Exploring Peer Effects Associated with User Retention in a Socially Connected Business

We investigate peer effects associated with a user’s churn and subsequent retention of other users in the network. We use data from an upscale gym with information on exogenous churns of users that allows us to identify peer effects. We estimate a structural model of users’ plan choice and usage decisions that allows for bidirectionality in peer effects, direct/indirect peer effects, heterogeneity in the degree of centrality of users, and dynamics in peer effects. Our main results are as follows. (i) Unlike the churn of a low- or medium-centrality user, the churn of a high-centrality user has a strong negative cascade effect on the usage and subscriptions of other users in the network over time. (ii) To stop this negative cascade effect and increase the retention in the rest of the network, the firm’s decision on which of the central churner’s peers to target with promotions depends on the tradeoff between two forces: the individual level impact of the targeted promotion versus the positive spillover effect to the rest of the network that can increase over time because of carryover effects of usage and subsequent social multiplier effects (that stem from bidirectionality in peer effects). Thus, retention strategies focused on short-term outcomes should prioritize targeting users with low centrality, whereas strategies aimed at long-term outcomes should prioritize targeting users with high centrality.