Social Effects on Customer Retention

Irit Nitzan & Barak Libai
Journal of Marketing
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Although the considerable influence of social interactions such as word of mouth has been recognized in studies of customer acquisition, especially in the context of the adoption of new products, less is known about the social mechanisms that can drive customers to leave a supplier. In this study, the authors present a first-of-its-kind analysis of the effects of customers’ social environment on their likelihood of remaining with a service provider. Using data on communication among one million customers of a mobile phone service supplier in a Mediterranean country in 2008, the authors create a large-scale social system composed of customers’ individual social networks. They then follow these customers’ defection decisions to assess the extent to which a customer who leaves the cellular service might be affected by past defections of social network neighbors, and to determine the drivers of this phenomenon.

They find that a customer’s exposure to a defecting neighbor is associated with an increase of 80% in that customer’s defection hazard, when a host of social, personal and purchase-related variables are controlled for. Furthermore, they discover that the nature of the social effects on retention strongly resembles that of the effects found in the domain of adoption. The social effect on retention decays exponentially over time, indicating that firms should act swiftly, as soon as possible after a customer’s defection event, in an attempt to prevent potential chain defections of that customer’s network neighbors.

Similar to adoption, social effects on defection are enhanced by tie strength and homophily with defecting neighbors: The effect is stronger the closer the relationship with the defecting neighbor (in terms of communication volume) is, and customers are affected more by customers who are similar to them in terms of their personal characteristics. The authors observe each customer's network properties and note that customers with greater numbers of social connections are more likely to defect. From the opposite perspective, they find that highly connected customers might affect others more weakly than do customers with fewer connections. Moreover, they find that customer loyalty may help to “immunize” customers against the effect of the defection of others: Heavy users and customers with greater tenure are less affected by neighbors’ defections than are light users and newer customers, respectively.

These results underscore the need to further study the social aspects of customer retention, indicating that the tools and mechanisms used to study social effects on customer acquisition can be used to study the social effects on their retention. They also shed light on the need to incorporate social effects into the widely used churn prediction models and, in a more general sense, to take a “social view” of customer loyalty.

Irit Nitzan is graduating from the doctoral program of the Recanati Graduate School of Business Administration, Faculty of Management, Tel Aviv University. She has a BSc in Industrial Engineering and an MBA in marketing from Tel Aviv University, as well as industry experience managing the research and service operations of a large cellular service provider. Her research interests include customer relationship management and customer defection in particular, customer social networks, and services marketing.

Professor Barak Libai is an Associate Professor in the Arison School of Business at the Interdisciplinary Center (IDC), Herzliya, Israel. He has a PhD from the University of North Carolina at Chapel Hill and was previously a marketing faculty member at Tel Aviv University and at the Israel Institute of Technology and a Visiting Professor at the MIT Sloan School of Management. Much of his research deals with customer social effects such as word of mouth, and their effect on new product growth and the firm's profitability, growth of markets for new products, and customer relationship management. He has published in journals such as Journal of Marketing, Marketing Science, Journal of Marketing Research, Journal of Service Research, and International Journal of Research in Marketing, among others. His research on the economic consequences of customers' interactions has won several academic and industry research prizes.

Journal of Marketing, Volume 75, Number 6, November 2011
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Irit Nitzan & Barak Libai
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