A great example why LBYM is so difficult

[RonBoyd]

Looking at Life as One Big Subscription

Most of us mentally account for nearly all the money we spend, whether or not we realize it. We assign a book value to a purchase, Professor Okada says, based on what we pay. Usually we won’t replace that product until we think we’ve gotten our money’s worth. That explains why some people continue to wear ill-fitting shoes rather than chucking them.

A subscription moves consumers over the hurdle of mentally depreciating an existing asset. When you go on vacation and don’t get any movies from Netflix, it is easier to accept having wasted $30 for your subscription that month than it would be to have bought a $30 DVD and never watched it.

Some of the madness of the recent housing bubble can be blamed on an extension of the subscription mentality. ... They were treating an investment in real estate as though it were just another consumable product, to be disposed of with the same emotion one shows in recycling a monthly magazine.

Its not all bad, however:

Frugality is a virtue, as we remind ourselves during this recession. But it’s not ridiculous to spend on upgrades. ... a consumer can become more efficient by upgrading to a more fuel-efficient car or by buying a computer that crashes less often or boots more quickly. A new smartphone gives a person access to information everywhere, a liberating experience for anyone searching for a restaurant or a theater where no computer, bookstore or newsstand is nearby.

In any event, Marketers understand all too well how the process works:

“It’s hard to initiate subscriptions,” Professor Fader says. “But once you get them over that hurdle, great things happen.”

 

[Nords]

Good article.

They skip over the "hassle factor" of buying new stuff. When I get a subscription the decision is made once and not re-examined for years, maybe even decades. But when I buy something every 3-4 years I may stretch out the next purchase just to avoid having to go through the hassle.

 

[Meadbh]

Car leases are subscriptions too. In my case, I could lease a car as a corporate expense, which would make it quite cost effective. But I keep thinking that at the end of the lease, my use of the car would end, unless I chose to purchase the residual value. If I really loved the car, I would be torn. And that's what's holding me back. Because I get very attached to good cars....like the one I paid for in cash almost 15 years ago

 

[RonBoyd]

Good article.

They skip over the "hassle factor" of buying new stuff. When I get a subscription the decision is made once and not re-examined for years, maybe even decades. But when I buy something every 3-4 years I may stretch out the next purchase just to avoid having to go through the hassle.

Is this the same thing? (The "being in charge" factor.)

Those who love technology might pay $900 every two years to get a new and improved product, and more utilitarian users might spend $300 every four years. Those who see technology as a bother might shell out $150 every eight years to upgrade.

 

[Nords]

Is this the same thing? (The "being in charge" factor.)

Might be semantics. But while I love learning about the design of and using cool technology, I loathe the process of identifying our needs, locating appropriate products, acquiring them, and keeping them in operation.

 

[mickeyd]

Nice read with interesting ideas. Thanks for posting it Mr Boyd.

A subscription moves consumers over the hurdle of mentally depreciating an existing asset. When you go on vacation and don’t get any movies from Netflix, it is easier to accept having wasted $30 for your subscription that month than it would be to have bought a $30 DVD and never watched it.

I'm thinking that an annuity from a LI company is a subscription. Any ideas on that?

 

[RonBoyd]

Might be semantics. But while I love learning about the design of and using cool technology, I loathe the process of identifying our needs, locating appropriate products, acquiring them, and keeping them in operation.

Must be. Since I seem to be doing a poor job of saying the same thing you are.

 

[Meadbh]

Interesting subject. I guess any lease, or rental, is a subscription, and will work if you use it to pay for something that you plan to use regularly. So....renting an apartment, or paying a mortgage on it, to live in makes sense if you live there year round, but not if you only use it for vacations. "Renting" or leasing a car makes sense if you use it every day. "Renting" the use of a gym makes sense only if you go. So......the value of a subscription depends on the pattern of use.

For me, personally.....

Gym: I've had periods in my life when I've been very committed, and have gone three times a week. That was great value. But I've also paid and been too lazy to go!
Magazines: I don't read any magazine consistently. A subscription would be a waste of time.
Communications: Thanks to a discussion on this Forum I recently ditched most of the added features on my home phone. I don't miss any of them and I am saving >$20 per month. That was a wasted subscription for years!
Car: When my current car is no longer drivable, if I am still working, I will seriously consider leasing. Pay only for what I use, and make it a corporate expense.
Home: I currently own, but would consider renting in ER as I would be more mobile and wouldn't want to tie up a ton of capital.
Condo expenses on vacation property: That's a subscription. The neat thing is that I own only a fraction, and I use it, so I am subscribing only for what I use.
Mortgage on rental property: That's an investment, which is different. Subscriptions are for consumables.

 

[walkinwood]

I think the same subscription inertia works to our advantage in automatic investment plans and monthly payroll deductions for 401-Ks.

Thanks for posting a very interesting article.

 

[FIREd]

I hate subscriptions of any kind. After a few months of paying that Morningstar or Netflix subscriptions, they tend to just sneak permanently into your budget and become part of the "bills", whether you make good use of them or not. I hate that. So I always weight the pros and cons very carefully before committing to a new monthly payment of any kind.

