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

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Telecommunications Policy 28 (2004) 751–765

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doi:10.1016/j.

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Determinants of subscriber churn and customer loyalty in theKorean mobile telephony market

Hee-Su Kima,�, Choong-Han Yoonb

aKorea Information Society Development Institute, 1-1 Juam-dong, Kyunggi-do, Kwachun City 427-710,

Republic of KoreabCollege 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 ofsubscriber churn and customer loyalty are identified in the Korean mobile telephony market. Theprobability that a subscriber will switch carrier is dependent on the level of satisfaction with alternative-specific service attributes including call quality, tariff level, handsets, brand image, as well as income, andsubscription duration. However, only factors such as call quality, handset type, and brand image affectcustomer loyalty as measured by the intention/non-intention to recommend the service provider to otherpeople. The insignificance of subscription duration in affecting the loyalty-induced action indicates thatlock-in effects are likely to be concentrated among the ‘‘spuriously loyal’’ customers who are not willing tochurn just because of switching costs. These findings provide implications for the mobile business as well ascompetition policies for the mobile telephony market.r 2004 Elsevier Ltd. All rights reserved.

Keywords: Mobile; Churn; Satisfaction; Customer loyalty; Korea

see front matter r 2004 Elsevier Ltd. All rights reserved.

telpol.2004.05.013

ding author. Tel.: +82-2-570-4120; fax: +82-2-570-4069.

resses: [email protected] (H.-S. Kim), [email protected] (C.-H. Yoon).

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H.-S. Kim, C.-H. Yoon / Telecommunications Policy 28 (2004) 751–765752

1. Introduction

The mobile telephony market is one of the fastest-growing service segments in telecommunica-tions. 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 mobiletelephony is poised to surpass fixed telephony as the service most available to potential callersaround the globe.1 The spectacular growth of the mobile market has been driven not only byinnovation in wireless technologies but also by fierce competition among mobile carriers underminimal 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 customersfrom rival companies. As wireless penetration increases each year, how to avoid outbound churnand maximize customer loyalty has become a serious concern for wireless companies, though ahigher 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 isto understand the causes of churning. By using a binomial logit model based on a survey of 973mobile users in Korea, this paper identifies the determinants of subscriber churn and customerloyalty 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 subscribercharacteristics. The results show that the probability a subscriber will switch carriers is significantlydependent on the level of satisfaction with various (alternative-specific) service attributes of thatcarrier (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 factorsaffecting brand image such as call quality and handsets. On the one hand, this implies that brandmanagement in itself is an important area in mobile business, in which corporate resources need tobe committed separately. On the other hand, when viewed from the perspective of effectivecompetition, brand-building efforts to reduce churn may serve to raise a mobility barrier thatreduces 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 valueare shown to have significant explanatory power. Subscription duration is found to be negativelyassociated with churn probability, but turns out to have no significant influence on those loyalcustomers who are willing to recommend their present mobile carrier to other people. Therefore, aso-called lock-in effect is identified as existing among the non-loyal subscribers who wish to stayput 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

1See ITU (2000).2According 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).

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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 alsoraises concerns over the anticompetitive effect of customer lock-in in the mobile market and callsfor 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 communicationssectors in which service providers compete fiercely to acquire more subscribers. However, to theknowledge of the authors, there has been no article analyzing econometrically the determinantsfor 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 relationshipbetween market structure and market performance in regional mobile markets of the US. Morerecently, a special issue of Telecommunications Policy in February/March 2001 was devoted toarticles on the current issues of mobile telephony. In particular, two papers in this issue deservemention. Song and Kim (2001) measured the effect of restructuring the Korean mobile phonemarket through a simulation analysis, and Choi, Lee, and Chung (2001) analyzed the businessstrategies of the five mobile carriers in Korea and assessed the performance of governmentregulation 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 serviceprice, mobile service benefit perceptions as well as lack of number portability have strong effects oncustomer retention. In terms of subject matter and key implications, his article is similar to thepresent paper, but the latter uses an econometric model (logit model) that can properly deal with thedichotomous 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 ofmobile 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 anddemographic 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 UKcustomers’ switching of their telecom carriers including mobile operators. But they do not employan 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 isconstructed for deriving the factors that can explain the switching intention and loyalty of mobileconsumers. 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

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ownership of the SK Group. The long-time monopolistic market structure began to change from1996 with the entrance of new operators. Shinsegi Telecom entered the market in 1996 and threemore competitors, KT Freetel, Hansol M.com and LG Telecom entered the following year. Thewireless technology of the three new entrants, called PCS (Personal Communications System),was hyped as a harbinger of ‘‘dream communications’’ with superior capability of datacommunication 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 inattracting new subscribers for more than a year, though the incumbents soon caught up with theseentrants. In Fig. 1, the period from December 1997 to June 1999 shows the declining market shareof 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 millionin 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 Koreangovernment banned handset subsidies, thus raising the consumer cost of switching mobileoperators.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 aspossible. Although the initial popularity of the entrants’ new handsets (and the resultant shortageof 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 toM&As among the carriers. In 2000, SK Telecom acquired Shinsegi Telecom and KT Freetelacquired Hansol M.com.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

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

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.

