Competitive advantage in e-commerce firms: Profitability, customer retention and switching costs in online banking

Electronic commerce (e-commerce) provides consumers with the benefits of any time, any where transactions, with lower costs. By reducing these costs, however, e-commerce firms may also be reducing their customer retention since customers will have fewer "switching costs" to incur in changing their supplier (Porter 2001).;Switching costs contribute to competitive advantage by increasing the bargaining power of suppliers, increasing barriers to entry, decreasing the threat of substitutes and reducing the bargaining power of buyers. They increase competition for new customers and reduce competition for existing customers. Higher switching costs lead to increases in customer retention, profitability and competitive advantage (Ghemawat 2002).;Despite the prevalence of switching costs in the strategy and IS literature, few studies have empirically measured these costs and their effect on customer retention. This study will analyze transaction data to explicitly measure this component of switching costs. Results from this study indicate that customers using bill pay services of banks have higher numbers of transactions (leading to higher switching costs) and higher customer retention than their online or offline banking counterparts. This can lead to a sustainable competitive advantage for the firm.;At the firm level, profitability is a necessary but not sufficient component of sustainable competitive advantage. This study finds that banks that operate primarily online are more profitable while also providing higher interest rates to customers. This is in contrast to their competitors who operate primarily offline or somewhere between the two on the continuum ("hybrid"). This is also contrary to models in the IT economics literature that suggested that "hybrid" banks should be most profitable.;This study contributes to development of IT economics and e-commerce theory by testing existing theory with empirical data. Deviations from existing models allow for improvement and refinement of theory. For the empirical researcher, this study uses statistical methods (e.g., probit models, Markov chain method) commonly applied in other disciplines and brings them into the IT economics domain.