Companies increasingly are moving to subscriptions to sell everything from entertainment to security to newspapers. This could be because digital goods and services lend themselves to subscription-based models, and consumers appreciate the convenience. It could also be, however, because suppliers earn higher profits when subscribers fail to cancel subscriptions they are not using.
In Selling Subscriptions (NBER Working Paper 31547), Liran Einav, Benjamin Klopack, and Neale Mahoney find that consumer inattention to subscription services boosts companies’ revenues. Their estimate of the increase relative to what firms would receive if all consumers canceled their subscriptions as soon as they no longer valued them ranges widely, from 14 to more than 200 percent, depending on the circumstances.
When subscribers’ credit cards expire and they must take action to keep their subscriptions going, many choose not to renew.
The study examines monthly automatic subscription renewals for 10 digital and nondigital products in various merchandise categories. The data are drawn from transactions in a large domestic payment-card network that covers about 30 percent of all subscribers. The sample period is August 2017 to December 2021. The researchers find that when subscribers’ credit cards are replaced and they have to take action — update their credit card information online — to keep their subscriptions going, many do not resubscribe. This is consistent with the subscriber having stopped valuing the subscription at some point before credit card replacement, but not having canceled it until the replacement forced action.
One potential concern with the researchers’ interpretation of the observed drop in subscriptions is that the drop could reflect in part consumers’ decisions to switch credit cards. If subscribers are waiting for a new card in the mail, they might use a different card to renew their subscription. However, when the researchers zoom out to examine non-subscription purchases, they find no evidence of substitution, indicating the phenomenon is not driven by consumer card-switching behavior, and is instead specific to subscription plans.
Inattention appears most prevalent among subscribers with the least financial sophistication. The researchers consider renewal behavior among subscribers who have used their credit card for a cash advance, which because of card fees and high interest rates is considered an expensive way to borrow and is a proxy for low financial sophistication. In most cases, the drop in subscriptions is sharper after card renewal for those with cash advances than those without.
The researchers analyze various policies that could increase consumer attention to their subscriptions. While requiring consumers to actively renew every month would eliminate excess payments, it would also eliminate the convenience of subscriptions. However, an intermediate policy of requiring consumers to make an active choice every six months could cut the revenue impact of inattention by half, suggesting it is possible to substantially reduce excess payments without a large convenience burden.