Developing International Customer Loyalty to an Internet Shopping Mall




Moonkyu Lee, Ph.D.


Associate Professor of Marketing

Yonsei University

College of Business and Economics

Seoul, 120


Phone: 822-361-2531

Fax: 822-313-5331



Francis M. Ulgado, Ph.D.


Associate Professor of Marketing

Georgia Institute of Technology

DuPree College of Management

Atlanta, GA 30332-0520


Phone: 404-894-4360

Fax: 404-894-6030






Work In Progress Draft

Please do not quote or reproduce without the consent of the authors




Submitted to the Annual Meeting of the Academy of International Business

March 2000



Developing International Customer Loyalty to an Internet Shopping Mall



This paper examines determinants of international customer loyalty to an Internet shopping mall under the assumption that consumers perform a cost/benefit analysis when deciding whether or not they want to be "regular customers."It develops hypotheses regarding potential determinants of customer loyalty based on the service quality, transaction cost, and switching cost literature, and proposes a methodological framework to test the hypotheses.


Developing Customer Loyalty to an Internet Shopping Mall





The recent years have witnessed a rapid increase in the range of multimedia technologies available internationally.Among them, the Internet technology has dramatically changed the shopping environment for individual consumers throughout the globe.The number of consumers shopping through the business-to-consumer e-commerce media (�Internet or electronic shopping malls or e-malls,� hereafter) is skyrocketing these days.The size of the worldwide market for Internet malls was about 66 billion dollars in 1999 and is expected to grow up to be around 1 trillion dollars this year.Since Internet shopping malls, compared to traditional ones, undoubtedly provide some relative advantages to consumers such as wider assortment, shopping convenience, and lower prices, they will be diffused and used among the increasing number of shoppers across different countries.

However, there are some barriers that these Internet malls should get over with in order to reach more consumers and to be successful in the market.One of those barriers is perceived risk.Consumers generally perceive a certain level of risk when they make a shopping decision.In fact, perceived risk has been widely dealt with in the consumer behavior literature because it accompanies almost all purchase decisions to some degrees and influences shopping behavior (Bettman 1973; Cox 1967; Cunningham 1967).Consumers want to actually see, feel, smell, taste, or test a product before they buy one (Underhill 1999).Since they have to make a decision in an Internet mall based only on the information on a computer screen, their level of perceived risk is inevitably higher than when they buy from traditional stores.Then the important question is whether the shopping through Internet is only a fad or it is here to stay.The answer lies in whether and how these Internet shopping malls can overcome such barriers and develop a long-term, trust relationship with customers.

This paper identifies potential determinants of customer loyalty to electronic shopping malls (�e-loyalty,� hereafter) and examines their relative influences.While a considerable amount of literature has been devoted to the customer loyalty issues in the product domain (e.g., Jacoby and Chestnut 1978; LaBarbera and Mazursky 1983; Mazursky, LaBarbera, and Aiello 1987; Newman and Werbel 1973), little empirical research has been conducted to deal with these issues in the Internet shopping environment to date.The present study takes a cost/benefit approach to understanding e-loyalty.The basic assumption underlying the approach is that customers' intention to repatronize their current e-shopping mall is determined by the comparison analysis between costs and benefits associated with the customer/e-mall relationship.

������������� Since the Internet shopping malls can be considered as a type of service providers (�e-service,� hereafter), this research is conceptualized based heavily on the service marketing literature.In fact, the measurement and management issues of the benefit components have been extensively studied over the past years under the rubric of service quality (Bitner 1990; Bolton and Drew 1991a,b; Cronin and Taylor 1992; Brown and Swartz 1989; Parasuraman, Zeithaml, and Berry 1985, 1988; Parasuraman, Berry, and Zeithaml 1991; also see Fisk, Brown, and Bitner 1993 for a review), although those of the cost components have been relatively overlooked.This study conceptualizes several types of costs related to e-loyalty based on existing literature including the transaction cost analysis (Williamson 1975, 1979, 1981, 1985) and the switching cost approach (Heide and John 1987; Porter 1980, 1985; Weiss and Anderson 1992).It is believed that by examining the relative importance of these cost/benefit variables in determining e-loyalty, this research would contribute not only to better understanding how e-loyalty is formed, but also to effectively managing it from a marketer's standpoint.


Research Hypotheses

In this section, the major constructs of the study including e-loyalty and various cost/benefit factors are discussed.In addition, specific hypotheses are developed based on the existing literature.

