Does Customer Email Engagement Improve Profitability? Evidence from a Field Experiment of a Subscription-Based Service Provider
31 Pages Posted: 20 Jul 2020 Last revised: 24 Apr 2021
Date Written: June 27, 2020
Problem definition: This paper empirically investigates how customer email engagement affects the profitability of subscription-based service providers. Service providers have been using email engagement to increase customer retention. However, it is unclear whether email engagement improves their profitability. The existing literature focuses on email engagement’s benefit of customer retention but ignores its associated operating cost to serve retained customers.
Methodology/Results: We analyze the outcome of a field experiment conducted by a large U.S. car wash chain, which offers tiered subscription services to consumers and employs an RFID-based technology to track subscriber service events. We apply survival analysis and difference-in-differences methods to estimate the effects of email engagement on subscribers’ retention and service consumption. We find that a one-month engagement with two emails separated by a half-month interval increased the likelihood of subscriber retention by 7.4% five months after the experiment started and decreased the subscriber churn odds by 26.3% for the entire five-month duration. Meanwhile, we find that the same engagement increased a subscriber’s per-period service consumption by 8.8%. We identify two behavioral mechanisms associated with email engagement on service consumption. First, the engagement emails acted as a reminder to subscribers and increased their service consumption immediately after they received emails, but the reminder effect decayed within the short term and exhibited fatigue after the second email. Second, the engagement emails led to subscribers’ habit formation of increased service consumption in the long term after engagement termination. By computing customer lifetime value and the operating cost of service, we find that email engagement increases profit when deployed on mid-level infrequent users and top-level users but decreases profit when deployed on mid-level frequent users and basic-level users. Therefore, we recommend that the company use a selective strategy by sending engagement emails to only profitable subscribers.
Managerial Implications: Our study highlights that email engagement is a double-edged sword—it increases both customer retention and service consumption, and it may decrease profitability when the increased operating cost to serve retained customers outweighs the benefit of customer retention. Subscription-based service providers need to adopt a data-driven approach to optimize their email engagement strategies.
Keywords: subscription-based service operations, continuous engagement, email communications, field experiment, data-driven OM
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