MPRA Munich Personl RePEc Archive Suscrier churn in the Austrlin ISP mrket Gry G Mdden nd Scott J Svge nd Grnt Cole-Nel Curtin University of Technology, School of Economics nd Finnce, Perth WA 6845, Austrli, Curtin University of Technology, School of Economics nd Finnce, Perth WA 6845, Austrli, Curtin University of Technology, School of Economics nd Finnce, Perth WA 6845, Austrli 1999 Online t http://mpr.u.uni-muenchen.de/11450/ MPRA Pper No. 11450, posted 7. Novemer 2008 23:15 UTC
Informtion Economics nd Policy 11 (1999) 195 207 www.elsevier.nl/ locte/ econse Suscrier churn in the Austrlin ISP mrket * Gry Mdden, Scott J. Svge, Grnt Cole-Nel Communictions Economics Reserch Progrm, School of Economics nd Finnce, Curtin University of Technology, GPO Box U1987, Perth 6845, Austrli Astrct Rpid growth in Internet use, comined with esy mrket entry y Internet service providers (ISPs), hs resulted in highly competitive supply of Internet services. Austrlin ISPs rnge in size from few lrge ntionl opertors to niche ISPs focused on specilised service. With mny ISPs currently not profitle, suscrier retention is n importnt spect of survivl. This study develops model which reltes the proility of suscrier churn to vrious service ttriutes nd suscrier chrcteristics. Estimtion results show tht churn proility is positively ssocited with monthly ISP expenditure, ut inversely relted to household income. Pricing lso mtters with suscriers preferring ISPs which offer flt-rte pricing rrngements. 1999 Elsevier Science B.V. All rights reserved. Keywords: Internet; Customer churn; Pricing JEL Clssifiction: C93; L96; O33 1. Introduction The rpid growth in Austrlin Internet use, comined with reltively esy mrket entry y Internet service providers (ISPs), hs resulted in the competitive supply of Internet services, with one ISP per 2500 customers (Deprtment of Industry, Science nd Tourism (DIST), 1998, Deprtment of Communictions, Informtion Technology nd the Arts (DoCITA), 1998). Austrlin ISPs rnge in size from few lrge ntionl opertors such s OzEmil nd Telstr Big Pond, oth of whom hve over 200 000 suscriers, to smll niche mrket opertors. However, the current mrket structure is turulent. Jck Dvies, chief executive of * Corresponding uthor. Tel.: 161-8-9266-7763; fx: 161-8-9266-3026. E-mil ddress: mddeng@cs.curtin.edu.u (G. Mdden) 0167-6245/ 99/ $ see front mtter 1999 Elsevier Science B.V. All rights reserved. PII: S0167-6245(99)00015-3
196 G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 Americ On Line (AOL), recently sserted tht while two or three ig compnies will eventully dominte the Austrlin mrket, there is room for niche ISPs focused on usiness-to-usiness electronic commerce (Montgomery, 1998). ISPs provide users with networked informtion service y connecting to lrger ISP, or to network service provider (NSP). NSPs consist of regionl, ntionl nd interntionl Internet ckone providers who re linked together t network exchnge points. Circuits etween users, ISPs nd NSPs re typiclly provided y the pulic telecommunictions opertors (PTOs) Optus nd Telstr. Effectively, ISPs re resellers who purchse ndwidth cpcity in ulk from PTOs nd repckge it into smller prcels for retil sle. As such, the ulk of ISP costs comprise of interconnection nd trnsmission costs 48% of totl industry expenses in 1997 (Austrlin Bureu of Sttistics (ABS), 1998). Other vrile suscrier cquisition costs, such s dvertising, re proportionl to the size of the suscrier se. Accordingly, for given ISP flt-rte service chrge, the verge cost of providing Internet ccess flls with increses in the suscrier se. With mny ISPs currently not profitle, the retention of suscriers is n importnt 1 spect of ISP survivl strtegy. Severl Austrlin ISPs hve dopted loss-leder strtegies to quickly gin suscrier se. This strtegy is similr to the tht employed y United Sttes (US) ISPs. For instnce, the Strtegis Group (1998) suggest tht new ISP my hve to offer n introductory price tht is 20 to 30% elow mrket rtes to ttrct 2 customers. Although loss-leder strtegies prevent full cost recovery in the short-run they cn generte future revenue strems (for exmple, from