Journal of Retailing and Consumer Services xxx (xxxx) xxx–xxx

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Journal of Retailing and Consumer Services

journal homepage: www.elsevier.com/locate/jretconser

The impact of different price promotions on customer retention

Jungkeun Kim1
Department of Marketing, Advertising, Retailing, and Sales, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand

A R T I C L E I N F O A B S T R A C T

Keywords: This paper investigates the impact of different price promotion effects regarding two different types of service
Price promotion cost (i.e., a joining fee vs. a monthly fee) on retention intentions for new customers in the long-term service
Service retention industry. Based on the depreciation curve, mental accounting, and the escalation of commitment theory, we
Price framing predict that customers’ retention intentions will be higher when they start using a service with a free monthly fee
Depreciation
promotion rather than when they start it with a free joining fee promotion. This expectation was confirmed by
Long-term service
five studies; experiments, customer survey, and secondary data. The theoretical and managerial implications are
also discussed.

1. Introduction
Some services or products require customers to use or subscribe to
them in the relatively long term such as insurance services, sports
membership, gyms, and satellite/cable TV. In these long-term contract
industries, it is very important for marketers to keep or maintain their
customers in the long run. The previous research has suggested many
factors that influence customer retention. One factor is the impact of
previous price or sales promotions on retention (e.g., Blattberg et al.,
2009; Polo et al., 2011). Along with this stream of research, we examine
the impact of previous price promotion on customer retention in this
paper.
Practically, sales or price promotions are the most frequently used
marketing tools for attracting new customers in these industries (e.g.,
Schweidel et al., 2008). The previous literature has suggested that sales
or price promotions are some of the most effective tools for enhancing
short-term sales (e.g., Bemmaor and Mouchoux, 1991; Bucklin and
Lattin, 1992). However, another stream of research has suggested that
the long-term effect of price promotion on marketing outcomes is
generally not positive, compared to the short-term effect (see Blattberg
and Nelson, 1990 for a summary of these findings). For instance, Mela
et al. (1997, 1998) suggested that frequent price promotions could in-
crease customers’ price sensitivity, ultimately resulting in reduced
brand loyalty and/or brand equity. Similarly, Gedenk and Neslin (1999)
investigated the impact of in-store price promotions on purchase event
feedback (i.e., influence of ‘the current purchase on future brand pre-
ference’) and found that price promotions are negatively related to
purchase event feedback, suggesting a negative long-term effect of price
promotions. In a different perspective, Srinivasan et al. (2004) found
that price promotions did not increase either manufacturers’ or re-
tailers’ revenues. In sum, the previous literature has especially sug-
gested that price promotions are not effective tools for enhancing cus-
tomer loyalty or a company's profits in the long run, especially in
repeated-purchase or non-long-term contract situations, such as grocery
shopping.
Similarly, marketers in long-term contract industries face a trade-off
regarding sales or price promotions between (i) the short-term effect of
attracting new customers to their initial service and (ii) the long-term
negative effect of sales or price promotions, such as customer termi-
nation. If marketers could reduce the negative effect of price promo-
tions, they could enhance their overall positive retailing performance
based on price or sales promotions. Therefore the question, “How can
marketers in long-term contract industries reduce the negative effect of price
promotions?” is the key research inquiry of this paper. We suggest and
provide empirical evidence that different price-promotion framing may
reduce the negative effect, based on previous literature demonstrating
differential price-framing effects (e.g., Gourville and Soman, 1998;
Soman and Gourville, 2001).
In particular, we investigate the retailing situation where the costs
are twofold. Specifically, many long-term services (e.g., golf member-
ship, gym, satellite TV) require customers to pay two different types of
costs: (i) a fee that customers need to pay one time when they start
using the service (i.e., a joining fee, installation fee, or initiation fee)
and (ii) a fee that customers need to pay based on their usage for a fixed
period of time (i.e., monthly rate, annual fee, or monthly dues). For
instance, a new customer at a fitness center needs to pay an initial
membership joining fee, as well as a monthly fee for the first month. At
the same time, in order to attract new customers, many services

E-mail address: jkkim@aut.ac.nz.

1
The author would like to thank Professor Namwoon Kim for his wise comments.

http://dx.doi.org/10.1016/j.jretconser.2017.10.007
Received 31 July 2016; Received in revised form 21 September 2017; Accepted 14 October 2017
0969-6989/ © 2017 Elsevier Ltd. All rights reserved.

