The Challenge of Retaining Customers Acquired with Free Trials
Harald J. Van Heerde
October 17, 2014
Journal of Marketing Research, Forthcoming
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.
Number of Pages in PDF File: 57
Keywords: Free Trials, Customer Retention, Usage Behavior, Customer Lifetime Value, Customer Equity, Acquisition Mode, Selection Effects, Endogeneity, Econometrics
JEL Classification: M30, M31, M37
Date posted: May 16, 2012 ; Last revised: October 21, 2014
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