How much do you spend on subscriptions every month? Do you even know it offhand or do you have to check it? I know I can only recall 60-70% of them. But if you think about how much you spent on your last laptop, your last mobile phone, you typically can remember if it cost almost $2,000.
In a world of subscriptions, we need to have an amortization mindset in order to compare value properly. For example, nowadays, Netflix costs $20 a month. To many, it sounds not too expensive. Perhaps to some it may even feel cheap and affordable. If you’re buying a meal, that’s like $5 to $10 in Singapore, and you easily spend $20 on a good meal. So you might just actually consider that it’s not a big amount. But if you think about it long term, if you apply a bit of an “amortization mindset”, it’s actually very expensive to subscribe to Netflix. I’ll tell you why.
Think about the large purchases that most people will have, maybe a laptop, or maybe a mobile phone, perhaps a car, and these are typically large purchases. But when you think about them in amortized terms, for example, a mobile phone costs about $1,500 nowadays; amortize that over multiple years of usage. So, for example, if you’re using a mobile phone for three years, divide that by the number of months. And you’re looking at phones that are way cheaper per month. A $1,800 phone will cost about $75 per month amortized over 2 years. And once you think about it in that way, you realize that it’s not your devices that are expensive, but these subscriptions that are expensive. These $20 per month subscriptions add up!
Say you have a $20 per month subscription to Netflix and you buy it for two years, 24 months. In total, you are spending about $480 over two years. Is that affordable? And that’s $480 if you subscribe to Netflix for two years. If you subscribe for five years, the mathematics change; five years would be $1,200.
So when you think about that, and you start to think about your other purchases, if you look at a mobile phone. Some people use it for a year before they upgrade. Some people use it for two years or more. But think about it, when you use a mobile phone for two years, you might spend $1,800 on it. But after two years, you can actually sell it for maybe $500, and when you do that, you are actually only spending, say, $1,300 on your phone. And when you consider that across two years, you only spend about $50 per month.
Now consider what you do on your mobile phone versus what you do on Netflix. Is Netflix worth half of the value of a mobile phone? Not really, right? And then you add to that, Disney+, and all the various other subscription services, 10 bucks a month for your cloud storage, 10 bucks a month for the ability to edit documents and slight spreadsheets, and it all adds up.
So why am I talking about this? Because there are two ways that we can influence the maths of this.
Cost per month = Total cost divided by number of months.
One way is to reduce the number that we pay upfront (Total cost). Another is to increase the duration that we use a product for (increase the number of months).
Let’s say we reduce the amount that we spend on the phone: instead of spending $1,800, we choose to spend $1,000. Is that a smart choice? Are we gonna end up better off? We don’t necessarily know upfront. Because when you spend less on your mobile phone, you may end up selecting a phone that is perhaps slower or has fewer features, or it could be totally fine, depending on what you use your mobile phone for. Whether you’re using it to send emails, or to play games, or to run applications that require a bit more intensive processing. So based on your use cases, a $1,000 mobile phone might suit you, and then that’s the one that you should get. But if a $1,800 phone suits you better, then that’s the one you may choose. But when we’re considering value fully, we also need to think about it in terms of longevity.
For example, if a $1,800 phone lasts you four years, while a $1,000 phone lasts you two years, then you might as well go after the $1,800 phone, because you are going to come up better for that.
$1800 divided by 48 months = $37.50 / month
$1000 divided by 24 months = $41.67 / month
Now, of course, resale value also comes into play. A $1,000 phone that sells for $300 after two years would be better than a $1,800 phone that sells for near nothing in four years’ time. But you get what I mean, considering just the value of the phone or the price of the phone, all you are doing really is just stemming yourself from a better experience, and from a better value. This applies to your mobile phone, your laptop, and so on.
And once you start to think about things in terms of “amortization”, you really start to see the value of things, and at the same time, you see the value of subscriptions, and you start to realize the subscriptions are mostly not as affordable as they seem. So the next time a company like Netflix jacks up the price of their monthly subscription by another 20%, you may start to see the real impact. You may stop to think, what does this $20 subscription, now $25, mean to me? Perhaps you’ll consider that over five years, you now have to pay $1,500 instead of $1,200. What does that mean to you? And you start to figure out what you want to do. And that’s why amortization thinking is important. Thinking of value fully, by multiplying out subscriptions and dividing down full priced purchases, you are able to compare apples to thinly sliced monthly-paid apples.
