Pricing and consumption in subscription settings

This paper investigates how subscription pricing affects usage intensity, a key performance driver for firms operating under subscription-based business models. We analyze data from an online news publisher, a setting in which promotional pricing is commonly employed to attract new subscribers, though its broader effects remain ambiguous. Standard economic intuition suggests that lower-paying subscribers derive lower utility and thus consume less. In contrast, we document that promotional subscribers, on average, consume substantially more than those paying regular price, even after accounting for differences in churn behavior. This empirical pattern is inconsistent with simple demand models and points to the importance of taking unobserved heterogeneity into account. We develop and estimate an empirical model of subscription and consumption behavior, showing that, because subscription costs are sunk at the time of consumption, it is possible to recover the correlation between consumption levels and consumers’ unobserved willingness to pay. We use the model to recover the underlying consumer parameters and to evaluate the impact of alternative pricing policies on both subscription revenues (via customer acquisition) and advertising revenues (via subsequent consumption). Our findings highlight the economic value of understanding how price shapes not only who subscribes, but also how much they engage with the product.