Shah 2014

DENISH SHAH, V.
KUMAR, and KIHYUN HANNAH KIM*

Do customers exhibit recurring behaviors beyond repeat purchases? If
so, what are those behaviors, how are they formed, and why should
marketers care? The authors apply the theory of habit to customer
behavior in the context of a large customer data set of a national retailer.
They find that (1) beyond repeat purchases, customers recurring
behavior with respect to returning products, purchasing on promotion,
and purchasing low-margin items can be quantified along a continuum of
habit strength; (2) marketing has a temporal impact on the formation of
different customers habits; and (3) customers purchase and promotion
habits positively affect firm performance (by $58 million), whereas return
and low-margin purchase habits negatively affect firm performance (by
$62 million). The findings underscore the need for managers to consider
customer habits beyond repeat purchases, take stock of customers habit
measures before implementing policy changes, and leverage the habit
measures (as compared with using only traditional behavioral measures)
to strategically allocate resources at the customer level to maximize
customer and firm profits.
Keywords: habit, customer value, promotion, product return, firm

performance
Online Supplement: http://dx.doi.org/10.1509/jmr.13.0423
Managing Customer Profits: The Power of

Habits
A habit is defined as a persons psychological dispositions to repeat past behavior (e.g., Neal et al. 2012). As much
as 45% of human behavior can be deemed habitual and
prone to repetition when performed in the same contextual
situation (e.g., the same physical location; Wood, Quinn,
and Kashy 2002). If people repeatedly perform a particular

behavior in a given situation (with a satisfactory outcome)
over time, they become cognitively hardwired to repeat that
behavior consistently in the same or a similar situation (Marchette, Bakker, and Shelton 2011; Muraven and Baumeister
2000).
In the context of marketing, customers habitual behavior
has been regarded as an important research area and has
received considerable attention in the literature. For example, several studies have researched customers habitual purchase behavior (Ehrenberg and Goodhardt 1968; LiuThompkins and Tam 2013) in terms of brand inertia
(Corstjens and Lal 2000; Odin, Odin, and Valette-Florence
2001), store loyalty (Bell, Ho, and Tang 1998), and behavioral loyalty (Anand and Shachar 2004). Other scholars
have proposed methodological approaches to model habitual purchase behavior (e.g., Anand and Shachar 2004;
Erdem 1996; Roy, Chintagunta, and Haldar 1996; Seetharaman 2004). However, beyond repeat purchases, are there
other forms of recurring customer behavior that are important for managers?
*Denish Shah is Assistant Professor of Marketing and Assistant Director

of the Center for Excellence in Brand and Customer Management (e-mail:
shah@gsu.edu), and Kihyun Hannah Kim is a doctoral student in Marketing (e-mail: kkim21@gsu.edu), J. Mack Robinson College of Business,
Georgia State University. V. Kumar (VK) is Regents Professor, Richard
and Susan Lenny Distinguished Chair & Professor in Marketing, the Executive Director of the Center for Excellence in Brand and Customer Management, and the Director of the Ph.D. Program in Marketing, J. Mack
Robinson College of Business, Georgia State University; and Chang Jiang
Scholar, Huazhong University of Science and Technology (e-mail:
vk@gsu.edu). The authors thank a large multinational firm and Acxiom for
providing the data for this study. They also thank the JMR review team for
their guidance during the revision of this article. The authors are grateful to
the participants of the 2013 Theory & Practice in Marketing Conference
and Gayatri Shukla for their feedback. They thank Renu for copyediting a
previous version of this manuscript. Dominique Hanssens served as guest
associate editor for this article.
2014, American Marketing Association
ISSN: 0022-2437 (print), 1547-7193 (electronic)
726
Journal of Marketing Research

Vol. LI (December 2014), 726741
Managing Customer Profits
Evidence suggests the existence of different aspects of

recurring customer behavior (beyond repeat purchases),
with substantive implications for customer profits and firm
performance. For example, consider customers who return
previously purchased products. Customers return $264 billion worth of products, or almost 9% of total sales each year
(Kerr 2013). Of particular concern to marketers are
instances in which customers have consistently returned
previously purchased products, as in the cases of national
electronics retailer Best Buy (McWilliams 2004) and
apparel retailer Filenes Basement (Zbar 2003).
Similarly, deal-prone customers may habitually buy only
when an item is on promotion (Bawa and Shoemaker 1987),
and such behavior may be difficult to alter even when the
respective firm discontinues or reduces the level of promotions (e.g., Ailawadi, Lehmann, and Neslin 2001). For
example, in early 2012, national retailer J.C. Penney eliminated its heavily advertised sales and discounts in lieu of
fair and square everyday low pricing. Although the marketing policy shift seemed to make logical business sense,
the firm underestimated the strength of its customers habits
of purchasing during promotions. Consequently, habitual
promotion shoppers of J.C. Penney stopped buying from the
company, and it incurred a steep decline in sales that contributed to $985 million in losses over a one-year period
(Mattioli 2013).
A related dimension of customer behavior is purchasing
loss-leader items, or items that are temporarily priced at or
below retailer cost. From a retailers standpoint, loss pricing
strategy can help boost store traffic and indirectly increase
overall store profit when customers buy regular-priced
items in addition to the loss leaders (Walters and MacKenzie 1988). However, retailers may potentially lose out on
their margins if value-conscious customers (Monroe and
Petroshius 1981) only persistently buy merchandise at deep
discounts (Fox and Hoch 2005; Levy and Weitz 2004; Shah
et al. 2012).
In this research, we analyze aspects of recurring customer
behavior beyond repeat purchases. That is, we examine customers recurring behavior with respect to product returns,
promotion purchase, and low-margin purchase (advertised
to customers as markdowns or clearance). More specifically, we address the following five issues: (1) Do customers exhibit habitual behaviors other than repeat purchases? If so, what are these behaviors and how can
marketers quantify them? (2) Are customers different habitual behaviors independent of one another? (3) What is the
financial impact of customers different habitual behaviors
on the firms bottom line? (4) How does habit formation
occur? How can a firms outbound marketing influence
habit formation? (5) What are the implications of this
research for marketers and researchers? We address these
research questions through empirical analyses of a large
data set of a Fortune 500 national retailer comprising
approximately 460,000 customers. The customer data set
offers a wide variety of customer information, including
online and offline transactions recorded over time, qualitative data, and several demographic and psychographic
variables.
We summarize the overall contribution of this research as
follows:
727
1. We propose and operationalize empirical measures to quantify customers habits and validate them using self-report
measures proposed in the social psychology literature. We
find that, beyond repeat purchases, different aspects of customers recurring behavior (i.e., product return, low margin
purchase, and purchasing during promotion) can be reliably
inferred as habitual behavior.
2. We evaluate the economic value of different habits on firm
performance. We find that customers habits not only help
explain the variance in customers profit over time but also
have a significant and differential impact on the firms bottom line. More specifically, in our data, repeat purchase and
promotion purchase habits positively affect the firms bottom
line by $53.5 million and $3.9 million, respectively, whereas
product return and low-margin purchase habits negatively
affect the firms bottom line by $58.9 million and $61.6 million, respectively, over a four-year observation period.
3. We find that habit formation occurs nonlinearly over time,
with the growth trajectory varying by customer and by habit.
Furthermore, firm-initiated marketing has a significant temporal impact on customers habit formation. Previous
research in marketing has mainly regarded habit as an exogenous construct (e.g., Shah et al. 2012).
4. We discuss substantive managerial implications in terms of
how managers can leverage the influence of habit to the
practice of marketing.
We organize the rest of the article as follows. We begin

