16 August 2023

Subscriptions in the future

Recently, I found a clever paper by Einav, Klopack, and Mahoney about consumer behavior around cancelling subscriptions that struck a chord. I always fall for subscriptions - I’m a sucker for getting a recurring service handled for me in perpetuity. But the other shoe always drops when my house fills up with piles of unused paper towels, or worse, my bank account gets quietly drained by yet another TV subscription.

In this paper, the researchers estimated that companies selling subscriptions for digital products made between 14% and 200% more revenue from their current consumers than they would have if the consumer cancelled subscriptions immediately after they stopped using them. To assess this, they tracked whether the subscriptions ended up on the transaction history after credit card expiration since updating card details is an active choice (pretty nifty methodology).

The conclusions aren’t surprising, but the magnitudes are! Consumer businesses spend a lot of money chasing a percentage point of growth (re: how I spent the first half of 2023) so 14-200% would be growth that would be really hard to replace. But the implications for consumers are concerning, because this benefit incentivizes sellers to quietly disappear rather than constantly generating more value.

So what could the company do instead?

In the last decade, businesses have explored every model of how to sell things online. The issue is that frankly, subscriptions are the most frictionless way of getting payment information. When you add free trials on top, it’s hard to see a better way for a company to get an income stream. What’s more, upfront “life time subscriptions” can be quite dangerous if the company has fixed costs, creating literal debt that the business must continue to service forever more.

A more absurd option could be to remind the consumer of the value they got, personalized to their usage. A gym that reminds you that you’ve used it? Meal kits that tell you how much time you got back each week? Streaming that reminds me “when I haven’t watched in a while”? Unfortunately, as someone selling a service, I have no incentive to build this because I lose huge economic advantages. But perhaps it’s a good feature for a marketplace business (re: Amazon, Doordash, Deliveroo) - which basically operate economies within the economy. We could find that, by giving consumers awareness and control of recurring subscriptions, you could increase retention and spend on the platform.

If not the company, what about the consumer?

I think what’s most likely is that regulation will make this a fairer playing field. In March, the FTC proposed new “click to cancel” regulation requiring sellers to provide an “accessible cancellation mechanism on the same website or web-based application used for sign-up”. So no phone call cancellation when you signed up with an email. The United Kingdom already has this in place. These are all great first steps to set up a fairer transaction mechanism for consumers and sellers to interact.

However, it doesn’t solve the problem the paper identified of consumers forgetting to cancel. Under the proposed regulation, sellers would be required to send notice to consumers every year of the subscription. I’m sure this will create some churn, but probably not 14-200% worth of it.

That said, “click to cancel” does it easier to build recurring software to be built that cancels subscriptions. This is the basis of sellers like DoNotPay, Hiatus, and some financial planning services like Rocket Money (NB: the irony of a subscription service to cancel subscriptions has not escaped me, we live in the most fun timeline). Over time, I think more generic artificial assistants, with access to consumer financial data, might automatically bundle in a feature like this. These services could be included like no-questions-asked protections that many credit cards already offer today. And they could be as ubiquitous as ad block (43% of users use some ad blocking software according to Hootsuite (https://www.hootsuite.com/resources/digital-trends)), which effectively means that 14-200% of revenue might just disappear.

So maybe there is hope, through artful regulation and consumer empowerment, that we can get to a world where subscriptions are fairer for everyone. And then I can go back to signing up for stuff I won’t want in 3 months, and just letting my extremely overqualified AGI assistant handle it.