The Subscription to Everything Economy

Chances are, you have at least one subscription to a digital entertainment streamer, be it music, movies, television, or video games.  Or, you have a subscription to a business that offers access to services, ranging from a gym to a spa to a country club.  Why are so many things subscription-based today?

Economics of Subscription Plans

Why do businesses make us pay by the month or year to continue to access services?  Why don’t they just sell individual units of output?  Some subscription-sellers do, especially those that offer physical services like gyms, spas, and country clubs, but some require a full-fledged subscription before services will be rendered.  Critics of the subscription-required model often grouse that they would happily pay for one unit of output (i.e., a movie, TV episode, song, or ride) but are unwilling to sign up for a subscription.  Why do some sellers insist on a subscription if they are potentially losing out on individual sales?

Unpredictable Demand for Individual Units

The simple answer is that selling by the individual unit is quite risky for goods and services that have highly variable demand.  This is especially true of things with highly elastic demand, where customers are very sensitive to any increase in price.  Entertainment downloads and trips to gyms, spas, or country clubs are among the first line items to be cut from family budgets during times of economic stress, as they are seen as luxuries rather than necessities.  However, it may be more difficult for consumers to cut monthly subscriptions, as consumers may feel that they will want to enjoy those services later. 

Spreading Out Costs Can Mask “Pain of Paying”

Behavioral economists look at how human psychology affects spending and financial habits.  One important concept in this field is “pain of paying,” or how intensely consumers feel the effects of parting with their money.  Not surprisingly, consumers feel more psychological pain when paying higher prices.  We prefer paying smaller amounts over time, and paying with credit cards instead of cash.  As a result, monthly subscription payments can feel less painful than larger, one-time purchases, even though the total monthly fees are a greater amount.  

Auto Renewals Can Bring in Revenue With Little or No Marginal Cost

Auto renewal features keep subscriptions going until the customer actively ends them, which is less common than one might expect.  Sellers can therefore make lots of revenue without having to provide services - thousands of consumers are paying monthly for services they no longer utilize.  As a result, it literally pays to sell subscriptions, as a certain percent of your customers will likely continue paying in perpetuity.

Ability to Attract Paying Customers Through Free Samples or Freemium Models

Digital services can be designed so that prospective customers get a certain amount for free, but then have to pay for continued service.  This can be a powerful marketing tool.  Companies can design their freemium package to contain just enough attractive features to make customers want more.  Within the freemium package, users are regularly bombarded with advertisements and appeals to upgrade to the full subscription package, which promises more content and features.  Eventually, some customers will decide to upgrade.  Had the purchase been non-subscription, requiring an all-or-nothing up-front payment, many of those customers would likely have declined.

Controversies of Subscriptions

Surprise Subscriptions

Controversially, more and more features on devices like computers and automobiles are becoming subscription-based, typically with required payment kicking in only after users have become accustomed to the service.  For example, new cars often come loaded with desirable features like satellite radio and navigation…but now require users to purchase subscriptions after a year of free use to continue utilizing them.  Many users complain that this is a “bait-and-switch,” with those features being advertised as selling points on the car without being identified as paid extras.  

Advertised digital features, such as in-dash navigation or remote start, may also only be included on upper-level models of vehicles but be misleadingly advertised as available on lower-level models, with buyers of lower-level models only becoming aware that they must purchase the subscription separately after completing the purchase of the vehicle. 

Using Features to Make Services Addictives

Some digital services are designed using elements of human psychology to make them rather addictive.  These design features, known as dark nudges, intend to steer users toward certain decisions that are intended to benefit the seller (usually in terms of revenue or profit).  While a one-time purchase typically concludes business between the buyer and seller, online subscriptions can result in the seller constantly trying to convince the buyer to upgrade to a more expensive package.  This can result in all sorts of tactics, ranging from innocuous to downright unethical, to try and convince the user to upgrade for more money.

Zombie Subscriptions, Teaser Rates, and Busted Budgets

Many consumers are enticed to try online subscriptions that offer no-cost “free trial” periods…as long as a payment method is provided.  Consumers put in their credit card information and assure themselves that they will cancel before the week or month is up, thus getting to try the service without spending any money.  Then, life happens and the cancellation is forgotten.  Years later, thanks to auto renewal, the customer realizes that he or she has been paying for a digital subscription that was never used after the first week of the free trial!  Many consumers do not check their bank or credit card statements and thus do not realize that several “zombie subscriptions” are taking bites out of their disposable income.

Research has found that most consumers under-predict how much they are spending monthly on subscriptions, typically due to a combination of zombie subscriptions and being unaware that their actively-used subscriptions have increased in price annually.  Some of this is due to teaser rates that are offered to new users of a subscription.  For the first few months, users get to enjoy the subscription for a below-market price, but then the price goes up substantially.  Unfortunately, many consumers may not read that far into the fine print and mistakenly believe that they will pay the teaser rate every month.  Years later, they discover that they are paying double or triple what they thought due to the expiration of the teaser rate deal.