with a review of theory related to the habit construct and its
relevance to the practice of marketing. Next, we discuss the
data employed in this research. Then, we report our methodology and present the results. Finally, we discuss the managerial implications of the research, including a framework
that illustrates how managers can implement the habit construct to better manage their customers and firm performance. We conclude with limitations and directions for further research.
THEORY
Research on habit dates back to the late nineteenth century (e.g., James 1890). To understand why people are prone
to repeating a frequently performed task from the past, we
refer to the social psychology and neuroscience literature.
Early research studied habit formation as an associative
learning and stimulusresponse mechanism (Hull 1943).
Under this paradigm, habitual behavior is conceptualized as
a reflex-like response governed by automaticity and requiring minimal or virtually no cognitive attention (e.g., Posner
and Snyder 1975; Shiffrin and Schneider 1977). Habit formation is strongly related to the frequency of previous
behavior in a stable and recurring context. In other words, if
a person frequently repeats a given behavior (e.g., wearing a
seat belt after sitting in a car), that person will automatically
execute the behavior (e.g., wearing a seat belt) over time
whenever he or she encounters the same context (e.g., sitting in a car).
In the past few years, there has been a major resurgence
of habit-related research in the social psychology literature.
The renewed interest is based on understanding how a persons goals, intentions, and dispositions (e.g., attitudes, personality) mediate habit formation and affect cognitive associations that trigger temporal consistency of repetitive
behavior (Wood and Neal 2007). Contemporary research
has focused on the need for a goal and supporting conscious intentions to initiate an action that leads to some
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JOURNAL OF MARKETING RESEARCH, DECEMBER 2014
form of a rewarding or positive outcome, which in turn

serves as an incentive to perform the same behavior repeatedly in a similar context contingent on activation of the
same goal. In other words, conscious intentions and a goal
are essential for a behavior to be initiated. However, longitudinal field experiments by social psychologists have
shown that although intentions are important in the early
stages of habit formation, once a habit is formed, the impact
of intentions on driving behavior is weak to nonexistent
(e.g., Aarts, Verplanken, and Knippenberg 1997; Verplanken
et al. 1998). Indeed, strong habits may even override intentions. For example, Ji and Wood (2007) find that a group of
participants consistently repeated their habitual behavior
despite reporting intentions to do otherwise.
Persistent repetition of the same behavior in the same
context establishes a cognitive association of the context
and the associated response. According to neuroscience
studies, these associations become stronger over time with
an increase in repeat behavior (Yin and Knowlton 2006).
Consequently, when a person encounters the same context
cue, the regulatory control mechanisms (possible through
conscious intentions to act otherwise) are depleted by the
strong habitual patterns etched in the mind (Marchette,
Bakker, and Shelton 2011; Muraven and Baumeister 2000).
For example, Assael (1987) describes a model of habitual
purchase behavior in which a consumers satisfaction with
prior purchases of a brand is applied as a heuristic to simplify decision making; thus, the consumer readily applies
this prior satisfaction when deciding whether to buy the
same brand in the future, resulting in minimal consideration
of alternative brands.
In addition to regulatory depletion, the influence of habits
on behavior may be amplified by other everyday demands
(e.g., time pressures, competing distractions), personal
traits, and/or situations. For example, older consumers may
be more prone to habitual behavior given their reduced
inhibitory capacity and relatively high vulnerability to time
pressure and confirmatory search processes (Yoon, Cole,
and Lee 2009).
The theoretical underpinnings of the habit construct present
several opportunities for research that are relevant to the
practice of marketing. At a very fundamental level, any
form of consumers recurring behavior can be potentially
habit forming and of interest to any firm concerned with
managing customer relationships over time. Therefore, it is
worthwhile to extend the habitual behavior paradigm to
other types of recurring customer behavior beyond repeat
purchases. This notion is supported by marketplace evidence (discussed previously) as well as by Shah et al.s
(2012) recent study, which investigates different habit-like
traits for a segment of customers to explain unprofitable
cross-buying behavior.
In addition, many current marketing decision models and
practices (e.g., Ha 1998; Shimp and Kavas 1984) are based
on the fundamental notion that customers attitudes and
intentions drive behavior (e.g., Fishbein and Ajzen 1975).
However, longitudinal studies in social psychology literature have shown that as people form habits, the link between
attitude/intention and behavior becomes increasingly weak
(Ji and Wood 2007; Neal et al. 2012; Verplanken et al.
1998). In such a scenario, it would be important for mar-
keters to evaluate whether certain recurring customer

behaviors may be construed as habit forming.
In this study, we focus on the following four recurring
customer behaviors: (1) making a purchase trip, (2)
responding to a promotion, (3) buying marked-down items,
and (4) returning previously purchased products (in the context of the retailer included in this study). Furthermore, we
evaluate whether marketing plays a role in the formation of
customers habits and, if so, whether the influence of marketing on habit formation varies over time. In addition, we
evaluate whether customer habits help better explain the
variance in customer profits (beyond the traditional customer behavioral variables). The overarching goal is to
apply the theory of habit to the practice of marketing. We
operationalize the conceptual framework through a series of
empirical analyses. In the next section, we describe the data
used for the empirical analyses.
DATA
The data come from a Fortune 500 general-purpose

retailer with a major national presence in the United States.
(To preserve the confidentiality agreement, we do not reveal
the name of the firm.) The firm sells a wide assortment of
products to consumers (related to home improvement, gardening needs, furniture, and home appliances). It operates
more than 1,000 stores and stocks an average of 20,000
items per store, with prices ranging from a few cents to several hundreds of dollars to thousands of dollars. The productlevel margin varies widely, ranging from 15% to 125%,
with an average margin rate of 35%.
The observation period for the data set extends over four
years (20062009), during which period transaction data for
1.3 million unique customers were archived on a daily basis
across all retail stores. The transaction data contain rich
customer-level information including in-store and online
transaction details (e.g., time of purchase, store location,
purchase amount, number of items purchased, number of
product returns, response to marketing campaign), product
characteristics (e.g., product margin, product category), and
firm-initiated marketing efforts (e.g., direct mail, coupons,
e-mail campaigns). Through a research collaboration with
Acxiom, we augmented the transaction data with more than
1,000 customer characteristics (e.g., age, income, ethnicity,
education level, geographic information, hobbies, home
value, shopping traits, lifestyle clusters, media consumption
behavior). Consequently, we have 900,000 (out of 1.3 million) customers with good coverage of transaction and customer characteristics data. Given the objective of the
empirical analyses (i.e., analyzing customers habits over
time), we selected customers with at least one purchase in
each of the four years and dropped the remaining customers
from the analyses. Therefore, the final data set selected for
the empirical analyses comprises 460,000 customers.
We test for selection bias with respect to the cohort of
customers included in the study (i.e., 460,000 customers
with at least one purchase transaction with the retailer in
each of the four years). We summarize profile information
for the firms customers who are not included in the study
(for whom the relevant information was available) on the
basis of three customer characteristicsage, gender, and
incomeand compare this information with the profile of
customers included in the study. The difference in mean age
is not significantly different from zero (t-value = 1.30, p >

.1). To compare gender, we apply the chi-square test and
find that we cannot reject the null hypothesis, thus implying
that the two cohorts of customers are homogeneous with
respect to gender (c2(1) = 2.26, p > .1). Because the income
variable is an ordinal variable, we apply the Wilcoxon rank
sum test. Again, we find that we cannot reject the null
hypothesis and conclude that there is symmetry between the
two groups with respect to income (z-statistic = 1.27, p >
.1). Overall, the results indicate that the customer profiles
across the two groups are not statistically different with
respect to any of the key customer characteristics.
OVERVIEW OF EMPIRICAL ANALYSES
The empirical analyses are divided into three studies.

Each study addresses one or more of the key research objectives. Study 1 empirically quantifies different types of customer habits and validates them with a popular self-reported
measure used in social psychology. Study 2 quantifies the
economic value of customer habits in terms of its impact on
firm profits. Study 3 models the habit formation process on
a cohort of newly acquired customers and investigates the
dynamic impact of marketing on customers habit formation. In the next sections, we describe the methodology and
the findings corresponding to the three empirical studies.
STUDY 1: MEASURING CUSTOMERS HABITS
Habit strength has been most commonly measured by

social psychologists through self-reported measures of
behavioral frequency over time (e.g., Ouellette and Wood
1998; Triandis 1977; Verplanken and Aarts 1999). Because
(habitual) behavior can be exhibited in varying contexts, a
more efficient measure of habit strength can be obtained
when the stability of the context (in which the repetitive
behavior took place) is also taken into account (e.g., Danner, Aarts, and Vries 2008). For example, the same physical
location in which the repetitive behavior of interest is performed can serve as a basis for contextual stability (Ji and
Wood 2007). A relatively recent and popular measure of
habit strength is the Self-Report Habit Index (SRHI) proposed by Verplanken and Orbell (2003). Unlike the pure
behavioral frequencybased measures, the SRHI regards
habit as a psychological construct and thus incorporates the
phenomenon of automaticity that people experience as they
repeat behavior. In this study, we propose an empirical
approach for measuring habit strength on the basis of the
observed recurring behavior of customers in longitudinal
data sets.
Method
We conduct descriptive analyses of the retailers data set

to identify whether a sizeable proportion of the firms customers exhibit temporally recurring behaviors (beyond
repeat purchases) and, if so, what those behaviors are. We
find several notable shopping habits, such as customers persistently using the same self-service counter in the store,
buying items at approximately the same time of the day (or
same day of the week), and so on. From these behavioral
trends, we select four recurring consumer behaviors that
have a direct financial implication for the firm: (1) purchase
of low-margin items (low-margin purchase habit), (2)
return of previously purchased items (return habit), (3)
729
purchase of items on promotion (promotion habit), and