Please cite this article as: Kim, J., Journal of Retailing and Consumer Services (2017), https://doi.org/10.1016/j.jretconser.2017.10.007
J. Kim
frequently use price promotions, such as no joining fee or making the
first month free (e.g., Schweidel et al., 2008).
In this paper, we focus on two different types of price promotion
(i.e., price discounting for the joining fee vs. for the period rate) on
consumers’ responses. More specifically, we use two economically si-
milar promotions, which permits us to test our argument, above and
beyond the impact of the absolute amount of the discount.
Furthermore, we investigate the impact of previously different types of
price promotion on new customers’ retention intentions for subsequent
periods, as well as existing customers’ responses. In particular, we ex-
pect that customers’ intentions to continue the service would be high
when they start using the service with the free monthly fee promotion
rather than with the free joining fee promotion. The differential de-
preciation curve (e.g., Heath and Fennema, 1996) and escalation of
commitment (e.g., Staw, 1981) explain our expectation. In addition, we
also expect that the effect could have an opposite implication for ex-
isting customers. We elaborate the key hypothesis in the following
section after reviewing the relevant literature. Then, we report five
experimental studies and one field survey and make our conclusions
regarding this research.
2. Theoretical arguments, primary data analysis, and prediction
2.1. Customer retention
In this section, we review the factors influencing customer retention
rates, especially in the relatively long-term context. One stream of re-
search regards the relationship between customer retention rates and
satisfaction (e.g., Bolton, 1998; Crosby and Stephens, 1987; Rust and
Zahorik, 1993) or service quality (e.g., Bolton et al., 2006; Keaveney,
1995; Rust et al., 1995). For example, Rust and Zahorik (1993) pro-
vided empirical evidence that customer satisfaction was one of the
greatest influences for retention rates in the retail banking market.
Bolton (1998) also found similar results from cellular customer, in that
customer satisfaction was strongly related to the duration of the re-
lationship between customers and service providers, especially when
customers had a great deal of previous experience with the providers. In
addition, Bolton et al. (2006) showed that service quality was an im-
portant antecedent for renewal rates in the high-technology commu-
nication market. On the contrary, Keaveney (1995) found that
switching behavior could be primarily explained by service failure.
Other factors for retention rates have been investigated in terms of
various marketing mixes, such as loyalty programs (e.g., Bolton et al.,
2000; Lewis, 2004; Yi and Jeon, 2003), advertising and sales promo-
tions (e.g., Drèze and Bonfrer, 2008; Polo et al., 2011; Schweidel et al.,
2008; Uncles et al., 2013), and channel factors (e.g., Reinartz et al.,
2005), For example, Lewis (2004) provided theoretical and empirical
evidence of the long-term effect of loyalty programs on customer re-
tention in grocery and drugstore data.
One important factor from the marketing mix is the impact of price
on customer retention (e.g., Blattberg et al., 2009; Lewis, 2004;
Keaveney, 1995; Polo et al., 2011). For instance, Blattberg et al. (2009)
conceptually suggested the importance of price activities on retention.
Empirically, Keaveney (1995) showed that high prices or unfair/de-
ceptive pricing could significantly reduce retention. Polo et al. (2011)
further suggested that the price effect on customer retention was par-
ticularly effective in the later stages of market liberalization.
Compared to the current literature investigating the direct impact of
price on retention, this paper attempts to suggest a different perspective
to increase customer retention by changing the different framing of
price promotions, which is covered later.
2.2. Subtle price promotion effect
Price promotion is one of the important marketing/retailing tools to
attract new customers and maintain existing ones (e.g., Anderson and
2
Journal of Retailing and Consumer Services xxx (xxxx) xxx–xxx
Simester, 2004; Ailawadi and Neslin, 1998; Gupta, 1988). Recently,
based on an examination of 20 different product categories in the US
and UK, Bogomolova et al. (2015) found that price promotion was more
common after the global financial crisis. Therefore, understanding price
promotion is very important for the retailing and service industries.
One of the research streams regarding price promotion involves
investigating the subtle differences of price promotion on consumer
perceptions and responses regarding price promotions. For example,
some researchers have investigated the different types of framing on
price discounts (i.e., amount-off vs. percentage-off format) in retail
settings (Bambauer-Sachse and Massera, 2015; Bitta et al., 1981). In the
service domain, Soman and Gourville (2001) suggested that the simple
price information of bundling could influence service usage intention in
repetitive consumption situations, such as ski packages. Similarly, other
researchers focus more on the effect of subtle differences in price pro-
motion, such as the just-below price promotion effect (e.g., “up to 39%
off,” Banerjee et al., 2016), different price discount for trade-ins (Kim
et al., 2011), different price discount for bundle offers (Janiszewski, and
Cunha, 2004), simple price promotion cues, such as “sale” (Inman et al.,
1990), payment frequency versus the amount discount in multiple
payment consumption (Jhang and Kim, 2009), or comparing the price
discount and bonus pack (Hardesty and Bearden, 2003). The impact of
price promotion is different for the types of customers. For example,
Anderson and Simester (2004) found with field experiments that deeper
price discounting could increase sales from new customers, but de-
creased sales from established customers in durable products.
Along the same lines of existing research, we investigate the impact
of subtle price promotion effects by emphasizing different elements and
holding the economic benefit equal; moreover, we focus on the dif-
ferent effects across new and existing customers in this paper.
2.3. Depreciation and mental accounting
Imagine that two customers signed up to join a fitness center a few
months ago. The regular joining fee and monthly fee were the same.
Due to the price promotion, customer A was exempted from paying the
monthly fee and paid only the joining fee for the first month, whereas
customer B was exempted from paying the joining fee and paid only the
monthly fee. Later they found that their interest in the fitness center
was not high, and they considered stopping the service. Which one
would be higher in terms of service retention intention, customer A or
B? In this paper, we answer this question.
Like the company's accounting system, people also update or de-
preciate the value of a product based on their history of purchase and
usage. Heath and Fennema (1996, p. 95) define this mental deprecia-
tion as people's tendency to spread the fixed costs of their expenses over
time, mentally and implicitly. They also provide empirical evidence
that the depreciation curve is a linear function, in that people tend to
reduce the value of a product linearly over time. Along similar lines,
Gourville and Soman (1998) define payment depreciation as the “gra-
dual adaptation to an upstream transaction cost” (p. 161) and provide
empirical evidence that students who paid their athletic facility as a
semiannual payment plan attended the facility less frequently as the
months passed.
Based on the concept of depreciation, we expect a similar depre-
ciation for customers’ payments of long-term service. However, the
depreciation curve could be different for two types of fees: a joining fee
and a monthly fee. This is because people might hold different mental
accounting perceptions (Thaler, 1985) toward joining fees and monthly
fees. Mental accounting (Thaler, 1985; Thaler and Johnson, 1990)
suggests that we maintain a different mental account for each type of
transaction. When a cost is incurred, we open an account related to the
cost, maintain/update the account with a cost and benefit analysis, and
close the account when the transaction ends or when the cost and
benefit are mostly matched.
Specifically, we predict that people have relatively long period to
J. Kim Journal of Retailing and Consumer Services xxx (xxxx) xxx–xxx

100%

80%

Retenon rate
High Promoon Customers (n = 164,000)
60%
Low Promoon Customers (n = 112,000)

40%

20%

Fig. 1. Different depreciation curves for two types of fees. 0%

close the joining fee because such a fee is not related to the first period
of time, but is related to the benefit of using the service over a length of
time. For example, people could maintain a relatively higher remaining
value for their joining fee, even after using the service for a few months.
In contrast, people have a relatively short period of time to stop the
monthly fee, in that the monthly cost is easily matched to the benefits
for each month. For example, people are expected to perceive a very
low depreciated value for the previous monthly fee in the next month.
In sum, we expect that the duration of the remaining value after the
depreciation could be longer for the joining fee (vs. the monthly fee), as
shown in Fig. 1.
2.4. Main expectation
Based on depreciation and mental accounting theory, we mainly
predict a differential price discounting effect of the joining fee and
monthly fee on service retention in the long run. Based on the different
depreciation curve (i.e., Fig. 1), we expect different service retention
intentions for customers who previously had different price promotion
benefits. For the scenario of this section, we expect that service reten-
tion should be higher for customer A, who paid only the joining fee
rather than customer B, who paid only the monthly fee in the first
month because of their differential depreciated values for their initial
payments. Only customer A could have a relatively positive depreciated
value for the joining fee after a few months later from the time of
joining. We also predict that people's retention intentions will be in-
fluenced by historic payments (i.e., escalation of commitment; Arkes
and Blumer, 1985; Staw, 1981), given that people tend to make deci-
sions in order to protect their previous efforts and/or monetary
spending. Based on this expectation, we generate the formal Hypothesis
1.
Hypothesis 1:. The different type of price promotion will influence the
service retention intentions for customers. Specifically, service retention
intentions will be higher for those receiving a free monthly fee and paying a
joining fee rather than for those receiving a free joining fee and paying a
monthly fee.
3. Study 1: empirical evidence of the impact of price promotion on
retention rates
M+1
M+2
M+3
M+4
M+5
M+6
M+7
M+8
M+9
M+10
M+11
M+12
M+13
M+14
M+15
M+16
M+17
M+18
M+19
M+20
M+21
M+22
M+23
M+24
M+25
M+26
M+27
M+28
M+29
M+30
M
Fig. 2. Study 1: retention rates for two types of customers.
were categorized two groups: high-promotion customers (n = 164,000)
and low- promotion customers (n = 112,000), based on two different
channels of retailing. A typical promotion includes a discount for the
price of the phone itself and a one-time subscription fee; therefore, this
price promotion practice could be categorized as a one-time joining/
initiation fee discount rather than a monthly fee discount. The retention
rates were recorded from M+1 (February 2015) to M+30 (July 2017),
as shown in Fig. 2.
The results shows that the different levels of price promotion sig-
nificantly influenced the retention or survival rates. For the relatively
short-term context (i.e., within 12 months after the initial contract), the
average retention rate was 2.4% higher for the high- (vs. low-) pro-
motion customers. For example, in the M+6 month (i.e., July 2015),
customers in the high-promotion condition showed a relatively higher
retention rate (M = 97.2%) than those in the low-promotion condition
(M = 93.5%, difference = 3.7%; χ2 (1) = 2,213.3, p < .0001).
However, the retention rate crossed over in the +13 month. For the
subsequent years after the initial contract (i.e., M+13~M+24), the
average retention rate was 6.5% higher for the low- (vs. high-) pro-
motion customers. For the second year after the initial contract (i.e., M
+25~M+30), the difference between low- and high-promotion cus-
tomers was more dramatic, in that the average retention rate was
21.8% higher for the low- (vs. high-) promotion customers. For ex-
ample, in the M+30 month (i.e., July 2017), customers in the low-
promotion condition showed a significantly higher retention rate (M =
73.1%) than those in the low-promotion condition (M = 48.5%, dif-
ference = 24.6%; χ2 (1) = 16,586.9, p < .0001).
In sum, the secondary data analysis from actual customers’ behavior
clearly shows a negative long-term effect of joining or initiation fee
discounts on χcustomer retention rates. Consequently, it is very im-
portant for retailers to reduce the negative effect of price promotions
and to retain current customers in the long run. However, there is a
limitation of using secondary data to establish causality. In order to
enhance the internal validity of our findings of Study 1, we utilize more
controlled experiments in the following studies. We show that the
manipulation of subtle price promotion presentation could change the
retention rate in the subsequent experimental studies, resulting in
strong evidence of a casual relationship.

As mentioned earlier, the previous literature has suggested that

4. Study 2: establishing the phenomenon
price promotions generate a negative long-term effect, especially in
repeated-purchase situations. We expected a similar negative effect of
The purpose of study 2 is to provide initial empirical evidence of the
price promotions involving a one-time joining or initiation fee on re-
impact of different price promotions on service retention intentions
tention rates for long-term contract industries. In order to provide
(i.e., H1). We mainly use a similar scenario of the previous section.
empirical evidence, the researcher investigated the impact of a joining
fee promotion on retention in the long term. The detailed retention rate
data were collected from one of three major mobile carrier companies 4.1. Method
in South Korea. The key customers (n = 276,000) started to use this
mobile service in January 2015 with brand-new top-10 premium Thirty-five undergraduates from a large university (48.6% female,
phones, such as the iPhone 6, Galaxy 5, Galaxy Note 5, etc. Customers average age = 21.9) participated in this study. They were randomly

3
J. Kim
assigned to one of 2 conditions (type of price promotion: free joining fee
vs. free monthly fee price promotion) in a between-subjects design.
Participants were first asked to imagine that they signed up for a
fitness center 4 month ago. The joining fee of the fitness center was
$100, and the bi-monthly fee was also $100. When they signed up for
the center, there was a special marketing promotion. Participants in the
free joining fee condition were informed that they were exempted from
paying the joining fee and needed to pay only a bi-monthly fee ($100).
On the other hand, participants in the free monthly fee condition were
informed that they were exempted from paying the first bi-monthly fee
and needed to pay only a joining fee ($100) for the first two months.
Then, all participants were further asked to imagine that they have
used the fitness center for 4 months and found that their motivation for
exercise was not as strong as previously expected. They only visited the
fitness center 4 or 5 times in the last month. After that, participants
were asked to rate their retention intentions along a 9-point scale (1 =
definitely I would stop using fitness center, 9 = definitely I would
continue using fitness center). Finally, they were thanked and de-
briefed.
4.2. Results and discussion
As expected, the different types of previous price promotion sig-
nificantly influenced service retention intentions (F (1, 33) = 4.25, p <
.05). Specifically, participants in the free monthly fee condition (M =
4.63) showed higher retention intentions than those in the free joining
fee condition (M = 3.05). Put differently, retention intentions were
higher for those who paid only the joining fee (vs. the bi-monthly fee).
Therefore, this study provided initial evidence of the differential price
promotion effect.
One weakness of this study is the different amounts for the joining
fee and the monthly fee. Since the joining fee is $100 and the monthly
fee is $50 per month (i.e., bi-monthly fee is $100), people might show
higher service retention intentions when they paid a higher amount for
the joining fee. This is simply because of the sunk cost effect, indicating
that people tend to keep the previously high-paid option (e.g., Staw,
1981). In order to exclude this alternative explanation, we use the
monthly fee rather than the bi-monthly fee in study 3. In addition, we
use a scenario with a slightly higher price for the monthly fee (vs.
joining fee).
5. Study 3: replicating and extending the phenomenon
The purpose of study 3 is to provide additional evidence of the
impact of different price promotions on service retention intentions. In
this study, we also include a no price promotion condition as the con-
trol condition. Arkes and Blumer (1985) suggested that trying to avoid
appearing wasteful is related to the escalation of commitment. There-
fore, we measured perceived wastefulness for each payment in order to
check our assumption regarding different depreciation curves from the
joining fee and the monthly fee.
We expect people to have a higher level of being wasteful regarding
the previous payment of joining fees if they decide to discontinue using
the fitness center. However, the same perception was not applied to the
previous payment of the monthly fee, because their depreciated value
for the monthly fee could be very small at the end of each month. This is
because the costs and benefits of the monthly fee are expected to be
easily matched within the monthly period. Finally, we use a different
scenario, in which the amount of the joining fee is little less than that of
the monthly fee in order to remedy the weakness of study 2.
5.1. Method
Ninety-seven undergraduate and postgraduate students from a large
university (66.7% female, average age = 22.6) participated in this
study. They were randomly assigned to one of 3 conditions (type of
4
Journal of Retailing and Consumer Services xxx (xxxx) xxx–xxx
price promotion: free joining fee vs. free monthly fee vs. no price pro-
motion) in a between-subjects design.
The general procedure and task were similar to those of study 1,
except for a few modifications. Participants were first asked to imagine
that they signed up for a fitness center 4 month ago. The joining fee of
the fitness center was $45, and the monthly fee was $50. Participants in
the no price promotion condition were asked to pay the regular prices.
Participants in the free joining fee condition were informed that they
needed to pay only a monthly fee ($50) from a special marketing
promotion. Finally, participants in the free monthly fee condition were
informed that they needed to pay only a joining fee ($45) for the first
month.
Then, all participants were further asked to imagine similar in-
structions in study 1, and they were asked to rate their retention in-
tentions along the same scale of study 1. In order to check the different
depreciation for the two prices, they were asked to rate their perceived
wastefulness for each payment (i.e., if I stop using the fitness center today,
my previous payment of the “joining fee [monthly fee]” would be) along a 9-
point scale (1 = not at all wasteful, 9 = very wasteful). Finally, they
were thanked and debriefed.
5.2. Results
5.2.1. Perceived wastefulness
We expect that perceived wastefulness would be higher when
people paying only for the joining fee (vs. monthly fee) decided to
discontinue the service. The results confirmed our hypothesis.
Specifically, for perceived wastefulness involving the previous joining
fee, the main effect of the type of price promotion was significant (F (2,
94) = 3.38, p < .05) as shown in Fig. 3. Post hoc tests indicated that
perceived wastefulness for the joining fee was higher for the free
monthly fee condition (M = 5.81) than for the free joining fee condi-
tion (M = 4.45, p < .05). In addition, perceived wastefulness for the
joining fee in no price promotion condition (M = 5.94) was higher than
that for the free joining fee condition (M = 4.45, p < .05). In sum, the
wastefulness regarding the joining fee was higher for people those who
paid (vs. those who did not pay) the joining fee. On the other hand, the
main effect of the type of price promotion was not significant for per-
ceived wastefulness involving the previous monthly fee, (F (2, 94) =
1.47, p > .10). Put differently, perceived wastefulness for the previous
monthly fee was not influenced by the earlier price promotion (M_no
price promotion = 5.03 vs. M_free monthly fee = 5.35 vs. M_free joining fee =
6.10). In conclusion, the empirical data supported our key assumption
regarding the differential depreciation for the joining fee and the
monthly fee with perceived wastefulness.
5.2.2. Retention intentions
As expected and as shown in Fig. 3, the different types of previous
price promotion significantly influenced service retention intentions (F
(2, 94) = 4.82, p < .05). Post hoc tests confirmed that participants in
the free monthly fee condition (M = 4.84) showed higher retention
intentions than those in the free joining fee condition (M = 3.35, p <
.01), thus replicating the previous result. In addition, participants in the
no price promotion condition (M = 4.37) also showed higher retention
intentions than those in the free joining fee condition (M = 3.35, p <
.05). However, service retention intentions were similar between the
free monthly fee and no price promotion conditions (p > .10) (Fig. 3).
5.3. Follow-up study
The scenario-based method with extra instruction (i.e., asking about
retention intention a few months later) could have a limitation, espe-
cially in measuring retention intention. The purpose of follow-up is to
provide different evidence of the impact of different price promotions
on service retention decisions with a different dependent variable.
Specifically, we mainly use estimated months of fitness center use based
J. Kim Journal of Retailing and Consumer Services xxx (xxxx) xxx–xxx

