The challenge of retaining customers acquired with free trials

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.

Publication
Journal of Marketing Research, 52(2), pp. 217-234
Free trials Customer retention Usage behavior Customer Lifetime Value Customer equity Acquisition mode Selection effects Endogeneity Econometrics
Hannes Datta
Associate Professor of Marketing

I develop advanced econometric models that guide managerial decision-making and inform public policy in the area of digital media consumption (e.g., on streaming services), branding, and retailing. Watch an overview video here.