dvertising). Perhps, more importntly, incresed mrket shre mkes the ISP n ttrctive tkeover trget for lrger ISPs nd telcos. Accordingly, one spect of competition etween ISPs focuses on suscrier loylty, typiclly mesured y the churn rte. Churn is the percentge of the suscrier se which disconnects from n ISP during defined period. In 1997, one in seven suscriers world-wide ndoned their ISP every month turnover five times higher thn tht for moile telephones (Economist, 1997). Medi reports nd proprietry dt suggest the Austrlin experience is similr. The Communictions Economics Reserch Progrm (CERP, 1997) report Austrlin Internet churn rtes of 20% in 1997, whilst Telstr (1998) descrie very high level of churn for their ISP Big Pond. Anlysis of customer retention hs received recent ttention in oth economics nd mrketing litertures. Rust nd Zhorik (1993) nd Zeithml et l. (1996) exmine the link etween service ttriutes nd ehviourl intentions, such s defection nd loylty. Li (1995) nd Bhttchry (1998) empiriclly nlyse this 1 ISPs recorded n operting loss efore tx of 30.4 million Austrlin dollrs (AUD) for the yer ended 30 June 1997 (ABS, 1998). 2 Greenstein (1998) reports tht mny US ISPs provide sic ccess for ten US dollrs (USD), ut t lower qulity of service, nd so re often insufficiently funded for upgrding the network.
G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 197 reltionship y employing hzrd rte models to relte customer chrcteristics to 3 churn rtes. Further, Ci et l. (1998) use multi-ttriute choice experiments to focus on the reltionship etween customer churn ehviour nd the service ttriutes of Clifornin electricl utilities. In their study, vrious levels of service re contrsted with rnge of price discounts to test the threshold points t which loyl customer is induced to switch to competitor. Proility estimtes of churn re clculted using logit model. Following Ci et l. (1998), this study develops proility model for ISP 4 suscrier churn. The model reltes the proility of suscrier churn to vrious service ttriutes nd suscrier chrcteristics enling the churn proility to e clculted. Model estimtion is on dt otined from we sed survey of Austrlin residentil Internet users. The pper is orgnised s follows. Section 2 descries Austrlin ISP industry structure, pricing nd suscrier churn. Section 3 outlines the survey method nd Internet suscrier profile for respondents. Summry informtion for these dt is provided therein. A model of ISP suscrier churn is developed in Section 4, whilst generted vriles nd the econometric model specifiction re detiled in Section 5. Estimtion results re reported in Section 6. Section 7 contins concluding remrks. 2. Industry structure, pricing nd suscrier churn ISP ccess to interntionl nd domestic telecommunictions networks is primry production input, nd lower ccess chrges should shift ISP supply outwrd. As reported in Tle 1 pulic switched telephone network (PSTN) chrges typiclly ccount for over hlf the totl cost of ccessing the Internet in most OECD countries. At 1997 Austrlin lesed lines, nd locl-exchnge, long-distnce nd interntionl PSTN services were minly provided y Optus nd Telstr. Incresed competition within oth the PSTN nd ISP mrkets hs driven prices stedily down, ut s yet they hve to rech the low levels of flt-rte plns 5 offered in the US nd Cnd. At the end of June 1997 there were pproximtely 300 ISPs operting in Austrli, typiclly offering flt-rte plns nd plns which comined monthly ccess nd usge fees. For exmple, Ozemil offered to high-volume users flt-rte unlimited usge pln for AUD295 per month. Low-volume, frequent users cn suscrie to the OzSver 2 pln which offers 20 hours of ccess time for AUD39 per month nd AUD5 (AUD2.50) per dditionl 3 This pproch provides churn proility estimtes nd complements the work of Wyner (1996) nd Srinivsn (1996,) who provide customer vlution models. 4 Ktz nd Aspden (1998) lso exmine ISP suscrier turulence in their study of Internet dropouts in the US. Survey dt from 1995 nd 1996 shows tht dropouts re younger, poorer, nd less well educted thn were users. 5 The fixed locl-exchnge ccess chrge is nother importnt spect of Internet ccess.