Perceived wastefulnesss
Retenon intenons
7 signed up for the gym; and (iii) the amount of the discounted joining fee
5.94 5.81
6
5 4.84
4.45
4.37
4 often do you currently visit the gym/fitness center?”) along a 7-point
3.35
3
2 I will maintain the membership forever). Finally, participants were
1
No price promoon Free monthly fee Free joining fee
Fig. 3. Study 3: effects of different price discounts.
on two different price promotion situations. We expect that people who
get the free monthly free promotion (i.e. paying the joining fee) should
show a higher service duration estimate than those who get a free
joining fee (i.e., paying the same amount in the name of the monthly fee
upon starting).
Eighty-three US adults recruited from Amazon MTurk (average age
= 36.7, 32.5% female) participated. They were randomly assigned to
one of 2 conditions (type of price promotion: free joining fee vs. free
monthly fee price promotion) in a between-subjects design. The general
procedure was similar to that of study 2, except for a few modifications.
Participants were first asked to imagine the similar scenario of study 2,
in that the joining and monthly fee of the fitness center was $50 each.
Based on the different experimental conditions, they were asked to
imagine that they only paid either the joining fee or the monthly fee
due to a special price promotion. Then, they were asked to estimate the
minimum months they expected to use the fitness center.
The participants’’ estimated months to use the fitness center were
highly positively skewed (skewness = 5.78). Therefore, we used log
transformations. The result of an ANCOVA (i.e., age and exercise level
as covariates & gender as a control variable) indicated that the type of
price promotion significantly influenced the estimated months (F (1,
78) = 4.13, p < .05). Specifically, participants in the free monthly fee
condition (M = 10.38 months) showed a higher estimation of months
to use the fitness center than those in the free joining fee condition (M
= 6.09 months).
6. Study 4: evidence from actual gym customers
All previous experiments showed a causal relationship between the
regarding the joining fee: (i) the standard joining fee; (ii) whether there
was a price discount promotion on the joining fee at the time they
[if yes in (ii)]. The participants were asked to answer questions re-
garding the monthly fee: (i) the regular monthly fee; (ii) whether there
was a price discount promotion on the monthly fee at the time they
signed up for the gym; and (iii) the amount of the discounted monthly
fee [if yes in (ii)].
Third, participants were asked to rate their current usage (i.e., “How
scale (1 = not at all, 7 = very often) and retention intention (i.e., “How
much do you want to keep/maintain this membership?) along two 7-
point scales (1 = I will stop the membership right now/I will cease the
membership immediately, 7 = I will keep the membership indefinitely/
asked to provide their demographic information.
6.2. Results
6.2.1. Customers grouping
First, based on the self-reported data, we categorized 4 different
groups: (i) Group #1: no joining fee & no monthly fee discounted group
(n = 45); (ii) Group #2: only monthly fee discounted group (n = 11);
(iii) Group #3 only joining fee discounted group (n = 40); and (iv)
Group #4: both joining fee & monthly fee discounted group (n = 31).
Their current membership fee across the 4 groups was not significantly
different from each other (F (3, 122) = 1.30, p > .10).
6.2.2. Retention intention and other statistics
Since the two measurements of retention intention were highly
correlated (Pearson correlation r = .77, p < .001), we used the mean of
two variables in the main analysis. The detailed data pattern is illu-
strated in Table 1. Furthermore, we mainly focus on the comparison
between Group #2 (i.e., only monthly fee discounted group) and Group
#3 (i.e., only joining fee discounted group). The type of previous price
promotion significantly influenced current retention intention (F (1, 49)
= 4.02, p = .05). Specifically, gym membership retention intention
was higher when members joined with the only monthly fee discounted
promotion (i.e., Group #2; M = 6.00, SD = 1.16) than when they
joined with the only joining fee discounted promotion (i.e., Group #3;
M = 4.91, SD = 1.69).
Similar results were found for the duration of current membership
(F (1, 49) = 4.14, p < .05), in that the members of Group #2 (i.e., only
monthly fee discounted group; M = 35.18 months, SD = 49.18)
showed a longer duration of having a membership for the gym than
those in Group #3 (i.e., only joining fee discounted group; M = 16.28
Table 1
Study 4: effects of different price discounted promotions on outcomes.

