Customer Retention under Imperfect Information

Abstract

Many multi-product firms see new customers churning quickly after limited product experiences. The paper examines whether early churn is solely driven by customers' low preferences for a given firm or is affected by incomplete information about available products, using individual-level ticket purchases of classical music concerts at a major U.S. symphony center. The data exhibit patterns consistent with consumer learning, which not only suggest incomplete information about products (concerts) among first-time customers but also give a rationale for estimating true consumption utilities of concerts using experienced customers' choices. Descriptive analyses show a significant impact of experienced utility at the initial visit on subsequent churn, implying that the initial visit affects a customer’s expectations about all future concerts. To explore marketing strategies to reduce such information-driven customer attrition, the paper runs counterfactual analyses on policies that offer targeted marketing to second-time customers after their initial visit. The results suggest that it is challenging to earn back customers with targeted offers after their low-utility initial experiences, emphasizing the importance of introductory marketing and choice architecture in customer relationship management.