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0%

10%

20%

30%

40%

50%

60%

70%

80%

%

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%

Dec. 1997 Jun. 1998 Dec. Jun. 1999 Dec. Jun. 2000 Dec. Jun. 2001 Dec. Jun. 2002

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 toreduce the merged firm’s share of subscribers (57% at the beginning of the consolidation) to lessthan 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 hitjust under the 50% target. However, soon after, SKT’s market share began to increase in such away 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 deemedbeyond reasonable bounds. In particular, the situation has led policy makers to believe that afurther market concentration would deprive consumers of options and that appropriate policymeasures 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 stringentregulations on market dominating firms. As part of such measures, the interconnection fee thatthe new entrants pay to the incumbent has been set close to the cost of termination on theincumbent’s network, providing the advantage of economies of scale. In contrast, the incumbent’sequivalent fee to the entrants has been arranged to represent the higher cost of termination on theentrants’ networks. Under a retail price regulation currently imposed on SK Telecom, these cost-oriented 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 theentry-deterring effects of advertising prefixes as brand names. The target of this policy is mainlySK Telecom’s prefix (011). Since SK Telecom has more heavy users than any other mobilecompanies 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

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a symbol of prestige.3 This consumer preference toward SK Telecom can be thought of as an entrybarrier to new entrants. (The following sections of this paper formally demonstrate and discussthe implications of brand image in mobile businesses.) However, it remains to be seen whetherthese policies will stop or reverse the tipping of the Korean mobile market toward the leadingincumbent, 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 selectfrom a finite set of alternatives. It posits that an individual is likely to choose an alternative overothers when the level of its utility to him is greater than the utility of other alternatives. And, ascan be seen below, the canonical discrete choice model specifies the probability of an individual tochoose a certain alternative as a function of observed attributes of the individual and of thealternatives available to him, and these attributes are supposed to be causal variables affecting thechoice.4

For the subject of this paper, the set of alternatives is ‘to churn’ and ‘not to churn.’ The factorsthat influence the decision of an existing consumer on whether to switch to another mobile carrierare divided into choice-specific factors (service attributes of mobile operator) such as call qualityand price level and individual-specific factors (demographic characteristics and phone usagecharacteristics) such as income, age or subscription duration. Then the level of utility that the nthsubscriber obtains from either churning outbound or remaining with the current carrier can beexpressed as the following indirect utility function in terms of zjn (service attributes, jA{churn, nochurn}) and sn (individual-specific characteristics).

Ujn ¼ Uðzjn; snÞðj 2 fchurn;no churngÞ: (1)

The indirect utility in (1) can be divided into an observed part ðVjnÞ and an unobservedpart ðejnÞ:

Ujn ¼ Vjn þ ejn: (2)

The probability of the nth subscriber to churn, as derived by making the level of utility fromchurning greater than that from not churning, can be expressed as follows.

PrðchurnjjÞ ¼ PrðU churn;n4Uno churn;nÞ: (3)

If the unobserved part, ejn; is identically and independently distributed following a logisticdistribution, the revealed utility and the probability of churning are related by a binomiallogit.

3According 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.4See Cosslett (1981).

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This discrete choice model can also be applied to the issue of customer loyalty, if the twoalternative 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’swillingness to continue his/her relationship with a certain company or product/service, thedecision not to churn from the current mobile operator, dependent on the length of time, could beequated 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 companythan a mere decision not to churn. The stronger definition of customer loyalty adopted here islikely 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 aschange of phone number or purchase of a new handset, decisions not to churn may be simply theresult of avoiding the switching costs. These costs can often vary with changing strategies ofservice providers such as exemption of entry fees or handset subsidies and even with policymeasures like mandatory number portability. Under this condition, a more robust measure ofcustomer loyalty is called for. The ‘loyal’ customers, as defined, would not turn to anothercompany 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 experiencedusers is likely to have an impact on consumers’ subscription decisions. As a result, the mobileservice companies need to focus on increasing the number of supporters of their services/productsand not merely on retaining existing subscribers.

