Are Free-Trial Customers Worth Less than Regular Customers?

Abstract:     
Many service firms acquire customers by offering free trials. While these free trials may be popular with customers, a key question for a firm reviewing its customer base is whether customers attracted by free trials are systematically different from regular customers. If they are, their customer lifetime value (CLV) may differ as well. Despite the managerial importance of this question, no research to date has examined the CLV implications of free trials. Since many service firms offer not only flat-rate services (e.g., watching TV programs), but also pay per-use services (e.g., watching videos-on-demand), we model how both types of usage drive retention and CLV, moderated by the mode of acquisition (free-trial or regular). The model also allows for differences in responsiveness to marketing communication between free trial and regular customers. Based on panel data from a digital TV service for over 20,000 customers, the authors demonstrate that free-trial customers are, on average, worth 34% less than regular customers. However, free trial customers are much more responsive to marketing communication, offering opportunities to enhance the return on investment.

Number of Pages in PDF File: 46

Keywords: Free trials, Customer Lifetime Value, Acquisition mode, Regression model, Econometrics

JEL Classification: M30, M31, M37

working papers series