Netflix and bill – the high price of a subscription lifestyle

Netflix and bill – the high price of a subscription lifestyle 2nd November, 2023

One of the modern classics of economics is an article from 2006 with the self-explanatory title “Paying Not to Go to the Gym”, in which researchers Stefano DellaVigna and Ulrike Malmendier studied the behaviour of nearly 8,000 gym members and found it “difficult to reconcile with standard preferences and beliefs”.

By that, they meant that gym members seemed to be delusional, weak-willed or both. People on a monthly contract paid more per visit than those who simply showed up and paid at the door, suggesting they either had a very basic problem with arithmetic or, more likely, optimistic expectations about how often they would exercise. People on the rolling monthly contract also tended to let more than two months elapse between the last visit and the moment they got round to cancelling their membership.

For nerds like me, the article has an important message about the field of behavioural economics. We’ll get to that.

There’s also a broader question. The subscription business model has expanded from traditional products, such as newspapers and gym memberships to software, streaming media, vegetable boxes, shaving kits, makeup, clothes and support for creative types via Patreon or Substack. We should all be asking ourselves, if so many people are paying not to go to the gym, what else are we paying not to do?

A new working paper from economists Liran Einav, Benjamin Klopack and Neale Mahoney attempts an answer. Using data from a credit and debit card provider, they examine what happens to subscriptions for 10 popular services when the card that is paying for them is replaced. At this moment, the service provider suddenly stops getting paid and must contact the customer to ask for updated payment details. You can guess what happens next: for many people, this request reminds them of a subscription they had stopped thinking about and immediately prompts them to cancel it. Relative to a typical month, cancellation rates soar in months when a payment card is replaced — from 2 per cent to at least 8 per cent.

Einav and his colleagues use this data to estimate how easily many people let stale subscriptions continue. Relative to a benchmark in which infallible subscribers instantly cancel once they decide they are no longer getting enough value, the researchers predict that subscribers will take many extra months — on average 20 — to get around to cancelling.

Don’t take the precise numbers too seriously — as with most social science, this is not a rigorously controlled experiment but an attempt to tease meaning out of noisy real-world data. What you should take seriously is the likelihood that you are swimming in barely noticed subscriptions, some of which you would choose to cancel if you were forced to pay attention to them for a few minutes. Perhaps you should. Come to think of it, perhaps I should.

But I promised a geeky lesson about behavioural economics too. Loyal readers will have noted some recent scandals in behavioural science: experiments conducted separately by two well-known researchers, Dan Ariely and Francesca Gino, have been found (in the opinion of independent experts) to contain manipulated or fraudulent data. Both deny wrongdoing.

In the light of this dismaying situation, it would be understandable if people lost a bit of confidence in the field of behavioural economics. So it is worth reminding ourselves of what behavioural economics is trying to achieve. The field has long aimed to bring some psychological realism to economics, whose traditional textbook model has no room for people who take out a gym membership, fail to go to the gym and then neglect to cancel the gym subscription.

Its founding member is the co-author of Nudge, Nobel memorial prize winner Richard Thaler. Thaler’s project has always been not to argue that the textbook model is contradicted by laboratory experiments, but that it is contradicted by the way that important markets work in the real world.

It is certainly reasonable to ask how many experiments in social psychology may have been fraudulently manipulated. Less outrageous, but of more practical significance, is the possibility that many experiments in social psychology are poorly reported and analysed. As I’ve argued recently, we need to strengthen the foundations of scientific practice to prevent this. Economists can certainly learn from experiments, but contact with reality should be an important part of economics, which is — or should be — a practical subject.

Whether we are sticking closely to the old textbook model or embracing the latest ideas from behavioural science, our concepts should be taken more seriously when they explain what we see around us every day. If people really are lazy, short-sighted and inattentive, as behavioural economics suggests, then subscriptions are a hugely attractive business model. The subscriptification of everything suggests that businesses have noticed this.

There are some whimsical ideas in behavioural science, and some of them will not stand the test of time. But the central proposition of Nudge is not whimsical: it’s that the default position matters far more than you’d think, not in a laboratory experiment but in markets where billions or trillions are at stake. People delegate life-changingly huge decisions — for example, about contributions to their pensions — to the path of least resistance. If behavioural public policy means anything, it means shaping those default positions for the public good. It’s an idea to which I still subscribe.

Written for and first published in the Financial Times on 6 October 2023.

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