The Subscription Fatigue Paradox: When Too Many “Small” Payments Hurt Growth

One consideration sellers must make when deciding a price point is how consumers will mentally feel about the price.  Although the Law of Demand states that consumers will purchase greater quantities at lower prices, sellers must also consider elasticity of demand.  Does the increase in quantity sold make up for the decreased revenue per product?  If demand is elastic, the percent change in quantity is greater than the percent change in price, meaning that a 10 percent drop in price garners more than a 10 percent increase in customers.  However, if demand is inelastic, that 10 percent drop in price will only attract a smaller percent increase in customers…resulting in lower total revenue. 

Therefore, reducing prices is not always the best choice for sellers.  You will get more customers (unless you’re selling a Veblen good), but actually see your total revenue decline.  And at low prices, demand tends to be more inelastic, meaning little gain in sales from lowering prices further.

Subscription Fatigue

Nowadays, many digital services require a monthly subscription payment: streaming entertainment, software tools, online news, and even learning apps.  At first, it would appear that the lower monthly prices for these digital services would make consumers happier.  A generation ago, consumers had to pay larger amounts for these services, such as a large cable TV bill instead of multiple smaller bills for Netflix, Hulu, and Amazon Prime Video.  Research has discovered, however, that consumers can experience subscription fatigue from having many small subscription charges each month.

Mental Accounting

Why do we experience subscription fatigue, even if our overall spending is lower than before?  The phenomenon is mostly due to being overwhelmed by quantity: consumers feel like they have too many options.  Before the slew of digital subscription offerings, it was easier for consumers to feel like they had gotten a financial deal that worked for them.  When there are a score of different apps, however, there may always be the nagging doubt that you have gotten the best fit.  This can make even a smaller monthly payment feel like wasteful spending.

Secondly, mental accounting may make many small monthly payments feel like more spending than it actually is.  Mentally, we tend to break our subscriptions into separate accounts, giving each one some mental space.  With all of our modern digital subscriptions, we feel that we are spending lots of money each month.  In reality, our total subscription expenditures may be much lower than our pre-Internet spending on the same services.  There is also the pain of paying phenomenon, where consumers “feel” the unpleasant sensation of money leaving their metaphorical pockets.  Monthly subscriptions can increase the pain of paying by occurring more frequently than one-time purchases, even those of greater total expense.

Mental Accounting Can Lead to Subscription Churn

Feeling overwhelmed by many subscriptions can lead to churn, where consumers cancel one and move to another frequently.  They are on the “hunt” for the best possible deal.  However, over the long run, they are likely to be dissatisfied due to subscription fatigue and the burdens of mental accounting.  Instead of taking full advantage of the digital services they currently have, consumers are routinely seeking new substitutes.  This search can also be overwhelming, as consumers must compare the features of many different products.

The paradox of choice explains why consumers feel so fatigued in our digital era, at least in markets where they don’t know the products well.  When faced with too many options, we struggle to pick one, especially when we must mentally assign the monthly cost some space and weight.  Our brains assign this cost a greater effect on our total budget than it likely does.  As a result, we grow exhausted putting too much effort into the search for the package with the perfect blend of options and features: does Netflix have more shows I want to watch, or does HBO Max?  We may ignore the fact that any option has far more hours of desirable content than we can watch, mentally laboring over pennies.

How Sellers Can Combat Subscription Fatigue

Making subscriptions cheaper is not a cure-all for sellers struggling with churn.  Aside from inelastic demand, sellers who want to lower prices may struggle with the price-quality association phenomenon.  Consumers who do not know a product well may automatically assume the lower price options have lower quality.  Therefore, the Law of Demand can be skewed by consumers’ assumptions about higher prices equating to higher quality.  

Annual Fee Instead of Monthly

One possible solution is to reduce consumers’ mental accounting strain by charging an annual fee instead of twelve monthly fees.  Although the single annual fee may be higher than the twelve combined monthly fees, the mental load on consumers is decreased due to the less frequent “pain of payment.”  A consumer may think “I’d rather just pay once a year” and ignore the cost difference (as long as it is relatively low).  Consumers may also feel more secure with an annual deal, enjoying being “locked in” for twelve months without changes.

Bundling Subscription Services to Reduce Mental Accounting

A second possible solution, and one more common, is to bundle multiple services together.  This allows consumers to also reduce the strain of mental accounting by allowing multiple previous subscriptions to now be lumped together in one account.  Again, the total cost may actually be higher with the bundling deal, but consumers ignore it for the sake of convenience.  For example, a conglomerate digital company like Disney could sell a more expensive mega-bundle of all of its streaming options for a higher price versus allowing each streaming option to be subscribed to separately.  

Sellers who bundle for more money may benefit from consumers’ traditional belief that bundled services are actually cheaper.  Similar to the concept of buying in bulk, most consumers adhere to the belief that buying more total volume means a lower per-unit cost.  Sellers can take advantage of that and not reduce the per-unit cost, requiring savvy consumers to do the math themselves.  Relatively few prospective customers will crunch the numbers, meaning a majority will accept the bundle as a better financial deal.

The Bottom Line: Too Many Small Payments Feel Like a Burden

Mental mathematics is a lot of work, and can be exhausting.  The thought of adding another subscription, even if the deal is fantastic, may make consumers balk.  Instead, they are likelier to look for options that “free up” mental space and allow them to more easily conceptualize their total budget.  Therefore, counterintuitively, they may opt for higher annual prices or more expensive bundles in order to have fewer line items on their budgets.  This makes things simpler, but may not be the best financial deal.  You do pay for convenience, however, which could be worth it for some consumers based on how much utility they get from making life simpler.