How firms can go wrong by offering the right service contract : Evidence from a field experiment

Service firms typically offer customers a menu of pricing plans so that they may select the appropriate plan. Past evidence suggests that this may not be always the case; often customers find themselves in tariffs that do not minimize their costs. An increasingly popular strategy is to recommend plans to customers. In this paper, we examine the effectiveness of this strategy using a randomized field experiment in which some customers were offered plan recommendations and some were not. Our results indicate that encouraging customers to switch to cost-minimizing plans can, surprisingly, harm firm profitability primarily due to an increase in customer churn. We propose two drivers for how the campaign increased churn, namely, by lowering customers’ inertia to switch plans and by enhancing customers’ sensitivity to past overage (i.e., usage beyond the free allowance). Our data provide empirical evidence for both drivers. By leveraging the richness of our field experiment, we assess the impact of targeted encouragement campaigns on customer behavior and firm revenues.