Determinants of subscriber churn and customer loyalty in the korean mobile telephony market


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Determinants of subscriber churn and customer loyalty in the korean mobile telephony market

  1. 1. ARTICLE IN PRESS Telecommunications Policy 28 (2004) 751–765 Determinants of subscriber churn and customer loyalty in the Korean mobile telephony market Hee-Su Kima,Ã, Choong-Han Yoonb a Korea Information Society Development Institute, 1-1 Juam-dong, Kyunggi-do, Kwachun City 427-710, Republic of Korea b College of Economics and Business Administration, Hanyang University, 1271 Sa-1 dong, Sangrok-gu, Ansan, Kyunggi-do 426-791, Republic of Korea Abstract By using a binomial logit model based on a survey of 973 mobile users in Korea, the determinants of subscriber churn and customer loyalty are identified in the Korean mobile telephony market. The probability that a subscriber will switch carrier is dependent on the level of satisfaction with alternativespecific service attributes including call quality, tariff level, handsets, brand image, as well as income, and subscription duration. However, only factors such as call quality, handset type, and brand image affect customer loyalty as measured by the intention/non-intention to recommend the service provider to other people. The insignificance of subscription duration in affecting the loyalty-induced action indicates that lock-in effects are likely to be concentrated among the ‘‘spuriously loyal’’ customers who are not willing to churn just because of switching costs. These findings provide implications for the mobile business as well as competition policies for the mobile telephony market. r 2004 Elsevier Ltd. All rights reserved. Keywords: Mobile; Churn; Satisfaction; Customer loyalty; Korea ÃCorresponding author. Tel.: +82-2-570-4120; fax: +82-2-570-4069. E-mail addresses: (H.-S. Kim), (C.-H. Yoon). 0308-5961/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.telpol.2004.05.013
  2. 2. ARTICLE IN PRESS 752 H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 1. Introduction The mobile telephony market is one of the fastest-growing service segments in telecommunications. Nearly half of all potential telephone calls worldwide can be made through mobile phones. This figure was expected to reach more than 75% by the end of 2003, indicating that mobile telephony is poised to surpass fixed telephony as the service most available to potential callers around the globe.1 The spectacular growth of the mobile market has been driven not only by innovation in wireless technologies but also by fierce competition among mobile carriers under minimal regulations in sharp contrast to the fixed telephony market. As with many other services offered on a subscription basis, the mode of competition has shifted from acquiring new subscribers to retaining existing customers and luring away customers from rival companies. As wireless penetration increases each year, how to avoid outbound churn and maximize customer loyalty has become a serious concern for wireless companies, though a higher rate of customer churn signifies that the market is functioning well.2 The first step in minimizing outbound churn and building up loyalty of the existing customers is to understand the causes of churning. By using a binomial logit model based on a survey of 973 mobile users in Korea, this paper identifies the determinants of subscriber churn and customer loyalty in the Korean mobile telephony market. The determinants of subscriber churn are estimated by a model that relates the probability of switching to a set of possible explanatory factors including various service attributes and subscriber characteristics. The results show that the probability a subscriber will switch carriers is significantly dependent on the level of satisfaction with various (alternative-specific) service attributes of that carrier (call quality, tariff level, handsets, brand image), his income level, and subscription duration. Among these factors, brand image and duration of subscription provide interesting implications. Brand image is found to remain important even after controlling other factors affecting brand image such as call quality and handsets. On the one hand, this implies that brand management in itself is an important area in mobile business, in which corporate resources need to be committed separately. On the other hand, when viewed from the perspective of effective competition, brand-building efforts to reduce churn may serve to raise a mobility barrier that reduces competition, in particular when it is made by a dominant service provider. In addition, by estimating the determinants of customer loyalty as measured by intention to recommend the present carrier to others, the factors of call quality, handset type and brand value are shown to have significant explanatory power. Subscription duration is found to be negatively associated with churn probability, but turns out to have no significant influence on those loyal customers who are willing to recommend their present mobile carrier to other people. Therefore, a so-called lock-in effect is identified as existing among the non-loyal subscribers who wish to stay put most likely due to switching costs. The results of this paper can be useful for mobile operators interested in growth strategies and churn/retention management, since the Korean mobile market has exhibited the fastest growth 1 See ITU (2000). According to IDC, nearly one-third of all wireless phone customers changed carriers at least once in 1998. IDC expects defections to hit 57% in 2003, as wireless competition intensifies. IDC also estimates that each lost customer cost wireless companies an average of $676 in 1998. (Wall Street Journal (European Edition), September 18, 2000). 2