type of price promotion and retention intention. In this study, we ex- Group #1 Group #2 Group #3 Group #4
tend the external validity of this paper by investigating the retention No joining Only Only joining Both joining fee
rate by different price promotions. fee & no monthly fee fee & monthly fee
monthly fee discounted discounted discounted
discounted group group group
6.1. Method group*

One hundred twenty-seven US adults (average age = 35.8, 56.9% Retention 5.06 6.00 4.91 5.29
female) from an online panel (Amazon MTurk) participated in this intention (1.14) (1.16) (1.69) (1.22)
Duration of 20.78 35.18 16.28 12.81
study. The study was intended only for those who were currently using current months months months months
a gym or fitness center at the time of the survey (i.e., May 2017). membership (20.88) (49.18) (17.75) (1.17)
First, after confirming whether they had current gym/fitness center Current usage 5.18 5.91 4.68 5.35
membership, participants were asked to provide the duration of their (1.21) (1.04) (1.66) (1.31)
Current monthly $37.82 $47.54 $29.87 $29.74
current membership and the name/brand of the gym/fitness center.
membership (30.13) (53.02) (27.66) (28.60)
Second, we explained the cost structure (e.g., “Usually, there are a fee
one-time joining fee and a fixed monthly fee for gym/fitness center
membership”). Then, we asked participants to respond to questions *The values in the parentheses are the standard deviations.