198 G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 Tle 1 OECD Internet ccess nd pricing 1996 Country Income Internet price GDP per Totl price PSTN cpit USD USD c shre Luxemourg 42,351 54.27 0.56 Switzerlnd 41,632 64.67 0.71 Jpn 36,575 49.85 0.67 Norwy 36,028 44.96 0.76 Denmrk 33,125 61.56 0.77 Germny 28,720 65.49 0.74 US 28,646 28.88 0.48 Sweden 28,308 43.96 0.73 Austri 27,602 89.81 0.78 Icelnd 26,976 30.87 0.43 Belgium 26,453 52.02 0.78 Frnce 26,357 46.11 0.80 Netherlnds 25,293 56.59 0.73 Finlnd 24,259 32.05 0.74 Austrli 21,383 24.13 0.57 Itly 21,155 46.56 0.77 Cnd 20,081 20.59 0.58 UK 19,883 54.47 0.78 Irelnd 18,824 67.71 0.81 New Zelnd 18,455 50.80 0.41 Spin 14,792 51.01 0.61 Greece 11,754 58.28 0.51 Portugl 10,822 76.66 0.64 South Kore 10,645 n.. n.. Czech Rep. 5048 n.. n.. Hungry 3576 n.. n.. Mexico 3466 94.29 0.32 Polnd 2747 n.. n.. Turkey 2708 64.53 0.48 Averge 21,299 53.20 0.65 Source: OECD (1997). Denotes 1995 GDP per cpit. c Totl PSTN price is the verge of pek nd off-pek chrges. hour during the pek (off-pek) period. Austrli s verge Internet price of USD24.13 (AUD42.40) for 20 hours ccess (s reported in Tle 1) is less thn hlf the smple verge nd the second lowest of ll OECD countries. By the end of 1998 the Austrlin Internet mrket hd grown to over 600 ISPs. Tle 2 provides smll cross-section of the ville plns for oth lrge nd smll Austrlin ISPs during Novemer 1998. The rnge of prices, flexiility in pricing pckges (longer or shorter fixed rte periods) nd vriility in the threshold numer of not chrged reflects oth the nture of price nd non-price competition etween Austrlin ISPs. For instnce, Ozemil nd Telstr Big Pond
G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 199 Tle 2 Austrlin ISP Residentil pricing profiles, 1998 (AUD) ISP Low use Medium use High use Usge fee Setup fee Usge fee Setup feeusge fee Setup fee Excess volume/time AOL AUSTRALIA 9.95/3h/month 29.95/15h/month 4/h CONNECT.COM 10/3h/month 30/14h/month 50/27h/month 3.50/h (pek) 20/8h/month 40/21h/month 70/45h/month 1.75/h (off-pek) 100/65h/month 150/100h/month MAGNADATA 37.50/12 months 31.25/6 months 25/3 months 2.00/h 49/50h/month ONE.NET 1.95/h or $0.25/M 19.95 1.95/h 19.95 1.95/h 19.95 OZEMAIL 19.95/7h/month 30/20h/month 55/30h/month 5/h (pek) 85/50h/month 2.5/h (off-pek) 160/100h/month 44.95/month unlimited PRIMUS 8.95/5h/month 29.95/month or 1.50/h 14.95/10h/month 75/qurter unlimited hours with 200m/month limit Q NET 120/yer 30 650/yer 60 2000/yer 450 0.25/M or 2/h TELSTRA BIG POND 9.90/2h/month 35/20h/month 50/30h/month 3.5 5/h 44/month unlimited UP N AWAY SOLUTIONS 5 10/month 23/month 33 38/month Pek time is 7m midnight; off-pek is midnight 7m. provide 20 hours of monthly ccess for AUD30 nd AUD35, respectively. AOL entered the Austrlin mrket in lte 1998 nd is expected to provide unlimited ccess t low monthly flt-rte. Another potentilly lrge supplier, cut-rte crrier Primus Telecommunictions, lunched ntionl Internet division in 6 Decemer 1998. As such, effective price hs fllen drmticlly. Q Net offer 90 hours per month for AUD25, One.Net provide 56 hours for AUD29.95, whilst 6 ISPs lso compete on the sis of service qulity. In generl, ISPs choose the level of service, in terms of reliility nd speed, ccording to the size nd profitility of the suscrier se. Speed of ccess (the cpcity of ISP modems) is lso n importnt considertion for potentil suscriers. High speed connections to ckone networks re expensive, s re other service ttriutes such s we hosting, which re costly in terms of ssemly, mintennce nd mrketing. An ISP my differ in the speed of its modems in the rte t which it trnsfers informtion to ckone networks. This rte is vulnerle to rek down nd interruption, prticulrly t pek times. Such fetures depend on the fixed cost investment in hrdwre nd softwre long with ctive monitoring y ISP stff (Greenstein, 1998).
