Almost all companies give you a 7/14/30 day free trial to try their service (eg: Netflix, Spotify).
Some people forget to cancel the subscription and after the free trial expires, these companies begin charging instead of asking if you would like to cancel the subscription.
What's the purpose behind of this design? Is it because they want your money and they know that you will forget to cancel the subscription? Or is it because they can't auto cancel your subscription after the free trial?
Companies do it because they know you'll forget, and they get money as a result.
You're only getting the free trial due to the number of forgetful conversions they get as a result.
Yes, these companies benefit from people forgetting to cancel. However, besides this, there is another reason why companies do this.
One of the obstacles that a business has to making a sale is the effort that is required of the customer. You can have the best product at the best price in the whole world, but if too much effort is required of the customer to make the purchase, it will be tough to make sales.
In order to subscribe, the customer needs to go find their credit card, enter in the numbers, address, etc. It takes some effort on the customer's part. When a new potential customer comes along and signs up for the free trial, they have to go through the process of signing up. If the free trial automatically cancels a subscription at the end of the trial, then in order to convert the potential customer into an actual customer, another customer action is required, which places a barrier toward conversion. Instead, businesses combine signing up for the trial and subscribing to the service all in one action. Now, it requires a customer action to cancel, meaning that there is a barrier in place to discourage the customer from leaving.
There are many people on the fence about whether or not to pay for a subscription. These people would perhaps decide it is not worth the effort to start a paid subscription, but if they have already gone through the process of the free trial, they instead decide it is not worth their effort to cancel.
In some cases it is a scam, they never intend to let you cancel your free subscription easily.
Do a Google search to review the cancellation comments about the company you are considering a free trial with.
While not true for all companies, you should always check first. Sometimes it is by intent, sometimes poor quality control, in all cases it is expensive.
Example https://productforums.google.com/forum/#!topic/play/lqULU7_dZsc
Consider: If the free subscription was sufficient for you to realize you can't live without it. They would not need you credit card for the free period, you would be calling them the day it ended, to get it reconnected.
Per comments posted a new related question: Stop credit card payments for unstoppable auto renewal?
I think most of the answers are placing far too sinister of intentions behind the default. Imagine you sign up for a free trial of Netflix (or whatever) and you actually like it and want to continue using it. If it automatically turns off at the end of the trial unless you jump through hoops (even if they're easy hoops) then some people will be annoyed by that and never bother to jump through the hoops. You can imagine someone that signs up online and then puts that account in their smart TV only to have Netflix stop working after some amount of time. This person just wants to watch a show. They don't want to go on their computer or phone to sort it out. The number of people who will never go back and get the service turned back on because of the above is not 0.
One of the more striking place we can see how people respond to defaults is in organ donation volunteering. In countries where the decision is opt-in the numbers are about 15% and opt-out countries are about 90%. https://sparq.stanford.edu/solutions/opt-out-policies-increase-organ-donation
Of course organ donation and Netflix subscriptions are much different things but this just goes to show how influenced we as people are to the status quo. Netflix (and others) have to choose something for the default and it would seem really strange for them to pick the one which would go against their interest. It need not be the case that they're only doing it to trick people into forgetting to cancel. It could just as easily (and plausibly) be the case that they don't want people to forget to renew.
Some people got charged after the free trial because they forgot to cancel the subscription. But... what's the purpose behind of this design?
So they can charge people after the free trial because they forgot to cancel the subscription.
Of course the idea is to lock you in.
It is not only that you might forget to cancel, but they also make the cancelling a hundred times more annoying than the sign-up. Typically, sign-up is thirty seconds on their website; but to cancel, they require you to:
Yet another point of offering the free trial is that they bypass your critical thinking by avoiding presenting you with the question "Would you like to sign up for the normal subscription to our service?"
Faced with explicit question of judging whether the service is worth the money, you are more likely to give a critical evaluation and decide it's not worth it.
However, the free trial is more appealing since it costs no money, so it's something you're more likely to acquiesce to.
When the trial is over, you're somewhat more likely to favor the status quo and thus you continue your subscription... despite the fact you would still judge it not worth the money if you were prompted to give a critical evaluation of the service.