 

[Meadbh]

I hate subscriptions of any kind. After a few months of paying that Morningstar or Netflix subscriptions, they tend to just sneak permanently into your budget and become part of the "bills", whether you make good use of them or not. I hate that. So I always weight the pros and cons very carefully before committing to a new monthly payment of any kind.

Giood point. And perhaps another insight from this discussion is that LBYMs should regularly (annually?) examine all such expenses and ruthlessly cut those that are not producing value.

 

[bbbamI]

Giood point. And perhaps another insight from this discussion is that LBYMs should regularly (annually?) examine all such expenses and ruthlessly cut those that are not producing value.

To me, that is just another reason my expense spreadsheet is so valuable. It's there in black and white when I update it each month. Expenses going to one area are often times cut drastically, even eliminated; especially if I want to increase spending in another area. My interests change as time goes by...

Oh and one more thing....I will NOT wear shoes that hurt my feet....

 

[W2R]

Oh and one more thing....I will NOT wear shoes that hurt my feet....

Good!!! Me either! When my feet are happy, I'm happy too.

In the past have had to subscribe to some professional journals, which were pretty expensive though a tax write-off. But other than that, I haven't subscribed to a magazine or other periodical since high school. I have never subscribed to a newspaper. Sometimes I buy a Sunday paper or a magazine, or read them in the library, but I just don't subscribe.

I don't have Netflix either, though it may be my first exception to the no-subscriptions rule once I have retired and have time for it.

Right now, I do have a gym membership. I think that is my only "subscription" type of expenditure at present. If the gym allowed paying per visit when I show up, I would do that. However, the gym wouldn't make as much money from people if they did that. At least my membership does not automatically renew.

 

[mews]

Good!!! Me either! When my feet are happy, I'm happy too.

.

Money spent on shoes that fit is a necessity - and lots cheaper than the whole court/lawyer thing when you kill someone when they annoyed you on a day when the feet were hurting!

Gym - they were playing the alleged music much too loud for me today. So I left. I may go back later with my earplugs if I feel guilty. or not...

ta,
mew

 

[growing_older]

PROFESSOR OKADA, who has studied how marketers persuade consumers to replace what they have, says, “People don’t upgrade as frequently as they should if they were acting rationally.”

If more people thought this way, it could fuel consumption. Of course, it would also be likely to expand our disposal society. The two-year-old DVD player from Best Buy or the lightly used Leksvik bookcase from Ikea will be piled out by the curb

None of this makes any sense to me, except that marketers like subscriptions beacuse consumers pay every month over and over again. What possible evidence is there that people will upgrade more often if they act rationally. What possible rational reason could there be for upgrading the 2 year old used book case? New features? It holds modern books better? I think the "rational" consumer will NOT be upgrading just for every new feature that marketers decide to push, and this so-called expert has no rational reason for the statements made.

 

[Khan]

Good article.

They skip over the "hassle factor" of buying new stuff. When I get a subscription the decision is made once and not re-examined for years, maybe even decades. But when I buy something every 3-4 years I may stretch out the next purchase just to avoid having to go through the hassle.

I drove the same car for 18 years, the TV is 20, washing machine 17.
Not just because I'm cheap, but because I really hate shopping.
If I can't buy it on line and have it delivered, I'll wait until it dies or disintegrates.

 

[kumquat]

I drove the same car for 18 years, the TV is 20, washing machine 17.
Not just because I'm cheap, but because I really hate shopping.
If I can't buy it on line and have it delivered, I'll wait until it dies or disintegrates.

I tend to keep "stuff" a long time because I like fixing it. New "stuff" doesn't break and is no fun (my favourite car is 50 years old).

 

[freebird5825]

...For me, personally.....

Borrowing Meadbh's list

Gym: Nope. Too lazy and free spirited for structured exercise.
Magazines: Only with airline miles that are too low a level to be useful.
Communications: yes, all in one package including security and fire/smoke detection. Good value for cornucopia of comm/safety services received.
Car: Own all vehicles outright
Home: Own outright, but will be renting elsewhere after "the big move" later on.
Netflix: Yes, 1 at a time DVD delivery at lowest cost option. Watch 4-6 movies per month.
M*: Yes, multi-year. I use the website heavily for portfolio tracking and modelling future withdrawal portfolios.

 

[ksr]

I drove the same car for 18 years, the TV is 20, washing machine 17.
Not just because I'm cheap, but because I really hate shopping.
If I can't buy it on line and have it delivered, I'll wait until it dies or disintegrates.

I could have written these words! I also tend to keep my clothes until they fall apart - most are ready to be trashed by the time I'm finished with them. In addition to being cheap, and hating to shop, I get attached to and comfortable with my stuff. I kept my last car for 19 years and was pretty sad when I realized I had to finally replace it. When I was buying my current car the salesman asked me when I was going to look happy about the new car.

 

[RonBoyd]

If I can't buy it on line and have it delivered, I'll wait until it dies or disintegrates.

