Putting human tech into payments
How psychology explains subscriptions success and micropayment failure
Subscriptions are taking over the world. Or that’s how it can feel if you’re in the middle of any of the multiple sectors affected. Where once we paid for individual items, now we increasingly buy services to access what we need. Apple replaced iTunes with Apple Music. Blockbuster, less comfortably, was usurped by Netflix. Audible has moved to a membership model. Newspapers are all about their subscribers.
So, what’s going on? Why are subscriptions so much more attractive than buying just what you need, just when you need it, especially with micropayments on a journey to zero friction themselves? Is there more to this than meets the eye?
This thinking comes from a combined team, The Foundation, experts in customer-led business success, and Judopay, the global payment solutions provider that has been a leader in mobile commerce. The work we did together included conducting interviews with business leaders across sectors to learn about the payment journey their organisation has been on.
One such conversation was with Neil Robinson at TI Media, formerly Time Inc UK and before that IPC, the UK’s ‘Ministry of Magazines’. He was a Publisher and then Digital Director from the time of the first ‘dot-com’ revolution to the start of 2020, an unusually long time to see the digital revolution play out through the lens of just one organisation in the eye of a disruptive storm.
As news content went online and revenue went south, media companies grappled with the need to alter their business model and the basis of the value exchange they had with their customers, both audiences and the people, usually businesses, who wanted to reach them.
One initial hypothesis at TI Media was to use a ‘pay by content’ model, with micropayments allowing customers to pay for each article they read. In principle the solution made good sense. Readers would never again need to pay for more than they wanted or actually used, filtering out the irrelevant or the low-value peripheral interest filler. As Neil observed though, customers never really seemed happy with this approach.
The story is the same in mobile phone contracts. The average monthly mobile data usage in the UK is 1.9GB. For low data users, pay-as-you-go is generally better value than a contract. Despite this, a significant proportion of low data users still opt for fixed monthly packages providing far more than objectively they need.
So how do we explain this seemingly wasteful behaviour? Why would we choose a subscription model that we never use to the max, over micropayments that offer demonstrably better value?
One explanation comes from Prospect Theory, described by Kahneman and Tversky in 1979. It is a theory about the ‘psychology of choice’ and it has been used extensively in behavioural economics to understand and predict real-world customer behaviour. It was inspired by the observation that we react to gains and losses asymmetrically.
We feel worse about small losses than we feel good about small gains.
Prospect Theory:
The crucial parts of this real-world economic value vs perceived value curve described by Prospect Theory are:
- We are averse to losses because people feel the same size loss, eg £10, more strongly than the equivalent gain:
- Our emotions respond in a bigger way to a small change in value than to a big one, so three small changes end up adding up emotionally to more than one big change in value – winning £10 three times feels better than winning £30 once, and vice versa, with losing it all only even more so given point 1!.
How this explains the subscription take-over and micropayments failure
The act of payment is a moment of loss for the customer. When a customer makes a purchase, they agree to undertake a loss of hard-earned money in exchange for the promise of reward from something they need or want. That part comes in the future.
When seen in this light, and given the two observations about the ways we react to gains and losses emotionally, customers’ dislike of micropayments makes sense.
Even though the micropayment model is good economics, the repeated small losses each time the customer makes a micropayment feel additively ‘worse’ than a one-off larger payment or commitment. Since we are not rational decision makers it is this perception of value, not true rational value, that influences our behaviour.
This tells us something useful about subscriptions too. Even though a payment might be taken monthly by direct debit, the customer feels the loss at the point of initial commitment, not at each repeated regular payment. If customers felt the loss every month, Prospect theory suggests that eventually the repeated monthly losses would make subscriptions unpalatable in a similar way to micropayments.
The salience of the payment, in other words, how noticeable they are to a customer, also matters in whether and how it is felt. Subscriptions feel like one initial commitment, followed by a series of extremely low salience payments taken from an account. The low salience of the subsequent payments means that customers do not feel a sense of loss each time, making the subscription model attractive. This might be especially true if the initial decision was supported by a discounted deal of some kind, providing a sense of gain to offset the commitment pain.
This is backed up by real world evidence including ways that outliers seem to have made less favourable approaches work – at least temporarily.
One Dutch news outlet called Blendle (founded in 2013) managed, for a while, to run a micropayment media service. It was sometimes referred to as the ‘iTunes of news’. They collated news articles from various sources which members could read, with a micropayment taken from their account each time they did so. The key to Blendle’s temporary success appears to have been in the salience of payment. Or rather in its absence. Blendle took micropayments under the radar. Unlike iTunes which regularly checked security details, the Blendle platform almost never asked for payment confirmation. Due to the very small payment amounts, they managed to change the approach taken to security and fraud to let the micropayments go almost unnoticed by customers. Its survival was temporary, however. In 2019, the news outlet pivoted its pay-by-article model in favour of subscriptions. Its co-founder, Alexander Klöpping, told the press that it struggled to make the micropayment model profitable. Even with its extremely low salience payments, the payment model proved to be too much of an uphill battle to make work.
