Remember the days when you purchased a Microsoft Office Suite like Office 2010, you were purchasing a product for life. It came with a CD and an installation code that you could integrate on any device. If you got a new computer or laptop, you could easily install that software and have a working albeit older version of Microsoft Office on that newer device.
Fast-forward to today and you can still buy a permanent office product but at an exorbitant price. This is because Microsoft Office is no longer meant to be a permanent purchase option. What’s the use of a cure when I can give you medicine to manage your situation for the rest of your days.
My friends, we have entered the era of SaaS – Software as a Service. In place of the traditional software model where customers would purchase, install, and manage updates to their software, people now subscribe to the software and receive it along with any updates as an application delivered over the Internet or used via an internet browser.
This guide explores whether you should pay for subscriptions annually or monthly to maximize your savings. But before we dive in, allow me to give a brief disclaimer.
Disclaimer: This post contains affiliate links, which means I may receive a commission if you click a link and purchase something that I have recommended. Please note that this does not affect the price you pay, and I only recommend products or services that I believe will add value to my readers.
These days, software makers and other subscription-based services want you to pay for subscriptions annually or monthly – in perpetuity. The question is which of these offerings is actually the better deal.
Most service providers want you to take the longer option. Hence, the offer what appears to be a good deal on the surface. But do these discounts represent a true discount? Stay tuned to find out.
Understanding Monthly vs. Yearly Subscription Options
As we have established, most services from productivity software to entertainment platforms deliver their services in the form of a subscription model that you should pay for indefinitely. You then have to choose which frequency best suits your needs. The provider typically offers:
- a monthly option.
- a yearly option.
- extended plans of 2-3 years.
The service provider, obviously, wants you to choose the longest duration, so they offer a discount for the longer period subscriptions. That means, a multi-year option will offer a higher discount than the annual subscription. The annual subscription, in turn, is discounted compared to the monthly option. The discount can be presented in a myriad of ways such as “get 2 months free with your yearly subscription” or “get 17% off with your yearly subscription.” Of course, both of these options are essentially the same.
In behavioral economics, we call this practice “framing.” You frame the situation such that will “nudge” the person towards the choice you want them to make. In this case, one frame consists of getting 2 months free whereas the other frame just takes the percentage approach, promising you a 17% discount. Well, two free months divided by 12 equals 17%. In either case, the service provider is banking on you seeing the “discount” as being big enough to commit more of your money upfront to secure a longer term of service.
Is it cheaper in "real" terms when you pay for subscriptions Annually or Monthly?
To get you thinking about this in the right frame of mind, I will answer this question with another question. Imagine your uncle asks to borrow $1,000. He promises to return the exact same amount one year later. Would you consider this a fair exchange?
You would probably refuse if not on principle, then due to the absence of interest you should receive for tying up your money in this loan to your uncle.
Money today ≠ the same amount of money tomorrow.
Suppose a service charges $50 per month for a subscription while offering the yearly plan at $500, representing an upfront discount of 2 months or 17%.
- monthly plan cost: $50 x 12 months = $600
- yearly plan cost: $500 upfront, which the service frames as $100 savings, 2 free months, or 17% off.
At face value, the yearly plan seems cheaper, but is it a true discount in financial terms? This is where your understanding of the time value of money comes in.
Present Value vs. Future Value: The key to Annual vs Monthly Subscriptions
The key principle is that money today is worth more than the same amount of money in the future, due to its earning potential. If you pay $500 up front, you are giving up the opportunity to put that money to work, investing it, over that period of time. The question arises:
Is the $500 upfront cost worth more or less than the $50 subscription fee paid monthly?
To evaluate this, you can calculate the present value (PV) of the monthly payments and compare it to the $500 upfront.