Even online is not as safe from psychological influence as it once was:

Closing the Deal at the Virtual Checkout Counter

Just when we (us online shoppers) have become immune to the usual tricks -- phony customer reviews, time-limited sales, phony limited quantity claims, etc. --a new round is coming at us. Just like nuclear proliferation.

There is an interesting quote, however:

It is much simpler online than offline to discover that an item you bought yesterday is on sale somewhere else today. In fact, he said, people often spend more time researching a product after buying it online than before, to prove that they should not regret the purchase.

I wonder how many online buyers actually spend much time thinking about it after pulling the trigger. All that pre-sale research precludes that thinking for me.

 

[RonBoyd]

On second thought, online purchasing does have its hero companies:

Virtuous Amazon Customer Uses Same Gift Certificate Twice, Fesses Up, Keeps Cash

 

[Bestwifeever]

Money spent on shoes that fit is a necessity - and lots cheaper than the whole court/lawyer thing when you kill someone when they annoyed you on a day when the feet were hurting!

Gym - they were playing the alleged music much too loud for me today. So I left. I may go back later with my earplugs if I feel guilty. or not...

ta,
mew

Me too with our gym, Mew. Everyone who wants to hear music is already using an iPod, anyway.

DH has been tripping over a pair of shoes for a couple of years now--he will not give up wearing them. Idiot.

The subscription strategy I am most impressed with is cell phones, like the iPhones and Blackberries--$100 plus a month. Who would have thought some people would spend so much money without thinking on something that didn't even exist a fairly short time ago. And I wonder what the markup is for the cost of providing those services.

 

[happy2bretired]

I count my membership to Sam's as a subscription. Every year I renew it and wonder if I should. I like certain items from Sam's but I know I don't get my money's worth.

I know from past experiences that I cannot join a gym....nope.

One of the great things about the Kindle, there is no monthly charge and there is a very crude internet connection on it. If Apple comes out with their tablet, I will be tempted to get one and there probably will be a monthly charge.

I used to enjoy magazine subscriptions...a real magazine junkie. Now, since retirement, no magazine subscriptions and I rarely buy one. Libraries are great for magazines.

 

[W2R]

Me too with our gym, Mew. Everyone who wants to hear music is already using an iPod, anyway.

DH has been tripping over a pair of shoes for a couple of years now--he will not give up wearing them. Idiot.

The subscription strategy I am most impressed with is cell phones, like the iPhones and Blackberries--$100 plus a month. Who would have thought some people would spend so much money without thinking on something that didn't even exist a fairly short time ago. And I wonder what the markup is for the cost of providing those services.

Thank goodness, my gym doesn't play loud music (just soft background music, and I like it because it is all oldies but goodies). Most of its members are older, which might explain the softer, less raucous music. I just bought my first mp3 player so that I can listen to podcasts while working out. I didn't get an iPod, though, since a cheaper one does everything I happen to want and more. There is something deeply satisfying about listening to a financial podcast while lifting! I also listen to some on the emotional adjustment to retirement.

People who spend that much on Blackberries are sometimes really into texting a lot. The person in the next cubicle to mine, at work, spends half her work day texting to various friends and family on her Blackberry. I want to be part of the 21st century, but so far I don't really know anybody that texts (except her). So, even if I got a Blackberry there isn't anybody for me to text. I don't even have texting turned on, on my cell phone.

Actually, I wonder if a lot of the popularity of Blackberries and iPhones is due to their entertainment value while at work or in classes. I could be wrong!

I count my membership to Sam's as a subscription. Every year I renew it and wonder if I should. I like certain items from Sam's but I know I don't get my money's worth.

I bought a one year membership when I bought my house, which is just a few blocks from Sam's. I never used it, though, so didn't renew. I just don't buy that much stuff (or gas) anywhere, much less at Sam's, for it to be worthwhile. I liked some of their frozen foods but their food selection wasn't broad enough to suit me (and I don't eat much all by myself) so I had to shop elsewhere for most of my food.

 

[RonBoyd]

The subscription strategy I am most impressed with is cell phones, like the iPhones and Blackberries--$100 plus a month. Who would have thought some people would spend so much money without thinking on something that didn't even exist a fairly short time ago.

We are being forced (by the end of the month) to switch from Qwest's Sprint service to their Verizon version. (We have stayed with Qwest because of the absolute need for the "One Number" service they provided -- not the same as the Google app and if anyone is interested I can explain it further.)

Anyway, the Blackberry is one of the choice of phones available -- we are trying to decide whether to choose the 9630 ($149 for two) or the 9530 ($49 for two) model. The cost of the service, however, is the same regardless of which phone we choose -- Blackberry or any of the others -- $69 a month for 700 minutes and two phones. (Less $5.00 a month Bundle discount.) Apparently, the "add-ons" are where the $100 a month charges come from -- $30 for e-mail/Internet, for example. For various reasons, all we need is a telephone and all the other things are unwanted. Well, except for that (no cost) 3.2 MP camera, I guess.

And I wonder what the markup is for the cost of providing those services.

My guess is the markup is 100%. Caller ID, for example, is actually part of the normal operating process for a telephone company -- that is how they can give you a detailed Long Distance bill -- and making it seem "seem" special is simply brilliant marketing.