200 G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 Telstr, Ozemil nd Primus provide unlimited monthly ccess for AUD44, USD45 nd AUD25, respectively. The intense competition etween ISPs is ffecting customer retention. Minimising churn leds to n increse in the instlled se of suscriers through time compred to n ISP with higher churn. Further, the sles cost per retined suscrier is reduced, since ttrcting new suscriers is expensive in terms of dvertising, product differentition nd specil offers. 3. Survey method nd internet suscrier profile A profile of Austrlin residentil ISP suscriers ws otined from we survey conducted from Octoer 13 through Novemer 3 1997. A questionnire ws posted to the CERP we site nd dvertised to Internet suscriers through ntionl print medi nd y hyperlinks ttched to prticipting ISP home pges. Respondents were sked to supply informtion on their ISP, Internet use nd expenditure, pricing pln nd socio-demogrphic ckground. A further question sked respondents to indicte whether they intended to chnge their ISP within the next twelve months, nd their reson for intended churn. During the period of the survey 1257 ISP suscriers completed the questionnire from which 592 vlid responses were otined. Approximtely 20% of respondents indicted their intention to churn during the period Novemer 1997 to Octoer 1998. Tle 3 lists fctors considered importnt y suscriers in choosing their ISP. Personl recommendtion, ccess reliility (dropout rte nd connect time), ffordility, help desk support nd ccess speed re considered importnt. Interestingly, only 13% of ISP suscriers consider the ville content nd vlue dded services s importnt. Service fetures deemed importnt in deciding whether suscriers intend to remin with their current ISP re reported in Tle 4. Whilst ffordility is importnt, reliility nd ccess speed re lso of concern to suscriers. Technicl support, 24 hour help desks Tle 3 Reson for suscrier ISP choice (%) RECOMMENDED 37 RELIABLE ACCESS 35 AFFORDABLE 34 HELP DESK SUPPORT 30 CONNECTION SPEED 30 LOCAL CALL ZONE 24 CONTENT 13 PROVIDED WITH COMPUTER PURCHASE 13 ISP STAFF INSTALLED THE COMPUTER 10 ISP OFFICE CONVENIENTLY LOCATED 5 The respondent llowed multiple responses.
G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 201 Tle 4 Key service fetures (%) Not Resonly Very importnt importnt importnt RELIABLE 0 15 85 ACCESS SPEED 0 24 76 INEXPENSIVE USAGE CHARGES 1 52 47 INEXPENSIVE ACCESS FEE 1 52 47 TECHNICAL SUPPORT 6 63 32 24 HOUR HELP DESK 15 65 20 VALUE ADDED SERVICES 28 64 9 The respondent llowed multiple responses. nd vlue dded services clerly mtter less. Tle 5 shows tht ccess price nd reliility re the most common resons for suscrier churn. 4. A model of ISP suscrier churn The likelihood tht n ISP suscrier churns is exmined here in the context of discrete choice. Discrete choice theory rgues tht suscriers consider ISP ttriutes, such s reliility nd help desk support, when deciding on whether to churn (McFdden, 1981). To the extent tht customers with similr demogrphic chrcteristics exhiit similr preferences, demogrphic profiles cn e ssocited with the proility of mking decision to churn. Accordingly, ISP j s service th ttriutes (z jn) nd suscrier demogrphic chrcteristics (s n) llow the n suscrier s stisfction to e defined y the indirect utility function: U 5 U(z, s ) j 5 hchurn, not churnj (1) jn jn n It is convenient to decompose indirect utility (1) into oserved (V ) nd jn unoserved (e ) components, viz: jn U 5V 1 e jn jn jn Tle 5 Reson for suscrier churn (%) ACCESS PRICE 34 UNRELIABLE ACCESS 29 NOT SPECIFIED 22 OTHER ISP 7 POOR SERVICE SUPPORT 4 BILLING COMPLAINTS 3 LACK OF VALUE ADDED SERVICE 1 The respondent llowed multiple responses. (2)
