The Challenge of Retaining Customers Acquired with Free Trials

Many service firms acquire customers by offering free-trial promotions. However, a crucial challenge is to retain the 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 decisions to r...

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Bibliographic Details
Published in:Journal of marketing research 2015-04, Vol.52 (2), p.217-234
Main Authors: DATTA, HANNES, FOUBERT, BRAM, VAN HEERDE, HARALD J.
Format: Article
Language:English
Subjects:
Consumer behavior
Customer retention
Customer services
Decision making models
Hypotheses
Marketing
Marketing management
Retention
Sales promotions
Service introduction
Studies
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Summary:Many service firms acquire customers by offering free-trial promotions. However, a crucial challenge is to retain the 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 decisions to retain the service. This article conceptualizes how marketing communication and usage behavior drive customers' retention decisions 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 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. Using household panel data from a digital television service, the authors find systematic behavioral differences that cause the average customer lifetime value of free-trial customers to be 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, customer lifetime value, and customer equity.
ISSN:0022-2437
1547-7193
DOI:10.1509/jmr.12.0160