Loyalty to an Internet Shopping Mall (e-LOYALTY)

Customer loyalty is the dependent variable of this study.Czepiel and Gilmore (1987) define customer loyalty as a specific attitude to continue in an exchange relationship based on past experiences.Their definition implies that levels of customer loyalty can be assessed by attitudinal measures such as the ones based on intentions to repatronize a service provider.Such attitudinal measures have an advantage over behavioral measures (e.g., repeat patronage) in that they can provide greater understanding of the factors associated with the development and modification of loyalty (Oliva, Oliver, MacMillan 1992; also see Dick and Basu 1994; Jacoby and Chestnut 1978 for the comparison between behavioral and attitudinal measures of customer loyalty).

While Czepiel and Gilmore (1987) propose that service loyalty is formed based solely on past experience, research evidence shows that consumers tend to adopt loyalty as a tool to reduce risk and uncertainty when finding a new service provider (Guseman 1981).In other words, future expectations can be another important basis for the loyalty formation.Thus, customer loyalty in this study, or e-loyalty is defined as:

customers� intention to repatronize their current Internet shopping mall based on past experiences and future expectations.


�� ���������� Antecedents of e-loyalty are identified below based on the literature.As mentioned earlier, there are two sets of factors, one concerned with e-service quality as the benefit components of the model and another related to the present and future costs of e-services, which are further categorized into economic, transaction, and switching costs.

The Benefit Component: Overall e-Service Quality (QUALITY)

�� ���������� One of the critical determinants of e-loyalty would be the overall quality of services as perceived by customers.Perceived service quality has been conceptualized and measured as a form of attitude (Bolton and Drew 1991a; Parasuraman, et al. 1988).Recently, researchers have demonstrated that service quality is determined by customer satisfaction/dissatisfaction with service experiences (Bitner 1990; Bolton and Drew 1991a,b) and that service quality, in turn, affects service loyalty (Bitner 1990).Therefore, it is expected that:

H1: The better the perceived quality of e-services, the higher customers� intention to repatronize their Internet shopping mall.


�� ���������� An important issue in testing this hypothesis is how to measure perceived e-service quality.Parasuraman, et al. (1985, 1988, 1991) have developed a service quality measure, SERVQUAL, on the basis of their gap theory, which states that customers' assessment of overall service quality is determined by the degree and direction of the gap between their expectations and perceptions of actual performance levels.They have also identified five dimensions underlying overall service quality, namely tangibles, reliability, responsiveness, assurance, and empathy.In addition, they have proposed that perceived service quality could be estimated by calculating the difference between expectations and perceptions of actual service performance.This measurement paradigm is adopted in the present study.In the following sections, the cost component of the model is dimensionalized and discussed.

Economic Costs

�� ���������� Economic costs are basically what consumers have to give up or sacrifice to obtain a product or a service.Two types of economic costs are conceptualized, monetary and nonmonetary costs.

�� ���������� Service Cost (SERVCOST). The effect of monetary cost or price on consumer behavior has been extensively dealt with in marketing.The literature, applied in the e-service context, suggests that the cost in combination with the benefit of using an e-service determines overall e-service value, which influences customers' purchase intention and behavior (Dodds and Monroe 1985; Dodds, Monroe, and Grewal 1991; Monroe 1990; Zeithaml 1988).Since the cost has a negative impact on customers' budgets, it would have a negative impact on their intention to patronize or repatronize the service provider, ceteris paribus.Therefore,

H2: The higher the perceived service cost, the lower customers� intention to repatronize their service provider.


�� ���������� An important assumption underlying this hypothesis is that it is not actual or objective, but rather, is perceived cost that would affect consumer judgment and behavior (Jacoby and Olson 1977; Monroe 1990; Zeithaml 1988).This assumption underlies all the cost-related hypotheses in the paper.

�� ���������� Service Time (SERVTIME).The concept of economic costs can be extended to include nonmonetary costs such as service time, i.e., the amount of time during which a service is provided (see Murphy and Enis 1986 for a review of time prices).Service time would affect repatronage intention in the same way as service cost would.Many customers would like to have faster services, although there may be some individual or situational differences in the value of time.Fast-food services and express check-out services in grocery stores are a few of the many examples of firms' recognition that faster services are important to large segments in their market.Applied in the e-shopping environment, this implies that consumers prefer faster delivery of information and goods.Thus,

H3: The longer the e-service time, the lower customers� intention to repatronize their Internet shopping mall.


