Does Customer Email Engagement Improve Profitability? Evidence from a Field Experiment in Subscription Service Retailing

Abstract

Problem definition: This paper empirically investigates how customer email engagement affects the profitability of subscription service providers and retailers. They 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 that offers tiered subscription services to consumers and employs an radiofrequency identification-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 7.0%. We provide suggestive evidence for two behavioral mechanisms that explain the effect of email engagement on subscribers’ service consumption. First, the engagement effect decays over time and exhibits fatigue after the second email, suggesting that emails act as reminders to subscribers. Second, the engagement effect persists after engagement ends but weakens over time, suggesting the habit formation of subscribers. By computing subscriber lifetime value and the operating cost of service, we find that email engagement increases profit when deployed on mid-level infrequent-use subscribers and top-level subscribers but decreases profit when deployed on mid-level frequent-use subscribers and basic-level subscribers. 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. We recommend that subscription service providers and retailers adopt a data-driven approach to optimize their email engagement strategies.