I posted last week about customer lock-in, and briefly discussed subscription services as an example. Then on Monday, The Conversation published this article by Katharine Kemp (UNSW):
Subscription business models have become common – many products are now provided in the form of software, an app or access to a website. Some of these would once have been a physical book, newspaper, CD or exercise class.
Most people who use online services have experienced the frustration of finding a credit card charge for an unwanted, unused subscription or spending excessive time trying to cancel a subscription.
Businesses can make it difficult for consumers to stop paying for unwanted subscriptions. Some do this by allowing consumers to start a subscription with a single click, but creating multiple obstacles if you want to end the subscription.
This can include obscuring cancellation options in the app, requiring consumers to phone during business hours or making them navigate through multiple steps and offers before terminating. The report points out many of the last-ditch discounts offered in this process are only short term. One survey respondent said:
I wasn’t able to cancel without having to call up and speak to someone. Their business hours meant I had to call up during my work day and it took some time to action.
Other businesses badger consumers with frequent emails or messages after they cancel. One respondent said a business made “the cancellation process impossible by making you call and then judging your reason for cancellation”.
Let me reiterate some points from last week's post (as well as posts here and here about online subscriptions). Making it difficult to unsubscribe creates a form of switching cost. 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.
We often think about switching costs in monetary terms, like the contract termination fee on a mobile phone contract, or a break fee on a fixed mortgage. However, switching costs can be highly effective even if they are not monetary. In fact, they could even be more effective. Take the example from Kemp's article - in order to unsubscribe, you have to call up and speak to someone. That takes time and effort (a switching cost). Add to that the fact that the call has to be made during business hours (increasing the switching cost). Being bombarded with emails or messages after cancelling adds a switching cost (although one that can be easily avoided by automatically sending all those emails to the junk folder).
Part of Kemp's article highlights these switching costs, and raises some justifiable concerns (at least, justifiable from a consumer's perspective). As a solution, she highlights firms that try to make it 'easy' to unsubscribe, noting that:
Businesses focused on a short-sighted cash grab fail to realise that consumers might cancel but later return if treated well.
However, consumers don't all return, regardless of how well they are treated. Because of that, it is more profitable for many firms to try and lock consumers in (if it wasn't profitable to do this, the firms wouldn't bother).
That brings us to the second aspect of Kemp's article, which is about how firms profit from their locked-in customers. In my ECONS101 class, I talk about two main ways that firms profit from these customers. First, firms may engage in multi-period pricing. This involves selling at a low price initially (sometimes an artificially low price, like a free trial), and then raising the price once a customer is locked in. This is why drug dealers may give away their highest-quality product for free! Second, firms may profit by selling complementary goods and services. This is how the manufacturers of coffee pod machines make their money - not from selling the machines, but from selling the pods. These firms can afford to give quite generous bonuses to their sales staff because each sale is going to generate a lot of coffee pod profits.
Kemp argues that 'unfair practices' should be legislated against. It is hard to argue against preventing unfairness. However, in practical terms, it may not be as simple as Kemp makes it out to be. Some ways that firms lock customers in can easily be re-framed in terms of customer privacy. Why does Firm XYZ make customers call during business hours to cancel their subscription? Because they want to be sure that the request to cancel is genuinely coming from the subscribed customer, and not from some identity thief. It would be difficult to legislate against a firm making customers who want to unsubscribe prove their identity.
On the other hand, some (but not all) of the ways that businesses profit from locked-in customers are clearly unfair and could be legislated against. Kemp discusses free trials that automatically transition to a paid subscription, or subscriptions that auto-renew. There is little justification that firms can provide for the former, and for the latter they would have to rely on 'customer convenience'. Neither is a particularly good justification, when set aside the costs that consumers face when firms engage in those practices. Certainly, subscription services are something that governments should be taking a closer look at.
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