Elevate

Ideas and insights to take your marketing to the highest level

August 10, 2015
Lance A. Bettencourt

Why Free Trials Are Worth Your While

In a bid to acquire customers, both B-to-B and B-to-C firms are offering free trials. Dropbox for Business offers a free 14-day trial. Salesforce.com offers a free 30-day trial. You can sign up for a free 30-day trial of Amazon Prime or Microsoft Office 365 Home.

It’s clear that free trials are increasingly popular, but it’s certainly not clear that free trials are a smart marketing decision. Like any other promotional pricing strategy, a free trial is an investment that should be evaluated for its long-term marketing ROI.

How does customer retention compare between free-trial customers and others? How does usage and customer lifetime value compare? And if discrepancies exist, is there anything that marketing can do to make a free trial a more economically sound decision?

Hannes Datta, Bram Foubert and Harald J. Van Heerde from Tilburg and Maastricht Universities set out to answer these questions by applying advanced econometric analyses to panel data from more than 16,500 customers of a large European digital television provider. Approximately 12,500 of these customers were acquired via a direct marketing promotion for a free three-month trial. The remaining 4,000 customers committed immediately to an annual contract with a fixed monthly subscription fee.

The study, “The Challenge of Retaining Customers Acquired With Free Trials,” which was published in the Journal of Marketing Research in April 2015, found that customer retention is lower among those acquired via free trial—and this is true even after the initial free trial period. Unlike regular customers, free-trial customers join without a commitment to the value of the service—and, perhaps, even with a limited understanding of its benefits—which makes them particularly vulnerable to leaving the firm before the company can get a return on its investment. If too many take this path, a company obviously might want to reconsider offering a free trial.

In a similar way, the research showed that free-trial customers use the flat-rate elements of the service less (such as less time watching regular subscription TV), although they use pay-per-use video-on-demand more. The lower flat-rate usage may not seem like a big deal at first glance. However, it’s also problematic for customer retention. Consistent with other studies, the results revealed that higher usage increases customer retention, especially for flat-rate usage, and this relationship was especially strong among free trial customers. Lower usage is bad, and lower flat-rate usage is really bad among free-trial customers.

Finally, the study demonstrated that free-trial customers are more responsive to marketing efforts. Both advertising and direct marketing exposure increase customer retention, and this effect is even stronger for free-trial customers.

Should a Free Trial Be in Your Marketing Mix?

By using their model, the researchers were able to estimate the difference in customer lifetime value (CLV) between free-trial and regular customers over a three-year time horizon. They found that the CLV was 59% lower, on average, for free-trial customers. For this specific company, the researchers concluded that a free trial would have to attract nearly two-and-a-half times more customers than the status quo to make it an economically sound marketing decision. That’s a pretty high threshold.

This is just one company’s example, but in practice, this means that a free trial can be a good thing, but a company must understand the economics behind the decision in terms of revenue and costs. For some companies, it’s a good marketing investment. For others, it’s not.

Of course, the threshold for success in terms of new customer acquisition becomes lower if either customer retention, or usage goes up for free-trial customers, and the research makes it clear that there are two distinct paths to making this happen. First, a company should invest more in marketing communications to free-trial customers. Because free-trial customers lack confidence in the service’s value to them, they rely on other sources of insight—even from the service provider. As such, marketing communications should reinforce the value of the service to the customer, ideally even offering tailored insights into individual usage and benefits.

Second, a company should seek to increase usage levels among free-trial customers. As with marketing communications, free-trial customers look to their own usage behavior as a sign of the value of the service. When that usage is low, they are especially likely to abandon the service, so the smart marketer will offer incentives, reminders and opportunities for free-trial customers to increase their usage. A digital TV provider, for example, could offer more channels to free-trial customers. At the very least, the provider could highlight specific channels of potential interest to a free-trial customer based on past viewing behavior.

 

Lance A. Bettencourt is a co-founder and managing partner of LIFT PhD, a service that matches corporate decision-makers with the expertise of business school professors. Bettencourt is a distinguished marketing fellow at the Neeley School of Business at Texas Christian University, and author of Service Innovation: How to Go from Customer Needs to Breakthrough Services

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