COMPANIES MUST MAKE important decisions about which features to include in the
goods and services they offer to customers. Understanding the return on investment (ROI) for a
feature is essential to increasing profitability. Adding features increases costs, but it may increase
revenues as well, either by attracting new customers or retaining existing customers. Notably, as we
describe in this article, the features that retain customers may be different from the features that
initially attract customers.
Customer lifetime value is the net profit earned over the course of a company's relationship with
the customer.1 To maximize customer lifetime value, a company must not only convince customers to
buy its product or service once; it must also retain them. Hotel and airline companies, for example,
invest heavily in loyalty programs designed to encourage their best customers to come back again
and again. About one-third of leisure
guests and about one-half of business
travelers say they are loyal to a hotel
brand. 2 Subscription-based services
such as Netflix and Amazon Prime
frequently offer free trials to attract cus-
tomers, hoping that they will recoup
their investment when customers sign
up and become paying subscribers.
Profits flow to video game app develop-
ers not when their apps are downloaded
for free, but when users decide to keep
playing and spend money to upgrade the
app or make in-app purchases. Yet in
many cases, the notion of generating
revenue is no more than a pipe dream:
According to one estimate, less than
40% of video game players return to a
free-to-play game after the first session;3
another analysis found that, on average,
Which Features Increase
Customer Retention?
M A R K E T R E S E A R C H
Most companies aspire to design goods and services that
encourage repeat business. Yet businesses often invest in
expensive features without adequately understanding
how the features that attract new customers may differ
from those that will retain existing ones.
BY REBECCA W. HAMILTON, ROLAND T. RUST, AND CHEKITAN S. DEV
THE LEADING
QUESTION
How should
companies
decide which
features to
include in
products or
services?
FINDINGS
Features that retain
customers may be
different from those
that attract new
customers.
Having too many
features can de-
crease customer
satisfaction.
Different research
methods are suited
to measuring the ef-
fects of features on
customer attraction
and retention.

 

 

80 MIT SLOAN MANAGEMENT REVIEW WINTER 2017 SLOANREVIEW.MIT.EDU
M A R K E T R E S E A R C H
three-quarters of people who download apps stop
using those apps within 90 days.4
Given the importance of retaining customers,
companies have an incentive to design goods and ser-
vices with customer retention in mind. Unfortunately,
they often add expensive features to their offerings
without knowing whether or how much the new fea-
tures will increase retention. Our research has shown
that adding too many features can actually decrease
customer satisfaction with products after customers
have used them. In one of our studies, participants
were initially more inclined to choose a digital video
player that had 21 features over one that had only
seven features. However, after participants used the
21-feature video player to perform a series of tasks,
they were less satisfied than those who used the
seven-feature model, and they were significantly less
likely to say they'd choose it again for another task. 5
Thus, although having more features increased initial
choice, it had the opposite effect on customer reten-
tion. This is what we call "feature fatigue."6
Hotel companies, too, frequently add amenities,
such as fitness centers or free wireless internet access,
hoping that they will drive trial, market share, and
loyalty. 7 The result is what hotel industry analysts
refer to as "amenity creep" — a proliferation of fea-
tures added to attract new guests. Using current
research methods, it is difficult to tell which features
have the most impact on customer retention. How
much more likely is a hotel guest to return if he or
she enjoyed a fitness center, free wireless internet
service, or free bottled water on his or her last visit?
Clearly, companies would be able to make
smarter business decisions if they could accurately
predict their ROI for specific features. In this arti-
cle, we share some insights from our research at a
global hotel company. (See "About the Research.")
We highlight the important difference between fea-
tures that attract customers and features that retain
them, discuss how to measure the effects of features
on attraction and retention, and point out key is-
sues in predicting ROI, such as differences in the
costs of various features and in the relative impor-
tance of new versus existing customers.
Attracting Customers Versus
Retaining Them
Some features may be valuable because they attract
new customers, while others are valuable because
they retain existing customers. For example, having
a strong user community can be a powerful feature
for retaining gamers. On the other hand, if the com-
munity behaves aggressively toward rookie players, a
strong community may scare new users away.8
An added challenge is that consumers themselves
may evaluate features differently when they are mak-
ing an initial choice between alternatives versus
when they are evaluating their satisfaction with a
consumption experience. Typically, adding more
features or amenities increases the likelihood that
consumers will choose a company's goods and ser-
vices; 9 each feature added gives the customer one
more reason to choose the product. For example,
when customers choose a hotel, airline, or theme
park, their choices may be influenced by amenities
or star attractions 10 in addition to core attributes
such as location or price. To maximize initial choice,
managers often decide to offer more amenities.
ABOUT THE RESEARCH
Our research on features began with a discus-
sion about a mousepad — complete with a
clock, a calculator, and an FM radio — that one
of us brought back from a conference a num-
ber of years ago. Would the list of features
make the mousepad more attractive to con-
sumers, we wondered, or would the two
pages of instructions printed in a tiny font be
a turnoff? To find out, two of the authors and
fellow researcher Debora Viana Thompson
created some electronic products, varied the
number of features they included, and con-
ducted a series of experimental studies. Not
surprisingly, consumers were initially attracted
to products that had more features. However,
their preferences changed once they had used
the products, and we observed that consum-
ers were consistently more satisfied with the
products that had fewer features. We called
this effect "feature fatigue." i
We wondered whether consumers would
fall prey to the same pattern in the hotel indus-
try, where brands are often described as
engaging in "amenity wars." We were able to
convince a global hotel company to help us find
out. With our fellow researcher Michel Wedel,
we conducted a large-scale survey of guests,
asking them about their use of hotel amenities
both before and after they were guests at one
of the company's hotel properties. The com-
pany maintains a sophisticated customer
database and was able to match the survey
data with longitudinal revenue data. We con-
ducted a detailed analysis of ROI for three
amenities of interest (a fitness center, free in-
room internet access, and free bottled water)
and found that these amenities varied in the
value they offered the company. Some had
the power to attract customers, while others
had the power to retain customers.ii Thus, a
financially sound decision to add an amenity
depends on a company's proportion of new and
existing customers as well as the revenue and
cost streams associated with the amenity.

