MARKETING SEMINAR

Switching Cost
(Sixth Meeting)

Prepared for:
Prof. Dr.Yasri, MS
Nip. 19630303 198703 1 002

Prepared By :
(1109346) Rafita Khairunnisak
(1109356) Suci Marcelina Efendi
(1109368) Dabitha Wise Maliha

STUDY PROGRAM MANAGEMENT

FACULTY OF ECONOMICS
UNIVERSITAS NEGERI PADANG
2015
INTRODUCTION

Switching cost is a form of sacrifice customers if they move to another company or

organization. Switching costs can be the form of money, lose the opportunity to get a gift, the
possibility of worse quality of services, the possibility of a bad image, the psychological costs,
labor costs, time, etc. By creating or utilizing switching cost, companies can be decrease
competitive price, build competitive advantage and get incredible profits as an investment
(Klemperer, 1995). To win the market competition with switching cost is not intended to lock in
customers, but also to create the strategic thinking, and look at the potential for the future.
Frequently, there is a problem in the management of switching cost, that when the company
itself becomes locked because of their success today. It has resulted in reluctance or inability to
anticipate changes or innovations.

Burnham, et al. (2003) defines the switching cost as a one-time costs associated
perceived or customers with the process of switching from a service provider services / products
to the provider of the services / products. The cost of switching cost is not only limited to
economic costs, but could include a wide range of costs. Fornel (1992) revealed that the cost can
arise from switching cost included the cost of the search, transaction costs, the cost of learning,
loyal customer discounts, customer habits, the cost of emotional, cognitive effort, financial risk,
social risk, and psychological risks.

A variety of fascinating phenomenon arises when the majority of customers are willing to
cover the cost switching is greater, to get a product. They do not think of a greater monetary cost
to move, because, to get other benefits, which are generally, not a monetary form. The amount of
the switching cost is strongly influenced by the level of competition within the industry.
According to Lee, Lee, and Feick (2001), the switching cost becomes important when there are
many providers of a service in the market. When there are so many providers, while the low
switching cost, the dissatisfied customers tend to have low loyalty and easy to switch to another
provider, if the switching costs are high, then the customer is likely to remain loyal. Customers
will also remain loyal to the company if the customer feels receive greater value than other
companies.
1. How to create switching costs (switching barrier) for customers

a. Definition of switching cost

According to Burnham et.al (2003) and Siregar (2009), switching cost is the cost incurred
by the customer immediately move from one service to another service. Porter (1998) and
Wijayanti (2008) defines the switching cost as the cost of which will be faced by customers
when switching from one supplier to another supplier. Aydin and Ozer (2004) in Wijayanti
(2008) stated switching cost is the sum of the cost of economic, psychological and physical.

Jones, Mothersbaugh, Beatty (2000) and Lacey (2007) describe that switching cost is the
customer's perception of time, money, and effort required to switch brands, companies and
service providers. Fornel (1992) and Purnomo (2008) described the process of switching cost
are to finding another provider, transaction, learning, change of habits, emotional, financial
risk, social and psychological.

Therefore, it can be concluded that the switching cost is a sacrifice issued by the
customer if the customer choose to switch to another brand, products or services. The
sacrifice is not only physical, but also involved economic, psychology and others.

Research shows that switching barriers may have a good effect on customer retention and
interaction (Lee et al, 2001). As a result, when a high switching barriers, the company can
continue to maintain customer services even though they are not satisfied. While the goal of
most companies is to offer a 100 percent customer satisfaction, it is often not feasible. For
example, American customer satisfaction index for the second quarter of 2002 (ACSI Index,
2002) showed that overall customer satisfaction index for cross-industry only 73 percent
(Ranaweera and Prabhu, 2003). So, companies have to identify alternative ways to retain
customers, such as the bottleneck. Ranaweera and Prabhu (2003) argues that research on the
role of switching barriers can help service firms find alternative cost effective to achieve
customer satisfaction
b. Definition of switching barriers

According to Bansal and Taylor (in Ranaweera and King, 2003) definition of moving
obstacles or barriers switching are charging consumers to resources and opportunities
necessary if he moved or barrier to action to move.

In research conducted by Bansal et al. (2005) defines three categories which are
antecedent of customer migration. These categories are:

1. Push Variable, namely satisfaction, quality, values, beliefs, and perceptions of price,
2. Pull Variable, the attractiveness of competitors,
3. Mooring variable, namely the cost of moving, social influence, the behavior of the past,
and tendency to search variations.