3.1. Model

A binomial logit model is utilized to relate the probability of a subscriber leaving his currentmobile carrier to explanatory factors including service attributes and demographic variables.The model is expressed as follows:

Pjn ¼ Fðx0jnbÞ; (4)

where Pjn is the probability that the nth subscriber will switch from the jth carrier to another, x0jn

is a vector of explanatory variables, b is a vector of coefficients to be estimated, and F representsthe cumulative logistic distribution function.

5There 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.

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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 toswitch 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 a5-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

6There 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.

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Satisfaction with tariff levels means satisfaction with the overall amount of money paid for linerental, 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 ofvalue-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 beingcurrently used. Satisfaction with brand-image corresponds to how favorably one evaluates thereputation/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 explainedbelow) is based on several references including a survey questionnaire used by a leading mobileoperator in Korea.8

For demographic variables, age and sex were used, while income and average monthly paymentfor mobile calls were selected for economic variables. Mobile phone usage variables included thesubscription duration with current operator, duration of current handset used, and a dummyvariable to measure past switching. The subscription duration with the current operator is relatedto the lock-in effect, since consumers are likely to stick with the same service provider to avoidswitching costs such as a change in phone number. Since subscribers are often observed to switchto the carrier that offers more advanced handsets, the longer a subscriber has used his presenthandset, the more likely he is to switch carriers for a new handset. This is why the duration of thepresent handset used was included as an explanatory variable.

7Customer 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 withy8The 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 individual-

specific 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.

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Furthermore, a distinction was made between those who had churned in the past and thosewho had not because those with the experience of churning in the past may be able to assess thecurrent carrier more accurately. A dummy variable was utilized in order to incorporate thisdistinction.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 remainingrespondents. 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 inSeptember 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 agovernment-initiated survey aimed at measuring customer satisfaction with mobile telephonyservice.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 consumerresponses during this period and the analysis based on these might be lacking in universality in itsimplications for other countries) in that since June 2000, handset subsidies have been banned bythe Korean government to lessen the socially wasteful replacements of handsets and the resultantfinancial 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 theproportion relative to the total number of subscribers) declined during the initial part of thisperiod 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 midpointof each group was taken to represent the monthly income variable of those who selected thatgroup.10

4. Estimation results and discussion

As shown in Table 2, the probability of subscriber churning was found to be dependent on thelevel 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 subscriptionduration, and positive for income and duration of handset used.

9The original number of respondents was 1335, but only 973 of them answered all the questions that corresponded to

the variables included in the model.10Another 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.

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Table 2

Estimation results for churn and customer loyalty models

Variable (1) churn (2) loyalty

Constant 0.282 2.528***

(0.762) (7.168)

Duration of subscription 0.028*** 0.008

(3.375) (1.248)

CS1 (call quality) 1.052*** 1.250***

(5.784) (8.154)

CS2 (tariff) 0.658*** 0.088

(3.271) (0.538)

CS3 (billing) 0.108 0.213

(0.596) (1.341)

CS4 (value-added services) 0.050 0.033

(0.256) (0.205)

CS5 (customer services) 0.140 0.238

(0.744) (1.502)

CS6 (handset) 0.881*** 0.379**

(4.999) (2.343)

CS7 (brand) 0.571*** 1.032***

(3.198) (6.158)

Age 0.007 0.0006

(0.848) (0.746)

Sex dummy (male=1) 0.015 0.150

(0.080) (0.619)

Income 0.002*** 0.0004

(3.762) (0.794)

Monthly payment 0.002 0.002

(0.667) (1.001)

Duration of handset used 0.031*** 0.0002

(2.844) (0.021)

Dummy for switching experience 0.038 0.157

(0.198) (0.892)

Number of observations 973 973

Number of observations with dependent variable=1 251 401

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 levelacross different mobile carriers since a direct comparison of these service attributes acrossdifferent carriers is rarely available and tariff plans are usually offered as a menu of contracts withdifferent combinations of rate elements.11 However, the estimation shows that users’ perception ofthe quality and price of their mobile service directly affects their intention to switch.

11Rate 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.