(4) purchase from the same retail store (purchase habit).
Note that several marketing studies have acknowledged the
importance of these behavioral traits and incorporated them
as behavioral measures in empirical studies (e.g., for product return behavior, see Petersen and Kumar 2009; for
cherry-picking propensity, see Fox and Hoch 2005; for deal
proneness, see Webster 1965; for coupon proneness, see
Bawa and Shoemaker 1987). A fundamental distinction of
our approach is that we also incorporate the feature of temporal consistency into the behavioral measures. Consequently, customers recurring behavior is rationalized as
stemming from underlying habit strength that increases
(decreases) in magnitude as customers consistently (inconsistently) repeat the same behavior over time. More specifically, the theory of habit postulates habit strength as a continuum, with habit of relatively high strength characterized
by relatively (1) high intensity of recurring behavior, (2)
high automaticity, and (3) low variance of contextual stability (e.g., Danner, Aarts, and Vries 2008; Neal et al. 2012). In
this study, contextual stability is implied by the stability
of the physical location at which behaviors of the customers
are observedthat is, more than 95% of customers interactions with the firm are observed at the same retail store of
the firm.
We define promotion habit as the general behavioral
tendency of a customer to selectively purchase items that
are offered to customers as deals. The retailer in this study
employs a range of direct marketing media such as e-mails,
coupons, and direct mailings to offer deal-based promotions
regularly to its customers. The customer data set distinguishes a promotion item purchased by a customer through
a binary flag. Therefore, we measure the intensity of a customers promotion purchase as the number of times a customer purchases a product on promotion. To make this
measure comparable across customers, we normalize it by
the total number of times a customer i makes a purchase
from the store. That is,
(1)
Intensity of Promotion Purchase i
Number of Promotion Purchasesi

.
Total Number of Purchase Incidencesi
Consumers promotion purchase behavior is analogous to

the more commonly used term deal proneness (e.g., Bawa
and Shoemaker 1987; Blattberg et al. 1978; Webster 1965),
which has been described in the marketing literature as a
general proneness to respond to promotions (Lichtenstein,
Netemeyer, and Burton 1990, p. 55). Deal proneness can
often entice customers to buy an item primarily because it
was a deal (Hackleman and Duker 1980) and consequently have it lie around the house unused (Thaler 1983).
Deal proneness is conceptually different from value
consciousness (Lichtenstein, Netemeyer, and Burton
1990). Whereas deal proneness represents a consumers
commitment to the deal (Henderson 1988), value consciousness represents a consumers desire to pay low prices subject to some quality constraint (Monroe and Petroshius
1981). Consequently, value-conscious customers are likely
to purchase mainly items that are offered at steep discounts
(Fox and Hoch 2005; Levy and Weitz 2004; Shah et al.
2012).
730
We identify repeat buying of steeply discounted products

of the firm as the low-margin purchase habit. Whereas the
firm typically employs direct marketing media (coupons, emails, and direct mailings) to promote relatively high-margin
items, low-margin items are mainly markdowns in stores
communicated through newspaper inserts and occasionally
print and television ads. The basic objective of the retailer
for lowering the margin on certain items is to incentivize
customers to visit the store with the underlying belief that
customers will also purchase other, higher-margin items.
Customer purchase of low-margin items is captured by an
indicator variable in the firms customer transaction data set.1
Therefore, the intensity of a customers low-margin purchase
can be measured as the number of times a customer purchases a low-margin item, normalized by the total number of
times a customer i makes a purchase from the store. That is,
(2)
Intensity of Low-Margin Purchasei
Number of Low-Margin Purchasesi

.
Similarly, we define product return habit as a customers

general tendency to return previously purchased products. We
measure the intensity of product return behavior as follows:
(3)
Intensity of Product Returns i
Number of Product Returnsi

.
We define purchase habit as a customers general tendency to repeatedly buy from the firm. We measure the
intensity of purchase behavior as follows:
(4)
Intensity of Purchasesi
Number of Days on Which Purchases Are Madei

,
Total Number of Daysi
where the total number of days refers to the observation

period corresponding to each customer. Note that the
denominator term in each of the four equations normalizes
the measures and makes the intensity measure ranges from
0 to 1 for all customers.
We measure the intensity of the aforementioned four
behaviors for every six months (i.e., semiannually) for
which data are available (i.e., four years). We calculate the
overall mean for the intensity measure corresponding to
each behavior k (represented in Equations 14) by averaging the N semiannual measures. That is,
(5) Mean Behavioral Intensityik =
Intensity of Behavior
t =1
Ni
ikt
where Ni is the number of semiannual measures over which

the corresponding behavior for a customer i is observed.
1Note that the retailer has few product items that are chronically low
margin. However, the proportion of these items (by total sales from lowmargin items) is less than 10%, and removal of these items from the lowmargin purchase (and habit) measures does not significantly affect the
measures.
As we discussed previously, prior literature has conceptualized habit as a psychological disposition whereby habit
strength is associated with recurring behavior with automaticity as an underlying psychological driver (e.g., Danner, Aarts, and Vries 2008; Neal et al. 2012). We infer automaticity on the basis of the level of temporal consistency
of the recurring behavior over time and quantify it on the
basis of the inverse of the standard deviation (s) of the
semiannual measures of behavioral intensity.
Consequently, we measure habit strength for the four
aforementioned customer behaviors by dividing the mean
behavioral intensity measures by the standard deviation (s):
(6)
Habit Strength ik =
Mean Behavioral Intensityik

.
1 + ik
As evident from Equation 6, we add a 1 to the standard

deviation in the denominator. It serves two purposes: (1) in
the event that s = 0 (when all semiannual measures of the
behavioral intensity are the same), the customers habit
strength will be the same as the mean behavioral intensity
measure during the observation period and (2) the denominator term (i.e., 1 + sik) will always be greater than 1. This
ensures that the habit strength measure will lie along a continuum ranging from 0 to 1 for all customers.
Incorporating temporal stability helps make the habit
measure empirically different from the pure behavioral frequency measures used in prior literature. For example, consider the example of Customer A, who makes 80%, 90%,
0%, 10%, and 70% of her purchases through coupon
redemptions across five semiannual periods, versus Customer B, who makes 50% of his purchases through coupon
redemptions across each of the five semiannual periods.
Conventional behavioral measures quantify the level of deal
proneness (or coupon proneness) as .5 for both customers
(the mean level of coupon redemption across the five periods). In contrast, the proposed habit strength measure discounts the mean by the 1 + sik to account for the temporal
consistency of the two behaviors. The standard deviation is
.42 for Customer A and 0 for Customer B. Therefore, the
promotion habit strength (based on the observed level of
coupon redemptions) for Customer A is .35, while it is .5 for
Customer B.
In summary, the proposed empirical measures quantify
habit strength to be high when the customer exhibits not
only a high degree of the recurring behavior over time (i.e.,
relatively large value of the numerator term of Equation 6)
but also a high level of temporal stability (i.e., relatively
small value of the standard deviation or the denominator
term of Equation 6).
To establish face validity of our habit measures, we measure the habit strength corresponding to the four behaviors
by adapting the SRHI survey-based approach (proposed by
Verplanken and Orbell 2003) for 507 customers of the firm.
We obtained the measures at the end of the observation
period. Web Appendix A lists the measurement items
employed in the survey.
The SRHI incorporates both performance frequency and
automaticity of behavior to measure habit strength and has
been widely cited in the social psychology literature. Therefore, we treat the habit strength measures obtained from the
SRHI-based survey (for 507 customers of the firm) as true
habit strength measures. We then compute the correlation

