Annual subscription at a discount vs monthly subscription: which is better?

Many online products and services can be renewed monthly or annually. The annual fee is considerably lower than the sum of the monthly fees over a year. Does it always make sense to take the discount and pay annually? Let us find out.

Published: December 4, 2019 at 10:14 am

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Many products and services offer users a choice: pay monthly or once a year at a considerable discount. Does it always make sense to take the deduction? Typical examples are several SaaS (software as a service) products, website hosting etc. The yearly payment is often at a considerable discount. For example, the annual fee is the equivalent of only ten months fee (i.e. two months free). Products at such discounted rates are often bundled with other products. E.g. two months of free Netflix with a 4G subscription or broadband. Such a choice can be confusing, and it is often tempting to pay the annual fee and claim the discount. However, this can be problematic. We discuss how to choose in such cases.

Let us use an example. Website host Godaddy has a plan named “Deluxe Hosting”. The normal monthly fee is Rs. 599. If we pay for 12 months, there is a 30% discount, and the monthly fee is only Rs 419; Pay for 24-months (36% discount) or Rs. 379 a month; Pay for 36 months (50% discount) or Rs. 299 a month.

A new website owner can find the 50% discount quite tempting. After all (they would tell themselves) no one would host a business or blog site for only a month! Let us think long-term, pay for 36 months and take the 50% discount

This is precisely what the service provider wants us to do! Pay a lump sum instead of spread out payments. It is also tempting to argue this case using math by finding the effective IRR of the annual vs monthly payments. However, often, factors that cannot be quantified have a say in such matters. Read more: The trouble with rent vs buy calculations

When we look at the features offered by a website host or SaaS provider, it is hard for a newbie to understand and appreciate the characteristics of each plan, especially the limitations. Many cloud-based software providers offer a trial period of about 1-2 weeks.

Even if we spend all our time evaluating the software during the trial period (highly unlikely), we may not explore all its features. Often we understand limitations only after the subscription has started. Sometimes the plan could even be unsuitable for our actual need. Buying a long-term plan can be a trap, especially if they do not refund unused subscription time on cancelling.

When freefincal first moved out from WordPress to independent hosting, it was on a shared Hostgator plan (3Y) it was then upgraded to a 3Y cloud hosting (still shared). The service was always the same. Personnel often gave robotic answers without understanding context and at times blocked the site without warning when it uses too many resources (CPUs or RAM). We then have to move out midway of the 3Y subscription.

Freefincal is currently hosted at A2hosting VPS with monthly subscriptions. This makes relocations easier. The service here is significantly better, and they take a moment to understand the support question! In spite of that, having made several wrong “discounted annual payment” decisions in the past, this author believes there is always a feature/limitation that we did not know about and prefers monthly payments. Severing a monthly contract is so much easier.

If after, using the services and features for an extended amount of time, we are satisfied, a monthly vs annual renewal discussion makes better sense.

Even then, as long as there is a monthly income source and the subscription fee is manageably lower, it still makes intuitive sense to pay monthly instead of handing out a lump sum for the same service! This kind of SIP is better than a lump sum payment!

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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