The impact of subscription programs on customer purchases

• Main Authors: IYENGAR, Raghu, PARK, Young-Hoon, YU, Qi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: Subscription business; Retailing; E-Commerce; Causal inference; Machine learning; Generalized random forest; Sunk cost fallacy; Marketing; Sales and Merchandising
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7020; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8019/viewcontent/SSRN_id3529681_2022.pdf
• Institution: Singapore Management University

Subscription programs have become increasingly popular among a wide variety of retailers and marketplace platforms. Subscription programs give members access to a set of exclusive benefits for a fixed fee upfront. In this paper, we examine the causal effect of a subscription program on customer behavior. To account for self-selection and identify the individual-level treatment effects, we combine a difference-in-differences approach with a generalized random forests procedure that matches each member of the subscription program with comparable non-members. We find subscription leads to a large increase in customer purchases. The effect of subscription is economically significant, persistent over time, and heterogeneous across customers. Interestingly, only one third of the effect on customer purchases is due to the economic benefits of the subscription program and the remaining two thirds is attributed to the non-economic effect. We provide evidence that members experience a sunk cost fallacy due to the upfront payment that subscription programs entail. Finally, we illustrate how firms can calculate the profitability the subscription program and discuss the implications of our findings for customer retention and subscription services.