The switching costs of online subscriptions

Switching costs provide sellers with a lot of opportunity to extract additional profits from consumers. That's because high switching costs create customer lock-in - customers are unwilling to change provider, or stop buying, because they would then face the costs of switching. For example, there may be a disconnection fee if you try to change your mobile phone service. Or, it may simply be difficult to make a change - perhaps you have to fill in some forms, and go into a store with valid photo identification, in order to change to the new mobile phone service. Those sorts of costs can be quite effective in keeping customers locked in.

Switching costs and customer lock-in are important aspects of business strategy, especially for firms offering subscription services, who want to ensure that their customers remain buying from them over the long term. The Financial Times had a good article back in June related to this (ironically, paywalled):

Put your hand up if you have looked at a credit card statement recently and spotted a charge for a subscription that you had forgotten signing up for.

You’re not alone. The number of new subscriptions per US consumer peaked last year and cancellations are now outpacing new sign-ups. But for many services, getting out can be a lot more complicated than getting in, as I discovered when I tried to end my monthly payment to Amazon’s Audible recorded books membership.

If I cancelled, the app warned, I would lose the three book credits that I have already paid for but not used. Instead, it touted a “pause” button that would put off the next payment for three months. Not wanting to set that money on fire, I dutifully obliged and set a calendar reminder to cancel in October.

The more difficult (costly) it is to cancel a subscription, the more likely we consumers are to simply keep the subscription in place. That creates an incentive for sellers to make the cancellation process as onerous as possible, to increase the switching cost, and ensure that we continue to subscribe. The seller can also use our locked-in status in order to sell us other products or services. However, regulators have recently started to push back:

In the EU, pressure from Brussels led Amazon to begin allowing customers to end their Prime subscription with just two clicks using a clearly labelled “cancel” button. It also changed its UK policies around that time, but only altered US cancellations this year, ahead of the FTC lawsuit. The company, which plans to fight the case, insists that its cancellation procedures are “clear and simple . . . by design”.

A simple 'cancel' button effectively minimises the switching costs, allowing consumers to free themselves from the shackles of an ongoing subscription. However, sellers have no incentive to offer this unless they are forced to by regulators. And, there is little to stop the seller from sending consumers to a new screen after they click 'cancel', pointing out some special offer that the consumer is missing out on, in the hopes that they will re-subscribe. And, they have consumers' contact details, so no doubt they will continue to spam their former subscribers unless they separately follow the procedures to 'unsubscribe' from the mailing list.

Subscriptions are very profitable for sellers, and are only growing in importance in the modern economy. We can expect sellers to try their best to keep the switching costs high.