The Impact of Subscription Programs on Customer Purchases

Abstract

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 up front. In this article, the authors examine the causal effect of a subscription program on customer behavior. To account for self-selection and identify the individual-level treatment effects, they combine a difference-in-differences approach with a generalized random forests procedure that matches each member of the subscription program with comparable nonmembers. The authors find that 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 noneconomic effect. Evidence supports that members experience a sunk cost fallacy due to the up-front payment that subscription programs entail. Finally, the authors illustrate how firms can calculate the profitability of a subscription program and discuss the implications for customer retention and subscription programs.