Why Behavioral Economics Doesn’t Work with Subscriptions
Behavioral economics is really interesting. In this field, researchers study how people consistently make irrational decisions. When we understand these well enough, we can craft situations where buyers are more likely to buy our products. Nice.
Why doesn’t this work with subscriptions? Well, it does, a little, but you need to be very careful. Let’s break a buying decision up into two parts, rational and irrational. You might also think of these as logical and emotional.
Behavioral economics can be effective at getting you to buy something. They find a way to make the irrational part of the brain influence the decision. This is true with subscription products as well.
However, once someone buys a subscription, they use it and learn the true value of the product. Then eventually, the rational brain takes over. If the price is higher than the value the buyer experiences, they will unsubscribe.
Behavior Economics Don’t Work for the Long Term
Think about a subscription as having three revenue buckets: win, keep, and grow. In consultant speak these are called acquisition, retention, and expansion.
You can use behavioral economics to win new customers, but almost by definition, you will have a higher churn rate than if you didn’t. The revenue buckets that really matter for the long term success and growth of a subscription product come from keeping and growing customers. Behavioral economics have not been shown to influence buyers making renewal decisions.
This only makes sense.
When a buyer first buys, they don’t have all the information so it’s impossible to make a completely logical decision. As the buyer gains experience with the subscription, their knowledge goes up so renewal decisions become more and more rational.
A True Life Example of Subscription Churn
I can’t help but think of my experience with the Wall Street Journal. Although I like their paper, I despise their business practices.
Several years ago they “tricked” me into subscribing for $60. A few years later I was looking through my credit card statement and saw they charged $300. After researching and reading carefully, I found they did disclose this, but it wasn’t obvious to me. So I decided to cancel. I couldn’t cancel online. I had to search for a phone number and call someone to get my subscription canceled. It’s like they knew they were tricking people into buying and hoping the pain of canceling was more than the pain of paying. Ugh.
In subscription, we often offer a free trial. That way people can learn the true value of our offering. Notice though that you have to deliver great value, much more than you charge, if you want a user to pay you.
This is a very legitimate business practice. You could think of using behavioral economics as a way of inducing trial. You may “trick” someone into buying your product initially, but if you deliver way more value than you charge there won’t be a problem.
So, maybe the title is a little strong. Behavior economics can help subscription companies win new customers. All of the “tricks” you read on creating pricing pages, like font size and color, target the irrational mind. But the product must satisfy the rational part of the mind if you want to keep or even grow those customers.
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Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.