5
J. Kim
months, SD = 17.75). In addition, the previous promotion also sig-
nificantly influenced current usage (F (1, 49) = 5.47, p < .05), in that
the members of Group #2 (M = 5.91, SD = 1.04) showed a longer
duration of having a membership for the gym than those in Group #3
(M = 4.68, SD = 1.68).
In order to investigate the mediating role of the duration of current
membership and current usage on retention intention, we conducted a
mediation analysis for Groups #2 and 3, based on Preacher and Hayes
(2008); Hayes et al. (2017); SPSS macro modules #4 with 5000 boot-
strapping samples). The regression model (i.e., retention = f (current
usage, duration of current membership, type of price promotion)) was
significant (R2 = .10, F (1, 49) = 5.47, p < .05). In detail, the current
usage was significant (b = .37, t = 2.61, p < .05), but the duration of
current membership was not (b = .01, t = .47, p > .10). More im-
portantly, the type of price promotion was not significant (b = − .56, t
= − .96, p > .10), suggesting significant mediation. Furthermore, the
results indicated an insignificant direct effect (95% bootstrap CI: −
1.717, .607). Furthermore, the results showed a significant indirect
effect of current usage (95% bootstrap CI: − 1.158, − .046), but an
insignificant indirect effect of the duration of current membership (95%
bootstrap CI: − .465, .147). The Sobel test was also marginally sig-
nificant for current usage (z = − 1.68, p < .10), but was not sig-
nificant for the duration of current membership (z = −. 41, p = .68).
Thus, we found a significant mediating role of current usage, suggesting
that people who joined a gym with a discounted monthly fee [joining
fee] visited the gym more [less] frequently and, subsequently, showed
higher [lower] retention intention in the future. However, the higher
retention intention was not mainly driven simply by a longer mem-
bership duration.
In sum, we found a significant effect of the previous price promotion
on current usage and retention intention from actual gym members.
Similar to the results of the previous experiment, we found that cus-
tomers who paid the joining fee (i.e., Group #2) attended the gym more
frequently and had higher retention intention, as well.
7. Study 5: impact of price promotion on existing customers
The purpose of study 5 is different from those of the previous study.
In the previous studies, we investigate the impact of different price
promotions in the perspective of new customers who received those
benefits. In this study, we investigate the effect from the perspective of
existing customers who did not receive the price benefits, and conse-
quently, experienced a loss from not enjoying the price discount ben-
efits. For existing customers, they will compare their payment structure
with that of new customers. When the current price promotion waives
the joining fee, existing customers might compare this benefit (i.e., $0
for the joining fee for new customers) with their depreciated joining fee
(i.e., depreciated joining fee: [$0 < $JF_depreciated < $JF_original] for
themselves), resulting in relatively low feelings of unfairness for the
new price promotion. On the other hand, when the current price pro-
motion waives the monthly fee, people might compare this benefit (i.e.,
$0 for the monthly fee for new customers) with their current monthly
fee (i.e., almost the full monthly fee for themselves), resulting in a high
level of feelings of unfairness (e.g., Bolton et al., 2003; Haws and
Bearden, 2006) for the new price promotion. In sum, we expect that the
free monthly fee [vs. the free joining fee] price promotion will generate
negative responses for existing customers who did not receive the price
promotion benefits.
Hypothesis 2:. The different type of price promotion for new customers will
influence service retention intentions for existing customers. Specifically,
existing customers’ evaluation of the price promotion for new customers will
be more negative for the price promotion of receiving a free monthly fee and
paying a joining fee rather than for the price promotion of those receiving a
free joining fee and paying a monthly fee.
6
Journal of Retailing and Consumer Services xxx (xxxx) xxx–xxx
7.1. Method
Fifty-two undergraduates from a large university (50.0% female,
average age = 22.6) participated in this study. They were randomly
assigned to one of 2 conditions (type of price promotion: free joining fee
vs. free monthly fee price promotion) in a between-subjects design.
The general procedure and task were similar to those of study 1,
except for a few modifications. Participants were first asked to imagine
that they signed up for a fitness center 4 month ago and paid both a
$100 joining fee and a $100 bi-monthly fee for the fitness center. In
addition, there was a recent special marketing promotion for new
members. Participants in the free joining fee [free monthly fee] con-
dition were informed that new members would be exempted from
paying the joining fee [first bi-monthly fee] and needed to pay only a
bi-monthly fee [a joining fee] ($100) for the first two months.
After that, participants were asked to rate their overall satisfaction
toward the membership of the fitness center along four 9-point scales (1
= dissatisfied/ unhappy/ disappointed/ displeased, 9 = satisfied/
happy/ delighted/ pleased, modified from Wirtz and Lee, 2003, Cron-
bach α = .93). They were also were asked to rate the perceived fairness
(i.e., “fair” and “justified”) regarding the price they paid along two 9-
point scales (1 = strongly disagree, 9 = strongly agree, based on
Greenberg, 1993, Cronbach α = .86) and retention intentions for using
the fitness center (1 = stop using, 9 = continue using).
7.2. Results
7.2.1. Overall satisfaction
First, overall satisfaction scores across the two experimental con-
ditions were lower than the neutral point (3.38 vs. ‘5’, t (51) = − 7.65,
p < .001), suggesting an overall negative effect of price promotion for
new customers. We expect higher satisfaction from participants in the
free joining fee (vs. free monthly fee) condition. As expected in
Hypothesis 2, the main effect of the different types of previous price
promotions was significant (F (1, 50) = 4.47, p < .05). Specifically,
participants in the free joining fee condition (M = 3.83) showed higher
overall satisfaction than those in the free monthly fee condition (M =
2.96).
7.2.2. Perceived fairness
We expect higher perceived fairness from participants in the free
joining fee (vs. free monthly fee) condition. As expected, the different
types of previous price promotion for new members significantly in-
fluenced perceived fairness for existing customers who paid the whole
price (F ( 1, 50) = 4.84, p < .05). Specifically, participants in the free
monthly fee condition (M = 2.96) showed a lower level of perceived
fairness than those in the free joining fee condition (M = 4.02). A
mediation analysis was conducted for testing the mediating role of
perceived fairness on overall satisfaction. The results indicated a sig-
nificant indirect effect of perceived similarity (95% bootstrap CI: −
1.430, − .087), but an insignificant direct effect (95% bootstrap CI: −
.594, .367). The Sobel test was also significant (z = − 2.15, p < .05).
Thus, we found a significant mediating role of perceived fairness.
7.2.3. Retention intentions
Overall, retention intentions across the two experimental conditions
were similar to the neutral point (5. 46 vs. “5,” t (51) = 1.48, p > .01).
However, the different types of previous price promotions did not sig-
nificantly influence service retention intentions (F (1, 50) = .45, p >
.10). These insignificant results could be attributed to the different
scenario of this study, in that the lack of motivation was not included in
this study.
8. General discussion
Price promotion is one of the common marketing/retailing tools for
J. Kim
long-term service providers to attract new customers. In this paper, we
investigate the impact of subtle difference of price promotions (e.g., a
free joining fee vs. a monthly fee for economically the same value) on
customers’ retention intentions for the subsequent period. We also in-
vestigate the impact of different price promotions on responses from
existing customers who did not receive the same benefit. Based on
mental accounting theory and the different depreciation curve for the
joining and monthly fees, we mainly find the differential price dis-
counting effect of the joining fee and monthly fee on service retention
intentions in the long run. The results of studies 2 and 3 suggest that
new customers who started to use the service by paying only the joining
fee [vs. paying only the monthly fee] showed higher service retention
intentions later on. In addition, the secondary data of study 1 and the
survey from actual customers in study 4 add external validity to our
findings. In addition, study 5 illustrated the notion that different price
promotions influence existing customers, based on the comparison
process and on feelings of fairness. Moreover, these different price
promotions revealed a moderating effect of customer type (i.e., existing
vs new customers) on the price promotion effect.
