Short- and Long-term Effects of Price Promotions on Consumption

Schmitt, Daniela ; Stahl, Florian ; Iyengar, Raghuram

Document Type: Conference presentation
Year of publication: 2017
Conference title: 39th Annual Marketing Science Conference
Location of the conference venue: Los Angeles, CA
Date of the conference: June 7–10, 2017
Publication language: English
Institution: Business School > Quantitatives Marketing und Konsumentenverhalten (Stahl 2013-)
Subject: 330 Economics
Abstract: Sales promotions form an important element of the marketing mix. Whereas a large stream of literature has investigated the impact of promotions on customer behavior for the grocery category, relatively less work has considered the effect of such promotions on the access to and consumption of services. The objective of this research is to investigate the short- and long-term effect of price promotions on customer retention and service consumption. We do so in the context of a large digital news publisher that offered temporarily lowered prices for digital subscriptions. Specifically, we analyze the effect of temporarily lowered prices of subscriptions on customer retention and consumption for both new and existing customers. The results show a significant increase in the retention and consumption for newly acquired customers in the short run as well as in the long run. The net impact of the promotion is, however, less positive than expected as existing customers both consume less, and churn more after missing the promotion. The latter showcases the tension that services providers may face when they offer promotions to acquire new customers. We validate our results using a dataset with another price promotion. We propose that current customers are frustrated with missing the promotion. We use data from a field experiment to validate our proposed mechanism. Existing customers were randomly exposed to an invitation to switch to a promoted, lower price. We find that exposure to the opportunity to switch can lower the drop in the consumption and churn of existing customers.

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