202 G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 The proility of churn is equivlent to the proility tht the nth suscrier derives greter utility from churning thn from remining with the ISP. Tht is: Pro(churn u j) 5 Pro(U churn, n. U not churn, n) (3) When the unoserved ejn re independently, identiclly distriuted ccording to the cumultive norml distriution the functionl reltionship etween reveled utility nd the likelihood of churn is inomil proit. 5. Vriles nd econometric model Vriles included in the churn model re grouped into four ctegories. Economic vriles include household income, price (monthly expenditure) nd the ISP pricing structure (flt-rte or usge sed). Usge vriles descrie the mnner in which ISP suscriers use the Internet. Internet use y generic service group (eduction, hoy or work relted), pplictions (rowsing or emil) nd suscrier Internet tenure re considered. ISP choice vriles mesure fctors underlying the respondent s choice of ISP. Respondent nd household sociodemogrphic vriles considered here re those found to e importnt in other studies (Ktz nd Aspden, 1997; Mdden nd Simpson, 1997; Kridel et l., 1998; Mdden nd Svge, forthcoming). The list of ll vriles included in the econometric model is provided in Tle 6. A inomil proit model is used to relte the proility of suscrier leving their current ISP with economic, Internet use, ISP ttriutes nd socio-demogrphic vriles. A dichotomous (0,1) vrile is used to clssify suscriers s to whether they intend to churn (CHURN51) or re unlikely to churn (CHURN50) within the next twelve months. The model is of the form: P 5 F(x9 ) (4) jn jn where Pjn is the proility the nth suscrier will churn from ISP j, xjn vector of ISP ttriutes nd suscrier (nd household) socio-demogrphic chrcteristics, is the prmeter vector to e estimted nd F(.) is the cumultive norml distriution function. In (4) the prmeters relte chnges in the explntory vriles to the direction of chnge in the churn proility. 6. Model results Estimted prtil effects (trnsformed prmeter vlues) which indicte the mgnitude of the response, nd djusted symptotic t-vlues re reported in
G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 203 Tle 6 Independent vriles Vrile Economic vriles INCOME1 INCOME2 INCOME3 INCOME4 MONTHLY BILL FLAT RATE TIMED USE Internet use vriles BROWSE EDUCATION EMAIL HOBBY TENURE MOVED WORK ISP choice vriles CONTENT HELP DESK PACKAGE RELIABLE SPEED Description 51, if weekly household disposle income,aud 160;50, otherwise 51, if AUD 160#weekly household disposle income,aud 400;50, otherwise 51, if AUD 400#weekly household disposle income,aud 700;50, otherwise 51, if AUD 700#weekly household disposle income,aud 1200;50, otherwise 5verge monthly expenditure on Internet ccess 51, if ISP pyment is flt-rte monthly (or nnul) fee with no usge fee;50, otherwise 51, if ISP pyment is sed on usge with no flt-rte fee;50, otherwise 51, if the Internet is used minly to we rowse;50, otherwise 51, if the