How to Compare the Cost When you Pay for Subscriptions Annually or Monthly
If we assume an annual interest rate of 6% (0.5% per month), you can calculate the present value of $50 payments over 12 months with the following formula: PV = PMT / [ 1 + .05)nt
PMT = $50
r = 0.005 (monthly interest)
t = month
n = 12 (the number of times interest is compounded)
You can easily perform this calculation in Excel either with the manual table or using the present value formula. Using the formula above, here’s a table showing you how it works:
| Month (t) | Payment | Discount Factor (1+r)t | Discounted Payment (PMT/(1+r)t) |
|---|---|---|---|
| 1 | 50 | 1.005 | 49.75 |
| 2 | 50 | 1.010025 | 49.50 |
| 3 | 50 | 1.015075125 | 49.26 |
| 4 | 50 | 1.020150501 | 49.01 |
| 5 | 50 | 1.025251253 | 48.77 |
| 6 | 50 | 1.030377509 | 48.53 |
| 7 | 50 | 1.035529397 | 48.28 |
| 8 | 50 | 1.040707044 | 48.04 |
| 9 | 50 | 1.045910579 | 47.81 |
| 10 | 50 | 1.051140132 | 47.57 |
| 11 | 50 | 1.056395833 | 47.33 |
| 12 | 50 | 1.061677812 | 47.10 |
| $580.95 |
To summarize the table, here are some takeaways:
- Paying $500 upfront at a 17% discount is financially better than making $50 monthly payments totaling $600.
- The present value shows that $580.95 invested today at a 6% annual return would grow into the same value as paying $50 each month for a year. Since the $500 cost is even lower than $580.95, it’s the better option in this scenario.
While the initial analysis suggests this is a good deal, there are some caveats. In today’s economy, a $500 outlay is a significant expenditure.
It’s worth parting with the money upfront if you have disposable cash not earmarked for higher priorities. You can also justify the expenditure if you aren’t likely to find a better deal on an opportunity of equal priority.
Speaking of Rates, Let's Compare Subscription Plans against one of the top savings account Rates in America.
Other considerations to think about are whether your investment or savings account gives you a comparable rate.
You can find some interest rates on savings up to 4.0% as in the Sofi Bank Savings Account. Assuming you bank with Sofi, making use of that nice-looking interest rate, here’s the new calculation using the Excel PV function for simplicity:
| Payment | 50 |
|---|---|
| 4.0% over 12 months | 0.003333333 |
| Months | 12 |
| Present Value | ($587.20) |
The new calculation shows that a slightly greater lump sum investment of $587.20 would give you $600 after 12 months. Even with one of the best savings accounts in all of American banking, the discount offers a powerful incentive to choose the yearly plan.
Microsoft Office Case Study: Their Annual Vs Monthly Plans
Here’s a personal case study on Microsoft Office 365 Family. My business is heavily dependent on Microsoft Office 365. My OneDrive usage is well past the free threshold of 10 GB. I heavily use a combination of Microsoft PowerPoint, OneNote, Excel, and Word for my Business English teaching business. Additionally, I maintain roughly 100+ GB of OneDrive Storage that I have accumulated over time. Simply put, I cannot operate my private teaching business without an active Microsoft 365 subscription.
Microsoft charges $9.99 per month or $99.99 per year. This is basically the same framed “discount” of 17% off or 2 free months.
Why I switched from their monthly plan to the yearly Plan?
I had originally been on the monthly plan, but my teaching business income fluctuates throughout the year, and the summer months are especially dry in terms of income. So, in my case, it made sense to switch to the yearly plan, so I could benefit by not having to pay the monthly bill over the summer months.
What’s more, I didn’t want to convert to the yearly option at a time in the year where I was about to go into a down period in terms of income. Therefore, I held onto the plan until November which is the height of my earning potential. Now, I know what you’re thinking – Black Friday is in November! This was another motivation as I tend to time my yearly subscriptions around Black Friday, so I can pay as little as possible on all my must-have subscriptions.
As you make your own choices whether to pay for subscriptions annually or monthly, think about the timing of these payments. Make sure you are paying for your plans at the optimal time of the year.
Use Coupon Codes to Stack Discounts on top of the Yearly Plan
Sadly, Microsoft doesn’t offer a Black Friday subscription discount although you can buy these subscriptions from year-to-year by purchasing the key from any electronics retailers. In Poland, where I run my English teaching business, I managed to purchase my yearlong Microsoft subscription for a paltry $67 on Allegro (the closest platform in Poland to Amazon). Now that, my friends, is a much better discount for Black Friday.
