Switching cost and brand loyalty in electronic markets: evidence from on-line retail brokers

Abstract

The ability to retain and lock-in customers in the face of competition is a major concern for e-commerce businesses, especially those that invest heavily in advertising and customer acquisition. In this paper, we propose a method for measuring the magnitude of switching costs and brand loyalty for on-line service providers based on the random utility modeling framework. Applying this approach to the on-line brokerage industry, we find significant variation (as much as a factor of 2) in measured switching costs. We find that customer demographic characteristics have little effect on switching, but that customer behavior (such as usage, changes in usage, and adoption of multiple brokers) are better predictors of switching behavior. We also find that firm characteristics such as product line breadth and quality reduce switching and may also reduce customer attrition. Overall, we conclude that on-line brokerage firms appear to have different abilities in retaining customers and have considerable control over their switching costs through product and service design and various unobserved retention strategies.