This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Monday, August 18, 2008

Cost + Subscription = Adding insult to injury

Posted By Paul

A product model that you see all the time is the system where you get the initial product cheap (or free) but the supplies that you need to purchase to USE the product are either less affordable, or downright expensive. According to an article on Wired (called "Free! Why $0.00 Is the Future of Business" which can be found here) one term for this is "cross subsidy" (where you get one thing free or cheap, but you need to buy another thing to use it).

One thing I've been seeing more and more are cool gadgets that are sold under this model EXCEPT the initial price tag for the item really isn't that cheap.

These types of devices are dangerous and thinking hard about them are a great way to take a frugal approach to life. Here are a few modern toys that come with a hefty initial price tag AND a monthly service fee:

iPhone - Yes, they are cool, but not only does the phone itself cost quite a bit ($200-$300), but they require a high cost data plan that seems to be about twice that of a normal cell phone plan ($70 per month per line for the iPhone, as opposed to most cell plans that cost $30-$40 per month per line). Just imagine what you could do with an extra $30-40 per month. If the whiz-bang technology is your thing and you can afford it then go for it, but give it some thought first.

Bodybugg - A device a I saw recently that is used for monitoring your calories burned. It's a really cool fitness device, but in order to use it you have to pay a $15 a month subscription fee on top of the $300-$400 initial price tag. If you ever decide that you don't want to pay the $15 a month then the device becomes essentially useless.

Satellite Radio - The receivers aren't cheap, and there is a monthly subscription fee involved. Not as bad as many other subscription based services but it's still another bill every month.

Not to say that owning any of these things make you a bad person. If you want some toys, and can afford them without putting your financial well being in jeopardy then go for it. Deciding to splurge on something doesn't necessarily make you financially irresponsbile (see my earlier post Know Your Indulgence), but I think that any non-essential item that requires a decent initial cost AND a monthly fee should be given some serious thought.

One way I like to think of these purchases is by taking the service cost of an item and adding it to the initial cost, and then see if I still think it's a good idea.

For example, let's say you're thinking of getting an iPhone, but you're not sure if you want to spend the money. Another way to look at the purchase is by taking the service cost and imagining it as part of the initial cost. Assume a 2-year service contract and an extra $30 a month for the iPhone plan over a typical cell plan, then that's $720. If the iPhone service still only cost you the same as a regular cell plan per month, but the device itself cost you $920-$1020, would you still buy it?

On a related topic is an earlier post:

Beware Of Subscriptions

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