R J Economics, Marketing and Management, Vol. 1, Issue. 1, June 2018. pp.

35-42

Relationship of Customer Satisfaction and Customer Loyalty with

Moderation of Switching Cost

*
M. Luqman Tauheed RANA1, Sara KANWAL2, Atif MAHMOOD 3

1. Department of Business Administration University of Sargodha, Lahore, Pakistan

2. Institute of Business and Management, University of Engineering and Technology, Lahore, Pakistan
3. Lahore Business School, The University of Lahore, Lahore, Pakistan

*Corresponding Author: luqman19891@hotmail.com

Abstract

This research was aimed to find out mechanism behind the retention of unsatisfied customers in banking sector of
Pakistan. 350 out of 500 self-administered questionnaires were received back and the latest technique of Preaches &
Hayes for testing moderation in SPSS was utilized. Results revealed that relationship of satisfaction and loyalty is
strongly moderated by the switching cost. This research is very useful for the bank managers to make their bank
policies and to make a strategic fit between the customers and banks relationship. Banks can use the switching cost
concept in a very well manner to retain the customers.

Key Words: Customer Satisfaction, Customer Loyalty, Switching Cost, Banks of Pakistan

1. Introduction: Jain and Kumar, 2015) have successfully identified

switching costs that moderate the link between
It is commonly believed that economy is the
satisfaction and customer retention and that can
major pillar in development of any country and
partially explain the weak overall relationship. The
service sector plays a vital role in the development of
abovementioned results could be an important issue
countries as said by Ostrom et al., (2010) that in most
in that the impact of satisfaction on customer
developed countries service sector has a great part in
retention decreases under conditions of high
making strong their economies. Moreover, banks of
switching costs.This research was aimed to determine
Pakistan are also playing an important role in the
the effect customer satisfaction in this new age of
development of Pakistan. Banks in Pakistan are
technology on customer’s loyalty and how switching
continuously expanding and running their businesses
cost plays its role in this relationship. Although, there
with undifferentiated products (Khalid & Irshad,
are many studies have been conducted on this issue,
2010). Satisfaction has typically been viewed as an
but there is not much work done in Pakistan so far.
important determinant affecting customer retention
This study will be very helpful for the mangers to
(Oliver, 1980; Fornell, 1992; Anderson and Sullivan,
understand their customers and set their strategies in
1993). Furthermore, previous literature also has
order to compete in the market and accomplish the
examined the impact of switching costs on customer
expectations of their customers. Therefore, this study
retention (Jones, Mothersbaugh, and Beatty, 2000;
is a valuable contribution in the literature which
Lee, Lee, and Feick, 2001; and Ranaweera and
presents this fact in the context of Pakistani banking
Prabhu, 2003) and has shown that switching costs
sector, a developing country.
present barriers to exit by customers and contribute to
decision of customers to keep their existing
transaction relationships even in the face of
dissatisfaction. Previous studies (Stan et al., 2011;
 Rana et al: Relationship of customer satisfaction and customer loyalty ……………….
2. Literature Review
2.1. Customer Satisfaction
According to Kotler et al, (2009) satisfaction can
be defined as a feeling which origins when a
customer compare the received value of a service or
product against his expectations. Furthermore it can
also be defined the overall judgment of a customer
for the good or service(Woodruff,
1997).Additionally, customer satisfaction helps the
service provider in maintaining the long haul
relationship with their customers (Cheng et al.,
2011).
2.2. Customer Loyalty
Heskett et al., (1994) suggested that customer
loyalty motivates customers for repeat purchases and
persuade them to refer those products or services to
others. Duffy (2003) proposed that customer loyalty
is a feeling of association which a customer has
towards a brand. This feeling incites customer for
acquiring a good or service repeatedly. Subsequently
this generates sizeable and better financial outcomes
for the firm.
2.3. Switching Costs
Heide and Weiss (1995) defined switching costs
as “the cost involved in changing from one supplier
toanother.” For Dick and Basu (1994) the domain of
switching costs includes both monetary and
nonmonetary costs.
3. Model and Hypothesis
Generally, every banking company aims at
earning profits, expanding its business by offering
more diversified products or services over time and
capturing a larger market share progressively.
Customer loyalty can favorably contribute towards
this basic aim of the banks (Hayes, 2008) as it is an
effective tool for generating repeat sales from the
customers (Chu, 2009). Furthermore these loyal
customers can serve as effective elements in the
marketing mechanism when they refer their bank to
Available at: http://www.rjoem.com/
more people. In this way these existing customers
contribute towards increasing their respective bank’s
customer base and market share. The financial base
of any bank is largely dependent on this
