On the Diffusion of Subscription-Based Services: The Roles of Price, Advertising, and Customers’ Defection

There are a limited number of aggregate service diffusion models that have been analytically analyzed and empirically estimated for subscription-based services. Aggregate diffusion models of this sort are instrumental for decision-making and forecasting the number of subscribers over time. In this article, an aggregate diffusion model of subscription services for a monopoly is developed, incorporating a customer acquisition process, a customer attrition process, and marketing-mix variables. On the empirical side, using Canadian cable TV diffusion data related to several provinces, the inclusion of marketing-mix variables into the aggregate diffusion model for subscription services that incorporate customers’ defection is found to improve its performance. An extended Kalman filter estimator shows that advertising affects the coefficient of innovation, whereas price affects the coefficient of imitation. On the theoretical side, the sensitivity of marketing-mix decisions to a change in customers’ defection at the steady state is operationalized for a long planning horizon together with fixed marketing-mix decisions over time. Upon meeting certain realistic conditions, it is shown for the first time that customers’ defection could enhance a firm's profitability. Managerial implications of the study, together with directions for future research, are discussed.