It’s been some years that I have trouble sleeping. Not because my investments keep me awake, some nights my body simply decides that it does not want to sleep. Gone are the days when I could drink five redbulls (and some vodka) in a night out and then sleep like a baby; if I try that now, I would probably stay awake for a week straight.
There are some borderline-legal natural solutions, the issue with them is that after a couple of days I basically have the opposite problem, I am never 100% awake during the day. Thankfully lot of companies now are trying to solve this. Eight Sleep, a start-up founded by an Italian, is a great and effective one; the problem is that their product is veeeeeery expensive. As much as I wish this was priority number one for me, for the next four five years I would have a non-negotiable budget drain: nursery (the side plan was to become a big influencer so they would offer it to me for free but…so far I am as successful as the Italian rugby team in the Six Nations tournament). So this left me with some wearable options. I had a look at the Oura ring but I realised quite fast that I was basically trading a sleepy face for a douche look, see the latest season of Succession:
I then went back to Whoop and realised that they do not sell a widget but a membership:
A subscription that actually works?
This an upside-down post. I will start from what I think works (for us, the consumer/user) and then analyse the issues that subscriptions have on our budget, to close on the ultimate budget-killer, the “buy now pay later” solution. I will use Whoop only as a proxy of their marketing solution, if the product is good or not I leave it for others to dissect.
Do you know the Patek Philippe tag-line? I hope you do not so here it is:
It would have been perfect for Apple and their planned obsolescence strategy. You never actually own an Apple product, because every two years their battery dies and you have to buy a new one. You think you are buying something but you are actually on the clock the moment you exit the store, Apple decides when you have to renew your subscription even if you do not have a formal one.
In this sense, Whoop is honest and forthcoming: they sell a subscription and they call it so. I like the fact that they offer the user the option of paying only once per year, with a discount. This way you can easily compare the cost of the subscription with other products, like the Apple Watch: if your Watch typically lasts two years, the correct Whoop comparison is simply £288*2. Being a one-off cost, albeit a yearly one, makes it also easier to budget for it (more on this later).
What if you stop using it and then forget to cancel the subscription before it rolls over? This is the main risk of yearly subscriptions. Having 23 years of experience in managing gym contracts in multiple legal jurisdictions I feel like I have a system Saul Goodman would be proud of, but I appreciate this might not be the case for you. Right now one of my biggest financial sins is the subscription to NBA LeaguePass; the NBA runs a program similar to Whoop, a yearly subscription. I had it for six or seven years and I never missed a renewal each September. Why? Simply because the expense is so big it is impossible to forget. If you really do not trust your memory (nor the alarm you put on your phone, because you do…right?) you can pay with a card that will soon expire or one of those virtual cards that get destroyed after being used. This way, even if you forget, Whoop will try to charge a card that does not exist anymore and they will remind you that the subscription is going to expire soon.
The advantage of the Whoop plan, compared again to the Watch, is that every time they roll out a new gadget you get the upgrade straight away; not a reason to stretch your budget if you cannot afford it but a nice to have once given the payment structure they choose.
Why subscriptions works (for the service provider)
A subscription is simply a service that you can stop if you opt-out. Richard Thaler wrote an entire book, Nudge, on how companies can direct our decisions by simply framing a choice as an opt-in or opt-out. By framing it as an opt-out, companies make their customer ‘stickier’. In recent years, Wall Street became obsessed with subscription businesses, eager to pay higher and higher multiples for steady cash flows.
Not only do we as customers have a hard time to opt-out, or simply forget to do so, our brain is not that good at understanding the real cost of a service. Selling something at £24/month is easier than £288/year because for our brain is hard to figure out 24*12. We are lazy creatures, it is the 9.99 fallacy in a different sauce.
If (when?) smart contracts on the blockchain become mainstream, I bet we will see more subscriptions with daily rates; right now it cannot be done because the transaction and admin costs cannot justify the increase in revenues. But you already see marketing offices using ads that go “it’s less than £1 per day!”.
There are also other business reasons why subscriptions are valuable; for example, they are the only way a company can get data about its customers if they sell via a platform or a distributor.
Death by a thousand cuts
Subscriptions kill our budget because we (usually) see them as a one-off expense. I grew up in a world where costs were transaction-based. Even the phone was! Yes, you settled the bill on a monthly basis but you paid per phone call. There was an immediate, very intuitive link between the money you had and what you could afford: can I pay for the gas and drinks at the club? Yes, let’s have a night out. No, I will just hang out with my friends in a random parking lot. I was starting each month as a white canvas, my excel spreadsheet being my wallet; to check my budget I had to tap my ass or the local ATM, a recurrent pilgrimage since I had to pay everything in cash anyway. As long as you were not asking your friends to lend you money, coming the next month you were as good as ever.
