Modelling customer behaviour in contractual settings

Ascarza, Eva (2009) Modelling customer behaviour in contractual settings. Doctoral thesis, University of London: London Business School.

Abstract

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.