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Buy It Now, Pay Forever? The Economics of Subscription Overload
In previous generations, consumers often bought items individually when they were needed. Now, thanks to the Internet and robust shipping networks, both digital and physical items are often delivered on a constant or periodic basis thanks to subscription services. Millions of consumers use digital subscription services to access thousands of movies, television shows, and video games rather than purchasing or renting them individually. Retail sites like Amazon and Walmart have many products that customers can order on a monthly or every-three-months subscription, ranging from beauty care products to household cleaners.
Why Are Subscription Services Popular?
Subscription services are convenient because they allow for automatic access to desired goods and services without consumers having to make individual purchases or trips. This can save considerable time, giving them economic value. In previous generations, how much time and fuel was used on trips to movie and video game rental outlets or excessive trips to individual stores to buy individual items? Today, most of our entertainment and household goods can be delivered, although we are likely to incur some shipping costs for the latter.
A second benefit of subscription services is increased variety and selection. Netflix, Hulu, and Disney+ have thousands of titles to choose from, which is more than most consumers would find at a video rental store. Subscription boxes from Amazon and Walmart often rotate products, giving consumers a chance to experience new brands. Prior to subscriptions, consumers would have to seek out variety on their own, which could be time-consuming. Today, most Western consumers can access thousands of products on their smartphones.
Long-Term Cost of Recurring Payments
Subscription packages are convenient, but their recurring payments create a hidden problem: most consumers underestimate their long-term costs. Many consumers may be attracted by the reasonable initial cost of a subscription service, not fully accounting for the fact that the cost will be incurred every month. Others may be enticed by deals that offer no payments for ____ months, figuring that their income will increase by the time payments begin. Or, they may put in their payment information to access a free trial period…but forget to cancel and begin incurring charges.
Consumers who do not budget with fidelity may lose track of their subscription services, resulting in hundreds of dollars in monthly charges. Currently, it is estimated that almost half of consumers are paying for at least one subscription service that they no longer use, having switched to a competitor’s service. A common example would be signing up for a new entertainment streaming service, such as HBO Max, and later forgetting to cancel the Paramount Plus subscription as originally planned.
Why Consumers Underestimate Long-Term Costs
Consumers often underestimate long-term subscription costs by failing to budget them on a recurring basis as they would utilities. This may be especially true of subscription services purchased as a last-minute gift, with frantic consumers seeing only the low monthly cost for the first month. Small monthly costs may not be added to a family’s budget because they seem insignificant, especially if the family has relatively high income. As multiple such subscriptions are added, however, this unbudgeted amount becomes significant and should be a line item. Because they are not a line item, however, the family may be surprised to discover they are overspending each month.
The Planning Fallacy
Psychologically, we tend to fall prey to the planning fallacy when creating long-term budgets. We are likely to be overly optimistic about both our future income being higher and our future costs being lower. We do not like to plan for cost overruns, and thus may optimistically budget our allowed spending to be too close to our income. Many subscription costs increase over time, often on an annual basis, and this may be excluded from budget projections. Consumers may sign up for a subscription package that is a good deal at the time, but later discover its price has increased too much to make it worth it.
How Subscription Fatigue Impacts Budgeting and Consumption
It can be tough to deal with managing our many subscriptions. They are easy to sign up for, but hard to limit or cancel. This can create subscription fatigue, with customers feeling frustrated and overwhelmed. Unfortunately, many consumers are prone to procrastination, and keep pushing back the planned time to sit down and go through their subscriptions. This fatigue and procrastination can lead to perpetually broken budgets as consumers continue to pay for many unused subscriptions, month after month.
Eventually, those who overcome the procrastination may cancel most or all of their subscriptions out of frustration. This can lead to changes in consumption, with consumers now having to purchase items individually. While this may be cost-effective for disciplined consumers, some may overspend due to feeling that their budget has been “freed up” more than it actually has. Consumers who underestimated the costs of subscriptions when signing up for them may conversely overestimate the savings accrued by canceling them.
All-Or-Nothing Thinking
Subscription fatigue may affect consumption negatively by making consumers fear that they are overspending on prescriptions and thus sharply reduce their purchases of individual items, perhaps to their detriment. It may also lead to overspending due to the fallacy of all-or-nothing thinking, which can cause consumers to spend freely if they believe that their budget has already been broken. A consumer may think “well, I’ve already broken my budget for this month, so might as well buy what I want and get back on track next month.” However, if this occurs for several months, that consumer may be draining his or her savings.
Feeling subscription fatigue may dissuade consumers from budgeting out of fear that they will do a poor job. Again, due to all-or-nothing thinking, consumers may avoid creating a monthly budget out of a fear that if they miss any recurring line items they should not embark on the exercise. This can lead to consumers never creating a formal budget, resulting in perpetual financial problems. One way to reduce this problem is to encourage basic financial literacy education in schools, especially during the last year or two of secondary education. In the United States, more than half of the 50 states have legislation implemented or pending that require students to complete a one-semester personal financial literacy class to graduate from high school.
Why Businesses Pursue Subscription Models
Locking in Long-Term Revenue
Not surprisingly, businesses like subscription models because they bring in perpetual income and allow for long-term budgeting. This is especially true of subscription models that do not allow cancellation at any time and require customers to accept annual contracts. Whether or not the customer uses the service to its full extent, the seller gets paid. To help guarantee this long-term income, many subscription services have made cancellation difficult. For example, while consumers can easily sign up for most subscription packages with a few taps of their smartphone screen, cancellation can require an actual phone call to customer service. Young consumers’ dislike of phone calls helps “lock in” long term income as fewer are willing to call and cancel their subscriptions.
Ability to Bundle
Sellers, especially those offering subscription boxes or packages of items, can use these services to bundle slower-selling items into the boxes and get revenue from them in a way that would be more difficult with individual item sales. Some items may net very little revenue if sold individually, but bring in some revenue if bundled with more popular items. For example, a firm can offer bundle “add-ons” for very low prices and get some consumers to agree, whereas no consumers would buy the individual products from the add-ons separately. Bundling also allows the firm to advertise all products within the bundles as complements, enhancing demand for them.
Some bundles may be even bundled with other bundles, such as through inter-company promotions, convincing consumers to purchase individual bundles that they would not individually. For example, some Internet service providers may promote bundles from participating companies at lower prices. Or one entertainment streaming company may offer a cross-promotion with another entertainment streaming company, such as a music streamer (XM satellite radio or Spotify Internet streaming music) with a television and movie streamer (Fox Nation, Hulu, or YouTube TV). Overall, this allows both companies to increase their revenue due to demand-enhancement effects of bundling complementary goods and services.
