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The Challenge of Retaining Customers Acquired with Free Trials

Journal of Marketing Research, Forthcoming

57 Pages Posted: 16 May 2012 Last revised: 21 Oct 2014

Hannes Datta

Tilburg University

Bram Foubert

Maastricht University

Harald J. van Heerde

Massey University - Dept of Communication, Journalism & Marketing

Date Written: October 17, 2014

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.

Keywords: Free Trials, Customer Retention, Usage Behavior, Customer Lifetime Value, Customer Equity, Acquisition Mode, Selection Effects, Endogeneity, Econometrics

JEL Classification: M30, M31, M37

Suggested Citation

Datta, Hannes and Foubert, Bram and van Heerde, Harald J., The Challenge of Retaining Customers Acquired with Free Trials (October 17, 2014). Journal of Marketing Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2060645 or http://dx.doi.org/10.2139/ssrn.2060645

Hannes Datta (Contact Author)

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

Bram Foubert

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Harald J. Van Heerde

Massey University - Dept of Communication, Journalism & Marketing ( email )

Dept of Communication, Journalism & Marketing
Private Box 756
Wellington, 6140
New Zealand

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