Relational Price Discounts: Consumers’ Metacognitions and Nonlinear Effects of Initial Discounts on Customer Retention

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Practitioners increasingly employ relational price discounts by granting initial discounts to new customers with the goal of building sustainable relationships. However, extant research provides mixed findings on the long-term effects of initial discounts on customer retention. The current research aims to reconcile this mixed evidence by exploring nonlinear effects of initial discounts on customer retention. Drawing on marketplace metacognition theory, the authors hypothesize that moderate initial discounts (5–35%) have positive effects on customer retention, while low (<5%) and high (>35%) discounts have negative effects. Two large-scale field studies in an insurance company's car insurance branch and property insurance branch provide empirical support for the hypothesized patterns. An additional laboratory experiment tests the psychological mechanism underlying the nonlinear effects. When compared with low and high discounts, moderate initial discounts lead customers to form higher expectations of future relational benefits provided by the firm, as well as to lower their expectations of future discounts. Finally, this research offers customer lifetime value implications based on the depicted findings.
Original languageEnglish
Pages (from-to)115-131
JournalJournal of Marketing
Volume82
Issue number1
Early online dateAug 2017
DOIs
Publication statusPublished - Jan 2018
MoE publication typeA1 Journal article-refereed

Keywords

  • relational price discounts
  • marketplace metacognition
  • customer retention
  • nonlinear effects
  • price promotions

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