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Gauging the ‘subscription economy’ boon to companies

Federal regulators want to make it easier for consumers to cancel auto-renewal subscriptions. New Stanford research indicates the financial stakes for consumers and businesses.

Anyone who has a subscription is probably familiar with this scenario: Paying for a recurring product or service that is no longer needed or wanted.

A new study co-authored by Stanford economists Liran Einav and Neale Mahoney examines how much companies gain when customers aren’t paying attention or, if they are paying attention, don’t do anything about those automatic $12.99-a-month type of memberships they could do without. Einav and Mahoney find that business revenues are from 14 percent to more than 200 percent higher than they would be if consumers were more proactive about managing their unwanted accounts.

The study comes as companies are relying more on automatic renewals to sell everything from movie streaming services to home-cooked meals — and increasingly are coming under scrutiny for dubious practices. The Federal Trade Commission (FTC), for instance, recently charged Amazon for allegedly “duping” consumers into enrolling for its Prime subscription service — and making it difficult for them to cancel.The FTC is also considering proposed rules that would make it as easy for consumers to halt their digital subscriptions as it is for them to sign up.

Einav and Mahoney – who are also, respectively, the Tad and Dianne Taube Healthcare Fellow and the George P. Shultz Fellow at the Stanford Institute for Economic Policy Research (SIEPR) — note in their paper that the growth in digital subscriptions is often attributed to two factors. One is the growth in e-commerce that has increased the opportunities for subscription-based payment models, and the other is the belief that subscriptions help consumers by removing the hassle of one-off purchases.

But Einav and Mahoney — along with their coauthor, Ben Klopack, an economist at Texas A&M and former graduate fellowship recipient at SIEPR — suggest that auto-renewals take advantage of customers who have subscriptions they no longer value.

“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,” the scholars write in their working paper, which was released this week by the National Bureau of Economic Research.

The researchers find evidence to suggest that less financially sophisticated consumers are especially vulnerable to industry practices: Those who took out cash advances appear to have higher rates of unwanted subscriptions.

Weighing policy responses

The research is the latest study to shed light on how consumers can be lax about memberships or subscriptions and the tricks companies use to lure consumers into automatic sign-ups.

Einav, Mahoney and Klopack set out to answer an important question: How much of a financial boon is subscriber inertia to companies? Answers are hard to find.

The study authors base their estimates on transaction data they received from a large payment card network on the condition that the company and the individual subscription services are not identified.

Overall, they study 10 popular subscription services that cover entertainment, security, retail goods, and newspapers. Their analysis uses data that spans from 2018 to 2021 and includes information on 23 million accounts and 35 million subscriptions.

Specifically, the researchers look at what happened when consumers updated their billing information on subscription accounts after receiving a new debit or credit card. This step essentially forces consumers to make an active decision about whether or not they want to continue paying for a subscription.

The study finds a steep drop in renewal rates at this juncture: Cancellations rates were four times higher when consumers received a replacement card and had to update their subscription billing information as a result.

The paper’s authors use the sharp increase in cancellation rates to estimate the effect of customer inattention on company revenues.

They find that the increase in revenues can be substantial. For the average plan they study, they estimate that revenues are 85 percent higher than they would be if consumers made an active decision each month.

“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 authors write.

As the FTC weighs a policy response, it is also considering, among other steps, requiring companies to periodically remind customers of their auto-renewed subscriptions. The researchers analyze the potential impact that prompting consumers to re-up or cancel at various time intervals — from once-a-month to every 24 months — would have on company revenues. They estimate, for instance, that requiring subscribers to take action at six-month intervals would translate to about a 50 percent reduction in the additional revenue gained from consumer inattention.

“Our research highlights the financial benefits to consumers of well-designed regulation of the `subscription economy,’” Mahoney and Einav say. “The stakes are substantial for consumers and businesses.”

Klopack received his PhD from Stanford in 2019 and was a former recipient of the Patricia Liu McKenna and Kenneth McKenna Graduate Fellowship.