Bansal (2005) concluded that the mooring variable has the strongest effect in influencing
customer intention to make the shift, and followed by a pull variables, and which has the
weakest effect is push variable.

c. The way to create switching costs.

1) Improve the knowledge of the product (product knowledge) to its customers. Companies
should be aware that the increase in product knowledge is not only necessary for the
salespeople (sales people) they are, but also need doing for customers. Product
knowledge is important for the customer because the customer understand and be familiar
with a variety of products and services companies (including the plan to launch a new
product, if it is possible) it is expected that more customers have emotional closeness
with the company, so it is not easy to move.

2) Integrate the company with customers. Many bank companies currently offering ease of
transactions by phone, internet, and others. Customers must register first, verification,
before the service can be activated, so there are procedures to go through the customer.
Basically, the phone banking or e-banking, the company seeks to integrate business
processes with customer business processes. Customers who are used to get the ease of
service in the business process, will think twice if you want to move, because it means
 that he must repeat the registration procedure and others are quite troublesome to the new
company.

3) Launching a loyalty program. Airlines since been implementing reward point system for
passengers loyal, in the form of frequent flyer. With this system, the customer will try to
continue collecting points can be redeemed for gifts provided by the company. Today
many retail stores that have implemented the same thing in the form of shopping cards,
discount cards, membership cards, and others. With this tactic, the customer will feel
"loss" if you have to sacrifice with point, if he moves to another company.

4) Creating a customer community. This last tactic is done so that the customer was not
"lonely". An example is a large community of users of motor-known brands., Handset
brand specific user community, and others. Companies can actively create a community
where he feels kinship with other customers, will feel reluctant to move to another
company.

5) Being a one stop shop, or at least part of a one stop shop system. Basically, customers
want to simplify the decision-making process to meet their needs. During the various
needs can be met by the company, then the customer will be reluctant to move to another
company. For example, a beauty salon that is able to provide excellent service from start
to wash hair, haircut, beauty consultations, facials, Menicure, pedicure, and others are a
one stop shop that potentially bind to its customers, than if the salon can only provide
services cut and wash your hair just for example. Car repair shops, shopping centers,
banks, can also apply the same principle. Even if a company is not in a position to be able
to become a one stop shop, the company can be aligned and working together with other
companies to establish a one stop shop system.
Sudarmadi explained that loyalty enthusiasm that can be used as a switching barrier
companies (www.swa.co.id, January 2005). Each marketer should be able to create a program
that is customer feedback which indirectly can create emotional consumers to be more loyal.
The tricks are:

1) Emotional create a cause

Emotional create more loyal consumers. Example: Nokia with tagline "Nokia connecting
people"

2) Bit rate of change

For example, providing product samples so expect consumers will try it.

3) Community system
It can be done in two ways: neutralize knowledge (publications products through
websites, journals or internal) to explain the benefits of the product and create
community, to make the club as a reward consumers who have given to the company.
2. Types of switching costs (moving barrier) consumers

Patterson and Smith (2003) suggested in services marketing, there are several types of
switching costs that affect the consumer's decision to switch to the other. It Is:

a. Continuity costs which include some of the following things.

Loss of special treatment, such as special benefits, special treatment, special attention
and the like.
Perceptions of risks or uncertainties related to the level of performance of the new
service provider.

b. Learning Costs (setup costs) which includes some of the following things:
The search cost, include the time, effort and money required to seek and obtain a
reliable alternative service providers.
The attraction of alternative (attractiveness of alternatives) is estimated to possible
customer gratification obtained from alternative relationships. That is if customers
perceive that the service provider is not a more attractive alternative than the service
provider this time, it is likely that customers will not to change the supplier, even
though he was not satisfied with the current service provider.
Having to explain repeated customer preferences and conditions to the new service
provider. In other words, customers have to educate a new service provider in order to
understand clearly the desire, nor the conditions of the respective customer's unique
preferences.

c. Sunk Costs, namely consumer perceptions of time and emotional effort that has been
painstakingly devoted to build and maintain close relationships with service providers.
Including psychological discomfort due to decide who has good interpersonal relationships
with employees or certain service providers.

Switching barrier consists of three types, namely switching cost (move), attractiveness of
alternatives (interesting things from several alternatives) and interpersonal relationships
(personal relationships) (Jones et. al in Claes 2003: 4).
 Meanwhile, according to Budi Suharjo (Palupi, 2003), switching barrier is not only based on
economic considerations, but is also associated with psychological factors, social, functional and
rituals. It is these factors that make it difficult for customers to switch to other products or
services so that customers continue to use the product or service chosen.

