The Impact of Free-Trial Acquisition on Customer Usage, Retention, and Lifetime Value
Harald J. Van Heerde
July 26, 2013
Many service firms acquire customers by offering free-trial promotions. A crucial yet unexplored question is whether customers acquired by free trials differ systematically from regular customers in terms of their usage and retention behavior, and customer lifetime value. To address this issue, the authors conceptualize how a consumer’s retention decision is driven by marketing communication and usage. They next develop hypotheses how the effects of these drivers are moderated by the mode of acquisition, i.e., free-trial or regular. To test the hypotheses, the authors model a customer’s retention decision and usage behavior of both flat-rate (e.g., watching TV programs), and pay-per-use services (e.g., watching videos-on-demand). The model allows for unobserved heterogeneity, selection effects, and endogenous marketing instruments. On the basis of panel data from a digital TV service, the analyses demonstrate behavioral differences which make free-trial customers, on average, worth 55% less than regular customers. However, free-trial customers are more responsive to changes in marketing communication and usage rates, which offers opportunities to target marketing efforts and enhance customer equity.
Number of Pages in PDF File: 52
Keywords: Free Trials, Customer Retention, Usage Behavior, Customer Lifetime Value, Acquisition Mode, Gaussian Copulas, Econometrics
JEL Classification: M30, M31, M37working papers series
Date posted: May 16, 2012 ; Last revised: December 23, 2013
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