Chapter XVII Internet Markets and E-Loyalty

XVII Internet Marketsand E Loyalty

Changsoo Sohn
The Catholic University of Korea, Korea

Dong-Il Lee
Sejong Cyber University, Korea

Abstract

As expectation of e-businesses has changed to disappointment, many e-business companies are trying to survive in Internet markets. As a way to survive in Internet markets, they try to build customers’ loyalty. This chapter explains critical components to build customers’ loyalty such as trust and switching costs. E-business companies need to try to enhance trust levels with setting up high switching costs.

Introduction

Recently, the expectation of Internet markets has changed due to disappointment. Many Internet companies try to survive in Internet markets by laying off many employees and finding out new profit models. As a way to survive in the market, they try to turn existing customers into loyal customers. They try to instill loyalty in customers’ minds. Loyalty is very important asset to the e-business company. Reichheld and Schefter (2000) said that loyalty by customer retention is critical to the success in e-business operations. Customers who trust the company are more likely to share personnel information without hesitation, which may increase loyalty.

This chapter describes what loyalty is and what factors are critical to explain online customers’ loyalty, which called e-loyalty. Finally, this chapter discusses the strategies to establish e-loyalty in Internet markets.

What Does E Loyalty Mean?

Generally, loyalty indicates customers’ behavior to prefer specific brands or companies to other alternatives. Oliver (1999) generally explained that loyalty is “a deeply held commitment to re-buy or re-patronize a preferred product/service consistently in the future …” Dick and Basu (1994) defined loyalty by illustrating loyalty conditioning with repeat patronage and relative attitude. Based on the idea, loyalty can be classified into four different categories: loyalty, latent loyalty, spurious loyalty, and no loyalty. When customers have strong preference and repeat purchases, they have loyalty. Latent loyalty emerges “when a consumer has a strong preference for or attitude toward a company’s brand over its competitors’ brands, but does not exhibit high repeat patronage due to some situational or environmental variable” (Javalgi and Moberg, 1997). On the other hand, spurious loyalty “could occur if there were no alternatives in a category” (Javalgi and Moberg, 1997). Thus, spurious loyalty may be difficult to include in “real” loyalty category because customers with spurious loyalty may switch the brand or service if a new alternative comes up.

Based on the above literature, the concept of loyalty in this study had better include loyalty and latent loyalty only. Spurious loyalty is excluded because it is difficult to regard customers who may switch (if alternatives come up) as loyal customers. Loyalty and latent loyalty have strong preference, while latent loyalty and spurious loyalty show high repeat patronage. Thus, loyalty can be explained by attitudinal viewpoint and behavioral viewpoint. Behavioral viewpoint considers loyalty “the amount of purchases for a particular brand” (Javalgi and Moberg, 1997; Bass, 1974; Tranberg and Hansen, 1986), while attitudinal viewpoint states that loyalty must “incorporate consumer preferences and dispositions” (Javalgi and Moberg, 1997). Therefore, loyalty by strong preference can be comparable to attitudinal loyalty and loyalty by high repeat patronage can be comparable to behavioral loyalty. If customers show high preference and mental attachment to the specific Internet store, the customers can be loyal.

For e-businesses, Reichheld and Schefter (2000) used the term “e-loyalty.” E-loyalty is different from loyalty without “e-” in that e-loyalty emphasizes loyalty of customers who have transacted over the Internet. Since Internet markets are different from traditional markets in terms of non-existence of human beings and physical facilities (Sohn, 2000), the loyalty from online customers must be considered differently. E-loyalty means customers’ attitude to visit the specific Web site and make transactions comfortably. Thus, this chapter defines e-loyalty as attitudinal loyalty in Internet markets. Although customers show low repeated purchases from Internet markets, the customers can be considered as loyal customers if they show high preference, based on the definition of attitudinal loyalty described above.

What Can Influence E Loyalty?

Trust

Gefen (2000) explains trust as “willingness to engage in activities where a person is exposed to risk without the ability to control the related behavior of others.” Moorman et al. (1993) said that trust is “a willingness to rely on an exchange partner in whom one has confidence.” Also, Morgan and Hunt state that trust is “confidence in the exchange partner’s reliability and integrity.” Meanwhile, Dayal et al. (2001) explained trust by using a trust pyramid composed of six components: state-of-the art security, merchant legitimacy, fulfillment, customer control, tone and ambience, and consumer collaboration.

Many studies tried to explain trust in its own ways. Most of them emphasize confidence and reliability (Garbarino and Johnson, 1999) with reducing uncertainty and complexity (Gefen, 2000). Thus, trust can be defined as willingness to engage in activities with confidence and reliability by reducing uncertainty and complexity. In Internet markets, trust is closely related with e-loyalty (Singh and Sirdeshmukh, 2000; Garbarino and Johnson, 1999; Morgan and Hunt, 1994; Gwinner et al., 1998).