  3. 3. ARTICLE IN PRESS H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 753 rate in the world for the past few years and is entering a mature or saturated stage. This paper also raises concerns over the anticompetitive effect of customer lock-in in the mobile market and calls for appropriate policy measures to ease switching barriers for more effective competition. An increasing number of articles regarding the mobile market have appeared in academic journals and econometric analysis of customer churn has been applied to some communications sectors in which service providers compete fiercely to acquire more subscribers. However, to the knowledge of the authors, there has been no article analyzing econometrically the determinants for customer churn in mobile telephony. Valletti and Cave (1998) traced the development of competition in the UK mobile telecom market and reviewed mobile operators’ strategies, while Fullerton (1998) studied the relationship between market structure and market performance in regional mobile markets of the US. More recently, a special issue of Telecommunications Policy in February/March 2001 was devoted to articles on the current issues of mobile telephony. In particular, two papers in this issue deserve mention. Song and Kim (2001) measured the effect of restructuring the Korean mobile phone market through a simulation analysis, and Choi, Lee, and Chung (2001) analyzed the business strategies of the five mobile carriers in Korea and assessed the performance of government regulation on the Korean mobile market. Gerpott, Rams, and Schindler (2001), studying the German mobile cellular phone market, showed that customer retention, loyalty and satisfaction were causally interlinked and that mobile service price, mobile service benefit perceptions as well as lack of number portability have strong effects on customer retention. In terms of subject matter and key implications, his article is similar to the present paper, but the latter uses an econometric model (logit model) that can properly deal with the dichotomous decisions of consumers on whether to churn or not and whether to remain loyal or not. Kim and Kwon (2003), studying the factors that consumers take into account when they choose mobile operators, showed that network size mattered to the Korean consumers in their choice of mobile operators, ascribing the result to intra-net call discounts and the quality signaling effect. Madden, Savage, and Coble-Neal (1999) estimated a binomial probit model relating the probability of subscriber churn in the Australian ISP market to various service attributes and demographic characteristics. In the non-academic arena, two OFTEL reports, Consumer Switching Behaviour in the Telecoms Market and Mobiles-Barriers to Switching and Quality Issues, present findings on the UK customers’ switching of their telecom carriers including mobile operators. But they do not employ an econometric method in analyzing the reasons for switching. The paper is organized as follows. Section 2 provides a snapshot of the evolving structure of the Korean mobile telephony market and recent policy issues. In Section 3, a logit model is constructed for deriving the factors that can explain the switching intention and loyalty of mobile consumers. Section 4 then presents the results of the estimation analysis and their implications, and Section 5 provides the conclusion. 2. Overview of the Korean mobile telephony market The mobile telephony service in Korea was launched in 1984 by a government-owned company, Korea Mobile Telecom (KMT). Later, in 1994, KMT became SK Telecom under the new
  4. 4. ARTICLE IN PRESS 754 H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 ownership of the SK Group. The long-time monopolistic market structure began to change from 1996 with the entrance of new operators. Shinsegi Telecom entered the market in 1996 and three more competitors, KT Freetel, Hansol and LG Telecom entered the following year. The wireless technology of the three new entrants, called PCS (Personal Communications System), was hyped as a harbinger of ‘‘dream communications’’ with superior capability of data communication over existing cellular technology. This state-of-the-art image of the new entrants, as embodied partly in more stylish handsets, enabled them to outpace the incumbent operators in attracting new subscribers for more than a year, though the incumbents soon caught up with these entrants. In Fig. 1, the period from December 1997 to June 1999 shows the declining market share of the leading incumbent, SK Telecom. The fierce competition among the five operators to acquire new subscribers resulted in a rapid growth in mobile phone users. The number of mobile service subscribers was at around 6 million in 1997, but it quickly reached around 30 million (61% of the population) as of June 2002 (Fig. 1). Note also that the number of users exiting the market or switching carriers (referred to as ‘outbound churn’ in the figure) had steadily increased until June 2000, when the Korean government banned handset subsidies, thus raising the consumer cost of switching mobile operators. During the period of rapid growth, the five mobile carriers were engaged in a heavy marketing blitz, offering handset subsidies to new subscribers in a bid to increase market share as quickly as possible. Although the initial popularity of the entrants’ new handsets (and the resultant shortage of handset supplies to the incumbent) made it possible for them to penetrate the market quickly, subsidy competition subjected all the new entrants to severe financial strain, leading finally to M&As among the carriers. In 2000, SK Telecom acquired Shinsegi Telecom and KT Freetel acquired Hansol Among the mergers, SK Telecom’s acquisition of Shinsegi Telecom raised concerns over the possibility of dampening competition in the mobile market. One of the major conditions set by the 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 - Jun- 97 Dec- 97 Jun- 98 Dec- 98 Jun- 99 Dec- 99 Jun- 00 Dec- 00 Jun- 01 Dec- 01 Jun- 02 Subscribers Outbound churn Fig. 1. Trends in the growth of subscribers and outbound churn. Source: Ministry of Information and Communication. *Official outbound churn data not available after June 2001.
