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?
Time is money, so paying a large amount now to avail of a discount (or to protect against a future price rise) can feel like a loss. On the other hand, paying a higher price month to month down the road also feels like a loss.
Which option carries the greater risk? The seller clearly benefits from the upfront payment because it secures a customer and eliminates ‘churn’ (the risk of the customer cancelling). But this doesn’t mean the buyer automatically loses. Mathematically, a large discount is a massive guaranteed return on your cash that is hard to beat by investing it elsewhere. However, the buyer does lose something vital: flexibility. By paying upfront, you are betting that your needs won’t change.
If a buyer’s future income is guaranteed, taking a big upfront discount is easy to justify. But for a newbie starting a new website or business, future success is rarely guaranteed. In that case, hoarding cash and staying nimble is far more important than chasing a discount
Typical examples include several SaaS (software as a service) products and website hosting. The yearly payment is often at a considerable discount. For example, the annual fee is equivalent to only a 10-month fee (i.e., two months free). Products at such discounted rates are often bundled with other products. For example, two months of free Netflix with a 4G subscription or broadband is available. Such a choice can be confusing, and paying the annual fee and claiming the discount is often tempting.
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Let us use an example. A website host has a plan named “XYZ 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 for annual vs monthly payments. However, factors that cannot be quantified often 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 (which is highly unlikely), we may not explore all its features. Often, we only understand the limitations after the subscription has started. Sometimes, the plan could even be unsuitable for our actual needs. Buying a long-term plan can be a trap, especially if they do not refund unused subscription time upon cancellation.
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 the context and, at times, blocked the site without warning when it used too many resources (CPUs or RAM). We then have to move out midway through the 3Y subscription.
At the time of writing, Freefincal is hosted on a VPS from A2hosting (later acquired by World Host Group and now migrated to Hosting.com) with a monthly subscription. This makes relocations easier. The service here is significantly better; they take a moment to understand the support question! Despite having made several wrong “discounted annual payment” decisions in the past, this author believes there is always a feature or limitation we did not know about and prefers monthly payments. Severing a monthly contract is so much easier.
If we are satisfied after using the services and features for an extended period, a monthly vs annual renewal discussion makes more sense. Even then, as long as there is a monthly income and the subscription fee is manageable, it still makes intuitive sense to pay monthly rather than handing over a lump sum for the same service!
In summary, buy something when needed and renew it as often as possible without paying for longer durations.