between the SRHI measures and the proposed empirical
habit strength measures (obtained by applying Equations 1
6) on the observed customer transaction data for the same
507 customers of the firm).
Results and Discussion
We apply the habit measures to all customers of the firm

and estimate habit strength during the observation window
of four years. Note that unlike purchase habits, low-margin
purchase, return, and promotion habits are not exhibited by
all customers of the firm during the observation period.
Specifically, 97,132 customers of the firm did not exhibit
any incidence of return behavior and 228,448 customers did
not exhibit any promotion purchase behavior during the
observation period. For the remaining customers, the habit
strength measures are best interpreted as the relative strength
of habit (along a continuum ranging from 0 to 1) over the
four-year observation period. The means (standard deviations in parentheses) of the habit strengths corresponding to
the four behaviors are .03 (.03), .11 (.09), .07 (.08), and .35
(.13) for purchase, return, promotion, and low-margin purchase habits, respectively. Note that our observation data
are both left- and right-censored and contain a mix of existing and new customers. Because we obtain the habit
strength measures after discounting them by the 1 + sik term
in the denominator (see Equation 6) to account for temporal
731
(in)consistency, we expect the absolute magnitude of the

habit measures to be relatively low. Figure 1 illustrates the
overall distribution of the four habit strength measures.
It is possible that customers recurring behavior may be
an artifact of the firms marketing cycles or naturally recurring store visits, as in the case of a gas station or grocery
store. In the context of this research, we rule out the former
by noting that the correlation between customers purchase
behavior and firm-initiated marketing during the observation period is very low (r = .04, p < .01). The latter explanation is not applicable in the context of a general-purpose
retailer. Nevertheless, researchers and managers should
validate the empirically computed habit strength measures
with the SRHI measures for a large sample of the customers
before interpreting them as true indicators of habit strength.
In the context of this research, the proposed habit strength
measures (obtained from Equation 6) correlate strongly
(Pearsons correlation coefficients range from .82 to .95)
with the SRHI-based measures (obtained from the survey)
for a sample of 507 customers of the firm.
To evaluate the importance of incorporating both frequency and temporal consistency of behavior to quantify
habit strength, we evaluate the correlation between the
SRHI-based measures and frequency-based measures (the
numerator of Equation 6) as well as inertia-based measures
(the denominator of Equation 6). The results (see Table 1)
indicate that the correlation coefficients of the SRHI meas-
Figure 1
A: Purchase Habit
17.5
DISTRIBUTION OF HABIT STRENGTH MEASURES
15.0
12.5
5
4
7.5
Percent
Percent
10.0
2.5
5.0
.006 .054 .102 .150 .198 .246 .294 .342 .390 .438 .486 .534 .582
C: Promotion Habit
17.5
3.5
D: Low-Margin Purchase Habit
2.0
Percent
10.0
1.5
7.5
1.0
5.0
0
0 .04 .12 .20 .28 .36 .44 .52 .60 .68 .76 .84 .92 1.00
2.5
12.5
2.5
3.0
15.0
Percent
B: Return Habit
.096 .192 .288 .384 .480 .576 .672 .768 .864 .960
.5
0 .04 .12 .20 .28 .36 .44 .52 .60 .68 .76 .84 .92 1.00
732
Table 1
the four habit measures (on an average) are not highly intercorrelated within the same customer.
Regular purchase habit is negatively correlated with promotion habit (.1) and low-margin purchase habit (.12),
implying that customers who habitually redeem coupons or
purchase low-margin items are selective in their purchases
and thus not likely to exhibit high purchase behavior frequency. In contrast, the intercorrelation between promotion
habit and return habit is the highest (.2) among the pairwise
correlations of different habits, implying that customers
who return products are also likely to buy on promotion.
Such customers persistently buy products offered on promotion and most likely return them later. We observe a positive
correlation (.12) between promotion habit and low-margin
purchase habit, indicating a segment of customers who are
deal prone as well as value conscious. Overall, the intercorrelation of the four habit strength measures is relatively low
(Pearsons correlation coefficients range from .12 to .20),
thereby implying that different customer habits are independent of a customers loyalty to the retailer (as exhibited
by a relatively strong purchase habit).
COMPARISON OF THE CORRELATION OF SRHI WITH

DIFFERENT MEASURES OF RECURRING BEHAVIOR
Habitual Behavior
Purchase habit
Promotion habit
Return habit
Low-margin
purchase habit
Correlation of SRHI with
Inertia-Based
Measure
.768
.465
.558
.451
(<.001)
(<.001)
(<.001)
(<.001)
Notes: p-values are in parentheses.
Frequency-Based Proposed Habit

Measure
Measure
.848
.563
.619
.598
(<.001)
(<.001)
(<.001)
(<.001)
.954
.872
.925
.815
(<.001)
(<.001)
(<.001)
(<.001)
ure with an inertia-based measure range from .45 to .77 for

the four habitual behaviors. The correlation coefficients of
the SRHI measure with a frequency-based measure range
from .56 to .85 for the four habitual behaviors. In comparison, the correlation coefficients of the SRHI measure with
the proposed habit measures have the highest magnitude
and range from .82 to .95 for the four habitual behaviors,
thereby underscoring the importance of incorporating both
performance frequency and temporal consistency of recurring behavior in the habit strength measure. From a managerial standpoint, computation of habit strength using customer data serves as a cost-effective and feasible approach
(compared with the survey-based approach) to determine
the habit strength of virtually all customers of the firm.
Figure 2 shows the Pearsons intercorrelation coefficients
of habit measures across all customers of the firm.2 Notably,
STUDY 2: IMPACT OF HABIT ON FIRM

PERFORMANCE
Why should managers measure customers different habitual behaviors beyond repeat purchases? In Study 2, we quantify the economic values of different customer habits in terms
of their impact on customer profits and firm performance. In
addition, we evaluate whether the habit measures can help
managers improve their ability to forecast customer profits.
Method
We first specify a simple linear model to evaluate

whether customers habits significantly affect profits as
specified in Equation 7:
2These
results are similar to the intercorrelation of habit measures

obtained from the survey-based SRHI data. For reasons of brevity, we do
not report the (similar) results from the SRHI data.
Figure 2
INTERCORRELATION OF HABITUAL BEHAVIORS
Promotion Habit
.20*
.12*
.10*
Return Habit
.03*
Purchase Habit
.01*
*p < .001, corresponding to the Pearson correlation coefficients displayed in the figure.
.12*
Low-Margin Purchase Habit

(7)
Total Profiti = a0 + a1Total CBi + a2Total Revenuei

+ a3Purchase Habiti + a4Return Habiti
+ a5Promotion Habiti
where
+ a6Low-Margin Purchase Habiti + ei,
Total Profiti = sum of profit of customer i across the four years,

Total CBi = the total number of different product categories
purchased by customer i across the four years,
Total Revenuei = total revenue (computed as the price paid multiplied by the quantity of the respective item[s]
purchased) of customer i across the four years,
a = parameters to be estimated, and
ei = random error term.
We compute the dependent variable (total profit) by subtracting the cost of product returns and marketing cost from
the gross contribution margin of the customer over the fouryear observation period. The inclusion of covariates such as
the Total CB and Total Revenue is consistent with previous
customer profit models (e.g., Kumar and Shah 2009;
Venkatesan and Kumar 2004). Note that revenue does not
share a perfectly linear relationship with profit. Customers
typically purchase multiple products of varying margins during the observation period. As we discussed in the Data
section, the retailer stocks approximately 20,000 items in
each store, with margin rates varying widely from 15% to
125%. We also include purchase habit, return habit, promotion habit, and low-margin purchase habit (measured over the
four-year observation period) as covariates in Equation 7 and
estimate the model as an ordinary least square regression.
Equation 7 offers a simple regression-based descriptive
model to enable managers to assess the impact of different
habits on customer profit.3 However, longitudinal analyses
of customer data are warranted to account for the dynamics
of customers habit strength over time. Moreover, longitudinal analyses can enable managers to forecast customers
profits. Consequently, we specify a dynamic version of the
customer profit model in Equation 8:
(8)
Profitit = hi + b1Profitit 1 + b2CBit + b3Revenueit

