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The Financial Pitfalls of Subscription Model Services

Man checking subscription model services on phone

Quick! Name all the subscription-based services you are currently signed up for.

Netflix or Hulu? Amazon Prime? How about software or online storage services like Microsoft, Dropbox or Google Cloud? Are you paying an annual fee to access the New York Times or Consumer Reports? What about music streaming apps like Pandora or Spotify?

If you’re like many, there’s a good chance you need to check your bank and credit card accounts to name them all.

In the past five years, the number of consumers taking part in the “subscription economy” has boomed. In fact, according to a survey by McKinsey & Company, the e-commerce market has grown by more than 100% annually. What that means is consumers are moving away from a pay-per-product model (think a one-time purchase of CDs or DVDs, for example). Instead, they are drawn into a relationship with companies, one in which their credit cards are periodically charged automatically in exchange for the convenience and/or thrill of receiving ongoing products and services.

Today, in addition to movie and television shows, consumers can sign up for everything from a nearly infinite source of music, a monthly package of dog treats or razors , meal delivery and the latest in make-upfashion and fitness trends.

While in one sense, subscription-based services are hardly a new idea. After all, health clubs, newspaper and magazine delivery, cable and even our utilities are in some sense a subscription fee-for-use model. At the same time, the sheer number of items and services, and the automatic nature of payments, has brought new challenges to managing one’s personal finances.

Even if you’re a savvy consumer and careful to avoid the “subscription trap” (for example, unknowingly signing up for ongoing purchases), it can be hard to keep track of—and remember—everything you’ve signed on for.

As with most all purchases, the key to smart finances is knowing why you buy the things you do, keeping a clear understanding of your bills, and making mindful decisions along the way.

The pros of subscription-model services

There are lots of advantages to subscription services. For one, it’s convenient. Suddenly, the latest album and up-to-the-minute news is at your fingertips. Gone are the days of writing and sending checks every time your magazine subscription requires renewal. (Although, that time and money you may save in stamps and licking envelopes may be used up by keeping a close eye on your bank account history.)

The subscription economy also offers abundance. With Spotify, for example, you can access music from all around the world. With the nearly countless options of movies and television shows through Hulu, Netflix and Amazon Prime, you wouldn’t have to leave your house for days! You also can also borrow expensive items for special occasions (designer clothing and accessories, for example) without having to shell out the total price of owning and maintaining them.

What’s more, subscription services like streaming media are a minimalist’s dream come true. After all, who wants to store and organize all those CDs and DVDs (and books!) when they’re stored in the cloud and available at the click of a button?

Finally, according to the designers of the subscription-based model, the ongoing relationships with their consumers allow companies to adapt to individual and changing customer demands, making the consumer experiences more dynamic and responsive. With the information companies gather from your media selections, for example, you may then be exposed to music and shows you may not have discovered on your own. As a major engineer of subscription commerce, Zuora CEO Tien Tzue, put it, companies enjoy “an ongoing, dynamic relationship where the central unit is customer happiness.”

So what’s the problem with subscription-based delivery models?

Well, first, when you sign up for streaming media you don’t actually own…anything. That means, when your subscription to Netflix or Spotify ends, so does your virtual collection.

You also become subject to a company’s price increases. Products and services may start off as affordable, but if you don’t keep an eye on it, you may find yourself automatically contracted into a newer, higher rate (and, in some cases, may have to pay an early termination fee to opt out!) If you don’t own a software CD, for example, you are forced to pay whatever annual fee they charge. In the end, consumers may lose control over their own purchasing choices. For some, for example, living without Microsoft or Adobe software would make functioning in the world nearly impossible.

How to be subscription savvy

Managing your finances in our new subscription-based economy requires vigilance and discernment. The print may be small, but it’s imperative to read the terms of agreement and to keep an eye on your bank statements to monitor automatic withdrawals. Know the end-dates of your contracts. Sometimes you may have to manually opt-out.

Instead of continually hunting down your automatic withdraws, you might consider shifting all of your subscriptions to one pay source, such as PayPal, so you can find them all in one place and even set up alerts each time a payment is made. (Perhaps not surprisingly, there are a growing number of services that can help you manage, evaluate and cancel the subscriptions you no longer need.)

If reading about the potentially bottomless pit of subscription services is making your head spin, take a deep breath. As a first step, simply make a list of all the companies that make periodic automatic withdrawals from your accounts. Then, if they are annual or monthly subscriptions, write the fee next to the name. Commit to regularly looking through your digital devices and app stores to make sure you’re not still paying for apps you purchased during, say, a now-abandoned meditation or dieting phase. Subscription-models don’t have to overwhelm your finances. In the end, you simply want to have a clear picture so you can determine which subscriptions are truly vital to your work or pleasure and which are redundant or simply outdated.