The lesson to learn is if you’re going to switch, choose your timing wisely. Wait until the optimal month to convert your monthly plan to yearly plans. If possible, time these annual subscriptions to take advantage of seasonal discounts such as Black Friday. If you can purchase your subscription as a key, make sure you switch off the automatic renewal option as you will revert to the normal price from the service provider.
Case Study 2: Skillshare and the Power of Coupon Codes Plus the Yearly Plan
This next use-case scenario centers on another personal story where I was switching my monthly subscription to a yearly one. In fact, I made this switch at the exact same time as I had done for my Microsoft Office 365. While I needed to find a third-party vendor to get a Black Friday deal on my yearlong Microsoft subscription, Skillshare had a great deal already, worthy of an instant switch with no hesitation.
At the time, Skillshare was offering a yearlong plan for $99. That’s a whopping 45% discount which is clearly much more than a present value discount. Even better, I just searched the web for Black Friday coupon codes to Skillshare and found an additional 40% off coupon to add at the checkout. In the end, I paid $60 for the following year which was exactly one third of what I would have paid on a monthly basis. That’s an insane combination discount that I couldn’t pass up.
Ultimately, the decision to pay for subcriptions annually or monthly can be influenced by additional factors like coupon codes. Using coupons can stack on top of the already offered discounts, doubling your savings.
The Economics Behind Coupons
The Skillshare example taught me a valuable lesson in always searching for coupon codes. This brings us to the question of how economists views coupon codes.
I remember back to my first quarter at UCLA where I was taking Econ 1. The professor was teaching us about the demand curve and what economists call, consumer surplus. The idea is that when a buyer purchases something for less than what he or she was willing to pay, the get some utility – consumer surplus. Likewise, if a vendor sells a product for more than what he would have willingly accepted, he gets producer surplus.
My professor, then, joked that coupons were ways that supermarkets identified the cheapskates. He then later explained that in a perfect world, the seller would sell to those willing to pay more at the price they were willing to pay while also selling to the cheapskates at a price they were willing to pay. In the end, there would be no consumer surplus because both groups would pay a price they were comfortable with, with the vendor maximizing his own utility.
The best way for vendors to do this is to offer discounts in the form of coupons. Yet, to use these coupons, the buyer needed to jump through some hoops to get the discounts. Those who were willing to pay more, wouldn’t bother jumping through those same hurdles to obtain the products at a lower price.
Are Your Subscriptions Sunk Costs or Flexible Choices?
A further economist’s view comes to the idea of sunk costs. Costs can be sunk in one of two ways:
- You paid for something and cannot get the money back. Since you cannot get any return on the money already spent, you must decide whether to keep spending money to see the project through to the end or cut off spending on the project regardless of how much money you had spent on the project.
- The other sunk costs are your fixed costs or overheads that you have to pay regardless of any business or productivity decisions you are faced with. You shouldn’t decide whether or not to hire some extra help for the holidays because you have to pay rent or utility costs.
Your subscription costs are sunk when they are necessary – like my Microsoft 365 example. I simply cannot operate my teaching business without it, so the cost is sunk – I have to have it no matter what.
In this case, I should take advantage of the yearly plan. In fact, if there was a longer 2 or 3-year option, I would be inclined to commit provided their “discount” or present value calculation made sense.
There are several subscription-based services that are probably worth the longer commitment. Such services include VPNs and web domain and hosting.
On the other hand, Entertainment services have a significant amount of options and alternatives. Nowadays, Netflix has competition from Prime, Disney +, and more. You have music streaming memberships and Audible.
You could find your budget and savings potential significantly taken up by all of these subscription services.
The moral here is to commit long term to the most necessary services while being judicious with your entertainment subscriptions – switching them on and off like a tap.
Here are some Actionable Steps to Make Smart Choices on your Subscription Plans
Like it or not, subscription services are here to stay, offering a mix of convenience and flexibility at a cost. The real question is how you approach these costs to get the best value. By understanding concepts like the time value of money, sunk costs, and the art of framing, you can make smarter choices about whether to choose monthly, yearly, or multi-year subscriptions—and when to make the switch.
