Designing Promises with Reference-Dependent Customers: The Case of Online Grocery Delivery Time

49 Pages Posted: 11 Dec 2022

See all articles by George Gui

George Gui

Columbia University - Columbia Business School, Marketing

Tilman H. Drerup

Instacart

Date Written: December 10, 2022

Abstract

Firms often need to promise a certain level of service quality to attract customers, and a central question is how to design promises to balance the trade-off between customer acquisition and customer retention. For example, most E-commerce platforms need to promise a certain delivery time. Over-promising may attract more customers now, but its impact on future retention depends on consumer inertia, learning, and loss aversion. Empirical analysis of this topic is challenging because the realized and promised service qualities are often unobserved or lack exogenous variation. We leverage a novel dataset from Instacart that directly observes variation in promised and actual delivery time to study this problem. We apply a generalized propensity score method to nonparametrically estimate the impact of delivery time on customer retention. Consistent with reference dependence and loss aversion, we document that customers are around 92% more responsive once the delivery becomes late. Our results inform a structural model of learning and reference dependence that illustrates the importance of estimating loss aversion and distinguishing promise-based reference points from expectation-based reference points: the company would forgo millions of dollars in revenue if it underestimates loss aversion or assumes expectation-based reference points.

Keywords: Promise, Reference Dependence, Online Grocery, Customer Acquisition, Customer Retention

JEL Classification: C14, C52, L14, L15, M21, M31

Suggested Citation

Gui, George and Drerup, Tilman H., Designing Promises with Reference-Dependent Customers: The Case of Online Grocery Delivery Time (December 10, 2022). Available at SSRN: https://ssrn.com/abstract=4298782 or http://dx.doi.org/10.2139/ssrn.4298782

George Gui (Contact Author)

Columbia University - Columbia Business School, Marketing ( email )

New York, NY 10027
United States

Tilman H. Drerup

Instacart

United States

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