+ b4Purchase Habitit + b5Return Habitit
+ b6Promotion Habitit
where
+ b7Low-Margin Purchase Habitit + eit,
hi = time-invariant unobserved factors,

Profitit 1 = the profit for customer i at time t 1,
CBit = the number of different product categories purchased by customer i in time t,
Revenueit = the total revenue (computed as the price paid
multiplied by the quantity of the respective
item[s] purchased) of customer i in time t,
b = parameters to be estimated, and
eit = random error term.
The subscript t refers to six-month time intervals. Consequently, we model customer profit every six months (which
3We thank the editor for asking us to include a simple ordinary least
squaresbased profit equation (i.e., Equation 7) before discussing the relatively complex versions of the customer profit model (i.e., Equations 8 and 9).
733
is similar to the time interval for the habit strength measures

in Study 1). Inclusion of the lag of the dependent variable
(Profitit 1) helps capture the effect of prior profit and unobserved factors in the model.
We compute the four habit measures (in Equation 8) by
applying the measurement approach described in Study 1
for every time period t. Note that we need at least two observations to compute the standard deviation. Therefore, the
habit measures are computed from the second time period
of the observation period. The unobserved factors (hi)
include customer-level factors that are unlikely to change
over time (e.g., customers physical proximity to the store).
Note that the time-invariant variable (hi in Equation 8) can
be correlated with Profitit 1 and can lead to biased parameter estimates. To address this problem, we transform Equation 8 to a growth-growth model. That is, from each
variable in Equation 8, we subtract its corresponding lagged
variable (e.g., DProfitit = Profitit Profitit 1). This helps
eliminate the unobserved fixed effects (hi) from the model.
Consequently, we get a growth model as specified in Equation 9:
(9)
DProfitit = b1DProfitit 1 + b2DCBit + b3DRevenueit

+ b4DPurchase Habitit + b5DReturn Habitit
+ b6DPromotion Habitit
+ b7DLow-Margin Purchase Habitit + Deit.
However, the lagged dependent variable (i.e., DProfitit 1)

in Equation 9 is correlated with the error term (i.e., Deit)
because both terms have information from t 1. To account
for the endogeneity of DProfitit 1, we follow a widely used
method in econometrics and marketing: the ArellanoBond
(1991) difference general method of moments (GMM) estimator. The GMM takes into account the endogeneity of the
lagged dependent variable, which results in unbiased and
consistent estimates. The method involves two steps: First,
we use lags of the endogenous variables and time dummies
as instruments for their first differences. For example, Profitit 2 and Profitit 3 serve as instruments for DProfitit 1 in
Equation 9. Lagged values are valid instruments for the first
differences under the assumption that error terms are not
serially correlated (i.e., (E(eit, eit 1) = 0). If eit is not serially
correlated, the second-order difference errors eit eit 1 and
eit 2 eit 3 will not be correlated. We test this assumption
through the second-order autoregressive test (AR[II]), in
which the null hypothesis is that the second-order differenced error terms are not correlated (Arellano and Bond
1991). We also apply the Sargan/Hansen test to ensure validity of the instruments. The null hypothesis for the Sargan/
Hansen test is that the instruments are exogenous and, thus,
valid (Roodman 2006). Second, we use the instruments (i.e.,
lagged values of the endogenous variable and time dummies)
with the GMM estimator to obtain unbiased and consistent
estimates for the profit growth model (Equation 9). The
GMM estimator relaxes any assumptions about the distribution of the independent variables (Hansen and West 2002).
This is important because the distribution of habit strength
measures (especially return habit and promotion habit) contains a large number of zeros for several customers.
734

We report the results for Equation 7 in Table 2, Panel A.
The parameter estimates indicate that the purchase habit and
the promotion habit positively affect total customer profit
(a3 = 4,159.55, p < .01; a5 = 175.44, p < .01), whereas the
return habit and the low-margin purchase habit negatively
affect total customer profit (a4 = 1,380.41, p < .01; a6 =
367.96, p < .01). Consistent with prior research, other
covariates such as total cross-buying level and total revenue
have a positive impact on total customer profit (a1 = 3.98,
p < .01; a2 = .24, p < .01).
Table 2, Panel B, reports the results corresponding to
Equation 9. The Sargan/Hansen test and the AR(II) test indicate that the second-order differenced error terms are not
correlated and that the instruments are valid.
The parameter estimates indicate that the increase in
strength of purchase habit and the promotion habit positively affect customer profit (b4 = 575.83, p < .01; b6 =
52.42, p < .01). However, the increase in strength of the
return and the low-margin purchase habit negatively affect
customer profit (b5 = 274.21, p < .01; b7 = 73.00, p <
.01). Other control variablesincrease in lagged profit,
increase in cross-buying level, and increase in revenue4
4We checked for endogeneity issues resulting from the revenue covariate in
Equation 9 and found that it is not significantly correlated with the residual/
error term (r = .0001, p > .01).
Table 2
PARAMETER ESTIMATES
A: Total Customer Profit Model
Independent Variables
Estimate
Intercept
Total CBi
Total Revenuei
Purchase Habiti
Return Habiti
Promotion Habiti
Low-Margin Purchase Habiti
Model Statistics
Number of observations
R-square (adjusted R-square)
105.11
3.98
.24
4,159.55
1,380.41
175.44
367.96
Independent Variables
Estimate
p-Value
t-Value
33.6
45.8
1,118.0
99.9
143.2
13.4
56.4
B: Customer Profit Growth Model
<.001
<.001
<.001
<.001
<.001
<.001
<.001
461,395
.853 (.853)
z-Value
p-Value
DProfitit 1
.12
95.32
<.001
DCBit
8.87
130.3
<.001
DRevenueit
.23 2,134.0
<.001
DPurchase Habitit
575.83
109.9
<.001
DReturn Habitit
274.21
171.9
<.001
DPromotion Habitit
52.42
21.1
<.001
DLow-Margin Purchase Habitit
73.00
70.1
<.001
Model Statistics
Number of observations (customers)
1,924,991 (461,395)
Sargan/Hansen test c2(d.f.)
c2(14) = 18.2, Prob > c2 = .20
AR(II) test
z = .95, Prob > z = .17
have a positive impact on profit (b1 =.12, p < .01; b2 = 8.87,

p < .01; b3 = .23, p < .01).
We assess the empirical utility of the habit strength measures by running two benchmark models. In Benchmark
Model 1, we drop the four habit strength measures from
Equation 9. In Benchmark Model 2, we replace the habit
strength measures in Equation 9 with simple contemporaneous behavioral variables (i.e., customers observed behavior
without accounting for the temporal consistency). Comparing the models, we find that our proposed model (as specified in Equation 9) better explains the variance in customer
profits by 22% and 15% as compared with Benchmark
Models 1 and 2, respectively. For the purpose of forecasting, we treat the observation data corresponding to the first
seven semiannual periods as the calibration sample and the
eighth (last) semiannual period of the observation period as
the holdout sample. We employ the calibration sample to
estimate the parameters for the proposed model and the two
benchmark models and then apply the parameters to forecast customer profit for the holdout sample. We assess the
quality of the forecast by computing the mean absolute percentage error for each of the three models. The results indicate that the mean absolute percentage error increases by
32% for Benchmark Model 1 and 23% for Benchmark
Model 2 as compared with the proposed model. The results
underscore the importance of incorporating habit-based
measures in a customer profit equation.
To quantify the impact of customers habit strength on
firm performance, we apply the coefficient estimates of the
model results (in Table 3) corresponding to the four habits
and aggregate its effect on profit across all 460,000 customers of the firm over the observation period of four years.
The results indicate that customers purchase habits and promotion habits positively contribute to approximately $54
million and $4 million to the firms bottom line, respectively. In contrast, the return habit and low-margin purchase
habit negatively affect the firms bottom line by approximately $59 million and $62 million, respectively. In percentage terms, the customers habitual behaviors affect the
firms total customer profit by 1% to as much as 12%, as we
summarize in Table 3.
Firms are increasingly considering managing customer
relationships on the basis of the customers lifetime value
(CLV; Kumar and Shah 2009). Therefore, a related issue is
whether the negative impact of customers habits on firms
profits (as shown in Table 3) may be offset by the customers longevity with the firm. In other words, will the
results of Table 3 (based on the observed data) hold over
customers expected lifetime duration?
Customer lifetime value is defined as the net present
value of future profits from a customer over the time the
customer is expected to transact with the firm. To compute
the lifetime value of each customer, managers need to (1)
determine the time duration (in the future) over which the
Table 3
FINANCIAL IMPACT OF HABITUAL BEHAVIOR ON FIRM PERFORMANCE

