Customer Retention under Imperfect Information

Abstract

This paper studies why many firms face low retention among new customers. In particular, it examines whether customer churn at the firm level after a single product experience is solely driven by heterogeneous preferences or is affected by incomplete information about the products. Individual-level ticket purchases from a major U.S. symphony center are used, for which 60% of customers do not return after a single visit. The data exhibit patterns consistent with consumer learning, suggesting incomplete information about concerts among first-time visitors. Descriptive analyses show that imperfect information and learning spillover jointly cause customer attrition. First, many customers attend concerts with low match value because of incomplete information. Second, a low match value at the initial visit leads to attrition at the symphony center level, which suggests that the initial visit affects a customer’s expectations about all future concerts. To explore marketing strategies to reduce customer attrition, the paper develops a structural model that incorporates such learning spillovers. Counterfactuals analyze both policies that offer high-value concerts to first-time customers and policies that offer targeted marketing to second-time customers after their initial visit. The results emphasize the importance of introductory marketing and choice architecture given the information problem.