Switching Cost

Switching costs are understood as costs of changing services including time, monetary and psychological costs (Dick and Basu, 1994; Sengupta et al., 1997). Because of switching costs, a customer who is not satisfied may stay as a loyal customer (Gronhaug and Gilly, 1991). Ping (1993) revealed that customers who perceive that switching costs are high and that alternatives are difficult to find tend to be loyal. Switching costs include loss of benefits from existing service providers (Berry and Parasuraman, 1991). If customers find alternatives and perceive that benefits from new service providers excel switching costs, they may take the alternative. Thus, the relationship between e-loyalty and switching cost is positive. If customers perceive that switching costs are high, they are more likely to be “loyal” customers.

How Can We Build E Loyalty in Internet Markets?

In order for the e-business company to build customers’ e-loyalty, the company can have two dimensional strategies. One is pull strategy and the other is push strategy. Pull strategy is to entice customers, while push strategy is to push customers to have transactions. Providing trust is understood as pull strategy to enable customers to have visited continuously and voluntarily, while setting up high switching costs is understood as push strategy to enforce customers to have stayed in the Web site, regardless of their preferences.

Before explaining two dimensional strategies, antecedents of two strategies need to be explained. These antecedents can explain two dimensions like trust and switching cost. Subsequently, two dimensions influence e-loyalty in Internet markets.

Antecedents of Trust and Switching Cost

Trust and switching cost play roles of building e-loyalty as mediators. Simultaneously, Web page design, ease of Web use, and price premium are factors to have positive or negative effects with trust and switching cost. These are antecedents of mediators in an e-loyalty context. Web page design includes continuous update, visual appeal, and so on. Ease of Web use refers to the degree of easiness to use the Web site. While Web page design is comparable to the physical facilities of the store in traditional markets, ease of Web use is comparable to the actual experience in the store. The Web page design includes information that customers are looking for such as cost information, cheek-out procedure information, product information, FAQs, and policies (Lohse and Spiller, 1998). Ease of Web use includes ease to use (Dabholkar, 1996; Lohse and Spiller, 1998), enjoyment (Dabholkar, 1996), and so on. The Web page design and ease of Web use may be “signaling investment” of the company. Signaling investments indicate investment on physical facilities like buildings and logos (Boulding and Kirmani, 1993). Thus, customers who perceive that the company designs Web pages visually appealing and maintains a Web site easy to use tend to have trust in the company. Because the company may invest more on the Web site and subsequently customers can face better Web page design and perceive the Web site easy to use, the company cannot exit from the market without lots of loss in such investments.

In addition, Web page design and ease of Web use may be related with switching costs. Once customers are familiar with the Web site and provide personal information, they may have invested to the Web site. The investments could create mental switching costs not to quit the ongoing transaction because their mental efforts and knowledge are going to be useful. They may feel that the benefits from the current Internet company are higher than those from the alternative at some levels.

On the other hand, perceived price premium may be another factor to explain trust and switching cost. Perceived price premium is understood as “difference between super high price and perfectly competitive price” (Rao and Monroe, 1996). Higher perceived price premium may explain trust. According to agency theory, high-perceived price premium signals that customers will get more benefits for customers than those from other companies in the same industry. Thus, high-perceived price premium may result in high level of trust (Singh and Sirdeshmukh, 2000). By the same logic, high-perceived price premium may indicate more benefits. The customers who perceive more benefits may not switch the Internet company. This means that high-perceived price premium may be high switching cost because customers perceive large benefits from the company, considering actual price. This will grab customers to stay in their Web sites. From companies’ viewpoint, they set up high switching costs for customers not to switch by making customers perceive that they have large benefits.

E Business Strategies Pull and Push Strategies

Marketing strategies have push strategy and pull strategy. Push strategy pushes customers to purchase their products, while pull strategy pulls customers by enticing customers to their store. Switching cost setting is comparable to push strategy. If the competitor provides better services or benefits, the customer will go there. Pull strategy is comparable to trust building. If companies instill trust to customers, they will not go away. Pull strategy like building trust is more desirable than push strategy like setting up switching cost. So, companies must focus on mainly building trust rather than setting up high switching costs.

To build trust, Web page design as physical facilities and ease of Web use as actual experiences have the signaling effect that the Internet store invests a lot to the business. So it is trustworthy. Price premium also has signaling effect. The early stage of Internet markets, e-business companies had competed with low price. But, as the market is getting mature, price competition has its limitation. Rather than competing with low price, e-business companies must focus on providing many benefits, considering actual price, such as making the Web site easy to use or providing neat design of Web pages. This will make price premium high. When customers feel that they have lots of benefits from the Web site, they will revisit and subsequently be loyal.

Colgate and Lang (2001) discussed switching cost as a way to build loyalty by lockingin customers. For example, Amazon.com provided one-click service that customers do not need to input personal information again once they did so initially. The service makes customers want to revisit Amazon.com. Thus, higher switching cost is expected to make them loyal customers by forcing them to revisit Internet companies. But, this strategy has risks. If the competitor provides better services or benefits to offset the switching cost, the customers will go to the competitors.

Summary

The purpose of this chapter is to explain how customers can have loyalty to Internet companies. This chapter explained trust as pull strategy and switching cost as push strategy as ways to build customers’ e-loyalty. Thus, e-business companies deliberately weigh the use of both strategies regarding their ways of development and the characteristics of their customers and services. But, they must use both strategies, simultaneously.

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