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Article

Auto-Renew Exploits Inertia but Hurts Long-Term Profits

Marketing
Published on:

Subscribed consumers stay subscribed – a tendency that is often exploited by companies. However, a recent study by Klaus M. Miller of HEC Paris and H! PARIS center chairholder, Navdeep S. Sahni of Stanford University, and Avner Strulov-Shlain of the University of Chicago shows that in the long term, exploiting these consumer behaviors may not pay off.

computer user afraid in front of his devices

In today’s world it is impossible to escape from subscriptions. If it is not television streaming services, gym memberships and a weekly delivery of cook-at-home meals, you will at least be subscribed to a direct debit for your telephone contract or energy supply. 

As consumers, we continually enter subscriptions and although we may intend to cancel when we have watched the show or used the introductory offer, we often don’t. It is said we are inert when it comes to subscriptions – i.e., we tend to take no action and leave things as they are, even if the service decides to increase its price or change its terms and conditions. 

 

We tend to take no action and leave things as they are, even if the service decides to increase its price or change its terms and conditions.

 

This characteristic is often exploited by companies who offer a bargain price sign-up offer, then boost the price once the consumer is embedded in the subscription and has become inert. 

When signing up, are consumers aware of their future inertia? If they are, does it prevent them from signing up to seemingly attractive subscription offers? We explored whether this exploitative behavior is beneficial to companies and asked the question – should firms engage in it?

Two million people studied over two years

Many studies have explored the behaviors of consumers already signed up to subscriptions. For example, looking at the number of people who pay not to go to the gym has revealed the innate inertia of subscribed consumers. Instead, we wanted to understand what influences consumers when it comes to the initial decision of subscribing. 

We set out to investigate the behaviors of people who saw a subscription contract, and how its different features influenced their decision to sign up. In addition, we wanted to track the future behavior of those who signed up for different contracts. 

In a large-scale field experiment, we randomized the terms of subscription offers received by 2.1 million readers who hit the digital paywall of a large European newspaper.

Each reader was offered a subscription promo that either auto-renews OR auto-cancels. The auto-renew contract turns into a paid subscription for those who take up the promotion and do not explicitly cancel it – this is the exploitative contract. The auto-cancel contract will not automatically renew unless the promo taker clicks enroll onto a paid subscription – this is the non-exploitative contract.

We also offered a promotional trial period – for auto-renew and auto-cancel contracts – of either four weeks or two weeks, and a promotional price for these of either 0.99 euro or free (all the options can be combined with each other: contract type, duration and price). Crucially, all other aspects of the contract were the same. We then followed these potential subscribers for two years and observed their interactions with the platform. 

Sophisticated consumers prevent their own inertia

We observed that almost a quarter of consumers prefer to take up offers with auto-cancelling contracts. This reveals that many consumers are aware of their future inertia. 

As a consumer, when you see an exploitative subscription offer, you know that after you have watched the latest series of the show, you are likely to stay subscribed to a new streaming service for at least a short period. To avoid this, you go for the offer that supplies an easy opt-out, the auto-cancel contract.

Here, the consumer demonstrates an element of sophisticated behavior and pre-empts their future behavior. This is a novel finding as in previous studies consumers were thought to be naive to their inertia.

Increasing profits: play the long or the short game? 

In the short-to-medium term (weeks/months), the consumers who signed up to auto-renewal contracts stay longer than those in the auto-cancel ones. This is key for companies as it shows that on this timescale, offering auto-renewal contracts can increase profits. 

 

In the long term, there may be more profit in offering fairer auto-cancel contracts that build a loyal, content customer base.

 

However, in the longer term (over a year after the promotional period has ended) the newspaper company retained more subscribers that were in the initial auto-cancel group than in the auto-renewal group. Here, the initial profit advantages of the auto-renewal contract are cancelled out. 

Consumer fight-back 

So, should companies exploit consumer behavior to maximize profit? Our results suggest that, in the long term, the answer is ‘No.’ 

Initially, the company using auto-renew contracts will lose the people who are not inert - around 25% of their consumers. These people are aware of the auto-subscribe trap and avoid it. So, the company seeking a quick return misses out on these potential profits. 

We also see that the remaining consumers, roughly 75%, are partially inert. They sign up for the auto-renewal but then realize their inertia and over time, they cancel the contract.

These consumers are likely to view the profit-seeking company in a less favorable light in the future. In some circumstances, they retaliate – with 10% less likely to sign up for another contract with the same company. 

In combination, our results show that although customers know they are likely to stay subscribed to auto-renewing contracts, they underestimate exactly how inert they will be in the future and subscribe anyway. Only approximately 2% of the population are fully inert. They sign up to the contract and then stay in it despite not using the service.

A fairer subscription future?

So, it seems clear that the quick buck made from exploitative auto-renewal contracts can backfire. Some companies, like Netflix, are taking action to improve how they may be viewed by inactive consumers and are contacting this group to help them get out of subscriptions. In the long run, this may pay off and those consumers will return in the future. 

Regulators are becoming more concerned about exploitative subscription offers that take advantage of consumers’ inert behavior. As such, we may start to see more subscription offers with fairer terms, such as a choice to auto-cancel or an auto-renewal with regular reminders and a one-click escape route. 

 

Additional resources:

 

Applications

Companies engaging in exploitative auto-renewal subscriptions should be aware that not all consumers are inert. They immediately lose these customers, and this profit, before sign-up. In the long term, there may be more profit in offering fairer auto-cancel contracts that build a loyal, content customer base. In addition, we confirm that auto-renewing contracts do exploit consumer behavior. This conclusion will support regulators globally, who are increasingly worried about exploitative practices in subscription models.  Our work shows that to avoid this exploitation, companies could offer a choice between auto-renew and auto-cancel contracts. We suggest that the fairest way forward would be to develop more auto-renew contracts with reminders for consumers and to give them an easy way to cancel subscriptions.  

Methodology

We ran a large-scale field experiment that offered 2.1 million readers of a European newspaper either auto-renewing or auto-cancelling contracts. We then followed these potential subscribers for two years and observed their interactions with the platform. We empirically assessed their consumer behavior in the context of signing up to the contracts.
Based on an interview with Professor Klaus Miller on his paper “Sophisticated Consumers with Inertia: Long-Term Implications from a Large-Scale Field Experiment”, co-written with Navdeep S. Sahni of Stanford University, and Avner Strulov-Shlain of the University of Chicago, under review. The research was partially supported by the HEC Foundation.

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