phenomenon. Whilethe main effect of switching costs
on customer retention has been empirically supported
in a number of studies, some papers also have
examined the moderating effect of switching costs on
the satisfaction-retention link. Jones et al. (2000)
suggest that when perceived switching costs are
lower, unsatisfied customers are less willing to stay
than satisfied customers; when perceived switching
costs are higher, unsatisfied customers keep their
current providers. Their results indicate that the
impact of core satisfaction on repurchase intentions
decreases under conditions of high switching costs.
Some empirical studies have shown that the
relationship between satisfaction and customer
retention is weak: as switching costs increase,
sensitivity of customers to satisfaction diminishes
(Hauser, Simester, and Wernerfelt, 1994; Jones et al.,
2000; and Lee et al., 2000). Burnham et al. (2003)
highlight that switching costs have been associated
with higher profits (Beggs and Klemperer,1992), an
inelastic response to price (Farrell and Shapiro,
1988), increased product preannouncements
(Eliashbergand Robertson, 1988), and barriers to
market entry and sustainable strategic advantage
(Karakaya and Stahl, 1989;Schmalensee, 1982; Kerin
et al. 1992). As pointed out by Dwyer et al. (1987),
Heide and Weiss (1995), all elsebeing equal, a
customer will prefer existing relationships to
economize on switching costs, such as the
transactionspecificinvestments that he made on the
relationships.Lam et al. (2004) suggest that “part of
switching cost may involve loyalty benefits that that
have to begiven up by a customer when his or her
relationship with the service provider ends.
In conclusion, it appears that more research is
necessary in order to understand the role of switching
costs in the formation of customer loyalty. As this
line of inquiry has only recently emerged, empirical
results have so far been relatively scarce and partly
contradicting. Therefore, we test the following
hypotheses:
36
 Rana et al: Relationship of customer satisfaction and customer loyalty ……………….
H1: Customer satisfaction has a positive effect on
customer loyalty.
H2: Switching costs have a positive effect on
customer loyalty.
H3: Switching costs moderate the link between
customer satisfaction and customer loyalty.
Based on a review of the literature (Lee et
al., 2001; Ranaweera and Prabhu, 2003; Mohsan et
al., 2011 ), a model which links customer satisfaction
and switching costs on customer retention was
developed (Figure 1).
SC
CS CL
CS: Customer Satisfaction, SC: Switching Cost
CL: Customer Loyalty
4. Research Methodology
Purpose of this study was to analyze the effect of
customer satisfaction on customer loyalty and the
role of switching cost on the relationship of customer
satisfaction and customer loyalty. For the
accomplishment of this objective, convenient
sampling was used and data were collected through
self administered questionnaire. Out of total 500
questionnaires, 350 completely filled questionnaires
were received back. A five-likert scale was used to
measure all the items from “Strongly disagree” to
“Strongly agree”. Questionnaire was divided into
twoparts. First part was arranged to collect
demographic information of respondents. Second part
of questionnaire was contained items related to
customer satisfaction, switching cost and customer
loyalty adapted from Mohsan et al., (2011).
Available at: http://www.rjoem.com/
5. Results
Before the analysis, all necessary tests for
checking the linearity, normality, autocorrelation,
heteroskedasticity, detection of outliers and
multicollinearity were conducted on data and were
proved satisfactory. Moreover, reliability and validity
of the instrument were assessed at item level. For this
purpose, Cronbach’s Alpha coefficients were
calculated to measure the internal consistency of
different variables used in research questionnaire.
Cronbach’s Alpha values for customer satisfaction,
customer loyalty and switching cost are α = 0.778, α
= 0.818 respectively and α = 0.712 respectively.
Higher values of Cronbach’s Alpha indicate higher
internal consistency of items of different variables.
All obtained values of Cronbach’s Alpha are greater
than the thresh hold level 0.7, therefore show
adequate reliability (DeVellis, 2003).
5.1. Descriptive Analysis
Descriptive statistics of collected data are
presented in Table 2, which provides preliminary
information. Values for mean (3.8017 - 3.8184), and
standard deviation (0.68-0.81) of all the variables and
their dimensions show high levels of deviation from
mean values. This indicates that when employees of
banks provide improved service quality to customers,
in turn customers get satisfied and build loyalty with
the same bank.
Table 3 shows that customer satisfaction is
enacted as predictor variable, Loyalty is enacted as
outcome variable, Switching cost enacted as
Moderator variable.
From the Table 4, customer satisfaction has
significant positive effect on Loyalty and interaction
between Switching cost and satisfaction is regressed
on Loyalty, the coefficient value is -.0663(.0337) and
t value is > 1.96, since p value is <.05 and both LLCI
and ULCI are same sign. This interaction effect
shows that switching cost acted as moderating
variable between customer satisfaction and Loyalty.
37
 Rana et al: Relationship of customer satisfaction and customer loyalty ……………….

