Practitioners increasingly employ relational price discounts by granting initial discounts to new customers with the goal of building sustainable relationships. However, extant research has provided mixed findings on the long-term effects of initial discounts on customer retention. The current research aims to reconcile this mixed evidence by exploring nonlinear effects of initial discounts on customer retention. Drawing on marketplace metacognition theory, the authors hypothesize that moderate initial discounts (5%–35%) have positive effects on customer retention, whereas low (<5%) and high (>35%) discounts have negative effects. Two large-scale field studies in an insurance company's car insurance branch and property insurance branch provide empirical support for the hypothesized patterns. An additional laboratory experiment tests the psychological mechanism underlying the nonlinear effects. When compared with low and high discounts, moderate initial discounts lead customers to form higher expectations of future relational benefits provided by the firm, as well as to lower their expectations of future discounts. Finally, this research offers customer lifetime value implications based on the depicted findings.
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