Physical Stores in the Digital Age : How Store Closures Affect Consumer Churn

In this paper we investigate how consumers derive value from having the option to use physical stores for their transactions focusing on the DVD rental market. We use a large individual and transaction level panel dataset including information from consumers who subscribed to an online-offline video rental service from a leading company that closed a large number of physical store locations during our study period. Our empirical approach is to estimate a conditional logistic panel data model quantifying the extent to which offline store closures induced individuals to terminate their subscriptions with our focal company. We further examine how physical store closures affected consumers' churn decisions differently for individuals who either heavily or lightly used physical stores for their transactions. Our results show that the closure of a physical store in a zip code increased the churn rate by approximately 50% for heavy users of physical stores and that the increase in the churn rate was essentially zero for light users. Our findings thus show that physical stores substantially increase loyalty for a fraction of consumers, and that there is substantial heterogeneity across consumers regarding how much utility they derive from having the option of using physical stores for their transactions. Our results provide a critical ingredient that managers need to have when formulating their online-offline channel operations strategies