in the travel agency questionnaire 128 JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) This summary has been provided to allow managers and executives a rapid appreciation of the content of this article Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present Executive summary and implications for managers and executives Customer defections hit profitability Creating a long-term relationship with customers is the key to the survival and growth of service firms Consistently high levels of customer loyalty boost competitive advantage, employee morale and productivity In contrast, the steady draining away of clients has a devastating effect on a service company's performance One study has demonstrated that a percent decrease in customer defections could translate into a 25-85 percent increase in profits, depending on the service industry Importance of quality and costs Lee and Cunningham demonstrate that a customer's loyalty is determined not only by his or her perception of service quality, but also by the costs which arise from dealing with the service provider and those that would arise from switching to another provider Economic, transaction and switching costs Economic costs are what the consumer must sacrifice to obtain the service They include the price of the service and the amount of time spent receiving it Transaction costs include the difficulty which the customer has in assessing the service provider's performance The service provider's specific knowledge about individual customers' idiosyncrasies and their needs and wants is another factor related to transaction costs It reduces the difficulty of the service transaction and so makes the customer more likely to remain loyal Switching costs include the costs of gathering information about other possible service providers, the customer's perceptions of risk in selecting a new provider, the extent to which alternative providers cannot match the current provider's range of services and the possibility of having to travel further to get to the new service provider Study of banks and travel agents Lee and Cunningham examine these matters in relation to banks and travel agents For many customers, banking services are directed at intangible assets, delivered on a continuing basis Switching from one bank to another is notoriously difficult Travel agents, in contrast, generally produce physical products (travel tickets) at a specific time (just before a journey) Switching from one travel agent to another is relatively easy to Service quality has a strong impact on customer loyalty in both banks and travel agents Reliability and responsiveness are particularly important to bank customers, while the clients of travel agents stress the key role of empathy The price of the service and time spent receiving it are not significant for the clients of banks or travel agents, perhaps because the costs are not high and there is usually little difference between service providers Clients prefer a customized service Service providers with specific knowledge about their individual customers benefit from great customer loyalty This is particularly true among banks, but some travel agents, too, are especially successful by customizing their JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 129 service They assign frequent travellers to a specific agent, who develops a personal file for each client This contains such details as preferred airline, class of travel, seat and payment method, and enables the agent to customdesign services to the particular client Customers are more likely to remain loyal where the cost of finding a new service provider is high, and where the client would have to travel further to reach the new service provider Geographical proximity is especially important for bank customers These results therefore imply that not all customers are loyal because they are truly satisfied with the service they are receiving Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) What marketers must There is usually very little difference in the range of services offered by different banks and travel agents and the quality of services they provide may be easily duplicated by competitors Customers may therefore switch if offered a more convenient alternative service Marketers must consequently identify dissatisfied customers, listen to their problems and develop effective programmes which satisfy their needs and expectations Customers may defect from service companies which fail to so (A preÂcis of the article ``A cost/benefit approach to understanding service loyalty'' Supplied by Marketing Consultants for University Press.) 130 JOURNAL OF SERVICES MARKETING, VOL 15 NO 2001 Downloaded by Central Michigan University At 22:30 22 December 2014 (PT) This article has been cited by: Peng-Chan Chang, Chun-Ling Chuang, Wang-Ching Chuang, Wei-Ching Lin 2015 An examination of the effects of quality on customer loyalty: the automobile industry in Taiwan Total Quality Management & Business Excellence 26, 203-217 [CrossRef] Jamye Foster, Melinda A McLelland 2015 Retail atmospherics: 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