  5. 5. ARTICLE IN PRESS H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 755 80% 70% 60% % 50% 40% 30% 20% 10% 0% Dec. 1997 Jun. 1998 Dec. Jun. 1999 Dec. Jun. 2000 Dec. Jun. 2001 Dec. Jun. 2002 SKT 66.9% 50.5% 42.7% 41.3% 43.1% 57.6% 53.9% 49.7% 52.3% 53.4% Shinsegi 16.5% 15.1% 15.3% 15.0% 13.8% KTF 5.1% 13.5% 16.8% 18.4% 18.2% 18.7% 19.7% 34.5% 33.0% 32.8% Hansol 6.1% 8.6% 10.1% 11.4% 11.7% 10.1% 11.7% LGT 5.4% 12.3% 15.1% 14.0% 13.2% 13.6% 14.7% 15.8% 14.7% 13.9% Fig. 2. Trends in market share of mobile carriers in Korea. Source: Ministry of Information and Communication. Fair Trade Commission for the approval of SK Telecom’s acquisition bid was for SK Telecom to reduce the merged firm’s share of subscribers (57% at the beginning of the consolidation) to less than 50% by June 2001. As a result of this ruling, SK Telecom took measures to reduce its share, one of which was to decline to accept new subscribers. As of July 5, 2001, SKT’s market share hit just under the 50% target. However, soon after, SKT’s market share began to increase in such a way that the net increase of subscribers to either of the other mobile operators became negative (see Fig. 2). Though market concentration can be viewed as a result of the efficiency-enhancing market process, the recent direction of the Korean mobile market tipping towards SK Telecom is deemed beyond reasonable bounds. In particular, the situation has led policy makers to believe that a further market concentration would deprive consumers of options and that appropriate policy measures are necessary for effective competition in the mobile telephony market. A typical set of policy measures to this effect are what is referred to as asymmetric regulation. This type of regulation provides greater advantages to new entrants and places more stringent regulations on market dominating firms. As part of such measures, the interconnection fee that the new entrants pay to the incumbent has been set close to the cost of termination on the incumbent’s network, providing the advantage of economies of scale. In contrast, the incumbent’s equivalent fee to the entrants has been arranged to represent the higher cost of termination on the entrants’ networks. Under a retail price regulation currently imposed on SK Telecom, these costoriented access charges on termination would certainly benefit new entrants. Another asymmetric regulation aimed at weakening incumbent advantages means that mobile carriers will be disallowed to use carrier-specific prefixes in phone numbers, in order to prevent the entry-deterring effects of advertising prefixes as brand names. The target of this policy is mainly SK Telecom’s prefix (011). Since SK Telecom has more heavy users than any other mobile companies and has spent amply on advertising its service products centered around the 011 prefix, many Korean consumers prefer to have it (partly) out of a display motive, perceiving the prefix as
  6. 6. ARTICLE IN PRESS 756 H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 a symbol of prestige.3 This consumer preference toward SK Telecom can be thought of as an entry barrier to new entrants. (The following sections of this paper formally demonstrate and discuss the implications of brand image in mobile businesses.) However, it remains to be seen whether these policies will stop or reverse the tipping of the Korean mobile market toward the leading incumbent, without overly handicapping the incumbent or doing harm to consumers. 3. Econometric model of subscriber churn and loyalty In order to analyze the dichotomous decision of consumers on whether or not to switch carrier, an appropriate econometric tool is a binomial logit model based on discrete choice theory. Discrete choice theory is the study of behavior in situations where decision makers must select from a finite set of alternatives. It posits that an individual is likely to choose an alternative over others when the level of its utility to him is greater than the utility of other alternatives. And, as can be seen below, the canonical discrete choice model specifies the probability of an individual to choose a certain alternative as a function of observed attributes of the individual and of the alternatives available to him, and these attributes are supposed to be causal variables affecting the choice.4 For the subject of this paper, the set of alternatives is ‘to churn’ and ‘not to churn.’ The factors that influence the decision of an existing consumer on whether to switch to another mobile carrier are divided into choice-specific factors (service attributes of mobile operator) such as call quality and price level and individual-specific factors (demographic characteristics and phone usage characteristics) such as income, age or subscription duration. Then the level of utility that the nth subscriber obtains from either churning outbound or remaining with the current carrier can be expressed as the following indirect utility function in terms of zjn (service attributes, jA{churn, no churn}) and sn (individual-specific characteristics). U jn ¼ Uðzjn ; sn Þðj 2 fchurn; no churngÞ: (1) The indirect utility in (1) can be divided into an observed part ðV jn Þ and an unobserved part ðejn Þ: U jn ¼ V jn þ ejn : (2) The probability of the nth subscriber to churn, as derived by making the level of utility from churning greater than that from not churning, can be expressed as follows. PrðchurnjjÞ ¼ PrðU churn;n 4U no churn;n Þ: (3) If the unobserved part, ejn ; is identically and independently distributed following a logistic distribution, the revealed utility and the probability of churning are related by a binomial logit. 3 According to a consumer survey, 72.7% of Koreans picked up SK Telecom as the most used brand among the three mobile service providers. This figure far surpasses SK Telecom’s market share (in terms of subscribership) that is around 56% as of May 2003. (The Financial News, May 4, 2002) However, there are some other consumer reports saying that call quality differences are negligible among the mobile carriers in Korea. 4 See Cosslett (1981).
  7. 7. ARTICLE IN PRESS H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 757 This discrete choice model can also be applied to the issue of customer loyalty, if the two alternative decisions ‘churn’ or ‘no churn’ in the above paragraphs are replaced by ‘remain loyal’ or ‘not remain loyal’, respectively. Since customer loyalty generally refers to a customer’s willingness to continue his/her relationship with a certain company or product/service, the decision not to churn from the current mobile operator, dependent on the length of time, could be equated to loyalty to that company. However, customer loyalty in this paper refers to the ‘willingness to recommend his company (or its service) to other people’. This can be considered a stronger form of trust in that company than a mere decision not to churn. The stronger definition of customer loyalty adopted here is likely to be more suitable for identifying true loyalty in mobile phone markets by filtering out ‘‘spurious loyalty’’5: since the act of churning generally incurs a variety of switching costs such as change of phone number or purchase of a new handset, decisions not to churn may be simply the result of avoiding the switching costs. These costs can often vary with changing strategies of service providers such as exemption of entry fees or handset subsidies and even with policy measures like mandatory number portability. Under this condition, a more robust measure of customer loyalty is called for. The ‘loyal’ customers, as defined, would not turn to another company even though switching costs become negligible. Moreover, in markets like mobile telephony where consumers have limited ability to discern differences in the quality of service across different companies, word of mouth from experienced users is likely to have an impact on consumers’ subscription decisions. As a result, the mobile service companies need to focus on increasing the number of supporters of their services/products and not merely on retaining existing subscribers. 3.1. Model A binomial logit model is utilized to relate the probability of a subscriber leaving his current mobile carrier to explanatory factors including service attributes and demographic variables. The model is expressed as follows: Pjn ¼ Fðx0 jn bÞ; (4) where Pjn is the probability that the nth subscriber will switch from the jth carrier to another, x0 jn is a vector of explanatory variables, b is a vector of coefficients to be estimated, and F represents the cumulative logistic distribution function. 5 There is no definitive definition or method of measurement of customer loyalty, but Dick and Basu (1994), synthesizing several definitions of customer loyalty, criticized the traditional behavioral measures of customer loyalty that focus on propensity for repeat purchase with little attention to attitudinal factors behind the purchase decisions. They label as ‘‘spurious loyalty’’ those purchases guided not by a concomitant strong attitude but merely by situational exigencies. Cross-classifying two (low and high) levels of attitude and repeat patronage, they categorized loyalty into four types: no loyalty, spurious loyalty, latent loyalty, and loyalty. Griffin (1995) renamed Dick and Basu’s four types of customer loyalty as no loyalty, spurious loyalty, latent loyalty, and premium loyalty. According to Griffin, the customers with premium loyalty become vocal advocates for the product or service and constantly refer it to others. In sum, by defining customer loyalty as ‘willingness to refer/recommend to others,’ attitudinal factors are taken into account and thus more robust predictions about continued relationships become possible.