Table 5 showed conditional effect of satisfaction significant. Similar results were found by stan et al.,
on Loyalty is significant at the value of moderator in (2013) and Jain & kumar, (2015).
all cases of Low, average and High switching cost.
7. Conclusion and Managerial Implications
6. Discussion
It is important to understand how barriers to
The main objective of this study was to
switching can be further increased. Due to intense
investigate the role of switching costs on the
and close competition in banking industry, customer
relationship between customer satisfaction and
is tending to switch from one service provider to
customer loyalty. Customer satisfaction is key driver
another service provider easily. This study further
for retaining the customers (Yang et al.,2004; Edward
strengthens the perception that even in banking
et al.,2011). As the literature review revealed, there is
industry a due consideration should be given to the
reason to suggest that perceived switching costs of
switching cost to retain the customers. From
customers impact on repeat purchase decisions and
managerial perspective, this study suggests that banks
are thus an important factor to consider when
should embrace various anti-switching barriers to
adopting marketing managerial practices. Therefore,
increase the switching cost to retain their customers.
we assessed the moderating effect of switching costs
Banks should frame their strategies by enhancing
on the relationship between satisfaction and loyalty.
switching costs in terms of providing discounts
Findings of the study revealed that the moderating
points, better customer relationship etc. to retain the
effect of switching costs on the relationship between
existing customer base.
customer satisfaction and customer loyalty is

References

Al-Eisa, A. S., & Alhemoud, A. M. (2009). Using a of internet banking among non-metropolitan
multiple-attribute approach for measuring internet users of Pakistan. International
customer satisfaction with retail banking Business & Economics Research Journal
services in Kuwait. International Journal of (IBER), 10(4), 45-56.
Bank Marketing, 27(4), 294-314.
Asubonteng, P., McCleary, K. J., & Swan, J. E.
Al-hawari, M. (2008). The influence of traditional (1996). SERVQUAL revisited: a critical
service quality factors on customer review of service quality. Journal of
satisfaction: a practical study within the Services marketing, 10(6), 62-81.
context of Australian banking. The Business
Aydin, S., & Özer, G. (2005). The analysis of
Review, Cambridge, 11(2), 114-119.
antecedents of customer loyalty in the
Ali, F., Khan, A., & Rehman, F. (2012). An Turkish mobile telecommunication market.
Assessment of the Service Quality Using European Journal of Marketing, 39(7/8),
Gap Analysis: A Study Conducted at 910-925.
Chitral, Pakistan. Interdisciplinary Journal
Babakus, E., & Boller, G. W. (1992). An empirical
Of Contemporary Research In Business,
assessment of the SERVQUAL scale.
4(3), 259-266.
Journal of Business research, 24(3), 253-
Aslam, H. D., Khan, M., Tanveer, A., & Amber, T. 268.
(2011). Perceived barriers towards adoption
38

Available at: http://www.rjoem.com/

 Rana et al: Relationship of customer satisfaction and customer loyalty ……………….

