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Out Of The Trap: Conversion Funnel Business Model, Customer Switching Costs, And Industry Profitability, Niloofar Abolfathi, Andrea Fosfuri, Simone Santamaria

Research Collection Lee Kong Chian School Of Business

Research Summary: Across many industries, firms employ a conversion funnel business model to attract customers with basic and affordable products, generate lock-in, and then sell them more advanced and expensive products. We argue that this business model, coupled with high customer switching costs, results in a market outcome characterized by aggressive pricing and reduced profits. A sudden reduction in customer switching costs disrupts the conversion funnel and can eventually increase industrywide prices and profitability, an outcome that contradicts conventional wisdom in strategy research. We develop a stylized model to formalize our ideas and provide supportive evidence using a difference-in-differences methodology …