Transaction Costs

�� ���������� Another type of nonmonetary costs is considered based on the transaction cost analysis (Williamson 1975, 1979, 1981, 1985).Williamson postulates that transaction difficulties or "transaction costs" are present in exchange processes as a consequence of the interaction among various factors.He posits that the organizational structures and boundaries are determined by the efforts to minimize transaction costs.The transaction cost analysis has been widely employed to understand many marketing phenomena such as distribution channel relationships (e.g., Anderson and Coughlan 1987; Dwyer and Oh 1988; Heide and John 1988; Klein, Frazier, and Roth 1990) and customer/service provider relationships (e.g., Bowen and Jones 1986; Oliva, Oliver, and MacMillan 1992).To the Internet shopping context, the following factors have been particularly pertinent.

�� ���������� Difficulty of Assessing Service Performance (DIFFICULT).From a customer's standpoint in the exchange process, one major source of transaction costs is the difficulty of evaluating service performance (Alchian and Demsetz 1972; Bowen and Jones 1986; Williamson 1975, 1981).Such difficulty is prevalent with e-services primarily because there are some degree of uncertainty involved in the transaction regarding the quality of the products, delivery time, and so on.Zeithaml (1981), based on the classification system developed by Darby and Karni (1973), proposes that most services are high in experience qualities or credence qualities since their quality can hardly be assessed until or even after they are consumed.

�� ���������� The difficulty of assessing an e-mall�s performance puts a burden on customers because they would have to closely monitor the services provided by the mall.Even if they do so, they would not often be sure if they were paying a fair price (Bowen and Jones 1986).Therefore, such transaction difficulty would eventually have a negative impact on e-loyalty.This leads to the following hypothesis:

H4: The greater the difficulty of assessing the performance of the current e-mall, the lower consumers� intention to repatronize the mall.


�� ���������� Service Provider's Specific Knowledge about Customers (SPECIFIC).Another factor related to transaction costs is a service provider's specific knowledge about individual customers� idiosyncracies and their needs and wants (Williamson 1979, 1985).This concept is different from the ambiguity of service performance described above in that it reduces transaction difficulty and works positively on service loyalty.Thus, the service provider's intimate understanding of customers' tastes and preferences would not only speed up the transaction process, but also bring about customer satisfaction and loyalty through service customization.Therefore:

H5: As the e-service provider�s knowledge about customers� needs and wants increases, customer loyalty increases.


Switching Costs

�� ���������� Switching costs have been examined in the context of micro-economics (e.g., Farrell and Shapiro 1988; Klemperer 1987a,b), interfirm relationships (e.g., Caves and Porter 1977; Porter 1980, 1985), and distribution channel relationships (e.g., Heide and John 1987; Weiss and Anderson 1992).Although they have been dealt with in different areas, the basic idea that has inspired the research is essentially similar.That is, once a transaction relationship is established, one party becomes more dependent on the other as the cost of switching transaction partners gets higher.Applied in the current research context, this means that customers often become "locked into" their current service provider due to high switching costs.

�� ���������� Switching costs are the costs anticipated to incur in the future, whereas economic and transaction costs are those incurring in the present transaction.As mentioned earlier, customer loyalty is formed based on future anticipations as well as past experiences.Thus, switching costs should be explored here as an important determinant of e-loyalty.The cost of switching Internet malls should depend on the levels of the following factors.

�� ���������� Information Search Cost (INFOCOST).When customers consider switching to a new mall, one of the first difficulties they face involves gathering information about substitutes (Porter 1985).Such difficulties are termed �information search cost.�Although this cost can be high or low depending on the type of mall that a consumer looks for, it would affect the overall level of switching costs.Specifically, the higher the information search cost, the higher the overall switching costs, and thus, the less likely customers are to switch to a new mall.This leads to:

H6: As the cost of searching for information about a substitute increases, e-loyalty increases.


�� ���������� Perceived Risk (RISK).Another factor related to e-mall switching is customers' perceptions of risk in selecting a new mall.Perceived risk has been extensively dealt with in the literature since it accompanies most purchases to some extent and affects various aspects of purchasing behavior (e.g., Bettman 1973; Cox 1967).It has been suggested that consumers try to handle the risks by deliberately searching for prepurchase information (Locander and Hermann 1979; Lutz and Reilly 1973; Murray 1991), resulting in increased brand/store loyalty once a good choice is made (Cunningham 1967; Guseman 1981; Roselius 1971; Sheth and Venkatesan 1968).Thus, applied in the e-service context, this implies that perceived risk functions as an important deterrent to service switching.Hence,

H7: As perceived risk increases in selecting a new mall, e-loyalty increases.