Type of switching barrier or obstacle is a risk move. (Jones et al in Julander, Claes Robert &
Magnus Soderlund (2003): "Switching barrier is any factors make it difficult, or costly
consumers to change providers". In other words, "Barriers to switching are all factors that make
it difficult or give charge to if customers switch service provider ". There are three types of
transition costs which are:

1. Transaction Cost
It is the total cost spent by customers when changing service providers as a reply. For
example: if saving money in the bank and wants to close the account because they want to
move to another bank, the amount of money from savings to be deducted for administrative
costs.

2. Learning Cost
It is seen as a learning process where the experience led to changes in knowledge, attitudes
and or behavior. So if consumers switch from the service provider where their subscribe,
consumers must adjust back to where he subscribe now.

3. Artificial Cost
It is the cost coming from the company itself to retain its customers. The company provides
complementary services tailored to customer needs. For example: coupon discounts given
company for the next purchase if consumers conducting transactions of at least Rp. 100.000.,
Thus, the customer is bound to make transactions with the company.
3. Why customers switch their products and services to another?

To identify the reason why customers switching products and services to another, we give
questionnaires that each product and service has 5 questions. Our total respondents are 30
customers.

a. Product (Smartphone)
For product, we focus identify on Smartphone because nowadays there are a lot of
Smartphone brand compete each others to get their customers especially making innovation.
To identify it, we gave this below questionnaire.

1 What is your Smartphone brand? (Checklist one of them)

o Samsung
o Apple
o Sony
o Blackberry
o Others

2 Are you a brand loyal customer of your Smartphone brand? (Checklist one of them)
o Yes
o No

3 Which attributes did attract you to purchase your Smartphone brand?

(Rank these attributes in order of their importance to you)
o Price
o Quality
o Features
o Trusted Brand

4 What influenced you to buy your Smartphone brand?

(Rank these influences in order of their importance to you)
o Advertising
o Trend
o Family/Friends/Relatives
o Others

5 Will you switch your Smartphone brand one day? (Checklist one of them)
o Definitely yes
o Probably yes
o Not sure
o Never
 After we spread these questionnaires, most of our correspondents using Apple and the
second are Samsung. There are 10 correspondents answered Apple and 8 correspondents
answered Samsung. Besides, there are 5 correspondents answered Sony, 4 for Blackberry and
3 for others. As all of we know that nowadays, Apple and Samsung are the most popular
Smartphone brand in the world. According to report from Brand Finance, Apple has brand
value of $128 which is the first rank in the world. The second rank is Samsung that has brand
value of $82 billion. Therefore as rival, Apple and Samsung now competes each other to get
their customers. It is possible that each customer will switch their Smartphone between these
brands. Whether from Apple customers turn to Samsung customers, or conversely from
Samsung customers turn to Apple customers.

From the second question, 17 of our correspondent answered that they are not loyal to
their Smartphone brand. And 13 of correspondent answered that they are loyal to their
Smartphone brand. We also ask some of questions directly to our correspondents that why
they are loyal or not loyal to their Smartphone brand. Some of them said that they are loyal
because they get used to using their Smartphone brand. Some of them also said that their
Smartphone brand is famous and popular so they will feel confidence if they have famous
Smartphone brand. But, some of them said that they are not loyal because they like to explore
and trying other brands. Some of them also said that their Smartphone brand may not popular
again for longer term. For example, one of our correspondents is used to loyal with Nokia.
But now, he will fell shame if he still using Nokia because it is no longer popular brand.

For the attributes, our correspondents rank that trusted brand is the highest rank which
is the most important attract them to purchase their Smartphone brand. Most of them believe
that if they buy Smartphone trusted brand, they wont regret and they may loss if they dont
buy Smartphone trusted brand. The second is price, most of our correspondents are also
considering about the price as their ability to purchase it because not all of them may able to
buy Smartphone with high price even though its trusted brand. The third is quality and the
last is features.
 From the fourth question, trend is the highest rank to influences them to purchase their
Smartphone brand. Because most of our correspondents like to follows trends. The second
are Family/Friends/Relatives which include as word of mouth. The third is advertising and
the last is others.

For the last question, there are 11 respondents answered probably yes which means that
they probably will switch their Smartphone brand. 8 respondents answered not sure
because one day they may not switch their Smartphone brand. Then, 7 respondents answered
definitely yes because they are very sure that they will switch their Smartphone brand one
day. The last, 4 correspondents answered that never which means that they will never
switch their Smartphone brand.