 

 

SLOANREVIEW.MIT.EDU WINTER 2017 MIT SLOAN MANAGEMENT REVIEW 81
However, as mentioned earlier, our research
shows that adding more features can actually reduce
customers' satisfaction when using products. 11 As
more features are added to home electronics, for ex-
ample, the buttons on the remote controls proliferate
and often become smaller, making it more difficult
for users to access the features they want. Similarly,
adding more features to a website or an app makes it
harder for users to navigate and more time-consuming
to master. As more attractions are added to a theme
park, customers may not have time to experience
them all, and the park may become so large that it is
overwhelming for customers to navigate.
Thus, there is tension between offering the most
features to attract customers and offering the right
features to bring customers back. The same con-
sumers who say they want more features often end
up preferring fewer features once they start using a
product. This creates a challenge for managers:
sorting out the features people think they want be-
fore they have used a product from the ones that
will encourage them to return.
Some features have a strong influence on cus-
tomer attraction, while others have more of an
effect on retention. In our research at the global
hotel company, we found that free wireless internet
was much more likely to attract customers than free
bottled water. Admittedly, it would be quite sur-
prising if prospective hotel guests said they based
their decisions to stay at a particular hotel brand on
whether that brand gives them free bottles of water
during their stay; the value of a bottle of Perrier or
Fiji water is only a couple of dollars, and guests can
easily imagine picking up a bottle in the lobby or
from a vending machine instead. In contrast, there
are fewer substitutes for wireless internet service
during a hotel stay, and guests can predict their
frustration with camping out in the lobby to use
the free internet access there or connecting via their
mobile phones instead of paying a $15 fee to have
access in their rooms. A quick review of travel
blogs suggests that free wireless internet access is a
hot-button issue; some customers say they choose a
hotel that offers it as a matter of principle.
However, the picture changed when we switched
from looking at features that attracted guests to fea-
tures that retained them. Offering free bottled water
during a stay led to a bigger boost in customer
retention than offering wireless internet access. 12
Why the difference? Although customers may have a
good sense of the value of some amenities prior to
using them (such as in-room internet), the value of
other amenities (such as bottled water or a well-
equipped fitness center) may be more visceral or
emotional, and they may influence the consumer's
evaluation of the overall service experience in a more
holistic manner. It's harder for both consumers and
companies to predict how visceral or emotional
reactions to features will affect future behavior.13 For
example, gamers may not have any way of knowing
which features will increase the stickiness of an app
before they use it.
Thus, different research methods are required to
measure the effects of features on customer reten-
tion than are used to measure their effects on
attracting new customers. Surveys and conjoint
analysis, which ask customers to self-report the ef-
fects of features on their preferences, are helpful in
predicting which features will attract customers.
But measuring the effect of features on retaining
customers requires different methods. Longitudi-
nal studies comparing the subsequent purchases of
customers who use and do not use a feature, and
field studies comparing purchases over time, can
provide more accurate insight into retention. We
will describe these approaches more fully below. 14
Computing ROI
In collaboration with a global hotel company, we
developed a model to assess how features produce
financial return by attracting new customers and/
or by retaining existing customers. Our model inte-
grates three kinds of data: the revenue increase due
to the effect the feature has on attracting new cus-
tomers; the revenue increase due to the effect the
feature has on retaining existing customers; and the
costs associated with adding the feature. We tested
our model using three features or "amenities" of
interest in the hotel industry: bottled water, free
internet access, and access to a fitness center. We
validated the model using a field study.
Attracting New Customers In collaboration with
Forrester Research, a technology and market research
firm in Cambridge, Massachusetts, we ran what is
known as a discrete choice experiment15 with frequent

