Paulo Alburquerque, from INSEAD, will present "Managing Consumer Contract Choices: A Model of Product Usage and Subscription Decisions in Duration-based Pricing"

Abstract: Contract menus are nearly universal in service and subscription markets, where firms offer consumers multiple subscription plans with varying prices, access levels, and benefits. Previous literature has evaluated the success of different pricing strategies, hinging on how effectively firms can manage the self-selection of consumers into their preferred alternative. In this paper, the authors propose an approach where the firm can actively manage the allocation of consumers using not only price changes but other marketing tools. The authors develop a model of consumer contract choices that captures key behavioral factors such as uncertainty, learning, and inertia, while endogenizing consumer demand for the service. The authors estimate the model using data provided by a subscription-based online educational platform, which employs a duration-based pricing structure discounts for longer-term contracts, and evaluate the use of nudging tools, trial periods, and price changes as means to move consumers to the right contract. The findings show that by managing consumers’ initial contract choices, firms can better balance goals such as profit and consumer welfare maximization, fostering long-term customer relationships.