Behavioral Economics Black Magic: Fixed Schedule Billing

I have a feeling that if you asked most people how gyms make money, they’d intuitively grasp for an explanation that involves fixed schedule billing. The idea is simple. Businesses that operate under a subscription fee, like gyms, automatically withdraw the next payment each period unless the customer provides written de-authorization a certain number of days or weeks in advance. For a variety of reasons, many people will go on paying for months or years without using the service. The result is a steady profit stream for the business and a customer spending money for no value.

This fixed schedule billing is sometimes also called negative option billing, since the consumer’s failure to act is presumed as consent to keep charging every month. The monthly billing model is advantageous for businesses because customers often fail to cancel promptly after ceasing to use the service; they may even forget about the recurring charge altogether if it’s not particularly large, or if the cancellation process is too onerous (see Stancil, 2015). Behavioral economics would predict that people would let these subscriptions linger because of the status quo bias (Schweitzer, 1994).

For people who do remember that they have the monthly subscription, cancelling may also be difficult thanks to the discounting effect and the sunk cost fallacy.

The discounting effect makes people overvalue what they already own, while the sunk cost fallacy results from people not wanting to walk away from an investment even when logically, maintaining the investment means losing more money (folk wisdom calls this “throwing good money after bad”). In the case of an unused gym membership, these cognitive biases manifest as a persistent belief that this month will be different. I’m planning to go to the gym, really. If I cancel my membership now, then I don’t have the option to go to the gym! And it will cost me money to start a new gym membership so really it’s cheaper to hang on to this one.

Businesses encourage people to cling to these biases with tactics like:

  • Regular promotional communications to inactive members reiterating the value of membership
  • Joiner fees that make renewing a cancelled membership seem more expensive
  • Offering special deals when members do attempt to quit to entice them to remain on board

Rather than underscoring that payments toward an unused service are a waste, these communications emphasize membership as a benefit to protect.

For health behaviors, time-based billing can prevent people from taking action. Consider that unused gym membership. Perhaps the person doesn’t like that gym, or it’s out of the way to get to, or they don’t have convenient class times. However, as long as the person is paying a fee to that gym, the likelihood of paying for a different gym they might actually use is low.

The good news is that there’s a way to flip the script. The fixed interval billing paradigm could be adapted for health interventions by focusing people on something other than the money they’ve spent. Instead of doing what the gym does and pointing out the “savings” associated with staying, why not orient people to their behavioral investments and what they stand to lose by not making a change?  Or even their psychological readiness–“You’re in the right headspace to get active. Seize the moment and figure out a gym situation that actually works for you!”

Orienting people toward the progress they’ve made and encouraging continued movement toward a goal can leverage the discounting effect and sunk cost fallacy for the purposes of good. This is one way dashboards and progress tracking can help overcome some of our natural inertia–by reminding people how far they’ve come and helping them kick irrational biases to the curb.

References

Schweitzer, M. (1994). Disentangling status quo and omission effects: An experimental analysis. Organizational Behavior and Human Decision Processes, 58(3), 457-476.

Stancil, W. (2015). A better way to cancel your gym membership (and avoid other hazards of autopayment). University of Illinois Journal of Law, Technology, & Policy, Spring 2015, 103-147.

Leave a Reply

Your email address will not be published. Required fields are marked *