Consumer inertia: The high cost of consumer inattention

Digital products have become an indispensable part of our daily lives.

Whether for music, movies, news, car wash, gymnasium membership, broadband or cellular phone service, at some point, we purchase goods and services on a recurring subscription basis.

Before the internet, newspapers and gymnasium memberships employed the subscription model. According to Statista, the digital subscription economy is expected to grow to US$1.5 trillion dollars in 2025, from US$650 billion dollars in 2020.

Most people accept the logic that with technology, consumers have more choices and enjoy efficiencies that reduce prices. But how many times have you actually changed your cellular telephone service or broadband, or cancelled an entertainment package?

Most people have considered switching or cancelling, but not many do, or they can’t do it immediately. For many people, the hurdle is just too high – either you can’t find the information, and when you do, it’s never straightforward, or you give up after being put on hold for 600 seconds.

Then you start thinking, even if you don’t want it, your kids may, or maybe you’ll get around to it when you get around to it. This tendency to stay inactive and remain with a current good or service, is known as consumer inertia. Consumer inertia can be attributed to consumers’ brand loyalty, habit formation, inattention, and switching cost.

Consumer inertia has been studied extensively in economics, law, psychology, and even computer science. In a recently published National Bureau of Economics Research working paper, economists at Stanford University and Texas A&M University suggested that seller revenues may be boosted by more than 200 per cent from consumer inattention of their subscription services.

Researchers identified 10 most common subscription services and compared consumers’ choices in inactive and active situations. In an inactive situation, when the renewal contract date approaches, consumers can choose to do nothing, and their subscription would auto-renew, or they can try to cancel. In another scenario, when a payment card expires, consumers have to make an active choice on each of their subscriptions as they need to update their payment information.

What the researchers found was not totally surprising. When people had to actively decide whether to renew a subscription, many declined. In active choice situations, subscription cancellations increased by about four times, compared to other months.

Worse, not only people sometimes inattentively subscribe to services, they also tend to underestimate their subscription commitments. In another study conducted in 2018, one consulting company asked people to consider the subscription services they had. The respondents were then given 10 seconds to guess how much they spent per month on those services. After the initial response, the researchers prompted the same people with examples of subscription services and gave them another 30 seconds to think about their monthly spending. The average of the first guess was US$79.74, the second was US$111.61. The actual spending was US$237.33.

Consumer inertia or inattentiveness has important policy and business consequences. It incentivises sellers to offer services that are cheaper in the short run but more expensive in the long run, to the captive consumer.

Contracts can also be designed to increase inertia. And we must also remember that businesses are also customers – consumer inertia affects both the man on the street and businesses.

So, what can be done on the policy side?

In 2010, the State of California passed the Automatic Renewal Law (ARL), and a host of other states have followed suit, in response to a surge in consumer complaints, as they wrestle with an ever-increasing number of digital offerings. In 2021, the state of New York passed a law that “prohibits certain practices by businesses making an automatic renewal or continuous service offer to consumers in the state.”

Some of the main features of the New York ARL include:

1) Terms and conditions must be clear and conspicuous. “New York consumers should not be lured by false and deceptive practices – nor should it be their responsibility to comb through the fine print of a sales offer to determine if they will be trapped in an automatic renewal offer.”

This requirement partly has roots in the field of law and computer science that studies the use of deceptive designs, also known as dark patterns. Dark patterns are used in user experience on digital platforms to influence customers to take unintended actions, such as signing up for services, or agreeing to continuous subscription. Dark patterns is far from being just an academic interest. The US Federal Trade Commission (FTC), announced in November 2022, a “record-breaking settlement” of US$100 million with Vonage, a telecommunications company, for using dark patterns, among other tactics, to prevent consumers and businesses from cancelling.

2) Any automatic renewal should be affirmatively consented by the consumer on its own, and not together with other terms and conditions. If there’s a checkbox, it should not be pre-checked.

3) Sellers should send an acknowledgement and confirmation to consumers after they enroll in a subscription. The confirmation must contain information on how to cancel the subscription.

4) The consumer should be provided with a “cost-effective, timely, and an easy-to-use mechanism for cancellation.” If the consumer subscribed to a service online, then the consumer must also be able to cancel the subscription online”.

Companies can also encourage long-term loyalty by offering payment options. As a matter of convenience, I’m happy to pre-pay for a year’s subscription to Spotify.

After a year, the subscription ends without auto-renewal and I usually repurchase the same plan, after some period of longing for uninterrupted-by-ads Francesca Peters and Lefthanded.

There are options for monthly subscriptions too, which are cheaper on a monthly basis, for consumers who prefer it that way.

As a consumer, consumer inertia is not a bad thing if you are loyal to a brand and they reward you for it, or if your service provider keeps offering better deals in the face of competition.

But as products and services simultaneously get more complex in technology and simpler in delivery, the balance between sellers pushing and buyers demanding, has gotten lopsided.

The fog of information, and the jumble of jargons and dark patterns should not be exploited to trick consumers into unintended purchases.

The views expressed here are the personal opinion of the writer and do not necessarily represent that of Twentytwo13.