 

 

82 MIT SLOAN MANAGEMENT REVIEW WINTER 2017 SLOANREVIEW.MIT.EDU
M A R K E T R E S E A R C H
travelers to estimate the effect of each feature on their
initial choice of a hotel. We asked the travelers a series
of choice questions involving trade-offs between fea-
tures. Analyzing these choices allowed us to compute
the degree to which adding each feature was likely to
influence a customer's initial choice of each brand.
Because each brand managed by the global hotel
company competes with other brands in the market-
place, we computed predicted changes in each
brand's current market share.
Of the three features, we found that adding free
internet influenced initial choice more than adding
the other two features. The impact of adding free in-
ternet on predicted market share ranged across
brands from 3% to 17%, while the impact of adding
free bottled water or a fitness center on predicted
market share ranged from 0% to 3%.
Features That Retain Customers Next we con-
tacted guests by email before and after they stayed at
one of the hotel company's properties and asked
them to participate in an online survey. Guests re-
ported whether they expected to use each feature
and whether they actually used each feature during
their stay. We also collected 18 months' worth of visit
and revenue data after the stay and, as a control, 18
months of visit and revenue data prior to the stay. We
used the data to estimate the impact of using each
feature on future visits and revenues, controlling for
expected use of the feature, past visits, and revenue.
To estimate the parameters, we used a hierarchical
Bayesian model (visits and revenue conditional on
visits), but we found very similar results using simple
regression models. Surprisingly, of the three features,
bottled water had the largest impact on customer re-
tention and future visits.
Costs Associated With Adding Features We col-
lected data on the costs of offering each feature to the
hotel company, including the initial costs of imple-
menting the feature (for example, modifying facilities
and training staff), maintenance costs (such as staffing
and payments to third parties), and usage costs that
were incurred only when guests used the feature. The
total cost of different features — both in terms of cost
structure and timing — differs dramatically. Providing
free bottled water in guest rooms had very low installa-
tion and maintenance costs; the largest cost was the
per-usage cost of the water. By contrast, while pro-
viding in-room internet access had low installation
costs and virtually no incremental cost per use, the
annual maintenance costs for the service, supported by
a third-party vendor, were relatively high. Finally, the
fitness center had relatively high installation costs,
moderate maintenance costs, and moderate per-usage
costs. Collecting this data allows managers to consider
cost flows in comparison to revenue flows.
Calculating the Return on Features The hotel
company provided annual guest and revenue data
for each brand and the proportion of new versus
returning guests for each brand. We used the esti-
mation results for both attracting and retaining
customers, along with the cost data, to compute the
ROI for the three features in question (free bottled
water, in-room internet, and a fitness center). Al-
though all three features showed positive ROI, the
effects were driven by different factors. The ROI for
free internet was driven by its effects on attracting
customers, while the ROI for free bottled water was
driven by its effects on retaining customers.
We were able to validate our results for bottled
water against the ROI for the actual prior implemen-
tation of that feature by two of the hotel company's
brands. We compared revenues from properties of
two hotel brands that had added bottled water with
closely matched control properties that had not
added the feature. To control for seasonality, we
compared revenues from 12 months prior to the
implementation of the feature and 12 months after
the implementation of the feature across both the
test and control properties. Our model's ROI
The ROI for free internet was driven by its effects on attracting
customers, while the ROI for free bottled water was driven by
its effects on retaining customers.

 

 