In conclusion, there are several factors that make the customers switch their Smartphone
brand. Trusted brand, price, quality, and features are factors to attract them to purchase
another brand. Besides, trend, word of mouth, advertising are also factors to influences them
to switch their Smartphone brand.
b. Service (Airline)

For service, we focus identify on Airlines because nowadays there are a lot of Airline
brands compete each others to get their customers and loyal passengers. To identify it, we
gave this below questionnaire.

1 What is your main choice of Airline brand? (Checklist one of them)

o Garuda Indonesia
o Lion Air
o Indonesia AirAsia
o Citilink
o Others

2 Are you a brand loyal customer of your main choice Airline? (Checklist one of them)
o Yes
o No

3 Which attributes did attract you to choose your main choice Airline?
(Rank these attributes in order of their importance to you)
o Price
o Service Quality
o Safety
o Flight on time

4 What influenced you to purchase ticket of your main choice Airline?

(Rank these influences in order of their importance to you)
o Advertising
o Ticket promo
o Family/Friends/Relatives
o Others

5 Will you switch your main choice Airline one day? (Checklist one of them)
o Definitely yes
o Probably yes
o Not sure
o Never

After we spread these questionnaires, most of our correspondents main choice is Garuda
Indonesia. There are 10 correspondents answered Lion Air and 9 correspondents answered
Garuda Indonesia. Besides, there are 5 correspondents answered Citilink, 4 correspondent
answered Indonesia AirAsia, and 2 for others.
 From the second question, 19 correspondents answered that they are loyal to their main
choice Airline. And 11 correspondents answered that they are not loyal to main choice
Airline. We asked our correspondents the reason why they become loyal or not loyal to one
of Airline brand. Most of them answered because of experiences. If they have bad experience
during their flight, they may try to switch another Airline. Besides, they become loyal
because influences of flight destination. If an Airline has the only one flight on some
destination, the customers cannot choose or switch it to other Airlines because they are not
available. For example, Indonesia AirAsia is the only one Airline which has Kuala Lumpur-
Padang flight destination, so the customers do not have choice to switch another Airline.

For the attributes, our correspondents rank that price is the highest rank which is the
most important attract them to choose Airline. Most of them like Low Cost Carrier Airline
which can save budget for their travel. The second rank is safety, because they considering
about it and they must make sure that they will save during their flight. The third rank is
flight on time, some of our correspondent prefer on time because they will feel annoyed if
they are waiting in Airport for long time because of delayed. And the last rank is service
quality, some of correspondents also notice about service quality of the Airline such as
comfort and friendly stewards.

From the fourth question, ticket promo is the highest rank to influences them to
purchase the ticket of their main choice Airline. Most of our correspondents like to get lower
price than regular price. They even keep notice and waiting for promo ticket launched by the
Airline. The second are Family/Friends/Relatives which include as word of mouth. Many of
our correspondents prefer to believe their family, friends and relatives than advertising. Then,
the third is advertising and the last is others.

For the last question, there are 14 respondents answered probably yes which means that
they probably will switch their main choice Airline to another. 5 respondents answered not
sure because one day they may not switch their main choice Airline. Then, 8 respondents
answered definitely yes because they are very sure that they will switch their main choice
Airline one day. The last, 3 correspondents answered that never which means that they will
never switch their main choice Airline.

In conclusion, there are several factors that make the customers switch their main choice
Airline. Price, safety, flight on time and service quality is several factors to attract them to
choose Airline or switching from their loyal Airline. Besides, ticket promo, word of mouth
(family/friends/relatives), advertising are also factors to influences them choose to switch
Airline. Moreover, experience and flight destinations decisive factors to make customers
switch to other Airlines.
4. How SMEs or vendors prevent customers to switch their products or services
to another?

a. Differentiation strategy

For Small Medium Business or vendors, they need to determine what it is that makes
their enterprise different from others to prevent their customers switch to others. An effective
differentiation strategy can be used to highlight a business's unique features and make it
stand out from other SMEs. In essence, differentiation entails using marketing to create the
perception in customers' minds of receiving something of greater value than offered by the
competition.

Because of capital limitation, the small business entrepreneurs not have to make
innovation of their product or services. They have to know their core competencies as their
priority to selling their products or services. For example, Sate Mak Syukur in Padang
Panjang is famous because their delicacy satay is unique. Besides, they have to be creative to
make their enterprise different from others. For example, sell handicraft made from cans like
this picture.

b. Low cost strategy

SMEs and vendors also can differentiate their business by offering lower prices than
their competitors. This can be an effective strategy if the SMEs sell price-sensitive items
such as in-demand consumer goods and may even be necessary if SMEs are entering a
marketplace already crowded with numerous competitors. A price leader strategy requires
keeping a close watch on profit margins to ensure prices aren't too low. Vendors also need to
closely monitor competition for changing prices.
5. Why some consumers willing to move to another product or service even
though they know the price of products in the new company is more expensive
than previously?

