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Consumer ‘Inertia’ Boosts Subscription Firms’ Revenues by 200%

Set it and forget it has proven to be a massive top line benefit for subscription companies.

A recent study by Stanford economists estimated that auto-renewals, customer “inertia” and “inattention” has helped boost the revenues of some subscription companies by a range of 14% to 200%.  

And only when it comes time to change subscribers’ details — say, when a new debit or credit card is in hand — do consumers take a moment to reflect, and act, on decisions tied to those subscriptions.

That includes cancelling or downsizing them.

The study, which was penned by Stanford Institute for Economic Policy Research economists Liran Einav and Neale Mahoney, estimated that the lack of attention that consumers pay and whether they actually might need those subscriptions has given the tailwind to firms’ financials.

“While subscription products may provide convenience benefits to consumers, they may also allow firms to exploit inattentive subscribers, and thus incentivize firms to shift their payment model from pay-as-you-go to subscription models. Because subscriptions are automatically renewed, consumers who are inertial or not fully attentive may continue to pay for services they no longer value,” wrote the authors.

The study cited data that found that 32% of consumers signed up for subscriptions because they represented something “nice to have” and that 90% of subscribers underestimate their actual monthly spending on subscriptions — where the actual tally was 3x what had been estimated by those same consumers.

Cancellations in the Cards?

As for what we might term the “moment of truth” (our words, not the authors’), replacement cards tend to come with new card numbers, and consumers typically need to update their billing information with the subscription provider, “inducing an active renewal choice. Indeed, we document a sharp, abnormal drop in subscriber retention rates during the month of card replacement,” per the paper. The cancellation rates observed over a broad range of subscription models were about four times the level than might be seen otherwise.

“It is plausible to suspect that some of these subscription services would not be viable from a business perspective if not for its subscribers’ inattention,” the study concluded.

PYMNTS Intelligence has detailed that when confronted with the realities of how much they spend on subscriptions, or must mull renewals, consumers tighten their belts. As detailed here earlier in the year, more than half of subscribers have cited cost as a key reason to cancel their subscriptions. 

And there are at least some indications that cancellation practices are going to see increased pressure and scrutiny from regulators. In one example, in June, the Federal Trade Commission sued Amazon, alleging the company had used practices that “tricked and trapped” consumers into Amazon Prime recurring subscriptions. The FTC complaint alleged that the company, which gets roughly $25 billion in subscription revenues annually, has used “dark patterns” to trick consumers to enrolling into the program, and makes its cancellation process complicated.

There’s also impetus for subscription firms to make the interactions more streamlined and more proactive with consumers. In a recent interview with PYMNTS’ Karen Webster, Brian Bogosian, CEO of sticky.ioSeth Goldman, CEO of floral and gifting subscription firm UrbanStems; and Alex Brown, CEO of sustainable cleaning supplies subscription firm Truly Free said that flexibility to pause subscriptions, or move to different tiers, can cement consumer loyalty.