Bahia, K., & Nantel, J. (2000). A reliable and valid recreation programs. Leisure Sciences,
measurement scale for the perceived service 11(4), 367-375.
quality of banks. International Journal of
Crosby, P. B. (1979). Quality is free: The art of
Bank Marketing, 18(2), 84-91.
marketing quality certain. New York: New
Bennett, D., & Higgins, M. (1988). Quality means American Library.
more than smiles. ABA Banking journal,
Daniels, P., & Harrington, J. W. (2007). Services and
80(6), 46. 666 Pakistan Journal of Social
Economic Development in the Asia-Pacific:
Sciences Vol. 35, No. 2
Ashgate Publishing, Ltd.
Berndt, A. (2009). Investigating service quality
Davies, F., Moutinho, L., & Curry, B. (1995).
dimensions in South African motor vehicle
Construction and testing of a knowledge-
servicing. African Journal of Marketing
based system in retail bank marketing.
Management, 1(1), 001-009.
International Journal of Bank Marketing,
Blery, E., Batistatos, N., Papastratou, E., Perifanos, 13(2), 4-14.
I., Remoundaki, G., & Retsina, M. (2009).
Dawes, J., & Swailes, S. (1999). Retention sans
Service quality and customer retention in
frontieres: issues for financial service
mobile telephony. Journal of Targeting,
retailers. International Journal of Bank
Measurement and Analysis for Marketing,
Marketing, 17(1), 36-43.
17(1), 27-37.

Bolton, R. N., & Drew, J. H. (1991). A multistage

model of customers' assessments of service
quality and value. Journal of consumer
research, 375-384.
Bowen, J., & Hedges, R. (1993). Increasing service
quality in retail banking. Journal of Retail
Banking, 15, 21-21.
Brensinger, R. P., & Lambert, D. M. (1990). Can the
SERVQUAL scale be generalized to
business-to-business services? Knowledge
Development in Marketing, 289.
Chaoprasert, C., & Elsey, B. (2004). Service quality
improvement in Thai retail banking and its
management implications. ABAC Journal,
24(1), 47-66.
Cowling, A., & Newman, K. (1995). Banking on
people: TQM, service quality and human
resources. Personnel Review, 24(7), 25-40.
Crompton, J. L., & Mackay, K. J. (1989). Users'
perceptions of the relative importance of
service quality dimensions in selected public
Feigenbaum, A. V. (1951). Quality control:
Principles, practice and administration: An
industrial management tool for improving
product quality and design and for reducing
operating costs and losses: McGraw-Hill.
Finn, D. W., & Lamb, C. W. (1991). An evaluation
of the SERVQUAL scales in a retailing
setting. Advances in consumer research,
18(1), 483-490.
Gounaris, S. P., Stathakopoulos, V., &
Athanassopoulos, A. D. (2003). Antecedents
to perceived service quality: an exploratory
study in the banking industry. International
Journal of Bank Marketing, 21(4), 168-190.
Grönroos, C. (2007). Service management and
marketing: customer management in service
competition: John Wiley & Sons.
Guo, X., Duff, A., & Hair, M. (2008). Service quality
measurement in the Chinese corporate
banking market. International Journal of
Bank Marketing, 26(5), 305-327.
Muhammad Luqman Tauheed Rana, Atif
39

