Based on Research By Vikas Mittal

There’s More To Customer Loyalty Than Meets The Ear

  • Costs, administrative headaches and loss of established relationships play a part in customer decisions to change a service or product provider.
  • Strategic companies need to take these switching costs into account, along with customer satisfaction, as they devise strategies for keeping customers.
  • The psychological price of suspending relationships with a company’s employees or brands is more significant to customers than other switching costs.

“You gotta know the territory,” sings a salesman in Meredith Willson’s classic Broadway show The Music Man. You gotta know your customers, too, according to a recent study, because customer loyalty often depends less on what a customer thinks of a product – and more on what she thinks of the people behind it.

Any business knows it needs to get customers and to keep them. What makes some customers want an encore transaction and others leave after the first act, though, is less than obvious. Understanding those choices, however, is critical if companies hope to strategically manage their customers–a firm’s most valuable asset.

Vikas Mittal, a professor at the business school, teamed with Markus Blut, now of Aston Business School in Birmingham, England, David Mothersbaugh of the Culverhouse College of Commerce at the University of Alabama, and Carly M. Frennea, a doctoral student at Rice Business, to look at customers’ decisions to come back or move on.

The researchers focused on switching costs–the one-time costs associated with changing a service or product provider–and how these costs compare with customer satisfaction as influences on decisions to repeat business.

The study looked at three kinds of switching costs: procedural, financial and relational. Procedural costs are the time and effort required to identify and contract with a new provider. Financial costs are actual monetary expenses, such as fees for breaking contracts or giving up loyalty rewards like frequent-flier miles. And, finally, relational costs are the emotional or psychological tolls of cutting relationships with familiar suppliers or brands.

Vikas and his coauthors conducted a meta-analysis, that is, a statistical analysis of data from a range of published studies. They looked at results of 178 existing studies of decisions made by 133,000 customers.

Because methodology, quality and error vary among studies, meta-analysis is complex work. Putting results together accurately can be like plucking a common melody from hundreds of bands of varying talent playing different songs at the same time. Searching scientific databases and journals for studies, the team applied rigorous statistical analysis to put the material in harmony.

In one 2003 study, long distance telephone and credit card customers clearly weighed switching costs when contemplating repeat purchases. But the report was foggy about the link between switching costs and customer satisfaction. Left unknown: could high switching costs discourage an unhappy customer from making a change?

A 2015 study offered more insight. Consumer satisfaction, the research showed, diminished in importance in the presence of high relational costs for a supplier. Customers who liked a company and its employees were more forgiving about perceived glitches in satisfaction. Interestingly, the link between procedural and financial costs and customer satisfaction was weaker.

For managers deciding their marketing priorities, the guidance is clear.  Client switching costs, especially those involving relationships, may be as important to repeat business as the quality of the product itself. So here’s the coda: Truly knowing your customer is key to business, whether you’re selling one widget or 76 trombones.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at Jones Graduate School of Business at Rice University. Carly M. Frennea, formerly a doctoral student at Jones Graduate School of Business, is currently engagement science manager for Nike Inc.

To learn more, please see: Blut, M., Frennea, C., Mittal, V., & Mothersbaugh, D. (2015). How procedural, financial and relational switching costs affect customer satisfaction, repurchase intentions and repurchase behavior: A meta-analysis. International Journal of Research in Marketing, 32(2), 226-229.