Publication Type

Journal Article

Version

submittedVersion

Publication Date

9-2022

Abstract

Research Summary: Across many industries, firms employ a conversion funnel business model to attract customers with basic and affordable products, generate lock-in, and then sell them more advanced and expensive products. We argue that this business model, coupled with high customer switching costs, results in a market outcome characterized by aggressive pricing and reduced profits. A sudden reduction in customer switching costs disrupts the conversion funnel and can eventually increase industrywide prices and profitability, an outcome that contradicts conventional wisdom in strategy research. We develop a stylized model to formalize our ideas and provide supportive evidence using a difference-in-differences methodology with staggered treatment for a large, global sample of mobile telecommunications operators.Managerial Summary: Industry changes that lower customer frictions can surprisingly be beneficial for companies. Building on the telecommunications industry, we document how a reduction in customer switching costs following mobile number portability increases the profitability of mobile operators. We explain this finding based on a change in companies' business model. When switching costs are high, companies adopt a funnel business model designed to convert customers from basic to advanced products. While advantageous for a single company, when strategic interactions are accounted for, the diffusion of this business model has a depressive effect on average market prices and profitability. A reduction in customer switching costs breaks the funnel and decouples product pricing decisions that, counterintuitively, can lead to higher industrywide prices and greater profitability.

Keywords

Customer Switching Costs, Industry Profitability, Conversion Funnel, Business Model, Market Frictions

Discipline

Sales and Merchandising | Strategic Management Policy

Research Areas

Strategy and Organisation

Publication

Strategic Management Journal

Volume

43

Issue

9

First Page

1872

Last Page

1896

ISSN

0143-2095

Identifier

10.1002/smj.3388

Publisher

Wiley

Copyright Owner and License

Authors

Comments

Best Paper Prize Honorable Mention, SMS Conference 2021

Additional URL

https://doi.org/10.1002/smj.3388

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