The challenge of retaining customers acquired with free trials

H. Datta, B. Foubert, H.J. van Heerde

Research output: Contribution to journalArticleScientificpeer-review

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Abstract

Many service firms acquire customers by offering free-trial promotions. A crucial challenge is to retain customers acquired with these free trials. To address this challenge, firms need to understand how free-trial customers differ from regular customers in terms of their decision making to retain the service. This article conceptualizes how a customer’s retention decision is driven by marketing communication and usage behavior, and develops hypotheses about the impact of free-trial acquisition on this process. To test the hypotheses, the authors model a customer’s retention and usage decisions, distinguishing between usage of a flat-rate service and usage of a pay-per-use service. The model allows for unobserved heterogeneity and corrects for selection effects and endogeneity. Based on household panel data from a digital TV service, the authors find systematic behavioral differences which make the average customer lifetime value (CLV) of free-trial customers 59% lower than that of regular customers. However, free-trial customers are more responsive to marketing communication and usage rates, which offers opportunities to target marketing efforts and enhance retention rates, CLV, and customer equity.
Original languageEnglish
Pages (from-to)217-234
JournalJournal of Marketing Research
Volume52
Issue number2
Early online date31 Oct 2014
DOIs
Publication statusPublished - Apr 2015

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Marketing communications
Customer lifetime value
Customer retention
Unobserved heterogeneity
Digital TV
Customer equity
Endogeneity
Service firms
Household
Target marketing
Decision making
Selection effects
Panel data

Keywords

  • Free Trials
  • Customer Retention
  • Usage Behavior
  • Customer Lifetime Value
  • Customer Equity
  • Acquisition Mode
  • Selection Effects
  • Endogeneity
  • Econometrics

Cite this

Datta, H. ; Foubert, B. ; van Heerde, H.J. / The challenge of retaining customers acquired with free trials. In: Journal of Marketing Research. 2015 ; Vol. 52, No. 2. pp. 217-234.
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title = "The challenge of retaining customers acquired with free trials",
abstract = "Many service firms acquire customers by offering free-trial promotions. A crucial challenge is to retain customers acquired with these free trials. To address this challenge, firms need to understand how free-trial customers differ from regular customers in terms of their decision making to retain the service. This article conceptualizes how a customer’s retention decision is driven by marketing communication and usage behavior, and develops hypotheses about the impact of free-trial acquisition on this process. To test the hypotheses, the authors model a customer’s retention and usage decisions, distinguishing between usage of a flat-rate service and usage of a pay-per-use service. The model allows for unobserved heterogeneity and corrects for selection effects and endogeneity. Based on household panel data from a digital TV service, the authors find systematic behavioral differences which make the average customer lifetime value (CLV) of free-trial customers 59{\%} lower than that of regular customers. However, free-trial customers are more responsive to marketing communication and usage rates, which offers opportunities to target marketing efforts and enhance retention rates, CLV, and customer equity.",
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The challenge of retaining customers acquired with free trials. / Datta, H.; Foubert, B.; van Heerde, H.J.

In: Journal of Marketing Research, Vol. 52, No. 2, 04.2015, p. 217-234.

Research output: Contribution to journalArticleScientificpeer-review

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AU - Datta, H.

AU - Foubert, B.

AU - van Heerde, H.J.

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AB - Many service firms acquire customers by offering free-trial promotions. A crucial challenge is to retain customers acquired with these free trials. To address this challenge, firms need to understand how free-trial customers differ from regular customers in terms of their decision making to retain the service. This article conceptualizes how a customer’s retention decision is driven by marketing communication and usage behavior, and develops hypotheses about the impact of free-trial acquisition on this process. To test the hypotheses, the authors model a customer’s retention and usage decisions, distinguishing between usage of a flat-rate service and usage of a pay-per-use service. The model allows for unobserved heterogeneity and corrects for selection effects and endogeneity. Based on household panel data from a digital TV service, the authors find systematic behavioral differences which make the average customer lifetime value (CLV) of free-trial customers 59% lower than that of regular customers. However, free-trial customers are more responsive to marketing communication and usage rates, which offers opportunities to target marketing efforts and enhance retention rates, CLV, and customer equity.

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