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It is interesting that handsets are also a significant determinant of churn even though the abilityof mobile operators to differentiate their services via handsets is quite limited and of shortduration. The results indicate that the users take handsets seriously, whether it be aesthetic aspectsor 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 ofthe handsets offered by PCS service providers KT Freetel, Hansol and LG Telecom enabled themto outpace the incumbent operators in attracting new subscribers. After a year, the incumbentssoon caught up with these entrants by offering similar handsets. The competitive edge in handsetsa mobile operator may have over its rivals was short-lived, but the behavior of the mobile carriersand the results of the estimation point to the value of creating even a subtle difference betweenhandsets.12

The finding that brand image remains important, even after controlling for other factorsaffecting brand image such as call quality and handsets, implies that brand management in itself isan important area in mobile business, in which corporate resources need to be committedseparately. As more and more new technologies are incorporated into mobile phone services, itbecomes 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 astrong brand image, once built up, can act as a mobility barrier that may reduce competition, inparticular when a dominant carrier possesses it. Recall that a related policy measure has beentaken 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 hassubscribed to a mobile carrier, the more likely the subscriber will adhere to that carrier. Barringthe self-selection problem, this may indicate the existence of a so-called customer lock-in in themobile telephony market. As can be seen below, the tendency of less switching among those withlonger subscriptions is not attributed to self-selection since the subscription duration does notexplain customer loyalty. Rather, it does demonstrate the existence of customer lock-in. Notableamong the many causes of a customer’s lock-in with a mobile operator are switching costs, buyerinertia, 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

12One 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 volume-

based bargaining power across the mobile operators with the manufacturers).

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Table 3

Log likelihood ratio tests

(1) churn (2) loyalty

Restricted Log likelihood (A) 555.50 659.33

Unrestricted Log likelihood (B) 463.33 549.30

Log likelihood ratio statistic ð2 � ðA2BÞÞ 184.34 220.06

Degrees of freedom 14 14

Critical value from w2 table 29.14 291.4

Hypothesis: ‘‘All coefficients of explanatory variables equal zero’’ Rejected Rejected


company is statistically significant. The estimated coefficients of these variables have higher levelsof 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 ofsatisfaction with service performance, not by lock-in. This result implies that the lock-in effectcaused by a long subscription duration is concentrated on those customers who wish to remainwith their present company but not loyal enough to recommend it. The lock-in effect for thisgroup of customers probably comes from the switching costs that dominate the benefits fromchurning.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 toswitch carriers. The benefit from having a new handset must be greater for those who have olderhandsets.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 strongpositive relationship with the probability of churning. An obvious interpretation is that olderpersons 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 thehypothesis that the coefficients of the explanatory variables are all zero at the 1% level. For model(1), the restricted log likelihood is 555.50, and the unrestricted log likelihood is 463.33. The w2

statistic is therefore 184.34. With 14 degrees of freedom, the critical value from the w2 table is29.14, so the joint hypothesis that the coefficients of explanatory variables in model (1) are all zerois rejected. Likewise, for model (2), the joint hypothesis that the coefficients of the explanatoryvariables 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 presentservice provider unless they find a serious flaw or experience dissatisfaction with the servicesoffered by that company. And this tendency will strengthen if the act of switching brings about

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additional costs such as a change in telephone number. Thus far, the main cause of customerchurning in the Korean mobile market has been roughly known to be the desire to changehandsets 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 empiricalanalysis was conducted to identify the determinants of churning and customer loyalty in theKorean 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 inconflict with competition policy. In particular, customer lock-in and the entry-deterring effect of abrand image need to be addressed in competition policies for the mobile telephony market. Forinstance, policy measures to ease the switching barriers of consumers such as the introduction ofnumber portability will reduce customer lock-in, and publishing test results on the mobileoperators’ call quality and a multi-faceted comparison of their price plans will enable consumersto choose or switch to the best company mostly based on more objective factors rather than brandimage.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, thelargest mobile operator. Those who want to switch are more likely to choose SK Telecom thaneither of the two new entrants as recent trends in market structure demonstrate (see Table 2). Inregards to the worrisome prospect of worsening market structure, the best possible course ofaction would be to help consumers to make a better-informed choice and then to tackle theensuing problem of market concentration by structural measures. In other countries, typicalstructural measures include the introduction of MVNO (mobile virtual network operator) in theUK, Hong Kong, and Denmark. It is also possible to separate, as in the UK, dominant mobileoperators into network operation and retail divisions and to require that affiliated andindependent 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 asintegral 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 fixed-to-mobile access (termination) sub-markets. However, more regulatory vigilance on the retail sideof the mobile market is called for as well, particularly in terms of the growing concentration of themarket structure and the presence of barriers to customer mobility.

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13See Scott and Respini (2000).

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Documents

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