Exploring Peer Effects Associated with User Churn in a Socially Connected Business
50 Pages Posted: 18 Aug 2023 Last revised: 28 Aug 2023
Date Written: August 2023
In a socially connected business, the churn of a user can lead to reduced consumption of her peers, which can potentially spread to other users in the network. We investigate these negative peer eﬀects associated with churn of a user, and how they vary over time and with respect to the position of the churner in the network. We use data from an upscale gym with information on exogenous churns of users that allows us to identify peer eﬀects. We estimate a structural model of users’ plan choice and usage decisions, that allows for bidirectionality and asymmetry in peer eﬀects, as well as direct and indirect peer eﬀects. Our key results are: (i) Unlike the churn of a low and a medium centrality user, the churn of a high centrality user has a strong negative impact on usage and subscriptions of other users in the network which increases over time. This suggests that if the negative eﬀect from a high centrality churner is not stopped early on, it can spread throughout the network. (ii) To stop the negative impact of churn, a ﬁrm should target promotions to other users who have a high degree of centrality. This suggests that the conventional wisdom that ﬁrms should target promotions to users with a highest risk of churn, or highest upliftment in purchase probability/CLV may not work in the context of socially connected business with strong peer eﬀects.
Keywords: Peer effect, Social Network, Customer Relationship Management
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