Contribution to firms profit
Impact on firms total customer profits
Purchase Habit
$53,455,782
+10.4%
Return Habit
$58,994,564
11.5%
Promotion Habit
$3,993,206
+.8%

$61,637,712
12.0%
customer will stay active with the firm, (2) predict the contribution margin of the customer, and (3) predict the marketing cost expected to be incurred on the customer. Scholars
have proposed several CLV models in prior literature. For
illustrative purposes, we employ the beta geometric negative binomial distribution model to predict the probability
that a customer in a noncontractual setting (such as a customer of the retailer in this study) is still actively engaged in
the relationship with the firm given his or her purchase history (Fader, Hardie, and Lee 2005).5 We use the average of
the contribution margin and marketing cost for a customer
to obtain estimates of CLV. Further research could also
employ a driver-based approach, as suggested by Kumar et
al. (2008), to estimate the contribution margin and the marketing cost for each customer.
We present the results of the analyses in Figure 3. The
customers CLV scores are summarized in ten deciles
(where each decile represents the mean of 10% of the customers organized in descending order of CLV scores).
Drawing on the distribution of the CLV scores, we designate customers in the top two deciles (deciles 1 and 2) as
high-CLV customers, the middle six deciles (deciles 38) as
medium-CLV customers, and the bottom two deciles as lowCLV customers (deciles 9 and 10). Using this classification,
we present the prevalence of the four habits for the highCLV, medium-CLV, and low-CLV customers in Table 4.
The results indicate that the high-CLV customers possess
stronger positive habits on average (i.e., purchase and promotion habits) and, by virtue of their positive habits, are
likely to contribute considerably to the firm over their lifetime duration. In contrast, low-CLV customers possess
stronger negative habits (i.e., return and low-margin purchase habits) and are likely to contribute negatively over
their lifetime duration. The results also indicate that the
medium-CLV customers possess stronger positive habits
(i.e., purchase and promotion) on average than low-CLV
customers and possess stronger negative habits (i.e., return
and low margin purchase) on average than high-CLV customers. We did not observe any significant difference in the
5Because our approach is based on methodologies described in prior literature (i.e., Fader, Hardie, and Lee 2005; Kumar et al. 2008), we do not
reproduce the related CLV computation details.
Figure 3
DISTRIBUTION OF CLV (N = 461,395)

3,500
3,000
2,500
3,047
2,000
CLV ($)
1,500
945
1,000
500
0
500
521
3
296
4
153
61
5
6
Decile
11
7
7 121
9
10
Notes: The CLV ($) values represent the mean CLV for customers of the
respective decile. Each decile represents 10% of the customers.
735
Table 4
HABIT STRENGTHS FOR THE HIGH-CLV, MEDIUM-CLV, AND

LOW-CLV CUSTOMERS
Purchase habit
Promotion habit
Return habit
Low-margin purchase habit
Annual average cross-buy
frequency
Annual average revenue ($)
High CLV
(Deciles
1 and 2)
.054
.047
.096
.340
6.22
2,028.68
Medium CLV
(Deciles
38)
Low CLV
(Deciles
9 and 10)
856.27
646.45
.031
.039
.103
.348
4.55
.025
.025
.128
.402
3.57
attrition level of customers with strong positive or negative

habit(s). Indeed, both customers with strong positive habits
and those with strong negative habit(s) have below-average
attrition rates. This finding is expected because customers
with strong habits in general will continue to transact with
the firm in the foreseeable future by virtue of their habitual
behavior.
In summary, the results from this study underscore the
substantive importance of the four habit constructs in two
ways. First, there is tangible economic value associated
with each customers recurring behavior. In other words,
customers habitual behavior has a direct impact on the
firms bottom line, and we expect that impact to persist over
the lifetime duration of the customerespecially for customers with relatively high habit strength. Second, inclusion
of habitual behavior of customers in standard customer
profit models helps improve the model fit and reduce the
forecasting error.
STUDY 3: MODELING HABIT FORMATION
Given the economic importance of customers habits to

the firm, it is important for marketers to understand how
customers form habits and whether the firms marketing
influences habit formation. Therefore, the objective of
Study 3 is to evaluate how customers form habits as they
transact and interact with the firm and receive the firms
marketing communications and offers.
Method
The first step in evaluating habit formation entails understanding how habit strength evolves over time. Similar to
the process of learning, habits are formed gradually as people repeatedly perform a specific behavior in a stable context (Neal et al. 2011). Hulls seminal study of learning conceptualizes the relationship between repetition and habit
strength to follow an asymptotic curve (Hull 1951). Lally et
al. (2010) observe a similar relationship in their empirical
study in the context of the formation of peoples everyday
habits.
The data set contains a mix of existing and new customers. Because our data are left-censored, we do not know
the history of marketing to or the state of habit formation for
customers the firm acquired before the observation period.
Therefore, we chose a cohort of customers who initiated a
relationship with the firm in the first six months of the
observation period and who exhibited temporal growth in
habit strength (measured every six months) over the four-
736
year observation period. We measure habit strength by

applying the computations discussed in Study 1. Note that
(as we discussed previously) at least two time periods are
required to compute the standard deviation. Therefore, habit
strength is computed from the second time period onward.
Consequently, we get seven time periods (corresponding to
six-month intervals) per customer over the observation
period of four years. The customer cohorts comprise 3,360,
848, 4,548, and 336 customers, which corresponds to the
formation of purchase habits, return habits, low-margin purchase habits, and promotion habits, respectively. We apply the
visual analytics software JMP to examine the habit formation
trajectory for the respective cohorts and observe a nonlinear
growth pattern (at an aggregate level), as we illustrate in
Web Appendix B. The habit formation trajectories are consistent with prior literature (Hull 1951; Lally et al. 2010).
We apply JMP to get a visual representation of habit formation trajectories at the individual customer level. Customers vary significantly in terms of their initial level and/or
the rate of growth of the habitual behavior strength over time,
as Figure 4 shows with a representative set of six customers.
The figure in Web Appendix B and Figure 4 offer modelfree evidence of the habit formation dynamics, and we
apply these insights to specify a flexible sigmoid curve
model. That is, we specify the habit strength for a given
habit k for customer i at time t as follows:
(10)
Habit kit = hk min +
h kmax
1 + ki exp ki Xkit
The function SbkiXkit in Equation 10 is
where
+ kit .
b1kiBehavioral Intensitykit 1 + b2kiFirstt MKTit

+ b3kiSecondt MKTit,
k = 1, 2, 3, 4 (i.e., return habit, promotion

habit, low-margin purchase habit, and
purchase habit);
t = 1 through 7, each representing sixmonth intervals;
hkmin = the lower asymptote of the k habit
strength;
hkmax = the upper asymptote of the k habit
strength;
aki = the parameter that determines the
trajectorys intercept for customer i
and habit k;
bki = a vector of coefficients that determine
the rapidity with which the trajectory
will approach the upper asymptote
(hkmax) for customer i of habit k;
Xkit = time-varying covariates corresponding
to customer i at time t of habit k;
ekit = error term assumed to follow a normal
distribution with mean 0 and variance
s2;
Behavioral Intensitykit 1 = intensity of habit measures in the previous period;
Firstt = indicator for the first half of the observation period (i.e., Firstt = 1 when t =
2, 3, 4; 0 otherwise);
Secondt = indicator for the second half of the
observation period (i.e., Secondt = 1
when t = 5, 6, 7, 8; 0 otherwise); and
MKTit = the level of firms outbound marketing
for customer i at time t. This is operationalized (by the firm) as a weighted
sum of firms outbound e-mails,
coupons, and direct mailings to the
customers. The weights are assigned
by the firm and reflect the unit cost of
Figure 4
MODEL-FREE EVIDENCE OF INDIVIDUAL HABIT FORMATION TRAJECTORIES OVER TIME

.5
Customer 6: Low-Margin Purchase Habit
.4
Customer 2: Return Habit
Customer 4: Promotion Habit