First, the reason why consumers are willing to move to the products / services offered by
other companies is more expensive, we can identify based on research conducted by Thomas
A.Burnham, there are a variety forms of switching costs that may arise when customers switch to
using the products / services of other companies, that is: economic risk cost, cost evaluation, set-
up cost, learning costs, benefits cost loss, monetary loss cost, personal relationships and brand
relationship loss costs cost. All of this cost, highly affect the desire or intention of customers to
move to another company. Whereby, for a whole this cost will be things that are not taken into
consideration, when the customer receives the value or benefit was greater on products / services
the new company compared to remain loyal to the old company.

Customers who decide to switch providers even though the prices offered by the new
provider is more expensive due to the dissatisfaction factors. This is consistent with what is
proposed by: Junaidi and Dharmmesta (2002) states that the dissatisfaction of consumers is an
important factor which highly affects the decision very significant brand switching.
Dissatisfaction related to psychological or emotional discomfort, risk of financial loss as a result
of the higher its bad quality offered provider.

Quality of products or services directly influences customer satisfaction and trust.

Consumer satisfaction has significant impact on purchase intention. Thus, the quality of products
or services, perceived customer satisfaction attributes describes the evaluation of direct
experience. If perceived as unprofitable, customers will tend to switch to choose the products /
services from other providers, who are able to prove the quality of what each has to offer to
create satisfaction to the consumer. Indirectly, this is forcing consumers to switch to another
provider even though the price paid relatively more expensive.

Moreover, the various consumer behavior that successfully in identification in the field is
the tendency for the customer's willingness to to pay more for other providers, who are able to
attract attention caused the offer will be the quality of products / services offered better than the
quality of the received current customers. Thus, new providers can realize between expectations
and reality. Where, what customers need accordance with what customers perceive before.
Although, there is a greater cost to be paid, when it decided to switch providers, it will not be
something that is calculated, compared to the benefits they will receive. So, this will create
loyalty from consumers themselves. Loyalty can also be defined as a positive emotional,
evaluative, or in response to behavioral tendency toward a brand, label or alternatives that may
be selected by a person in his capacity as a user, decision makers or as purchasing agents (Sheth;
1974).
On the other hand, the switching cost is also defined as a one-time cost. Whereby,
consumers also argue that, no matter the expense of one-time costs for the products / services
better (price, accordance with quality) rather than survive at low prices and quality of
disappointing and poor image of the company, thus, will receive a loss, for long period of time.
For that, the consumer will assess a product / service for competitors in three ways, that is: the
image displayed by brand, quality and price. These factors are important because it will calculate
the economic value sacrificed by consumers in acquiring a particular brand than acceptable
quality, as well as their perception of the brand image than other brands.

For example: As a consumer, Suci (one of our group member) uses "Three" (3) card
provider. In the competition of telecommunications provider companies, tariff competition
becomes a new trend to attract the attention of consumers. Therefore, she would confront kinds
of variety of provider card from the various providers that offer price for the Android package.
After evaluating the price, she finally decided to buy a card Three (3) which is offer cheaper
prices. However, the price offered is does not match what we expected before. The ability to
access the internet highly slow due to the difficulty to get a good quality signal. So, finally she
ignored the cost of switching and decided to use the Telkomsel card. Although the price is more
expensive packages offered, but she was satisfied with the quality of the products offered, which
is able to provide comfort no matter where she is.
SUMMARY

Switching cost becomes important when there are many options of products or services in
the market. When there is so many options, whereas, low switching cost, the dissatisfied
customers tend to switch to another options, if the switching costs are high, then the customer is
likely to remain loyal. Customers will also remain loyal to the company if the customer feels
receive greater value than other companies. Thus, product / service quality, has an important role
in creating customer satisfaction.

Switching costs can provide benefits to the company, in particular, will directly affect the
level of customer loyalty. Switching costs can reduce the level of price sensitivity and customer
satisfaction. Moreover, the switching cost has a significant impact on the level of customer
loyalty. Consider the important role of customer loyalty in supporting the company's success and
survival of the company. Loyalty can also mean a preference of consumers to buy a particular
brand of a product category. This happens because consumers feel that a brand is able to offer
product features, image quality level of the product or products that comply with the price.
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