SLOANREVIEW.MIT.EDU WINTER 2017 MIT SLOAN MANAGEMENT REVIEW 83
estimates for the two brands were very similar to the
ROI results for the feature's actual implementation.
Implications of Our Findings
As companies place more emphasis on long-term rela-
tionships with customers, they should also attempt to
understand the role features play in retaining custom-
ers. Many companies don't just care about attracting
new customers; they also think about lifetime customer
value. And while subscription-based services may try
to woo new customers with free trials, they need to
convert as many as possible to become repeat users.
Thus, the ability to distinguish between features that
attract new customers and those that retain customers
is critical. Our research uncovers a few key insights:
Consumers are likely to overestimate the like-
lihood that they will use features. In our work
with the hotel company, we observed a pattern of
overestimating use of the three features we exam-
ined closely as well as most of the other 47 features
for which we measured expected and actual use.
Executives should accordingly use caution when in-
terpreting data from self-report methods such as
surveys, interviews, and focus groups suggesting that
customers want more features.
Customers tend to be better at identifying fea-
tures that will attract them than features that will
retain them. In our work with electronic products,
consumers consistently chose products with a high
number of features, but these products left them less
satisfied than similar products with fewer features.
Moreover, some features do not provide discernable
value to customers until they have used them. For
example, our research with the hotel company
showed that the effects of both bottled water and fit-
ness center features on initial choice were much
smaller than their effects on repurchase. Thus, man-
agers should consider using research methods suited
to uncovering the boost in retention that some
features provide, such as longitudinal usage studies
and field studies, to avoid missing out on providing
potentially profitable features.
Consider features as an investment in customer
lifetime value. Managers have developed many tools
for increasing customer lifetime value, such as loyalty
programs and sophisticated customer relationship
management systems. Like other initiatives that in-
crease customer retention, offering features designed
to retain customers may produce savings due to lower
customer acquisition costs and reduced servicing
costs. Clearly identifying the effects of features on
customer retention will allow managers to evaluate
features against other potential investments geared
toward increasing customer lifetime value.
Putting Our Insights Into Practice
Given what we have learned, companies shouldn't
rush to add new features that seem promising. Rather,
they should begin by asking a series of questions:
Why should I add this feature to my offering?
When considering a new feature, think about whether
the feature is likely to attract new customers, retain ex-
isting customers, or both. If your company's proportion
of new customers is high and is likely to remain high (as
is the case of distinctive tourist destinations that many
customers only visit once), features that are likely to
attract new customers should receive priority. In con-
trast, if a large proportion of business is from repeat
customers or if your company would like to increase
its proportion of repeat customers, more attention
should be given to features that retain customers.
Do my competitors offer the feature? Feature fa-
tigue and amenity creep often result from managers
wanting to match competitive offerings. Although
benchmarking is important, it is more important
with features designed to attract customers (includ-
ing getting them to switch from competitors) than
with features designed to retain customers. When
customers are unfamiliar with your brand, they may
conduct comparisons of features across brands. But
When considering a new feature, think about whether the
feature is likely to attract new customers, retain existing
customers, or both.

 

 

84 MIT SLOAN MANAGEMENT REVIEW WINTER 2017 SLOANREVIEW.MIT.EDU
M A R K E T R E S E A R C H
when people have already experienced your brand,
they will rely on their impressions of their experi-
ence to decide whether they will buy again. Thus,
when deciding whether to match the competition,
consider first whether your goal in adding the fea-
ture is to attract or retain customers.
How can I measure the effects of adding a feature
on customer retention? As we have discussed, differ-
ent research methods are suited for determining
whether features will retain customers or attract new
customers. Surveys, interviews, focus groups, and con-
joint analysis are very useful for predicting whether
specific features will attract customers.16 However, be-
cause customers often have a harder time predicting
whether features will influence their repeat purchases,
directly asking them (in surveys, interviews, focus
groups, and conjoint analysis) is unlikely to generate
accurate estimates of a feature's effect on retention. In-
stead, it is better to use what's known as A/B testing,
which involves implementing a feature in a few differ-
ent settings and comparing the results with those
where the feature hasn't been added. For example, you
might offer a particular feature to randomly selected
customers and not others, and then make compari-
sons; alternatively, you might add a feature to one
product offering and compare its repeat sales to those
of similar products where you haven't offered the fea-
ture. Such comparisons allow you to estimate changes
in both revenues and costs associated with adding a
feature, which will enable you to estimate the ROI.
Our approach for computing the ROI for fea-
tures allows managers to account for the effect of
specific features on both attracting and retaining
customers. Comparing changes in both revenues
and costs over time due to adding features allows
companies to make better decisions about which
features to include in their goods and services.
Rebecca W. Hamilton is the Michael G. and Robin
Psaros Chair in Business Administration and a pro-
fessor of marketing at Georgetown University's
McDonough School of Business in Washington, D.C.
Roland T. Rust is Distinguished University Professor
and David Bruce Smith Chair in Marketing at the
University of Maryland's Robert H. Smith School of
Business in College Park, Maryland. Chekitan S. Dev
is an associate professor at Cornell University's Col-
lege of Business and School of Hotel Administration
in Ithaca, New York. Comment on this article at
http://sloanreview.mit.edu/x/58202, or contact the
authors at s..k@mit.edu.
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Reprint 58202.
Copyright © Massachusetts Institute of Technology, 2017.
All rights reserved.

 

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