With that mindset, £6/month for Netflix is a great bargain! For less than a cocktail, I can have endless fun in those evenings where I do not, or cannot, go out. Would I sacrifice a cocktail for Spotify? Hell yes! Would I do it for NOW (the lame UK version of HBOMax)? I have to! What about the gym and Athletic Greens, do I want to be a fat dude? Definitely not.
Fact is, in my pre ‘everything is a subscription’ life, I was not having infinite cocktails. All these ‘oh so tiny’ payments add up and they do very quickly. More importantly, now I am not free to choose where and how to spend anymore. The month starts and ooops, half of my salary is gone (well, that was the pre-family me. Now I can enjoy bit heavier subscriptions like the nursery).
If reading this part you thought “obviously all those costs accumulate, are you stupid?” great for you; unfortunately the majority of us need that excel budget to arrive at that conclusion. Really, we need to see them, because in our mind they are still just £6 here, £10 there. And they are sticky AF. Before COVID I read that coming to the next recession, Netflix would suffer because unemployed people will cut it once they lost their salary. One thing is deciding not to go to the movie anymore because your wallet is empty, another is to cancel a subscription. The psychological endowment (? prob has a scientific name this thing) effect is stronger because one thing is not doing that trip you did not even plan yet and another to cancel a holiday you already booked.
This was my experience but I do not think it would be easier for the youngsters born in the subscription era. Probably it would be worse. Are your parents giving you a monthly allowance that you then use to pay Spotify? Or do you simply get your Spotify paid? Not seeing that payment is quite different from receiving an allowance and deciding to spend some of it to buy a CD. My daughter is two and a half and has never seen a banknote, it will be fun teaching her the value of money (like, not really fun).
Buy now Pay later
Money has a time-linked value: if the total cost is the same, paying in installments provides more value than paying 100% upfront. So why the “Buy now Pay later” service can be bad for consumers? Unfortunately, we live in a world where if someone offers you something at a discount, you should always ask yourself why?
Like Spiderman or the Amex cashback, great powers come with great responsibilities. The Amex cashback works only if you pay your balance in full every month. Otherwise the interests they charge you are way way higher than the cashback you receive. The BNPL solution is great provided you remember that today you are making a commitment for future payments. One thing is if you do it once to split that Peloton uber starting outflow, another if you splurge 20 times on Boohoo (did I miss taking the tube in London? not that much…but if you do not live in London you will never get the reference sorry).
Splitting a big expense in monthly instalments is handy but from a strictly budget-y point of view it should be irrelevant. Let’s say that in your monthly budget you have £200 for ‘extras’ and you consider the Peloton you want to buy as one. £200 would not allow you to buy it on the spot but you can start putting those £200 away as ‘Peloton downpayment’, month after month, and once your reserve reach £1200 (is it the cost of a Peloton? I do not know) you go and buy it. That’s what a responsible person would do but it also means you have to wait 6 months before you can cycle at home. The monthly instalment plan represent the same outflows but you will have your Peloton today, which is…better.
From a psychological point of view, the downside of the instalment plan is that the initial hype of owing a Peloton will disappear quite fast, way earlier than the six months it will take you to pay it. So at month four, you might see a new ‘shiny object’ and start to dream about it. But you are still paying for your bike, so now you might start to build even resentment against it. This psychological aspect is not equal for all of us but it is real. This wants to be just an example to highlight that even if we like to talk about spreadsheets and numbers, sometimes the devil is hidden somewhere else. You have to use financing solutions like leverage, not too little, not too much.
The issue with BNPL solutions is that they started from the right premise and then pushed it into overdrive. Now you have Klarna and friends checkout options EVERYWHERE. What you are missing is a place where you can check which, and how much, payments you delayed in the future. Unless you created your detailed spreadsheet obviously.
We are starting to see the consequences: shares of listed BNPL companies are getting hammered because they are reporting increasing losses. Part of those losses are linked to credit losses, customers that fail to repay their debt according to plan. It is easy to understand why: taken singularly, all those delayed payments might seem irrelevant…until the next month, when they are all deducted at once from your bank account.
Conclusion
Before committing your budget to future payments, being from a subscription or instalments, you should build the right framework to stay in control. The need for a very precise instrument depends on your circumstances, £40 might be an afterthought for someone and a material outflow for others. What you should not forget is that even small items adds up (surprisingly) quickly.
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