Internet is used minly for eductionl ctivities;50, otherwise 51, if the Internet is used minly to emil;50, otherwise 51, if the Internet is used minly for hoy ctivities;50, otherwise 5numer of months respondent hs een using the Internet 51, if the respondent hs suscried to more thn one ISP;50, otherwise 51, if the Internet is used minly for work relted ctivities;50, otherwise 51, if the respondent suscried to their ISP ecuse of ville vlue-dded content;50, otherwise 51, if the respondent suscried to their ISP ecuse of ville help desk fcilities;50, otherwise 51, if the respondent suscried to their ISP ecuse it is linked to computer purchse;50, otherwise 51, if the respondent suscried to their ISP ecuse of perceived reliility;50, otherwise 51, if the respondent suscried to their ISP ecuse of dvertised ccess nd downlod speeds;50, otherwise Socio-demogrphic vriles AGE 5suscrier ge MALE 51 if the respondent is mle;50, otherwise NUMBER 5numer of persons residing in the household whom use the ISP ccount 7 Tle 7. The model is well specified. Homoskedsticity of the error process is 2 8 supported y likelihood rtio test (x clc 5 37.5) t the 99% criticl vlue. A 2 goodness of fit mesure proposed y McElvey nd Zvoin (1981) provides n R sttistic of 0.49. Further, the model correctly predicts 82.3% (487 of 592) of the smple oservtions, nd there is no ovious is in predicting churn. A likelihood rtio test rejects the hypothesis tht the set of coefficients re not significntly 2 different from zero t the 1% level ( x 5 115.16). Another likelihood rtio clc 7 The mrginl effect for inry independent vrile, such s INCOME1, is computed s Pro[CHURN 5 1 u x*, ] INCOME1 5 1] 2 Pro[CHURN 5 1 u ] x*, INCOME1 5 0] (5) where ] x* denotes the men vlues of ll other independent vriles. 8 2 2 The likelihood rtio test of the hypothesis of homoscedsticity is sed on: l 5 n ln s 2 Sgng ln s g, 2 where n 5 S n, s is the pooled lest squres residul vrince. g g
204 G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 Tle 7 Estimtion results Vrile Prtil Stndrd Asymptotic effect error t-rtio CONSTANT 20.4845 0.1326 23.6530 Economic vriles INCOME1 0.1349 0.0756 1.7841 INCOME2 0.0889 0.0559 1.5887 INCOME3 0.0672 0.0432 1.5552 INCOME4 20.0557 0.0393 21.4167 MONTHLY BILL 0.0034 0.0009 3.8993 FLAT RATE 20.0792 0.0392 22.0205 TIMED USE 0.0165 0.0460 0.3595 Internet use vriles BROWSE 20.0912 0.0410 22.2219 EDUCATION 0.0305 0.0313 0.9744 EMAIL 0.2024 0.1041 1.9442 HOBBY 0.0037 0.0320 0.1146 TENURE 20.0021 0.0015 21.3690 MOVED 0.0738 0.0182 4.0654 WORK 0.0611 0.0325 1.8804 ISP choice vriles CONTENT 0.0568 0.0650 0.8735 HELP DESK 20.0251 0.0433 20.5801 PACKAGE 20.0467 0.0600 20.7788 RELIABLE 20.0874 0.0502 21.7428 SPEED 20.0606 0.0474 21.2796 Socio-demogrphic vriles AGE 20.0048 0.0013 23.5228 MALE 0.1390 0.0468 2.9722 NUMBER 0.0268 0.0143 1.8742 Log-Likelihood 2240.9 2 R 0.488 Likelihood rtio tests for susets of prmeters x x 2 2 clc crit (0.99) Economic 36.87 18.48 Internet use 27.44 18.48 ISP choice 20.74 15.09 Sociodemogrphic 23.42 11.34 Denotes significnce t the 5% level. denotes significnce t the 10% level. sttistic is pplied to test the joint hypotheses tht ech sugroup of independent vriles (economic, Internet use, ISP choice, socio-demogrphics) identified in Tle 6 seprtely hve no impct on the proility tht Internet users will churn.
G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 205 The clculted Chi-squred sttistics reported in Tle 7 clerly rejects the null hypothesis t the 1% level for ll susets of prmeters. The prmeter estimtes indicte tht suscriers in low income households (weekly household disposle income of less thn AUD160) re more likely to churn. Further, the proility of churn is greter the higher the monthly ISP expenditure, nd less when flt-rte pricing (rther thn some form of timed usge chrging) structure is employed y the ISP. Churn is more likely when the suscrier hs hd n ccount with nother ISP nd when the Internet is used for work relted purposes. For suscriers who chose their ISP on the sis of reliility, churn is less likely. The churn proility is higher for mles nd households where the ISP ccount hs multiple users. Younger suscriers re more willing to seek lterntive ISPs. 7. Conclusions Rpid growth in Internet use nd low rriers to ISP entry hve fuelled the sustntil growth of the Austrlin ISP mrket. ISPs re y nd lrge unprofitle due to the difficulty in cpturing sufficient revenues to offset costs. As the cquisition of suscriers is expensive, it is importnt to ISP survivl tht they retin their current suscrier se. ISPs hve sought to segment the mrket y offering rnge of pricing pckges, in n environment of strong price competition. This rticle develops proility model of ISP suscrier churn to llow the determinnts of this ehviour to e isolted. The empiricl results provide some focus regrding ISP suscriers churn. There is generl industry elief tht suscriers re highly price responsive nd will churn to gin smll discounts. This concept is consistent with the economic notion tht consumers re rtionl nd will choose the lowest price if nonprice ttriutes re the sme. This proposition is indirectly supported with the reported churn proility positively ssocited with monthly ISP expenditure. The pricing structure lso mtters with suscriers preferring ISPs which offer flt-rte pricing rrngements. Further, suscriers in low income households re more likely to churn. The results for nonprice ttriutes re similrly enlightening. The most importnt ISP chrcteristic, other thn prices, is reliility of service. The mnner in which suscrier uses the Internet is lso importnt in explining suscrier ISP churn. When suscriers primry use is emil nd where use is work-relted churn is more likely. However, where the suscrier s min use is rowsing, they re less likely to churn. Further, suscriers with churn history re more likely to churn. The importnce of these vriles is tht they re oservle to the ISP nd cn e of ssistnce in mintining suscrier se. Finlly, our results lso indicte tht customer chrcteristics re importnt in explining suscrier churn.
206 G. Mdden et l. / Informtion Economics nd Policy 11 (1999) 195 207 The likelihood of churn is higher for mles nd the ISP ccount hs severl users. Younger suscriers re more likely to churn. Some extensions of this study my prove eneficil. It would e useful to develop questions which would educe the mgnitude of price reductions required for suscrier to churn from n ISP. Considertion of the level of pricing (rther thn just the pricing scheme), nd wider rnge of Internet use nd demogrphic vriles. To ssist ISP network plnning some insight into the willingness of suscriers to py for reliility should e gined. Future work should lso consider Internet trffic congestion. Whilst price competition hd led to customers switching ISPs, low flt-rte pricing schemes hve lso encourged excessive use. Acknowledgements The uthors would like to thnk Pul Blyney, Richrd Kurs, Don Lmerton, Michel Wirth, Glenn Woroch nd two nonymous referees for helpful comments. Optus Communictions funding nd reserch ssistnce y Shrliyn Quek is grtefully cknowledged. Any opinions, findings or conclusions expressed in this pper re those of the uthors nd do not reflect the views of the nmed institution or individuls. References Austrlin Bureu of Sttistics (ABS). Telecommunictions Services, Ctlogue no. 8148, Cnerr, AGPS. Bhttchry, C.B., 1998. When customers re memers: customer retention in pid memership contexts. Journl of the Acdemy of Mrketing Science 26, 31 44. Ci, Y., Deilmi, I., Trin, K., 1998. Customer retention in competitive power mrket: Anlysis of doule-ounded plus follow-ups questionnire. Energy Journl 19, 191 215. Communictions Economics Reserch Progrm (CERP), 1997. CERP Internet Report, Deprtment of Economics, Curtin Business School. Deprtment of Industry, Science nd Tourism (DIST), 1998. Stts. Electronic Commerce in Austrli, Cnerr, AGPS. Deprtment of Communictions, Informtion Technology nd the Arts (DoCITA), 1998. Internet congestion nd pricing: A preliminry study, Informtion Pper 2, Cnerr: AGPS. Economist 1997. Trpped in we, Economist 342, 8 Mrch, 8, The Economist Newspper Limited. Greenstein, S., 1998. Universl Service in the Digitl Age: The Commerciliztion nd Geogrphy of US Internet Access. NBER Working Pper, no. 6453, Ntionl Bureu of Economic Reserch, Cmridge. Ktz, E., Aspden, P., 1998. Internet dropouts in the USA. Telecommunictions Policy 22, 327 339. Ktz, E., Aspden, P., 1997. Brriers to nd motivtions for using the Internet: results of ntionl opinion survey. Reserch Journl: Policy nd Applictions 7, 170 188. Kridel, D., Rppoport, P., Tylor, L., 1998. An econometric study of the demnd for ccess to the Internet. Presented t the Twelfth Biennil Conference of the Interntionl Telecommunictions Society, Stockholm, 21 24 June.
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