Implications of minimum contract durations on customer retention
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Implications of minimum contract durations on customer retention Jan U. Becker & Martin Spann & Timo Schulze
# Springer Science+Business Media New York 2014
Abstract Customer retention is a major driver of customer lifetime value and is thus a key performance metric in marketing management. Consequently, companies try to retain customers by offering contracts with minimum contract durations (MCD). Using behavioral, psychometric, and advertising data for a large sample of DSL customers, the authors study the impact of minimum contract durations on actual customer churn behavior. The analyses demonstrate that subscriptions with minimum contract durations do indeed help companies to successfully retain customers. The effect is impaired though, as companies typically (must) provide incentives to convince customers to commit to those contracts. We find that incentives attract customers that either cannot or should not be retained and hence require companies to carefully apply both MCD and incentives. Keywords Customer tenure . Contract options . Telecommunication
1 Introduction Customer retention is a major driver of customer lifetime value, especially in the case of continuously provided services with constant usage, such as flat-rate cellular phone and Internet services, cable television contracts, or health club memberships (Bhattacharya 1998). Companies in these industries often use contracts with minimum contract duration (MCD) to increase customer retention by attracting customers with long-term commitment.
J. U. Becker (*) : T. Schulze Kuehne Logistics University, Großer Grasbrook 17, 20457 Hamburg, Germany e-mail: [email protected] T. Schulze e-mail: [email protected] M. Spann Munich School of Management, Ludwig-Maximilians-University, Ludwigstr. 28, 80539 Munich, Germany e-mail: [email protected]
Mark Lett
It is a common industry practice to reward the customer commitment to MCD contracts with incentives (e.g., rebates or hardware; Kim et al. 2004; Tallberg et al. 2007). These incentives are deemed necessary to compensate customers for the uncertainty associated with their commitment (e.g., decreasing future rates or service quality; Della Vigna and Malmendier 2006; Miravete 2003). However, incentives may also entail undesirable effects for the company (Frey and Oberholzer-Gee 1997), as they attract customers that are primarily interested in the incentives. Such customers may not only terminate the service directly after the end of the minimum contract durations, but they may also show defaulting behavior by taking advantage of the incentives without paying for the service. Consequently, the use of MCDs would not only result in less loyal but also less profitable customers. Despite its practical relevance, there is little empirical research on the effect of MCDs on customer retention. In this paper, we study the implications of using an MCD in combination with incentives on customer defections and default. We use a unique set of transactional, survey, and advertising data from a European Internet Service Provi
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