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The “Monthly Bill” Model

For years, HS Dent has argued that most “discretionary” spending really isn’t all that discretionary.  The modern economy is organized around monthly payments, be they for the mortgage, the car, or even your son’s saxophone lessons.  These monthly commitments are not always easy to break, and breaking them can sometimes involve losing face.  It’s easy to forgo a restaurant meal and save money by eating at home.  But to actually take the proactive step of calling someone to cancel a membership or monthly plan…that can be hard.

At any rate, The Economist confirmed our points in a recent article: “The Triumph of the Monthly Bill”

No doubt reflecting what most readers have witnessed in their own lives, The Economist writes that throughout this recession,

As a rule, media products that are sold in shops—CDs, DVDs and magazines—have suffered… The kind of media for which people pay a monthly bill, in contrast, has not only held up better but has in some instances prospered through the downturn… “People would sooner unplug their refrigerators than their cable boxes,” says Craig Moffett, an analyst at Sanford Bernstein.

While the payment model has been durable in past recessions, we’re not so sure it will do as well this time.  Demographics are working against the model in two directions.  Baby Boomers, who would have never dreamed of cutting services in the past, are now downsizing their lives as they prepare for retirement.  And when you downsize, unused services tend to get cut.  (Changing addresses can often be the impetus that motivates you to make cuts.  For example, you may neglect to hook up a phone at your new home and opt instead to go “cell phone only” as we discussed in a prior post).

The other demographic challenge is that the large young and up-and-coming generation — the Echo Boomers — has become accustomed to getting things for free.  A newspaper home delivery subscription is simply unthinkable to them.  And some of the more tech savvy of the lot watch their favorite TV shows via Hulu or other internet sites, making cable TV redundant.  Even the internet bill itself is elusive to them:  a free Wifi signal is usually not far away, so why pay?

In “Talk is Cheap; Skype is Cheaper” we discuss yet another way to reduce the monthly payment.  Using Skype, iPhone users can route their voice calls through their data plans, thus allowing them to reduce their voice plan to the lowest possible level.

The key here is that, while the subscription model is not dead, it is far less robust than it used to be.  Changing demographics should continue to erode the model around the edges; the retention rate will not be as high as in years past, and it will be harder to attract new subscribers.  It’s not quite “dooms day,” but it certainly means that marketers will have to work harder to generate sales, and profit margins will almost certainly be lower.

Incidentally, an old associate of ours has created a blog dedicated to using the internet to streamline your life and reduce clutter.  In a lot of ways, his blog sums up succinctly many of the points we’re trying to make (check it out: “Electronically Obsessed”).  In a recent post, he profiled an Echo Boomer who had taken this neo-Spartan lifestyle to a new level, reducing his entire life “down to one suitcase and a single Blu-ray disk” (See post: “Moving to the Cloud.”)

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy