Does Customer Email Engagement Improve Profitability? Evidence from a Field Experiment of a Subscription-Based Service Provider

Abstract

Problem definition: This paper empirically investigates how customer email engagement affects the profitability of subscription-based service providers. Academic/practical relevance: 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: 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 the retention and service consumption of subscribers. Results: 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 17.5%, about half of which is attributed to a net increase in a subscriber’s service consumption conditional on her being retained and the other half to increased subscriber retention. Our heterogeneous analysis finds that the effect of email engagement differs for subscribers enrolled in basic-level, mid-level, and top-level services. By computing customer lifetime value and the operating cost of service, we find that email engagement increases profit when deployed on mid-level and top-level subscribers but decreases profit when deployed on basic-level subscribers. Therefore, we recommend the company to deploy email engagement on top-level and mid-level subscribers but not on basic-level subscribers. This selective engagement strategy can increase profit by 3.0%. 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.