  8. 8. ARTICLE IN PRESS 758 H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 Table 1 Description of variables Variable Description Dummy for switching (dependent variable for churning model) =1: Subscribers with intention to switch; =0: Otherwise Dummy for loyalty (dependent variable for loyalty model) =1: Subscribers with intention to recommend the present carrier to others; =0: Otherwise Dummies for satisfaction with call quality (CS1), tariff level (CS2), billing (CS3), value-added services (CS4), customer services (CS5), handset (CS6), brand image (CS7) =1: Satisfied with the respective service attributes of the present carrier; =0: Otherwise Age Subscriber’s age Dummy for sex =1: Male; =0: Female Income Midpoint of the income group each subscriber belongs to Monthly payment Average monthly payment for mobile telephony service Duration of subscription Duration of subscription with the present carrier (months) Duration of handset used Duration of the present handset used (months) Dummy for switching experience =1: Subscribers with switching experience; =0: Otherwise The value of the dependent variable was set to 1 when the subscriber expressed an intention to switch during the next one-year period or right after the expiration of the subscription contract, whichever came first, and 0 for the complementary case. Explanatory variables included in the model are listed and described briefly in Table 1. For alternative-specific variables, instead of using the service attributes of the mobile carriers directly, the level of satisfaction was used and it was measured by having each consumer evaluate (on a 5-point scale) major service attributes provided by the mobile carrier: call quality, tariff level, billing, value-added services, customer services, handset, and brand image.6 6 There are some reasons for using the scores of customer satisfaction. First, most of the important service attributes of the mobile service are hard to express as a single number that incorporates the various aspects of each attribute. For example, call quality can be measured by such indices as access failure rate, call completion rate, average noise level, and so forth, but any combined measure of these indices is inevitably subjective. As for price, any mobile operator offers its service price as a large number of optional price plans to target the consumers with different minutes of use. Thus, in order to express a mobile operator’s price as a single index, it is necessary to know the proportion of users for each price plan or average price per minute (by dividing total end user revenue by total minutes of use), but such information was not available. Secondly, mobile phone services can be considered heterogeneous or differentiated with different consumers assigning diverse values for the same attribute of the same alternative.
  9. 9. ARTICLE IN PRESS H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 759 Satisfaction with tariff levels means satisfaction with the overall amount of money paid for line rental, voice calls, and other services relative to the tariff plans offered by other mobile operators. Satisfaction with value-added services refers to satisfaction with the variety and usefulness of value-added services such as call forwarding, caller ID display and short messaging services. Satisfaction with a handset means satisfaction with the overall performance of the handset being currently used. Satisfaction with brand-image corresponds to how favorably one evaluates the reputation/reliability of his present company. Each of these variables is denoted as a CS (consumer satisfaction) variable for each service attribute.7 The selection of these attributes as well as subscriber-specific variables (to be explained below) is based on several references including a survey questionnaire used by a leading mobile operator in Korea.8 For demographic variables, age and sex were used, while income and average monthly payment for mobile calls were selected for economic variables. Mobile phone usage variables included the subscription duration with current operator, duration of current handset used, and a dummy variable to measure past switching. The subscription duration with the current operator is related to the lock-in effect, since consumers are likely to stick with the same service provider to avoid switching costs such as a change in phone number. Since subscribers are often observed to switch to the carrier that offers more advanced handsets, the longer a subscriber has used his present handset, the more likely he is to switch carriers for a new handset. This is why the duration of the present handset used was included as an explanatory variable. 7 Customer satisfaction is ‘‘a summary psychological state resulting when the emotion surrounding disconfirmed expectations is coupled with the consumer’s prior feelings about the consumption experience’’ (Parasuraman, Zeithaml, Valarie, Berry, & Leonard, 1988). Or it refers to ‘‘a customer’s perception of the value received in a transaction or relationship (where value equals perceived service quality relative to price) relative to the value expected from transactions or relationships with competing vendors’’ (Hallowell, 1996). But it is often measured by way of consumer surveys using questionnaires, where customer satisfaction is simply an everyday word so that survey respondents are asked questions like ‘‘How satisfied are you withy 8 The following references were consulted in choosing the explanatory variables: (i) A questionnaire used by SK Telecom (the leading mobile operator in Korea): At the time of beginning this research, SK Telecom used this questionnaire for its regular customer surveys. In this questionnaire, the respondents are asked to rate their satisfaction level (on a 5-point scale) for the following attributes of mobile services: reputation/brand image, handset (price and functioning), value-added services, customer service (complaint handling), tariff level, overall performance, willingness to remain with the company and willingness to recommend the company to others. Typical demographic statistics are also asked for here. (ii) Lowenstein (1995) shows an exemplary list of attributes of a service for designing customer retention models: customer service, product availability, price, product quality, billing, etc. (iii) Madden, Savage, and Coble-Neal (1999): Analyzing churning in the Australian ISP market, they included, as explanatory variables, ISP-choice (dichotomous) variables indicating whether or not each respondent chose their ISP because of value-added contents, available help desk, perceived reliability or advertised speed. For individualspecific variables, they used not only demographics such as age, sex and income but also Internet usage variables such as monthly expenditure on the Internet. (iv) Gerpott, Rams, and Schindler (2001): They report four individual features as key drivers of the customer value of cellular services: network quality, price, customer care such as complaint/inquiry handling and billing. Though their article was not consulted during work on this research, the model in this paper reveals the inclusion of these drivers.
