By Ben Martin.
WikiHow’s fantastic How to Get Out of a Gym Contract reads with the regulatory complexity you might expect from a law class on energy or taxes. And yet it’s a complexity that the consumer may encounter when trying to cancel a gym membership. A simple consumer transaction can be made difficult to increase subscriber retention.
As WikiHow explains, most states have laws regulating gym memberships. Arizona, for example, has laws mandating some cancellation refunds and preventing contracts of over three years. In April 2021, Governor Ducey signed HB 2697 to allow Arizonans to cancel contracts for gyms through email. Previously, gyms only needed to allow members to cancel through mail or in person. The Governor connected the bill to the pandemic, emphasizing the importance of Arizonans having “control over their finances and mitigation preferences.” On its face, the statute does not save money; it does not create refunds where there were none or allow cancellation where it was forbidden. Rather, it simply adjusts the friction involved in gym cancellation, allowing people to cancel with an email instead of paper. Nevertheless,that change is significant.
“Friction” in a consumer transaction is a pain point. It’s a point, between desire to purchase and actual purchase, where the consumer must exert effort to complete the transaction. The greater the friction, the greater the effort required, and the higher the likelihood that the consumer reconsiders the purchase and walks away from the transaction. Typing in your shipping address, waiting in a checkout line, and downloading a new app all represent points of friction. Reducing friction increases completed transactions. Consumers—this one included—are more likely to complete Amazon’s one-click ordering than to fill out their billing and mailing information on a new site.
Companies can mitigate friction through recurring payments. For instance, I pay Apple $10 a month to continue using its music streaming service. This transaction is mutually beneficial, at least in some sense. I’m not required to fork over $120 all at once for a year. I also don’t have to exert effort to pay Apple each month. And Apple gets to reduce friction in transactions which increases the expected value for subscribers. Automatic recurring payments, which are frictionless, have not become ubiquitous without global scrutiny. For example, India has begun implementing legislation requiring consumer approval of recurring payments above a certain threshold.
Carrots, Sticks, and Cancellation Friction
Recurring payments flip friction to the advantage of the company. This “cancellation friction” can keep people paying for goods and services even when they are no longer active users of those goods and services. Cancellation friction can be benevolent or malevolent. Warning someone on a cancellation screen that they have so much more to learn or gain is malevolent, offering them 10% off if they stay is benevolent. Malevolent friction uses loss as a stick, benevolent friction uses gain as a carrot. I signed up for a free month of Paramount+ and cancelled my subscription thirty seconds later. I was still able to watch Survivor for the next month. I signed up for a free month of Apple Fitness and went to cancel my subscription and was warned that I would immediately lose access to the content—malevolent cancellation friction. I decided not to cancel.
Malevolent friction can hurt brands by frustrating consumers. It’s possible gyms get away with higher degrees of malevolent cancellation friction because of the social shame associated with wellness. Modern folk wisdom holds that entrepreneurial spirits go to the gym at 5am every day, while people who lack initiative and ambition cancel their memberships. Cancelling Netflix is a sign of progress, cancelling a gym membership is a sign of regress. Basically, when cancellation is difficult, consumers don’t blame the gym.
New Year’s Resolutions as a Subsidy
So, when Governor Ducey connects a bill allowing email cancellation to financial control for Arizonans, he’s understating the case. HB 2697 reduces cancellation friction which, on the aggregate, saves Arizonans money on inactive gym memberships. Inactive is the operative word here. Reducing cancellation friction may cost active users more money.
Cancellation friction can reduce prices by inflating profits and subscribers above active users. Gyms are probably the poster child of this phenomenon. Numbers vary, but one survey found that 6.1 million American adults spent $397M on unused gym memberships. Cancellation friction increases the expected lifespan of a subscriber, which directly increases the expected value of a subscriber in recurring payment businesses. Therefore, cancellation friction allows infrequent or inactive users to subsidize prices for frequent users. An Arizonan who has a gym membership for 30 years benefits, in a real sense, from other Arizonans who flood the membership ranks in early January and struggle to cancel their membership because of friction. After all, 12% of all new gym memberships happen in January and most gyms lose 50% of their new members within 6 months. If cancellation friction can keep some users around longer, prices can decrease for dedicated active users without decreasing profits.
Inactive Users Should Not Subsidize Active Users
Let’s be clear. Companies should utilize cancellation friction. Companies should maximize shareholder value by carefully deploying malevolent and benevolent cancellation friction to maximize subscriber retention. Preemptively limiting modes of consumer transactions might limit opportunities for businesses to differentiate. But responding to existing concerns, like Arizona has done here, is exactly how the government should regulate consumer transactions. Companies and consumers should want inactive users to subsidize active users. I’m not convinced that the government should. Short-term shareholder value is different from economic growth.