Cushioning the Blow Justifying a Price Increase in a Subscription Business Context
Abstract
Whether to offset increased costs, signal quality, or respond to changing supply and demand conditions, a price increase can elicit a range of negative customer responses, from dissatisfaction to complaints, exits, and even boycotts. Although practitioners and academics agree that subscription businesses must justify their price increases, the comparative effectiveness of different justification types in reducing customer attrition remains uninvestigated. I use data from a 15-cell field experiment involving 10 cohorts comprising 1,655 customers, implemented by a multi-site Canadian storage provider, to assess how three price increase justification types—cost, market, and quality—affect customer attrition. In contrast to prior practitioner recommendations and academic research, I find that market justifications result in the lowest attrition rates. I then use the heterogeneity in the effects of these justifications across customers’ availability of alternatives and their distance from their chosen storage facility, to propose perceived switching costs as the mechanism that explains my findings. I also explore whether the effects of these justifications vary systematically across levels of price increase percentage and dollar amount, and the linguistic concreteness of the justifications. My thesis contributes to several multidisciplinary streams of literature on pricing, subscription businesses, and customer attrition behavior, and provides novel and actionable insights for managers.