  10. 10. ARTICLE IN PRESS 760 H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 Furthermore, a distinction was made between those who had churned in the past and those who had not because those with the experience of churning in the past may be able to assess the current carrier more accurately. A dummy variable was utilized in order to incorporate this distinction. As for the model of customer loyalty, a value of 1 was set for those who expressed a willingness to recommend their current mobile operators to other people, and 0 for the remaining respondents. Explanatory variables are the same as the ones used in the churn model. 3.2. Data The necessary data for the above estimation was obtained from a phone survey conducted in September 1999 from a sample of 973 subscribers belonging to the five mobile carriers in Korea.9 The phone numbers used for this survey were originally selected a few months earlier for a government-initiated survey aimed at measuring customer satisfaction with mobile telephony service. Though the data may seem somewhat outdated, it is meaningful to use the 1999 survey data since the period from June 2000 to the present can be regarded as abnormal (so consumer responses during this period and the analysis based on these might be lacking in universality in its implications for other countries) in that since June 2000, handset subsidies have been banned by the Korean government to lessen the socially wasteful replacements of handsets and the resultant financial strain on mobile operators. The discontinuation of handset subsidies served to raise the switching barrier for consumers. As a result, the number of mobile users who opted to switch service providers (not to mention the proportion relative to the total number of subscribers) declined during the initial part of this period as shown in Fig. 1. It should be noted that the respondents in the survey were asked to select their appropriate income group rather than report their exact income level. For this, the midpoint of each group was taken to represent the monthly income variable of those who selected that group.10 4. Estimation results and discussion As shown in Table 2, the probability of subscriber churning was found to be dependent on the level of subscriber satisfaction with service attributes that include call quality, tariff level, handsets, brand image as well as income, duration of subscription, and duration of handset used. And as expected, the estimated coefficients are negative for service attributes and subscription duration, and positive for income and duration of handset used. 9 The original number of respondents was 1335, but only 973 of them answered all the questions that corresponded to the variables included in the model. 10 Another way of quantifying monthly income is to dichotomize the subscribers into two groups, a low-income group and a high-income group, with the threshold monthly income level set at 3 million won. Almost the same result obtained from this method.
  11. 11. ARTICLE IN PRESS H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 761 Table 2 Estimation results for churn and customer loyalty models Variable (1) churn (2) loyalty Constant 0.282 (0.762) À0.028*** (À3.375) À1.052*** (À5.784) À0.658*** (À3.271) À0.108 (À0.596) 0.050 (0.256) À0.140 (À0.744) À0.881*** (À4.999) À0.571*** (À3.198) À0.007 (0.848) 0.015 (0.080) 0.002*** (3.762) À0.002 (À0.667) 0.031*** (2.844) À0.038 (À0.198) 973 251 À2.528*** (À7.168) 0.008 (1.248) 1.250*** (8.154) 0.088 (0.538) 0.213 (1.341) 0.033 (0.205) 0.238 (1.502) 0.379** (2.343) 1.032*** (6.158) 0.0006 (0.746) 0.150 (0.619) À0.0004 (À0.794) 0.002 (1.001) À0.0002 (À0.021) 0.157 (0.892) 973 401 Duration of subscription CS1 (call quality) CS2 (tariff) CS3 (billing) CS4 (value-added services) CS5 (customer services) CS6 (handset) CS7 (brand) Age Sex dummy (male=1) Income Monthly payment Duration of handset used Dummy for switching experience Number of observations Number of observations with dependent variable=1 t-values in parentheses. *Significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level. It is often difficult for mobile phone users to discern differences in call quality and tariff level across different mobile carriers since a direct comparison of these service attributes across different carriers is rarely available and tariff plans are usually offered as a menu of contracts with different combinations of rate elements.11 However, the estimation shows that users’ perception of the quality and price of their mobile service directly affects their intention to switch. 11 Rate elements here refer to monthly rental charge, per-minute rates for different call types (mobile to land, on-net mobile-to-mobile calls, off-net mobile-to-mobile calls), and so on.
