On Thursday, I posted about switching costs in the context of online subscriptions, and noted that sellers can take advantage of customers that are locked into buying from them because of high switching costs. However, the idea that subscriptions lock customers in was based on the theoretical notion that the more difficult (costly) it is to cancel a subscription, the more likely we consumers are to simply keep the subscription in place. This is backed up by anecdotal experience, so it would be sensible to question whether there is real empirical evidence to support this.
It turns out that there is, as noted by Tim Harford in this article in the Financial Times earlier this month:
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.
The NBER Working Paper by Einav et al. is available here (ungated version here). So, there is empirical evidence that supports the idea that subscriptions lock consumers into buying, because in that research, as soon as the lock-in was broken, many consumers stopped buying. Subscriptions clearly do provide a source of customer lock-in.
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