Tuesday, June 9, 2009

Magazine subscription math

A couple of months ago, our subscription to Money magazine expired. You're either thinking:

(A) What economist would ever let his subscription to Money expire?
(B) What economist would ever subscribe to Money in the first place?

Of these two questions, (B) is the right question to ask. I suspect that the magazine is full of snake oil, but I wouldn't know because I never read a page of Money for the duration of our subscription. Nothing about the magazine interested me. In my defense, it was a zero marginal cost purchase. We bought the magazine using frequent flyer miles because they were about to expire. We had more miles than Delta had interesting magazines, but we did not have enough for an actual flight.

When our last Money magazine came, the cover was a bold green reminder that our subscription was expiring. In big, bright yellow letters, the back cover said DON'T LOSE MONEY MAGAZINE. The word magazine was on its own line, so at first glance, I read the statement as don't lose money.

As that statement caught my eye, I had to look at the advertisement more closely. I flipped to the front page, which said "You can save up to $113.64 off the cover price by renewing your subscription." Wow. This sounds like a great deal, right? Most people love to save $113.64. If only I liked the magazine...

Still, $113.64 is a lot to spend on a magazine. It puzzled me that someone could save that much on one subscription. I read further to find out how one could save that much money on... Money. Upon reading the fine print, I discovered that I could save $113.64 if only I bought the three year subscription. Ahh, there's the catch.

But wait, there's more. For an advertisement that touts the longest subscription as being the best savings, one would expect that you get a discount for signing on for the three-year subscription. Not so. The cover listed three options:

one-year subscription $10 (you save: $37.88)
two-year subscription $20 (you save: $75.76)
three-year subscription $30 (you save $113.64)

In other words, each additional year costs $10. Aside from not having to resubscribe for a while, there's no gain for agreeing to the three-year subscription. Yet, Money magazine wanted me to know that I can save $113.64 if only I sign up for a long enough period of time. Why would they expect me to believe that is the right cost calculation? If they really believe that showing bigger numbers gets people to subscribe for longer periods of time, why didn't they advertise "thirty-year subscription $300 (you save $1,136.40)"?

If you understand discounting, you know that there's a monetary cost (albiet a small one) to socking away $20 for an extra two years.

Consider an example to illustrate the point. Suppose you can put your money in a bank account that gets 2 percent interest annually. Suppose also that you want three years of Money magazine, and you have $30 to spend right now. What should you do? Buy three one-year subscriptions. To see why, follow a yearly subscriber through time. His name is Barry.

In year one, Barry buys a one-year subscription, putting his remaining $20 in the bank. After a year, Barry has $20.40 in the bank. When he get the subscription notice after the first year, he pays for the next one-year subscription, leaving $10.40 in the bank. After the second year, Barry's bank account will have $10.61. When Barry pays for his third one-year subscription, he has $0.61 remaining from his initial $30.

Barry wouldn't have had that change in his pocket if he had signed up for the three-year subscription. Now, that's change I can believe in. I'm sure Barry would agree.

What's the most ironic part about this ad? Money magazine ran it. If what is between the covers is as bad advice as the advertisements, avoid reading Money. From the sounds of it, they want your money.

1 comment:

  1. Of course you are assuming the 3 years for $30 offer stays the same.

    If your boy Barry experiences a price hike during those 3 years he's in worse shape than taking advantage of locking in his price early.


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