Subscription models for goods have become so widespread, it’s possible to live an entire life without permanently owning anything. Thank the subscription economy, kickstarted over a decade ago by the likes of Netflix, Spotify, Blue Apron, and Uber, and today encompassing nearly every element of daily life. Now, you can pay for monthly access to software, news, entertainment, your work wardrobe, your morning cup of Joe, and even your regular dinner out.
It’s not hard to see why. Companies can make more money selling something repeatedly than selling it just once, especially if, like would-be gym goers, their repeat buyers forget they ever signed up, leaving sellers to collect a hefty monthly payment. The problem of forgotten subscriptions is so large there’s now a robust ecosystem of startups, such as Trim and Rocket Money, promising to save users money by ferreting out and canceling the subscriptions they forgot about.
Now, researchers have put a number on the high value of customer inertia. Inattention by buyers can boost a business’ revenue by as much as 200%, according to a new working paper from researchers at Stanford University and Texas A&M University submitted to the National Bureau of Economic Research.
“I knew that people forgot to cancel,” said co-author Neale Mahoney, an economics professor at Stanford. “The magnitude, the pervasiveness of this issue was surprising.”
Mahoney, along with fellow Stanford economics professor Liran Einav and Benjamin Klopack, an assistant economics professor at Texas A&M University, calculated the cost (or—to companies—benefit) of inattention by zeroing in on a specific moment in purchasers’ lives: Replacing a credit card.
New card, who dis?
Using a large dataset from an undisclosed payment system provider, the researchers first identified 10 common subscription services, and then looked at how frequently they were renewed during normal times and when the subscriber replaced a card, forcing them to update their payment information with each service.
Renewals sharply dropped off after these card replacements, even as other shopping behavior, such as buying groceries and gas, continued normally, leading them to a conclusion: When people had to actively decide to resubscribe to a service and enter new payment information, many opted out.
Working backwards from these calculations, they estimated that “inattention increases firm revenues by between 14% and more than 200%, depending on the service.”
To be sure, the 200% figure is a maximum — most companies get somewhere between a 30% and 80% revenue boost from customers’ spaciness, said Einav. For a typical consumer, though, that still means hundreds of dollars in unwanted spending. The average American now shells out nearly $220 a month on recurring subscriptions excluding cable and utility bills, according to C+R Research (and is only conscious of about 40% of that spending.)
Tried for a month, trapped for two years
That tracks with Mahoney’s personal experience. “You’ll have friends who say, ‘I should have canceled this immediately, and I ended up signing up for two years,’” he said.
The Federal Trade Commission is now looking to crack down on businesses that count on buyers to set it and forget it. Its so-called “click to cancel” rule, which drew more than 1,110 comments before the comment period closed in June, would require, among other things, that recurring subscription products actively force customers to re-enroll at periodic intervals. If customers were required to re-up every six months, it would cut the revenue benefits of inattention by half, the Stanford and Texas A&M researchers found.
In the meantime, consumers could benefit from scrutinizing their credit card statement every month, or follow the example of Mahoney, who told Fortune of setting up calendar reminders for himself to cancel recurring subscriptions when they stop being useful.
Still, while regular autopay is annoying to many, it’s possible to go too far in the other direction, Einav said.
Imagine “I'm going to force you every month to kind of go through all your subscriptions and figure out, yes, no, yes, no — if you have 15 things every first of the month, that's kind of annoying,” he said. “It’s not clear that we want [people] to go all the way to [being] fully attentive, because people have other stuff in life.”