Here are three key takeaways to guide your subscription strategy:
- Do the Math: Always calculate the true cost of a subscription over time, considering present value and opportunity cost.
- Time Your Switch: Leverage seasonal deals, like Black Friday, to lock in the best rates for necessary subscriptions.
- Prioritize Essentials: Commit to long-term plans for must-have services, while treating entertainment options with flexibility—cancel and reactivate as needed.
Finally, don’t forget to take advantage of coupon codes and third-party vendors. A little effort can result in significant savings, just like my Skillshare and Microsoft Office examples. After all, every dollar saved is a dollar earned—and a better way to enjoy the services you truly value.
Choosing the Right Subscription Duration
Not all subscriptions are created equal, and their term length should reflect how integral they are to your lifestyle or business. Here’s a quick guide to help you decide which subscription durations make the most sense:
Long-Term Subscriptions (2–3 Years)
Secure the services you know you will need for the foreseeable future and the ones that offer significant, true discounts for extended commitments. Examples include:
- VPNs like FastestVPN are essential for privacy and often discounted heavily for multi-year plans. In fact, FastestVPN offers a dirt cheap lifetime subscription that covers all the basics at $40.
- Web Hosting (e.g., Ultra Webhosting) is perfect for business owners, bloggers, and content creators who manage one or more websites. If you have a website, you are in it for the long haul and Ultra Webhosting offers 1-, 2-, and 3-year plans.
- Cloud Storage (e.g., Google Drive, Dropbox): If you have an email with Google or Microsoft, then you have some kind of cloud drive storage. If you don’t store that much on your drives, there’s no need to pay. Once, however, you cross the threshold to being over the free limit, there’s no looking back. You are going to need a long-term solution. Google Drive and Microsoft OneDrive have dueling offers that both make sense. Google Drive offers 2 TB of storage along with their suite of web browser applications whereas Microsoft 365 gives you 1TB of storage along with Microsoft Office 365. For business owners, you might consider Google Workspace Business Standard as it integrates your domain email via the gmail app. I’ve set this up myself and it has made using my domain email efficient while the recording option on my Meet meetings was a deal-maker.
- Productivity Software (e.g., Microsoft Office 365): Critical for most individuals and businesses, offering cost savings with multi-year options.
Medium-Term Subscriptions (1 Year)
Buy the following subscription types for a year to get value. Annual plans often balance cost savings with flexibility. Examples include:
- Sports packages like NBA.com, NFL.com, or ESPN Player. As I live in Europe and watch a lot of football (soccer), it’s great to get a season-long package that combines live tv, sports, tv series, and movies.
- Educational platforms like Skillshare offer great value. You can foster your growth mindset and immerse yourself in their catalogue of classes. Grow your skills at a low cost.
- Gaming services like XBOX Game Pass and PlayStation Plus allow you to pit your skills against other people as opposed to single-player against the AI. If you’re into gaming, why fiddle with the monthly option?
Short-Term Subscriptions (Month-to-Month)
This covers pretty much everything else. Entertainment and streaming have evolved and there’s so much good streaming out there besides Netflix. You will want to hop from one provider to the next as your favorite shows come available. Binge watch every Star Wars series on Disney +, then hop onto Netflix for Vikings and The Last Kingdom.
Audible is another favorite of mine, but I now have more audiobooks that I can ever hope to listen to. Quit them for a while to make them appreciate you enough to offer you a 3-month for $0.99 deal just like when you first signed up. By being on the monthly subscription, you can take advantage of seasonal deals and save more money.
Conclusion: Be a Strategic Subscriber
To wrap up, we have moved into a world where are lives are ever more dominated by subscriptions for services. These services span every facet of our lives. By understanding whether to pay for subcriptions annually or monthly, you can make smarter financial choices.
Well, that does it for this post. Before you sign off, I would love to hear what you think. Why don’t you comment below which subscriptions you find worth the money? What are the best deals you’ve found on a subscription? Can you beat my Skillshare example?