  12. 12. ARTICLE IN PRESS 762 H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 It is interesting that handsets are also a significant determinant of churn even though the ability of mobile operators to differentiate their services via handsets is quite limited and of short duration. The results indicate that the users take handsets seriously, whether it be aesthetic aspects or advanced features, and that they attribute these factors to their mobile operators, KT Freetel, Hansol and LG Telecom. In fact, as mentioned in Section 2, the stylish design and small size of the handsets offered by PCS service providers KT Freetel, Hansol and LG Telecom enabled them to outpace the incumbent operators in attracting new subscribers. After a year, the incumbents soon caught up with these entrants by offering similar handsets. The competitive edge in handsets a mobile operator may have over its rivals was short-lived, but the behavior of the mobile carriers and the results of the estimation point to the value of creating even a subtle difference between handsets.12 The finding that brand image remains important, even after controlling for other factors affecting brand image such as call quality and handsets, implies that brand management in itself is an important area in mobile business, in which corporate resources need to be committed separately. As more and more new technologies are incorporated into mobile phone services, it becomes harder for consumers to discern quality differences among similar service offerings. Within this environment, building a distinctive brand name is likely to be a fruitful investment. However, when viewed from the perspective of effective competition, it needs to be noted that a strong brand image, once built up, can act as a mobility barrier that may reduce competition, in particular when a dominant carrier possesses it. Recall that a related policy measure has been taken in Korea as was explained in Section 2. Furthermore, the estimation results indicate that a longer subscription duration tends to be associated with a lower probability of churning. Simply, this means that the longer a customer has subscribed to a mobile carrier, the more likely the subscriber will adhere to that carrier. Barring the self-selection problem, this may indicate the existence of a so-called customer lock-in in the mobile telephony market. As can be seen below, the tendency of less switching among those with longer subscriptions is not attributed to self-selection since the subscription duration does not explain customer loyalty. Rather, it does demonstrate the existence of customer lock-in. Notable among the many causes of a customer’s lock-in with a mobile operator are switching costs, buyer inertia, or loyalty originating from satisfaction with that company. As for the determinants of customer loyalty as measured by intention to recommend the present company to other people, only satisfaction with call quality, handsets, and brand image of that 12 One might attribute the significance of handsets in the present estimation result to the generous handset subsidies the Korean mobile operators had competitively offered to new and switched subscribers around the time of our survey in a race to build a larger subscriber base. However, this argument is not convincing in interpreting the present results because (1) The model in the paper links the probability of churning to the level of customer satisfaction with handset (its overall attributes) not to handset subsidies themselves, and (2) the users were often able to change handsets with handset subsidies without switching their mobile carriers by terminating and re-contracting their subscription with the same carrier. The latter point highlights the profusion of handset subsidies prior to June 2000, implying that consumer dissatisfaction with inadequacy of subsidies would have been rare. Even though handset subsidies were very commonplace, however, different mobile operators were provided with different handsets from mobile phone manufacturers at least because of differences in timing of new handset roll-outs (probably due to differences in volumebased bargaining power across the mobile operators with the manufacturers).