Habit Strength
.3
Customer 1: Return Habit
.2
Customer 5: Low-Margin Purchase Habit
.1
Customer 3: Promotion Habit

0
5
Period
the marketing medium. The weighted

sum is obtained by multiplying the
unit costbased weight with the frequency of the respective marketing
medium.
Given the operationalization of the habit strength measures

(discussed in Equations 16), hmin = 0 and hmax = 1 for all
four habit measures. Because habits are formed through
repetition of past behavior, the habit strength for any behavior at time t depends on the intensity of the corresponding
behavior in the previous time period (i.e., time t 1).
Furthermore, marketing may have an effect on habit formation, and the influence may vary temporally with the
increase in the strength of the habitual behavior over time.
Therefore, the time dummies First and Second are interacted with the marketing covariate to assess the time temporal effect (if any) of firm-initiated marketing on the habit
formation process in the first and the second half of the
observation period. We allow the parameters of the model
{ai, b1i, b2i, b3i} to vary randomly across individual customers, where the random components of the parameters
have multivariate normal distribution with mean vector 0
and variancecovariance matrix S.
The customer-specific effects allow the shape of the habit
formation trajectory to vary by customer and help account
for unobserved customer heterogeneity. We estimate the
model with the PROC NLMIXED routine of SAS 9.3 for
each habit measure. The routine uses an iterative maximum
likelihood procedure for estimating the fixed effects and the
variance components of the model. We execute the routine
by applying the NewtonRaphson optimization technique
with line search to find the global optimum to maximize the
likelihood function.
In Table 5, Panels AD, we show the fit statistics, the

maximum likelihood estimates of the parameters, and the
variance of error terms. The random effects corresponding
to the marketing covariate (i.e., b2ki, b3ki) are not significant
for all four habits, and thus we do not report them in the
model results.
Consistent with the theory of habit that postulates that
previous repetitive behavior contributes to habit formation,
we find that the intensity of previous behavior has a significant positive effect on the formation of all four habit
strengths (p-value of b1k < .001). In the model, we assume
the random component of intercept and past behavior to be
distributed multivariate normal with the expected value of
0. As Table 5 shows, there is significant variation across
customers for all four habits (i.e., variance components in
the parentheses). In addition, the within-group random
effect Var(e) is significant for all four habits (p-value of
Var(ek) < .001). For example, the lagged intensity of product returns is positively related to the return habit in the current period (t) because the fixed effect of lagged return proportion (b11 = 2.26) is positive. This effect size varies by
customer given that the random component is 1.12.
Marketing affects the habit formation process for all four
behaviors in a dynamic manner. For the purchase habit,
marketing in the first half and second half are both positively related to habit strength (p-values of b24, b34 < .001).
However, the impact of marketing on the formation of pur-
737
Table 5
HABIT FORMATION MODEL RESULTS

Parameter
Coefficient
(Variance
Component)
Return Habit
a01 Intercept
13.01 (37.13)
b11 Lagged intensity of
2.26 (1.12)
product returns
b21 Marketing in first half
.05
b31 Marketing in second half
.71
Covariance of variance
6.45
component a01, b11
Var(e1)
.001
Model Statistics
Number of customers
2 log-likelihood
Promotion Habit
a02 Intercept
10.79 (41.14)
1.58
(.35)
promotion purchases
.03
.63
3.53
component a02, b12
Var(e2)
.002
Model Statistics
Number of customers
2 log-likelihood
a03 Intercept
3.99 (4.52)
1.15
(.20)
low-margin purchases
.16
.40
.83
component a03, b13
Var(e3)
.002
Model Statistics
Number of customers
2 log-likelihood
Purchase Habit
a04 Intercept
36.98 (176.02)
6.22 (1.98)
purchase
.22
.11
36.28
component a04, b14
Var(e4)
.0005
Model Statistics
Number of customers
2 log-likelihood
t-Value
p-Value
1.3
25.4
12.6
.21
<.001
<.001
46.4
1.21
49
25.3
27
2.2
16.9
6.5
28.8
114
116
17.6
47.7
41.3
110.7
125.32
119.94
4.49
2.94
213.1
103.32
<.001
<.001
<.001
5,936
848
21,272
<.001
<.001
.03
<.001
<.001
<.001
2,352
336
6,353
<.001
<.001
<.001
<.001
<.001
<.001
31,836
4,548
86,724
<.001
<.001
<.001
.003
<.001
<.001
23,520
3,360
112,036
chase habit is twice as great in the first half of the observation period as compared with the second half of the observation period (b24 = .22, b34 = .11, respectively) despite the
finding that the level of outbound marketing is approximately the same in both time periods. The results suggest
that marketing plays a stronger role in the initial development of purchase habits. As purchase habit gains in
strength, customers begin to repeat their purchases (with
relatively less need for a marketing cue to perform the
desired action). Our finding is consistent with previous
738
research showing that interventions to change intentions do

not have a strong impact on behavior when strong habits are
formed (Webb and Sheeran 2006). Lodish et al.s (1995)
finding that advertising elasticity is higher for new products
than for established products also supports our result.
Notably, for each of the other three habit measures, the
influence of marketing on habit formation is stronger in the
second half than in the first half of the observation period.
For the promotion habit (b22 = .03, p < .001; b32 = .63,
p < .001) and the low-margin purchase habit (b23 = .16, p <
.001; b33 = .40, p < .001), the impact of marketing is positive and significant in both periods. However, the relative
magnitude of marketings impact is stronger in the second
half of the observation period. Here, marketing seems to be
indirectly encouraging habit formation by incentivizing customers to visit the stores and buy promoted or advertised
markdowns (low-margin items) repeatedly.
For the return habit, the impact of marketing in the first
half of the observation period is not significant (b21 = .05,
p > .05), while it is positive and significant in the second
half (b31 = .71, p < .001). There is a delayed effect of marketing in the case of product return behavior. That is, the
firms marketing will initially encourage the customer to
make a purchase, which in turn will trigger product return at
a later stage or in the subsequent period(s).
From a marketers standpoint, these findings are useful
because they offer an additional dimension of insight into
how marketing interventions should be managed at the customer level based on the state of the customers habit. We
elaborate on the managerial implications of these findings
in the next section.
Drawing on the findings of Study 2 (i.e., customers
habits have a direct impact on the firms bottom line) and
Study 3 (i.e., marketing significantly affects customers
habit formation over time), we can compute the indirect
impact of marketing on customer profits that result from
habit formation. We apply the parameter estimates from
Table 5 to compute the growth in customers habit strength
that can be attributed to marketing. We then apply the
parameter estimates of customer profit equation (from Table
2, Panel B) to assign a dollar value to the growth in habit
strength that can be attributed to marketing. The results
indicate that marketing positively affects the firms profit by
$.6 million and $.8 million through the formation of purchase and promotion habits, respectively. In contrast, marketing negatively affects the firm profit by $3.3 million and
$2.6 million through the formation of product return and
low-margin purchase habits, respectively.
MANAGERIAL IMPLICATIONS
Customer Habits Beyond Repeat Purchases
Habitual behavior is multidimensional. Customers are

likely to form a habit with respect to virtually any temporally recurring interaction with the firm in a stable context.
In this research, we find that, beyond repeat purchases, customers exhibit habitual behavior with respect to returning
previously purchased products, purchasing low-margin
products, and purchasing products promoted through direct
marketing. Notably, the different habitual behaviors are
relatively independent of one another (as Figure 2 illustrates). Therefore, focusing merely on the repeat purchase
behavior may ignore customers other habitual behaviors

that bear a significant impact on the firms bottom line (as
indicated in Table 3). Furthermore, customer habit strength
measures can help managers better forecast customer profits
compared with conventional behavioral measures.
Implementing the Theory of Habit to the Practice of
Marketing
Prior literature (e.g., Ailawadi, Lehmann, and Neslin