������������� Substitutability of the Service Provider (SUBSTITUTE).Substitutability is defined in this study as the extent to which the service activities the current service provider performs are available from alternative sources (cf. Bagozzi and Phillips 1982).The literature in interorganizational relationships suggests that there is an inverse relationship between the substitutability and dependence of one organization on another (e.g., Bagozzi and Phillips 1982; Heide and John 1988; Pfeffer and Salancik 1978).Although substitutability might vary across service industries, it is expected to lower switching barriers, and thus decrease e-loyalty.Therefore,

H8: The higher the substitutability of the current mall, the lower consumers� intention to repatronize it.


Figure 1 shows the potential determinants of service loyalty discussed thus far.


[Insert Figure 1 about Here]



Nationality Differences

In addition to the determinants mentioned, we also explore the possibility that nationality differences in terms of varying cultural and economic environments could have an impact on the nature of service quality perceived.For example, Malhotra et al 1994, contend that various environmental, economic and socio-cultural factors that influence developed and developing economies have varying influences on service quality determinants and evaluation.Therefore we hypothesize:

H9: Different national environments affect service quality determinants in varying ways resulting in varying levels of service loyalty.



Research Method


Selection of Services

�� ���������� Two e-mall categories, web-based home banking services and shopping malls, are selected for the study based on the expectation that the characteristics of these services would cover a wide range of variations on the taxonomic dimensions proposed by Lovelock (1983) and Bowen (1990).Specifically, for many consumers, banking services are directed at intangible assets, delivered on a continuing basis, and more importantly, involve formal "membership" relations, thereby reducing customers' abilities to switch.On the other hand, the Internet shopping malls sell physical goods, involve discrete transactions with no formal membership, and thus impose little restriction to service switching.

Measure Development

By the procedure suggested by Churchill (1979) and Nunnally (1978), multiple items are developed for the major constructs in the study on the basis of relevant literature.However, some straightforward constructs are measured by single items.For instance, information search cost is measured by the extent to which respondents agreed or disagreed with the statement, "It would be extremely costly to search for information about good home banking service [Internet shopping mall]."

Perceived service quality and risk are measured in the following way.First, past studies indicate that overall service quality is composed of five dimensions, which can be assessed by 22 service performance items to be summarized as five dimensions (i.e., tangibles, reliability, responsiveness, assurance, and empathy; Parasuraman, et al. 1988, 1991).Second, past literature also suggests that perceived risk is a multi-dimensional construct (Kaplan, Szybillo, and Jacoby 1974; Roselius 1971).Therefore, in this study, overall perceived risk is measured as well as perceptions of five risk dimensions (i.e., financial, performance, physical, psychological, and social risks; cf. Murray and Schlacter 1990).The purpose of including such measures of individual dimensions is to determine their relative impact on the overall service quality and risk perceptions, in case these overall perceptions would prove to be significant in determining e-loyalty.



Two types of questionnaires are developed and translated as needed, one for home banking service and another for e-shopping malls.The constructs and their corresponding items covered by these questionnaires are essentially the same.Most items are measured on 9-point Likert scales ranging from -4 = strongly disagree and +4 = strongly agree.The face validity of these items are then established through a pretest with several marketing professionals.Some items are revised to deliver clear meanings; several others are deleted due to unclear interpretations.

Data Collection


Data are collected through personal interviews with people working in offices in three multi-country large metropolitan areas.Interviewers are graduate students who are trained about the survey procedure.They visit the offices and ask people whether they are currently using either home banking service or Internet shopping malls.They contact only those who are using either one of those services.They present them with the purpose of the study and the questionnaire titled "Customer Evaluations of Service Quality."Each respondent fills out either the banking or e-mall questionnaire.At the beginning of each questionnaire, respondents are asked to consider the service provider (banking or e-mall) that they are using.If they use multiple service providers, they are asked to consider the one they use most often.They then fill in measures of service quality, transaction and switching costs, and e-loyalty.They also provide their demographic and background information.





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Figure 1


Potential Determinants of International Customer e-Loyalty