The current research has noteworthy theoretical implications. First,
this paper could contribute to the depreciation effect on service reten-
tion decisions. In contrast to payment depreciation (Gourville and
Soman, 1998), which focuses on the time gap between the purchase and
consumption of a product, we focus on the impact of the previous price
promotion effect regarding future retention intentions in repeated
consumption situations. In addition, we suggest that the depreciation
curve could depend on the types of price promotions.
Second, this study is related to preference reversal for economically
equivalent options (e.g., Bambauer-Sachse and Massera, 2015; Kim,
2017; Soman and Gourville, 2001; Thaler, 1985; Tversky and
Kahneman, 1981). For example, Tversky and Kahneman (1981) sug-
gested that people's likelihood of purchasing a ticket for a play would
be higher when they lose $10 in cash rather than a pre-purchased ticket
of the same value. Soman and Gourville (2001) provide empirical evi-
dence that ski intensions for the last days were higher when a four-day
ticket was presented individually rather versus in a bundled format. In
this paper, we suggest subtle price framing (i.e., a different price pro-
motion effect) as a source for preference reversal for the long-term
service industry.
Third, this study could importantly contribute to the literatures in
price fairness and the sunk cost effect. The implications of this study are
similar to Bolton et al. (2003), emphasizing the importance of the
communicating strategy for marketing activities in perceived fairness.
However, this research suggests that customers’ perceived (un)fairness
could be influenced by the selection of the price promotion, which has
never been investigated. In addition, this study could extend our un-
derstanding of the sunk cost effect (Staw, 1981), given that the impact
of previous spending on subsequent decisions could depend on different
types of price promotion framing.
Fourth, the main finding of this paper is based on the assumption
that (i) consumers remember accurately what they paid upon joining
the service and that (ii) this memory regarding previous payment in-
fluences future retention judgment. The first part of the assumption
could be supported by literature regarding memory-based price judg-
ment (e.g., Binkley and Bejnarowicz, 2003; Ofir et al., 2008), showing
that consumers have a detailed and accurate memory regarding a
previous purchase. The second part of the assumption could also be
supported by literature showing the effect of the previous payment
amount (e.g., Arkes and Blumer, 1985; Thaler, 1985) or method (e.g.,
Soman and Gourville, 2001) on future judgment. Therefore, we believe
that the previous payment could have significantly influenced future
judgment.
Fifth, related to the previous discussion, the actual data from studies
1 and 4 suggest that the previous decision itself could have a significant
impact on the subsequent period, such as over 2 years. This long-term
effect of a relatively simple decision action is not surprising, based on
7
Journal of Retailing and Consumer Services xxx (xxxx) xxx–xxx
the previous literature. For example, some literature regarding cogni-
tive dissonance theory illustrates that a simple self- choice (vs. com-
puter-choice) action could influence the spread of preference (i.e., dif-
ference in the evaluation of the chosen and rejection options) over
multiple years (e.g., Sharot et al., 2012). For example, Sharot et al.
(2012) showed that simple choice action influences attitudes toward
the chosen and rejected options, even 3 years later. Based on this ob-
servation, we believe that the experience of the previous promotion in
the initial stage could influence retention decisions substantially later.
Sixth, the results of this study could be moderated by promotion-
proneness, which can be defined as the “tendency to use promotional
information as a reference to make purchase decisions”, Martínez and
Montaner (2006, p. 158). Since people who are high (vs. low) in pro-
motion-proneness are likely to be influenced significantly by the pro-
motion in the attitude and choice task (Crespo-Almendros and Del
Barrio-García, 2016), we expect that the impact of the two different
price promotions on future retention intention will be more for high (vs.
low) promotion-prone customers. Future studies need to investigate the
moderating role of promotion-proneness.
Finally, the study has implications for the literature of service re-
tention intentions. For example, our results are the same as those of
Schweidel et al. (2008), in that both research studies suggest the im-
portance of previous promotion effects on retention decisions. How-
ever, our research provides more detailed predictions (i.e., different
price promotions) regarding service retention intentions.
The results of this research suggest important practical and man-
agerial implications. First, the results suggest a straightforward take-
home message for retailers and marketers. When retailers and service
providers have the option of choosing the target of a price promotion
for two different prices, it is better to provide price discounting for a fee
related to a fixed period rather than a fee related to a one-time payment
for starting up the service, especially when focusing on new customers.
Second, Vigna and Malmendier (2006) analyzed long-term con-
tracted gym members. They found that most of the members did not
frequently visit their contracted gym. For example, the average member
paid over $70 for the monthly fee, but visited the contacted gym only
4.3 times per month, indicating that members could save money if they
pay the daily fee (e.g., $10) rather than the monthly contracted fee.
This low visiting rate was the main reason for canceling a long-term
contract. The results of our survey results from study 4 suggest that the
type of previous price promotion significantly influences the current
usage of gym members. Specifically, members who paid the joining fee
(vs. monthly fee) actually visit the gym more frequently. This frequent
visiting rate may increase customer satisfaction, resulting in long-term
high retention. Marketers of long-term contracts who need to manage
usage can utilize the results of this study.
Third, based on the results of study 5, above recommendation could
be the opposite effect for existing customers who did not receive a si-
milar benefit. Therefore, marketers should choose the best options
based on the importance of new vs. existing customers and service re-
tention rates. In addition, this different price promotion could address
the problem of low customer retention from the variety-seeking ten-
dency (e.g., Berné et al., 2001) or satiation (also see Redden, 2008).
Finally, the findings of study 1 have several implications. Compared
to the previous literature showing the effect of price promotion on re-
tention, the results indicate that a heavy (vs. low) price promotion
could have a positive effect in the relatively short-term context, but
could also have an unintended negative effect, especially in the rela-
tively long-term context. Based on this observation, retailers may
maximize their profit, based on the scope of their target market and
market situations.
A few limitations in our research suggest the need for future re-
search. One limitation is that we did not pay a great deal of attention to
the types of service categories. In addition, we did not cover the si-
tuation of partial discounts for the two types of pricing (e.g., 50%
discounting for both fees rather than 100% discounting for a single fee)
J. Kim
or different types of price promotion (e.g., dollar discounting vs. per-
centage discounting) effects on retention. Second, even though we ar-
gued that a different depreciation curve is the key underlying me-
chanism of our finding, other alternative explanations could influence
the results. Future study needs to empirically test our key underlying
mechanism more rigorously. Third, there are a few weaknesses in Study
4, in that poor memory could influence the results; moreover, we did
not measure gym users’ perceived health benefits. Future study needs to
consider these factors. Fourth, even though we used multiple methods
(i.e., secondary data, survey, and experiment) and sampling (i.e., stu-
dents and online panels) in this study, future research needs to in-
vestigate this issue by manipulating different promotions from actual
businesses in order to extend the external validity of our findings.
Finally, the main experiment based on scenario-based method could
have the limitation of external validity. However, the scenario-based
experimental method is frequently used for retailing and service re-
search (e.g., Baumann and Hamin, 2014; Soman and Gourville, 2001).
Future research might investigate this research from these perspectives,
such as conducting a field experiment with different price promotion
manipulations.
In sum, this paper suggests one clear take-home message that dis-
counting the monthly fee (vs. the joining fee) is better for long-term
retention for new customers.
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