Personalized pricing for customer retention: Theory and evidence from mobile communication

Abstract

This paper analyzes firms' strategies that aim at retaining customers and examines consumers' characteristics that make them ideal targets for companies’ loyalty programs. Our contribution is both theoretical and empirical. On the theoretical side, we develop a formal economic model to study the incentives of firms to offer personalized pricing plans, when consumers are at risk of leaving and are heterogeneous in service usage. On the empirical side, relying on an original dataset of customers of one of the top mobile network operators in the Italian market, we find evidence of an inverted-U relationship between the usage intensity and the probability of being the target of a personalized offer, which is consistent with the theoretical prediction. In addition, we find that anti-churn campaigns have a positive effect on customer retention.