Modelling customer behaviour in contractual settings

The objective of this dissertation is to develop models of customer behavior that provide insights for firms working in contractual settings. A contractual setting is a business situation in which the time when a customer becomes inactive is perfectly observable. This is in contrast to noncontractual settings (e.g., Reinartz and Kumar 2000), where a company does not observe whether or not a customer is still active. In the first chapter we elaborate on this definition, providing a classification of contractual businesses depending on the nature of the transactions. In the second chapter we develop a joint model to forecast renewal and usage behaviors simultaneously. The models previously proposed for contractual settings primarily focus on predicting churn, while they are silent about how to predict usage behavior. In order to fill this gap, we develop a joint model of churn and usage behavior under the assumption that both are driven by the same underlying process (e.g., commitment). This enables the model to predict usage (thus contribution) and retention simultaneously and accurately. Besides its methodological contribution, this study has important managerial implications for customer base analysis, and lifetime value calculations. In chapter 3 we focus our attention on understanding customers’ behavior when subscribed to multi-priced contracts. A growing body of work about two- and three-part tariffs has recently emerged in the literature. However, even though three-part tariff contracts are now being offered in many business settings, there is no research investigating the effect of these pricing practices on customer switching and usage behavior. We explore this issue in Chapter 3. Given a unique data set from a mobile telephony operator, we investigate customer switching between two- and three-part tariffs as well as customers’ usage behavior under the two types of tariffs. We measure how an individual’s usage behavior is affected by changes in the tariff mechanism, and how the launch of the new tariffs impacts the firm’s revenue. The results of this analysis have important managerial implications for pricing and tariff design. Finally, we look at a customer relationship setting unstudied in the marketing literature: prepaid contracts. Prepaid is a big phenomenon in the market place. For many people, daily activities/services are prepaid; from commodities (transit commute, mobile phone, gas, etc.) to leisure products (Starbucks, Borders, etc.). Despite the popularity of this practice, we find that there is basically no work in the marketing and related literatures that explores this issue. Moreover, once we start exploring the notion of prepaid, we see references to gift cards, prepaid credit cards, transit cards, and various other forms of prepaid, though it is not clear how all these prepaid services are related. In Chapter 4 we review the various prepaid services and provide a framework to classify all these business settings. In particular, we uniquely characterize the prepaid mobile phone setting and identify several business issues that practitioners face in this market. Finally, we discuss the modeling challenges that researchers will face when trying to solve these business issues

A joint model of usage and churn in contractual settings. Marketing Sci

A s firms become more customer-centric, concepts such as customer equity come to the fore. Any serious attempt to quantify customer equity requires modeling techniques that can provide accurate multiperiod forecasts of customer behavior. Although a number of researchers have explored the problem of modeling customer churn in contractual settings, there is surprisingly limited research on the modeling of usage while under contract. The present work contributes to the existing literature by developing an integrated model of usage and retention in contractual settings. The proposed method fully leverages the interdependencies between these two behaviors even when they occur on different time scales (or "clocks"), as is typically the case in most contractual/subscription-based business settings. We propose a model in which usage and renewal are modeled simultaneously by assuming that both behaviors reflect a common latent variable that evolves over time. We capture the dynamics in the latent variable using a hidden Markov model with a heterogeneous transition matrix and allow for unobserved heterogeneity in the associated usage process to capture time-invariant differences across customers. The model is validated using data from an organization in which an annual membership is required to gain the right to buy its products and services. We show that the proposed model outperforms a set of benchmark models on several important dimensions. Furthermore, the model provides several insights that can be useful for managers. For example, we show how our model can be used to dynamically segment the customer base and identify the most common "paths to death" (i.e., stages that customers go through before churn)

When talk is “free”: the effect of tariff structure on usage under two- and three-part tariffs

In many service industries, firms introduce three-part tariffs to replace or complement existing two-part tariffs. In contrast with two-part tariffs, three-part tariffs offer allowances, or “free” units of the service. Behavioral research suggests that the attributes of a pricing plan may affect behavior beyond their direct cost implications. Evidence suggests that customers value free units above and beyond what might be expected from the change in their budget constraint. Nonlinear pricing research, however, has not considered such an effect. The authors examine a market in which three-part tariffs were introduced for the first time. They analyze tariff choice and usage behavior for customers who switch from two-part to three-part tariffs. The findings show that switchers significantly “overuse” in comparison with their prior two-part tariff usage. That is, they attain a level of consumption that cannot be explained by a shift in the budget constraint. The authors estimate a discrete/continuous model of tariff choice and usage that accounts for the valuation of free units. The results show that the majority of three-part-tariff users value minutes under a three-part tariff more than they do under a two-part tariff. The authors derive recommendations for how the provider can exploit these insights to further increase revenues

Beyond the target customer:social effects of customer relationship management campaigns

Customer relationship management (CRM) campaigns have traditionally focused on maximizing the profitability of the targeted customers. The authors demonstrate that in business settings characterized by network externalities, a CRM campaign that is aimed at changing the behavior of specific customers propagates through the social network, thereby also affecting the behavior of nontargeted customers. Using a randomized field experiment involving nearly 6,000 customers of a mobile telecommunication provider, they find that the social connections of targeted customers increase their consumption and become less likely to churn, due to a campaign that was neither targeted at them nor offered them any direct incentives. The authors estimate a social multiplier of 1.28. That is, the effect of the campaign on first-degree connections of targeted customers is 28% of the effect of the campaign on the targeted customers. By further leveraging the randomized experimental design, the authors show that, consistent with a network externality account, the increase in activity among the nontargeted but connected customers is driven by the increase in communication between the targeted customers and their connections, making the local network of the nontargeted customers more valuable. These findings suggest that in targeting CRM marketing campaigns, firms should consider not only the profitability of the targeted customer but also the potential spillover of the campaign to nontargeted but connected customers

Beyond the Target Customer: Social Effects of CRM Campaigns

Customer Relationship Management (CRM) campaigns have traditionally focused on maximizing the profitability of the targeted customers. We demonstrate that, in business settings that are characterized by network externalities, a CRM campaign that is aimed at changing the behavior of specific customers propagates through the social network, thereby also affecting the behavior of non-targeted customers. Using a randomized field experiment involving nearly 6,000 customers of a mobile telecommunications provider, we find that the social connections of targeted customers increase their consumption and are less likely to churn due to a campaign that was neither targeted at them nor offered them any direct incentives. We estimate a social multiplier of 1.28. That is, the effect of the campaign on first-degree connections of targeted customers is 28% of the effect of the campaign on the targeted customers. By further leveraging the randomized experimental design we show that, consistent with a network externality account, the increase in activity among the non-targeted but connected customers is driven by the increase in communication between the targeted customers and their connections, making the local network of the non-targeted customers more valuable. Our findings suggest that in targeting CRM marketing campaigns, firms should consider not only the profitability of the targeted customer, but also the potential spillover of the campaign to non-targeted but connected customers