The (un)surprising economics of subscriptions

Receive free Bryce Elder updates

We’ll send you a myFT Daily Digest email rounding up the latest Bryce Elder news every morning.

At the risk of sounding like a column by Life & Arts writer Bryce Elder, modern life sucks.

One of its worst elements, as we’re sure you’ll agree, is having to take out subscriptions for products that should really be available as standalone purchases.

Some companies, such as Adobe, have fully embraced this sales approach — most of its software products can now only be acquired through regular Creative Cloud payments. Here’s an article by Alphaville writer Bryce Elder on that.

From the company’s perspective, subscriptions help them reap steady revenues, rather than having spikes in sales grouped around major product launches. The argument for customers is that subscribing to a service that includes updates is cheaper than paying a large upfront cost every time your software of choice receives a major update. For goods subscriptions, it’s because shopping is difficult and annoying.

But businesses aren’t your friends, so there’s the natural suspicion that subscriptions — by being hard to efficiently monitor and manage — are ultimately costing subscribers more. That dynamic is the subject of a new NBER paper by Liran Einav and Benjamin Klopack of Stanford University, and Neale Mahoney of Texas A&M. They write:

Retailers are increasingly selling goods and services via subscriptions instead of spot markets. In this paper, we study one benefit to the retailer of selling subscriptions: the possibility that — presumably because of inattention or inertia — consumers continue to pay for subscriptions after the flow benefit falls below its price.

The authors have used data from a “large” but unspecified US payment card network to monitor this, focusing on cards that have been have been replaced for some reason (they give expiration as an example) — which forces card users to decide whether they want to maintain their current subscriptions, effectively forcing the questions of inattention and inertia:

Replaced cards require an active subscription renewal decision, and we document that months during which cards are replaced are associated with much higher rates of cancellation for the ten subscriptions we study. We write down and estimate a stylized model of subscription renewals that allows us to recover the baseline degree of inattention

After some application of those fancy-looking letters that economists are so fond of:

We find that seller revenues (or equivalently average subscription durations) are significantly higher due to subscriber inattention, with important heterogeneity across services. We estimate that inattention increases firm revenues by between 14% and more than 200%, depending on the service.

One interesting finding is that benefit of subscriber attention (from the subscriber’s perspective at least) varies greatly by service.

The paper models this in part through a hypothetical regulated system where subscribers are made to actively choose to continue their subscriptions at regular intervals. This table shows how the revenue ratio impact would change based on these increments (where ∞ is automatic renewal:

The authors find the effects “are substantial, yet highly heterogeneous”. In one of the example services studied, inattention is seemingly integral. Alphaville’s emphasis below:

Inattention (relative to “perfect” attention) modestly increases revenues for some services (eg, 14% for service G), but triples revenues for others (service B). 23 In other words, the average subscription duration for service B would drop from its observed duration of over a year to about 4 months if subscribers were fully attentive. It is plausible to suspect that this subscription service would not be viable from a business perspective if not for its subscribers’ inattention.

They note, however, that manual re-subscription could well be seen as a “potentially undesirable remedy”, which is academy speak for “it would be massively bloody annoying”. Indeed, automatic renewal is often a desirable feature.

What does it mean? Subscriptions are already under scrutiny, particularly as the Federal Trade Commission takes Amazon to court over allegations the ecommerce megalodon manipulated customers into subscribing to Amazon Prime.

Evidence that they are they (in) actively cost customers extra money might make them a popular target for the US’s happy-warrior regulators, but the balance between cost and convenience is very delicate. Could Uncle Sam soon be tapping people on the shoulder to check they still need Photoshop?