Available at: http://www.rjoem.com/

 Rana et al: Relationship of customer satisfaction and customer loyalty ……………….
Mahmood, Moeed Ahmad Sandhu, Sara
Kanwal 667
Harridge-March, S., Wong, D. H., Rexha, N., &
Phau, I. (2008). Re-examining traditional
service quality in an e-banking era.
International Journal of Bank Marketing,
26(7), 526-545.
Hossain, M., & Leo, S. (2009). Customer perception
on service quality in retail banking in
Middle East: the case of Qatar. International
Journal of Islamic and Middle Eastern
Finance and Management, 2(4), 338-350.
Ibrahim, E. E., Joseph, M., & Ibeh, K. I. (2006).
Customers' perception of electronic service
delivery in the UK retail banking sector.
International Journal of Bank Marketing,
24(7), 475-493.
Ismail, I., Haron, H., Nasir Ibrahim, D., & Mohd Isa,
S. (2006). Service quality, client satisfaction
and loyalty towards audit firms: Perceptions
of Malaysian public listed companies.
Managerial Auditing Journal, 21(7), 738-
756.
Jabnoun, N., & Hassan Al-Tamimi, H. A. (2003).
Measuring perceived service quality at UAE
commercial banks. International Journal of
Quality & Reliability Management, 20(4),
458-472.
Johnson, L. L., Dotsm, M., & Dunlap, B. (1988).
Service quality determinants and
effectiveness in the real estate brokerage
industry. Journal of Real Estate Research,
3(2), 21-36.
Juran, J. M., Gryna, F., & Bingham, R. (1974):
Quality Control Handbook: New York:
McGraw-Hill.
Khalid, S., & Irshad, M. (2010). Job satisfaction
among Bank employees in Punjab, Pakistan:
A comparative study. European Journal of
Social Sciences, 17(4), 570-577.
Available at: http://www.rjoem.com/
Kumar, M., Tat Kee, F., & Taap Manshor, A. (2009).
Determining the relative importance of
critical factors in delivering service quality
of banks: an application of dominance
analysis in SERVQUAL model. Managing
Service Quality: An International Journal,
19(2), 211-228.
McKecnie, S., Ganguli, S., & Roy, S. K. (2011).
Generic technology-based service quality
dimensions in banking: Impact on customer
satisfaction and loyalty. International
Journal of Bank Marketing, 29(2), 168-189.
Nunnally, J., & Bernstein, I. (1994). Psychological
theory: New York: McGraw-Hill.
Ostrom, A. L., Bitner, M. J., Brown, S. W.,
Burkhard, K. A., Goul, M., Smith-Daniels,
V.,Rabinovich, E. (2010). Moving forward
and making a difference: research priorities
for the science of service. Journal of Service
Research.
Parasuraman, A., Zeithaml, V. A., & Berry, L.
(2004). SERVQUAL: a multiple-item scale
for measuring consumer perceptions of
service quality. Retailing: Crit Concepts
Bk2, 64(1), 140.
Parasuraman, A., Zeithaml, V. A., & Berry, L. L.
(1985). A conceptual model of service
quality and its implications for future
research. the Journal of Marketing, 41-50.
Parasuraman, A., Zeithaml, V. A., & Berry, L. L.
(1988). SERVQUAL- a multiple-item scale
for measuring consumer perceptions of
service quality. Journal of retailing, 668
Pakistan Journal of Social Sciences Vol. 35,
No. 2 64(1), 12-40.
Royne Stafford, M. (1996). Demographic
discriminators of service quality in the
banking industry. Journal of Services
marketing, 10(4), 6-22.
40
 Rana et al: Relationship of customer satisfaction and customer loyalty ……………….
Sudesh. (2007). Service quality in banks-A study in
Haryana and Chandigarh. NICE Journal of
Business, 2(1), 55-65.
Sureshchandar, G., Rajendran, C., & Anantharaman,
R. (2003). Customer perceptions of service
quality in the banking sector of a developing
economy: a critical analysis. International
Journal of Bank Marketing, 21(5), 233-242.
Waqar ul Haq, & Muhammad, B. (2012). Customer
Satisfaction: A Comparison of Public and
Private Banks Of Pakistan. Journal of
Business and Management (IOSRJBM),
1(5), 01-05.
Available at: http://www.rjoem.com/
Webster, C. (1989). Can consumers be segmented on
the basis of their service quality
expectations? Journal of Services marketing,
3(2), 35-53.
Woodside, A. G., Frey, L. L., & Daly, R. T. (1989).
Linking service quality, customer
satisfaction, and behavioral intention.
Journal of health care marketing, 4(9), 5-17.
Zeithaml, V. A., Berry, L. L., & Parasuraman, A.
(1996). The behavioral consequences of
service quality. the Journal of Marketing,
31-4
41
 Rana et al: Relationship of customer satisfaction and customer loyalty ……………….

Table 2: Descriptive Statistics

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
CS 479 1.00 4.83 3.8017 .68321
CL 479 1.00 5.00 3.8058 .81941
SC 479 1.00 5.00 3.8184 .76426
Valid N (listwise) 479

Table 3: Model Summary

Model Summary

R R-sq F df1 df2 p

.7814 .6107 .2631 3 475 .0000

Table 4: Coefficients

Model
coeff se t p LLCI ULCI
Constant -.4660 .3891 -1.1978 .2316 -1.2306 .2985
SC .3064 .1523 2.0123 .0448 .0072 .6056
CS 1.0771 .1226 8.7834 .0000 .8362 1.3181
Int_1 -.0663 .0337 -1.97 .0498 -.1325 -.0001

Table 5: Conditional effect of X on Y at values of the moderator(s):

SC Effect se t p LLCI ULCI

3.0541 .8747 .0797 10.9704 .0000 .7181 1.0314
3.8184 .8241 .0866 9.5167 .0000 .6539 .9942
4.5826 .7734 .0998 7.7478 .0000 .5773 .9696

42

Available at: http://www.rjoem.com/