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

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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 5 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.

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JOURNAL OF SERVICES MARKETING, VOL. 15 NO. 2 2001, pp. 113-130, # MCB UNIVERSITY PRESS, 0887-6045

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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.

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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:
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H1: The better the perceived quality of services, the higher customers'
intention to repatronize their service provider.

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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

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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.

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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 do 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

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current research context, this means that customers often become ``locked
into'' their current service provider due to high switching costs.

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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:

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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 1 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.

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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 1. Potential determinants of service loyalty
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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).

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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.

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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)

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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
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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.

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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)
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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).

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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 do 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 do 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 do 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. 2 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 do 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.

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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 do 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. 2 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.
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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 variables is the service usage context,
e.g. the age of the customer/service provider relationship. It is speculated that
consumers are sometimes loyal to their service provider simply because they
have continued their relationship over a long period of time. In other words,
service loyalty can be built up on the customer inertia without much thought
or emotion. In this case, even unsatisfactory relationships tend to persist over
time. Although the phenomenon of inertia has been examined in the context
of interorganizational relationships (e.g. Yasai-Ardekani, 1986), it still needs
further investigation in the service setting.
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Appendix. Summary of measuresa
Customer loyalty to the service provider (LOYALTY): 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. 2 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''; 8 = ``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].

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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

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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 5 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 do.
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. 2 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.

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What marketers must do
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 do so.
(A preÂcis of the article ``A cost/benefit approach to understanding service
loyalty''. Supplied by Marketing Consultants for University Press.)

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