Managing Customer Profits: The Power of Habits

Abstract

Do customers exhibit recurring behaviors beyond repeat purchases? If so, what are those behaviors, how are they formed, and why should marketers care? The authors apply the theory of habit to customer behavior in the context of a large customer data set of a national retailer. They find that (1) beyond repeat purchases, customers' recurring behavior with respect to returning products, purchasing on promotion, and purchasing low-margin items can be quantified along a continuum of habit strength; (2) marketing has a temporal impact on the formation of different customers' habits; and (3) customers' purchase and promotion habits positively affect firm performance (by $58 million), whereas return and low-margin purchase habits negatively affect firm performance (by $62 million). The findings underscore the need for managers to consider customer habits beyond repeat purchases, take stock of customers' habit measures before implementing policy changes, and leverage the habit measures (as compared with using only traditional behavioral measures) to strategically allocate resources at the customer level to maximize customer and firm profits.