Prospect theory also offers an explanation for customer behaviour around micro-savings and microdonations. Whilst transactionally, a payment into your own savings account or to a charity you believe in are similar to a payment for a product or service, for the person paying they feel very different. A purchase payment feels like a loss but putting money in a savings account or giving to a charity feels like a gain. The Prospect model showed us that the positive cumulative feeling of many small gains feels more positive than one large donation.
So, what does this mean for organisations?
Salience and Prospect theory offers useful insight into the psychology of micropayment, micro-saving and microdonation behaviour.
For payments, a combination of psychological biases mean it is likely that customers will always feel more comfortable with a subscription, membership, or one-off payment business model. Micropayments will always be an uphill battle against the psychology of customers. This isn’t to say a micropayment model can never work, but to make it work the salience of the payment needs to be so low the customer does not feel the payments being taken. Much like a direct debit subscription in fact.
For positive payments like microdonations and micro-savings, the repeated small and salient experiences are likely to be well received. People feel disproportionately good about using their money in a positive way, regularly.
Is this the end of the line for micropayments?
Prospect theory offers a convincing argument of micropayment being a psychologically uncomfortable way for customers to pay for an ongoing service. But, is there still a place for this type of payment? Neil Robinson still believes so. Whilst customers never have felt (and likely never will feel) comfortable with micropayments as an ongoing relationship, Neil believes there is still a place for micropayments in media. Not as an ongoing relationship, but as a runway to regular use. The transition from a non-customer, to an infrequent user, to a potential future subscriber.
When the Times moved its online content from free to subscription-only, they lost 96% of their audience. Yet the media giant was pleased with this move – the 4% of subscribers gave a far greater and more predictable income stream than the previous model. For the organisation, the subscription model is especially valuable as it gives enormous predictability of future income, not just current income. This allows them to plan expenditure, commission articles, and prioritise future activity with greater certainty. As Neil points out, surely within that 96% of past readers who did not subscribe, there must be some value to be had? Even if those customers might not be willing to sign up to a regular subscription, they may occasionally still wish to access Times content? Surely, for these individuals who wish to access content very infrequently, a micropayment may be a way to reach them.
This can still fit with Prospect Theory. If the small losses are infrequent enough, the cumulative negative perception of the ‘losses’ will not add up to even the proportionately modest one-off loss of a subscription. Micropayment is not the basis of a frequent, valuable relationship… but it is a way to reach a cohort of customers, who, very occasionally, would like to access your content. The upside of this for the organisation is two-fold. Not only do they reach some of the 96% of customers who chose not to subscribe, but by demonstrating value to those customers, they give a runway for those non-subscribers to decide to subscribe in the future.
Whilst Neil could see a future of micropayments in media in this way, there are some barriers. Those infrequent content readers are likely people who get their content from a range of sources. The media industry loves to have loyal subscribers – a hangover from having ‘Times readers’ who had the paper delivered each morning. But the modern world does not look like this. People increasingly do not identify as Guardian readers, or Telegraph readers, but access a range of content online. If a customer was to use micropayment to pay for very infrequent content access across a range of media outlets, they currently would need to sign up and enter payment details to each individual site. This feels enormously high effort for the customer, and the payment process has extremely high salience. Why? Because there is no aggregator of content.
Until there is a single place where these customers can reach the broad range of content they want, occasionally (and can pay in a unified, low salience way), the chance of micropayment being a useful runway to subscription remains low. But this is changing. Services like PayPal One-Touch and Click to Pay are starting to allow customers to pay across many sites in an increasingly low salience way.
Perhaps then, in the media world at least, micropayments are not completely dead just yet. Not as an ongoing value exchange between customer and news outlet, but as an infrequent touchpoint on a runway to subscription. Whether this becomes a reality, aided by payment innovations, remains to be seen.
Understanding the psychology of customers, human tech, helps organisations design payment systems that feel natural and comfortable to the customers they serve and so work better all-round... Without understanding this human tech – organisations run the risk of designing payment systems that work for them, but not for the customers they serve.
Charlie Dawson established The Foundation in 1999 with the aim of helping organisations be more sustainably successful by being customer, not financially, led.
His original inspiration came from working on a new car company launch, Daewoo, that did this by happy accident to great effect, breaking records for speed of growth and disrupting an inward-looking market.
Previous clients include: HSBC, Morrisons, eBay, Harvey Nichols and Eurostar
Edmund Bradbury's move into consulting came from professional sport. Edmund experienced his own customer-led success story altering the traditional model of cycling sponsorship from paid (and not very effective!) advertising to really getting to the heart of what sponsors valued. He now helps other organisations unlock their own customer-led success stories, drawing from his pro sport experience and neuroscience background.
Previous clients include: Tesco Mobile, Lowell, HSBC, Pennington’s Law and Simplyhealth.
