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

Past evidence reveals that customers make ex-post mistakes when choosing service plans. Fearing a negative impact from customers' overspending mistakes on long-term profits, some firms are becoming proactive and now recommend optimal tariffs to their existing customers. In this paper, we use a randomized field experiment to examine the profitability of encouraging existing customers to switch to better plans. We find that encouraging customers to switch to cost-minimizing plans can actually harm the firm. The primary source for this negative effect is the change in behavior among customers who decide to reject the firm's recommendation. For this set of customers, churn notably increases, resulting in substantial losses. We propose two mechanisms for such increase in churn, namely lower inertia and customer regret. Our data provide empirical evidence for both drivers in the context we study. We also explore the impact of hypothetical targeted campaigns. The results suggest that selecting the right customers to target has a higher impact on profitability than allocating customers into optimal tariffs.