  13. 13. ARTICLE IN PRESS H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 763 Table 3 Log likelihood ratio tests (1) churn Restricted Log likelihood (A) Unrestricted Log likelihood (B) Log likelihood ratio statistic ðÀ2 à ðA2BÞÞ Degrees of freedom Critical value from w2 table Hypothesis: ‘‘All coefficients of explanatory variables equal zero’’ (2) loyalty À555.50 À463.33 184.34 14 29.14 Rejected À659.33 À549.30 220.06 14 291.4 Rejected company is statistically significant. The estimated coefficients of these variables have higher levels of significance than those in the estimation of churn. Unlike the churn model, the subscription duration has no significant effect on these loyal customers, indicating that long-time subscribers stick with their current companies purely out of satisfaction with service performance, not by lock-in. This result implies that the lock-in effect caused by a long subscription duration is concentrated on those customers who wish to remain with their present company but not loyal enough to recommend it. The lock-in effect for this group of customers probably comes from the switching costs that dominate the benefits from churning. In the churn model, the result of a positive estimated coefficient for the duration of handset used indicates that the longer a subscriber has used the present handset, the more likely he is to switch carriers. The benefit from having a new handset must be greater for those who have older handsets. In terms of the estimated coefficients of demographic variables, the probability of switching carriers is not related to a subscriber’s age in both models. However, monthly income has a strong positive relationship with the probability of churning. An obvious interpretation is that older persons and/or higher-income earners perceive carrier switching as less costly. Lastly, the likelihood ratio tests for estimation are reported for both the churn and loyalty models (model (1) and (2) respectively) as shown in Table 3. The likelihood ratio tests reject the hypothesis that the coefficients of the explanatory variables are all zero at the 1% level. For model (1), the restricted log likelihood is À555.50, and the unrestricted log likelihood is À463.33. The w2 statistic is therefore 184.34. With 14 degrees of freedom, the critical value from the w2 table is 29.14, so the joint hypothesis that the coefficients of explanatory variables in model (1) are all zero is rejected. Likewise, for model (2), the joint hypothesis that the coefficients of the explanatory variables in model (2) are all zero is rejected. 5. Concluding remarks As with many other services or products, mobile consumers tend to stick with the present service provider unless they find a serious flaw or experience dissatisfaction with the services offered by that company. And this tendency will strengthen if the act of switching brings about
  14. 14. ARTICLE IN PRESS H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765 764 additional costs such as a change in telephone number. Thus far, the main cause of customer churning in the Korean mobile market has been roughly known to be the desire to change handsets and dissatisfaction with specific service attributes such as call quality or price level. However, there has been no formal analysis of the cause of churning. In this study, an empirical analysis was conducted to identify the determinants of churning and customer loyalty in the Korean mobile telephony market. From the estimation results, many implications were drawn in regard to competition policy as well as the corporate strategies of mobile operators. However, some business strategies can be in conflict with competition policy. In particular, customer lock-in and the entry-deterring effect of a brand image need to be addressed in competition policies for the mobile telephony market. For instance, policy measures to ease the switching barriers of consumers such as the introduction of number portability will reduce customer lock-in, and publishing test results on the mobile operators’ call quality and a multi-faceted comparison of their price plans will enable consumers to choose or switch to the best company mostly based on more objective factors rather than brand image. For Korea, however, a perplexing dilemma for policy makers is that the introduction of number portability might aggravate the ‘tipping’ of the market structure further toward SK Telecom, the largest mobile operator. Those who want to switch are more likely to choose SK Telecom than either of the two new entrants as recent trends in market structure demonstrate (see Table 2). In regards to the worrisome prospect of worsening market structure, the best possible course of action would be to help consumers to make a better-informed choice and then to tackle the ensuing problem of market concentration by structural measures. In other countries, typical structural measures include the introduction of MVNO (mobile virtual network operator) in the UK, Hong Kong, and Denmark. It is also possible to separate, as in the UK, dominant mobile operators into network operation and retail divisions and to require that affiliated and independent retailers be treated in a non-discriminatory manner. The mobile sector has been growing in a deregulated environment, but is coming under increasing scrutiny by regulatory authorities in many countries as the mobile network becomes as integral a component of the national telecommunications system as the fixed-line networks.13 Thus far, the issue of effective competition in the mobile sector has been restricted mostly to fixedto-mobile access (termination) sub-markets. However, more regulatory vigilance on the retail side of the mobile market is called for as well, particularly in terms of the growing concentration of the market structure and the presence of barriers to customer mobility. References Choi, S. -K., Lee, M. -H., & Chung, G. -H. (2001). Competition in Korean mobile telecommunications market: Business strategy and regulatory environment. Telecommunications Policy, 25(1–2), 125–138. Cosslett, S. R. (1981). Efficient estimation of discrete-choice models. In C. F. Manski, & D. McFadden (Eds.), Structural Analysis of Discrete Data with Economic Applications. Cambridge, MA: The MIT Press. Dick, A. S., & Basu, K. (1994). Customer loyalty: Toward an integrated conceptual framework. Journal of the Academy of Marketing Science, 22(2), 99–113. 13 See Scott and Respini (2000).
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