2001) as well as marketplace evidence (e.g., Mattioli 2013)
has reported the fallacy of marketing policy shifts in the
context of major firms such as Procter & Gamble and J.C.
Penney. In both cases, the respective firms decided to move
away from their current practice of frequent promotions
while grossly underestimating their customers promotion
habits. The policy shift alienated customers instead of influencing the behavioral change (i.e., continued patronage
without the promotions) that both firms had hoped for. Predictably, financial performance was adversely affected
before both firms eventually reversed their decisions.
In the context of the retail firm included in this study, the
four habits of the firms customers affect the firms profits
differently, as we discuss in Study 2 and report in Table 3. In
general, firms should implement the methodology of Study 2
to regularly analyze the financial impact of their customers
habits. The extent to which different habits are prevalent
across customers of a firm and their impact on the respective
firms performance can vary across firms and industries. For
example, the product return habit is likely to be relatively
more problematic for firms in a retail industry with lenient
product return policies as compared with service industries,
in which product returns (or refunds) are less common (or
nonexistent).
Depending on the prevalence as well as the relative magnitude of customer habits, firms can make better-informed
decisions about marketing policy changes. For example, a
relatively high level of returns may require the introduction
of a more stringent return policy if a majority of serial
returners are also unprofitable for the firm. Similarly, a relatively large number of customers with a low-margin purchase habit should prompt the firm to revisit its pricing policy. However, some caution should be exercised here.
Managers must keep in mind that widespread prevalence of
a particular habitual behavior of a firms customers (with a
relatively high magnitude of habit strength) would imply a
general resistance to a change in that behavior. In such a
scenario, a unilateral marketing policy change in a competitive environment is likely to make customers switch to
another firm whose marketing policies are compatible with
their shopping habits (Ailawadi, Lehmann, and Neslin
2001).
At the individual customer level, knowledge of each customers habits can enable the firm to make strategic
resource reallocation decisions. The results from Studies 2
and 3 indicate that firm-initiated marketing may contribute
to the formation of return habits and low-margin purchase
habits, with an adverse impact on customer profit over time.
Because habits (by definition) are enduring constructs,
firms may strategically move marketing dollars away from
customers with relatively high return and low-margin purchase habits and reinvest them in developing the purchase
and/or promotion habits of other customers of the firm.
Alternatively, firms may selectively alter their marketing

practice for customers on an individual basis with the objective of breaking adverse habits (e.g., returns, low-margin
purchasing), as discussed in Shah et al. (2012) and practiced
by several firms in the context of serial returners (Kerr 2013).
In essence, knowledge of customers habits can enable
managers to make important strategic decisions. This is
because unlike conventional behavioral measures, a habit
measure represents the prolonged tendency of a customer to
consistently repeat past behavior with financial implications
for the firm.
Profiling Habitual Customers
Who are the habitual customers? To find out, we

regressed the habit strength measures on the customer characteristics available in the data set (obtained from Acxiom,
as discussed previously). We find that customer age is positively correlated with the four habit measures. Similarly, we
find that certain customer activities (e.g., collecting exotic
items, sewing/knitting/needlework, motorcycling) are negatively correlated with the four habits. We also find that some
customer characteristics correlate differently with different
habits. For example, whether the customer is a working
woman is positively correlated with purchase habit but
negatively correlated with return and promotion habits.
Notably, customer characteristics that may be attributed to
affluence such as savvy senior and premium card holder
are positively correlated with the low-margin purchase habit
and not related or negatively correlated with the purchase
habit.6
In summary, managers can infer customers habitual
proneness and strategically align their marketing efforts to
develop (deter) good (bad) habits that are likely to have a
positive (negative) impact on the firms profits. Inferring
customers habitual proneness on the basis of their characteristics could prove useful for managers in the context of new
customers or customers with limited transaction history, for
whom the proposed empirical approach may not be possible
for inferring habit strength. For example, in the context of
this study, the retailer could apply the insights from the profile analyses to customers with limited transaction history
who were dropped from the empirical analyses to infer
habitual proneness. The firm could then strategically invest
in developing customer relationships (through marketing)
with customers who exhibit a relatively high proneness of
forming a purchase and/or promotion purchase habit while
choosing not to invest in customers who exhibit a relatively
high proneness of forming a return or low-margin purchase
habit.
LIMITATIONS AND FUTURE RESEARCH DIRECTIONS
Habit represents a powerful and managerially useful

construct. In the context of marketing, it has been largely
unexplored beyond the repeat purchase behavior of customers. This presents tremendous opportunities for further
research. For example, this study analyzes customer habits
in the context of a particular retail store. Further research
might observe consumers behavior across multiple shop-
6These results should be accompanied by a strong theoretical support

before interpreting them as general indicators of customers habits. There is
scope for further research to generalize these results.
739
ping instances at different retail outlets (i.e., across different

contexts). It would be worthwhile to record whether a customers consumption habits at a particular retail store prevail in the context of other similar or competing retail
stores. Another underresearched area is the relationship
between customer characteristics and habitual proneness.
Although our research reports the relationships from an
empirical analyses standpoint, further research could take
the consumer behavioral route and validate the statistical
relationships found in this study through experiments. In
addition, there is scope to develop a strong theoretical
framework to support and thus generalize the empirical
relationship between customer characteristics and habit
strength.
Although we work with a large data set in this study, the
data are both left- and right-censored and span an observation period of four years. Moreover, we do not have information on competition. Further research might consider replicating this study using data sets with longer time frames that
contain information about competition. In addition, future
studies might consider adding other habit dimensions (e.g.,
recurring service requests from customers) or different
industry settings (e.g., business-to-business settings). In
conclusion, given the renewed interest of habit in the social
psychology literature and its economic value tied to different aspects of recurring customer behavior, research related
to habit in the marketing context seems to be a valuable
avenue for further research.
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DENISH SHAH, V.

KUMAR, and KIHYUN HANNAH KIM*

Keywords: habit, customer value, promotion, product return, firm

Online Supplement: http://dx.doi.org/10.1509/jmr.13.0423

Managing Customer Profits: The Power of

and Kashy 2002). If people repeatedly perform a particular

*Denish Shah is Assistant Professor of Marketing and Assistant Director

Journal of Marketing Research

Managing Customer Profits

Evidence suggests the existence of different aspects of

We organize the rest of the article as follows. We begin

JOURNAL OF MARKETING RESEARCH, DECEMBER 2014

form of a rewarding or positive outcome, which in turn

keters to evaluate whether certain recurring customer

The data come from a Fortune 500 general-purpose

Managing Customer Profits

is not significantly different from zero (t-value = 1.30, p >

The empirical analyses are divided into three studies.

Habit strength has been most commonly measured by

We conduct descriptive analyses of the retailers data set

purchase of items on promotion (promotion habit), and

Intensity of Promotion Purchase i

Number of Promotion Purchasesi

Consumers promotion purchase behavior is analogous to

JOURNAL OF MARKETING RESEARCH, DECEMBER 2014

We identify repeat buying of steeply discounted products

Intensity of Low-Margin Purchasei

Number of Low-Margin Purchasesi

Similarly, we define product return habit as a customers

Intensity of Product Returns i

Number of Product Returnsi

Number of Days on Which Purchases Are Madei

where the total number of days refers to the observation

where Ni is the number of semiannual measures over which

Mean Behavioral Intensityik

As evident from Equation 6, we add a 1 to the standard

Managing Customer Profits

habit strength measures. We then compute the correlation

We apply the habit measures to all customers of the firm

(in)consistency, we expect the absolute magnitude of the

DISTRIBUTION OF HABIT STRENGTH MEASURES

D: Low-Margin Purchase Habit

JOURNAL OF MARKETING RESEARCH, DECEMBER 2014

COMPARISON OF THE CORRELATION OF SRHI WITH

Correlation of SRHI with

Notes: p-values are in parentheses.

Frequency-Based Proposed Habit

ure with an inertia-based measure range from .45 to .77 for

STUDY 2: IMPACT OF HABIT ON FIRM

We first specify a simple linear model to evaluate

results are similar to the intercorrelation of habit measures

INTERCORRELATION OF HABITUAL BEHAVIORS

Low-Margin Purchase Habit

Managing Customer Profits

Total Profiti = a0 + a1Total CBi + a2Total Revenuei

+ a6Low-Margin Purchase Habiti + ei,

Total Profiti = sum of profit of customer i across the four years,

Profitit = hi + b1Profitit 1 + b2CBit + b3Revenueit

+ b7Low-Margin Purchase Habitit + eit,

hi = time-invariant unobserved factors,

is similar to the time interval for the habit strength measures

DProfitit = b1DProfitit 1 + b2DCBit + b3DRevenueit

+ b7DLow-Margin Purchase Habitit + Deit.

However, the lagged dependent variable (i.e., DProfitit 1)