When considering subscription services, popular streaming platforms such as Netflix and Spotify often come to mind. Yet, in recent years, subscription models have expanded well beyond digital content and now include diverse offerings- from book boxes to skincare and meal deliveries. In a recent study by Juniper Research, it was found that this booming subscription economy is expected to reach $996 billion by 2028, up from $593 billion in 2024. With such rapid growth, it is critical to raise a question: why do we stay subscribed, even when we use these services infrequently?
In this article, we will dive into the behavioral strategies employed by companies to engage customers, foster loyalty, and even drive greater spending. By leveraging well-established principles in behavioral economics like default settings, loss aversion, and others, companies have created a subscription model that caters to consumer habits while increasing their revenue. These subtle nudges shape our choices and sustain our commitment, often beyond our conscious intentions.
Default Settings and Convenience
Let’s start by considering a question: if every month you had to log into Netflix and actively renew your subscription, would you? Likely not. Consumers value, above all, convenience; in fact, a National Retail Federation study found that 83% of shoppers consider convenience as a top priority. For busy consumers, especially parents who feel time is always in short supply, convenience becomes even more essential, leading to a higher reliance on subscription services (82% compared with 66% for the general population).
This reliance is reinforced by default settings, which are designed to minimize friction. Subscriptions are typically set to auto-renew, capturing our tendency toward inertia- an unwillingness to change the status quo, even if we no longer use the service. Research shows that this "set-it-and-forget-it" method capitalizes on our reluctance to take that extra step to cancel, and companies understand this well. In recent years, even though we have seen basic subscription fees rise, consumers often absorb the cost, maintaining the subscription out of habit rather than necessity.
The Impact of Loss Aversion and Free Trials
To attract new subscribers, companies often offer a free trial- experiencing the service without the immediate financial commitment. However, behavioral economics reveals that once we have access to something, we are reluctant to let it go- a principle known as loss aversion. Kahneman & Tversky (2013) proved that people feel losses approximately twice as intensely as equivalent gains, thus canceling the subscriptions feels more like a sacrifice rather than a rational choice.
When users consider canceling a service, it is psychologically framed as a loss of convenience, content, and access that they have grown accustomed to. This perceived loss triggers negative emotions such as regret that often outweigh the potential financial savings of canceling. Moreover, to even enhance this effect, companies sometimes send “what you will miss” reminders, further reinforcing the feeling of loss and keeping users subscribed.
The Endowment Effect: The Value of Ownership
In behavioral economics, it is often mentioned that individuals tend to assign a higher value to items simply because they own them, a concept known as the endowment effect. According to Kahneman, Knetsch & Thaler (1990), people place greater worth on items in their possession, which influences their reluctance to let them go. Applied to subscriptions, once a user signs up and develops a sense of ownership, unsubscribing feels like a personal loss.
This effect is intensified through personalized content such as curated playlists, watch histories, or “For You” recommendations, which make the subscription feel exclusively tailored and valuable. This personalization deepens the sense of ownership, making the idea of canceling the service feel even more like giving up something that belongs to them.
Anchoring and Price Perception
Lastly, it's essential to consider the role of anchoring, as it is a strategy widely used by companies to shape our perception of price. By setting a relatively low monthly fee, companies make the service seem affordable and appealing, even if the total annual expense is significantly higher than what a consumer might spend in a traditional pay-as-you-go model. Behavioral research shows that we’re more inclined to commit to smaller, frequent payments than a large one-time cost, as these smaller sums seem more manageable and less intimidating.
Conclusion
In conclusion, the growth of the subscription economy reflects a significant shift in consumer behavior, driven by behavioral economics principles that companies expertly exploit. Through strategies like default settings, loss aversion, endowment effect, and anchoring, businesses have created a framework that fosters loyalty and encourages ongoing spending, often beyond what consumers might consciously choose.
However, these practices raise ethical considerations regarding consumer autonomy and transparency. As companies leverage psychological insights to maintain subscriptions, it becomes essential for consumers to remain vigilant about their choices and for companies to act responsibly in their marketing strategies. Ultimately, as we navigate this landscape, balancing business interests with ethical consumerism will be crucial in shaping a subscription economy that serves both parties fairly.
Written by Carolina Martins
References:
Kahneman, D., & Tversky, A. (2013). Prospect theory: An analysis of decision under risk. In Handbook of the fundamentals of financial decision making: Part I (pp. 99-127).
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental Tests of the Endowment Effect and the Coase Theorem. Journal of Political Economy, 98(6), 1325–1348.
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