It happens to me often as I work on my business: I am confronted with an opportunity to buy something that I must pay for either yearly for one price or monthly for a higher price. Until I started thinking about the Frugal Business principles, I really didn’t do a good job evaluating these opportunities.
Here’s the question: Which is more frugal?
- Buying a month-by-month service that you can cancel any time you want, or
- Buying the service for a year, at a lower price.
How I Did My Monthly-vs.-Yearly Analysis
Last year I signed up for an Adobe product (Creative Cloud with InDesign) because I thought I wanted to use InDesign for creating book manuscripts. I found it terribly complicated and difficult to use (not following my own advice about simplicity). I unfortunately signed up for a year because I wanted the lower monthly cost, so I started through the process of cancelling.
Here’s an analysis I just did (something it would have been helpful to do at the beginning):
Creative Cloud with one app (InDesign)
• Annual plan paid monthly $19.99 / mo. = 239.88 for 12 months.
• Monthly plan $29.99/mo. = $359.88 for 12 months.
If I stuck with the plan for the full 12 months, I would save $120 over the monthly plan for 12 months.
Cancelling the Annual Plan
If I paid for 4 months before cancelling:
4 months of the annual plan @ 19.99 = $79.96, plus $60 charge to cancel = $139.96
If I paid for 4 months at the ($29.99) monthly rate: $119.96
So by cancelling at 4 months, I would have saved money by paying the higher monthly rate.
If paid for 5 months before cancelling:
On monthly plan @ 29.99 = $149.95
On annual plan, paid monthly $99.75, plus $40 to cancel $129.75
At this point, the cost of the monthly plan exceeds the cost of the annual plan (including the cost to cancel). So it would be better to stick with the annual plan at that point.
The Longer You Stay, the Better the Annual Plan Looks
As you can see, the longer you use the service, the better the savings by taking the annual plan. But if you aren’t sure what you are doing, it’s best to pay monthly. You can always switch to the annual plan rate if you are certain you’ll want to continue with this service.
When I attempted to cancel my membership, I got into a long conversation (both in chat and then by phone) in which Adobe tried to convince me to stay. I see I’m not alone in this problem; see this article with another example of someone who had trouble cancelling an Adobe subscription.
Why People Cancel Memberships
It’s a phenomenon of our time that people cancel memberships. And they usually cancel in the beginning. A 2014 survey of health and fitness clubs found that the two most common reasons for cancelling memberships were:
- 40% cancelled because the membership was too expensive/they couldn’t afford it.
- 30% cancelled because they stopped going/didn’t use it.
We get to change out minds, but it’s not very frugal to change your mind if you have already paid for a long-term membership. That’s why gyms and health clubs don’t have monthly memberships. It’s not that they don’t want your business; they just want your money, and they don’t care if you show up or not.
Membership fees for shopping sites or places like Costco are a different story. The membership fee allows the company to offer you lower prices; the more you shop there, the more you save. The same concept works for membership fees for credit cards!
Just because you have found some app or service you like, that doesn’t mean there aren’t other similar services out there. Before you hit “buy” do some research. I looked for other PDF editing apps. I wanted to be able to edit a PDF, combine several PDFs into one, use signatures, and create fillable PDF’s (for my Frugal Business Secrets Super-Start Toolkit).
I looked at PDFfiller, a Chrome add-on. It was more expensive than Adobe for the same service, and I couldn’t find another service that had everything I wanted. So, back to Adobe.
What’s the Lesson Here?
Being frugal means checking out the monthly vs. annual costs of a service, evaluating the alternatives, and really knowing yourself and your business needs before you hit the “BUY” button on an annual cost.
Creating My Rule of Thumb for Monthly vs. Yearly
This may not work for you, but it’s the rule of thumb I’m going to use in these situations:
- First, decide on your criteria. You may not know exactly what you want at first, but at least get a few minimum requirements.
- Look for other alternatives. Spend some time deciding on your criteria
- Get the free trial, if one is available, and work it hard to make sure you really want this thing for a year.
- If the free trial isn’t available, select what seems to be the best alternative, with the monthly plan.
- After a few months, if you really like it and REALLY CAN’T LIVE WITHOUT IT, switch to the annual plan.
Here’s to the Success of Your Frugal Business!