This only works with the auto-renew option. If they canceled after the trial and asked you to sign up to the normal subscription, youre critical thinking would turn back on and you'd decline.
There's a lot of considerations mentioned in the other answers: scams, people intending to cancel but forgetting, making cancellation unduly obnoxious, etc. etc. They're valid reasons businesses do this sort of thing.
But those are not the primary reason companies engage in this practice. They do it because people are lazy.
Perhaps that's the wrong way to express it: a more precise formulation may be that default options matter.
Whatever the default is, people will often just do it, regardless of their stated preferences. People are lazy, busy, distracted, etc. The world is a complicated place.
Companies do this because research shows it works.
It is well known in the business world that requiring a credit card up front increases the barriers to becoming a lead (i.e. a potential customer). This decreases the number of leads a company gets, but increases the conversion rate, since only people who are serious about signing up will actually pull out their credit/debit card to begin with.
Quoting this study, it was found that 2% of website visitors would become free trials when a credit card was required, but 10% would become free trials when no credit card was required. This means that a free trial with a credit card is rejecting up to 80% of the people that would otherwise sign up for a free trial. Further, it is shown that 50% of people that sign up with a credit card go on to become customers, while free trials without credit cards only results in a 15% conversion ratio.
However, that only tells part of the story. While a 50% conversion rate sounds impressive, you have to remember that that is 50% of 20% of the number of leads that are acquired without a credit card free trial. While this study only had a sample size of 100, it suggests that companies actually do a lot better without a credit card during the free trial.
The no-credit-card trials get five times as many leads, and even though the conversion ratio is much lower, 90 day customer retention is better, ultimately resulting in more long term, stable revenue for the companies that do so. In other words, companies that do studies on maximizing profit have to decide if credit cards up front is better or not.
No matter how simple or complicated it is to cancel the account, the point is that credit cards up front produce fewer leads but with a better chance of conversion, while no-credit-card trials produce lower-quality leads but in a greater quantity. This means that companies have to choose on either better marketing to attract more leads, or better lead engagement to increase conversion ratios. It's all pretty complicated, but it's driven by a bunch of marketing research to try and figure out how to maximize profit.
There's no sinister motive in most cases (e.g. making it harder to cancel), simply filtering out those leads that they will have to spend money to cultivate only to lose them anyways. Each company decides if it's more profitable to have fewer leads at a higher conversion rate (usually because cost of cultivation is high) versus having lots of leads with lower conversion rates (usually because cost of cultivation is low).
There's other links in that post above that are worth reading, and with a bit of research, you can see that the decision to require a credit card for a trial is largely driven by the cost of cultivating a lead; higher quality leads are necessary for services that can't afford to give away too much "product" (or service, bandwidth, etc) for free, but some services may find it better to eat those up-front costs for the benefit of higher customer retention.
We live in a market society, where we pay for products. If the products don't meet our expectations, we have a right to a refund. With on-line media providers this is the same. It would be a administrative nightmare to try to refund people for a service they don't like, as a streaming service like this has hundreds of thousands of subscribers. It would cost them too much.
The idea is if you like something, you are happy to pay for it. Especially with financially stable adults with disposable income, setting up an entertainment service for their family without hassle is simple.
There is obviously a 'loophole' where you can get free subscriptions and then cancel. Some people forget. The majority of customers, if happy with the service they are provided will continue their subscription.
A company is offering something they think is of value to customers and the free month is an incentive to sign up and try it out to see if they like it. From the company's perspective, why would a customer want to cancel at the end of the trial period? They would only cancel if they are dissatisfied for some reason, which the company would like to try to avoid, because a long term satisfied customer is a lot more profitable than someone who uses a product for free, gets charged for the next month, and then cancels, perhaps before the cost of acquiring them as a customer has been paid off.
The company making the offer doesn't expect everyone to stay after the introductory period either, but if they expect more than half of them will like the product enough to keep using it, it doesn't make sense to make the default to auto-cancel as that's not what the majority of their customers would want.