How Does Mobile App Failure Affect Purchases in Online and Offline Channels?

Abstract

Mobile devices account for a majority of transactions between shoppers and marketers. Branded retailer mobile apps have been shown to significantly increase purchases across channels. However, app service failures can lead to decreases in app usage, making app failure prevention and recovery critical for retailers. Does an app failure influence purchases in general and within the online channel in particular? Does it have any spillover effects across other channels? What potential mechanisms explain and what factors moderate these effects? We examine these questions empirically, employing a unique dataset from an omnichannel retailer. We leverage a natural experiment of exogenous systemwide failure shocks in this retailer’s mobile app and related data to examine the causal impact of app failures on purchases in all channels using a difference-in-differences approach. We investigate two potential mechanisms behind these effects – channel substitution and brand preference dilution. We also analyze shopper heterogeneity in the effects using a theoretically-driven moderator approach as well as a data-driven machine learning method. Our analysis reveals that although an app failure has a significant overall negative effect on shoppers’ frequency, quantity, and monetary value of purchases across channels, the effects are heterogeneous across channels and shoppers. Interestingly, the decreases in purchases across channels are driven by purchase reductions in brick-and-mortar stores and not in the online channel. A significant decrease in app engagement post failure explains the overall drop in purchases. Brand preference dilution after app failure explains the fall in store purchases, while channel substitution post failure explains the preservation of purchases in the online channel. Surprisingly, purchases rise for a small group of shoppers who were close to the retailer’s store at the time of app failure. Furthermore, shoppers with a higher monetary value of past purchases, and less recent purchases are less sensitive to app failures. The results suggest that app failures lead to an annual revenue loss of about $2.4-$3.4 million for the retailer in our data. About 47% shoppers contribute to about 70% of the loss. We outline targeted failure prevention and service recovery strategies that retailers could employ.

Keywords: service failure, mobile marketing, mobile app, retailing, omnichannel, difference-in-differences, natural experiment, causal effects

JEL Classification: M31, L81, C01, C23, C90