The Economics of Subscriptions

The Economics of Subscriptions

If you haven't noticed, we live in a world where the “monthly subscription” is one of the preferred business models.

I'm not talking about those monthly payments that we all have that are for delivering real world services to us like home rent, Internet access, cable TV, mobile phone, banking fees, insurance, etc. These are the monthly bills we all grew up with. Some of these are utilities.

And I'm not talking about business expenses like web hosting, email services, etc. Presumably there are money making activities directly tied to those.

But what we are seeing nowadays is Internet companies who prefer to charge us monthly (or yearly) for access to their software or service in which you can argue there is very little incremental cost to them to deliver the service.

As we move away from the “ad model” of online business, we move towards the “subscription model” as one of the options.

A quick look at my Mint spending report shows me that I currently pay for:

  • Netflix – Entertainment
  • Spotify – Entertainment
  • Audible – Entertainment
  • Reddit – Entertainment
  • YouTube Premium – Entertainment
  • Masterclass (I am cancelling this) – Education
  • LinkedIn (I am cancelling this) – Education
  • Language learning app ($60/year, I should cancel this) – Education
  • Adobe Creative Cloud ($80/month, I should look to reduce this!) – Software
  • QuickBooks Online – Software
  • TubeBuddy YouTube SEO tool – Software
  • Fastmail Email account services (2 accounts) – Software
  • Ancestry.com ($30/month, I should cancel that actually) – A hobby of mine / Data
  • Vimeo video hosting ($101/year, I should cancel this too) – Online file storage
  • Dropbox (2 accounts, $129/year each – I should cancel one) – Online file storage
  • Google Drive (they just doubled their storage, do I still need to pay for this?) – Online file storage
  • Backblaze online backup service – Online file storage
  • MEGA (I should cancel this too) – Online file storage

That's probably not the full list, because I am probably forgetting some important ones.

Now you might legitimately argue that some of those are business expenses, and I can write them off my taxes. And I do where appropriate.

But even “business expenses” are real money, that could otherwise go into my pocket if I didn't spend it.

All of them are, at the end of the day, subscriptions for services. Some of which I never use but still pay for. Some of them are for things that you used to either pay one price for in the past (software and education) and now you pay for monthly. Some of them are purely for entertainment and replace what I used to spend on television, video games, books, magazines, etc.

To be fair, I am not saying that it's not a legitimate business model. Just look at all the companies dying to get paid monthly (or yearly) instead of one time. The list is long, and getting longer.

My issue, perhaps, is that it's a trap. Designed for us not to notice the true cost of something.

For instance, how much have I paid Adobe for their Creative Cloud over the past 2.5 years? $1,481. And every month, higher.

Now I'm an adult. I agreed to pay for this software. I own that. I notice, however, that the price went from $46 per month to $82 per month in the past couple of months. So there has been a pretty hefty price increase recently. Or more likely, a “special offer” expired and now I'm paying full price.

But do you see the trap? I signed up for a $40 per month service, and somehow it's taken $1,481 from me. And somehow the price increased to $80 per month without me knowing. (I'll call them tomorrow.) They've gotten me to pay a price I probably wouldn't have paid if it was an up front cost.

And the other part of the trap? Look at all the services I say “I should cancel”. This business model is designed for us to forget about them. Designed for the fee to come out painlessly each month without us really noticing. Very few companies notify you in advance of the renewal. Very few companies (almost none) ask you to confirm that you still want the service. And no company, that I'm aware of, detects that you're not using their services and proactively cancels your payment or really tries to get your attention about that fact.

And I'm not saying it is illegal, or should be illegal, or is even immoral to operate this way. A contract is a contract, and I agreed to pay $X per month if you gave me Y. And a deal is a deal right?

But one thing we will see… what we need to see… is a better way to track all these payments. I'd pay for a middleman to take the job of reminding me when a renewal is coming due, or to prompt me to decide to cancel a service I'm not using.

PayPal could do that, but doesn't. Mint could do that, but doesn't. Visa, MasterCard and American Express could do that, but don't. I suspect that it's not in their business interest to do so.

PayPal makes it's money by charging transaction fees. And must keep merchants using it's service. If it helped consumers to know when renewals were due, some merchants might switch to another method for that. Mint is owned by Intuit (the makers of Quickbooks). Credit cards are similarly beholden to merchants and that's a competitive business.

So there needs to be a service to do a bit of effort to keep my costs in line. I'd pay for that.

In the next blog post, I'll talk about “lifetime deals”. The savior of the subscription trap, with it's own set of problems.

Epilogue

  • Writing this post just got me to sign up for TrackMySubs which is a subscription tracking service (which is a subscription service itself)
  • I did end up cancelling a few of the above, probably saving me $1000 per year… 🙂

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