Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / How Your Brain Treats Monthly Subscriptions as a Fixed Cost
Transcript
- Lucas: Luna, let me ask you something. How many active subscriptions do you have right now? Luna: Oh, I'm almost afraid to count. Let's see... Netflix, Spotify, iCloud, my gym, a meditation app I swear I'll use, and Adobe Creative Cloud for work. So six, maybe seven. Lucas: That's about average. The typical American now carries between five and seven recurring subscriptions. And here's the thing — most people can name their streaming services, but ask them what they spend per month total, and they're off by forty to sixty percent. Luna: Guilty. I have no idea what the grand total is. I just see each one as like ten bucks, fifteen bucks, and it doesn't feel like much. Lucas: Exactly. That's the bias we're talking about today. Your brain treats monthly subscriptions not as variable discretionary spending, but as a fixed cost — almost like a utility bill. Rent is fixed, electricity is fixed, and pretty soon Netflix becomes fixed too. You stop evaluating whether you're getting value. Luna: So I've mentally moved Netflix into the same category as my water bill? That's a little troubling. Lucas: It is. And researchers at MIT and Stanford have studied this phenomenon — they call it 'subscription neglect.' In one study, they found that people who were given a subscription model for a service, even a free one, declined to switch to a cheaper per-use option because the subscription felt like a sunk cost they had already mentally allocated. Luna: Wait — they preferred to stay on the subscription even when the pay per use option was cheaper? That seems irrational. Lucas: Completely irrational, unless you understand that the subscription fee has already been mentally written off as a fixed cost. The brain says, 'I pay ten dollars a month for this no matter what, so I might as well use it.' Switching to pay per use would require rethinking every transaction, and that cognitive effort feels like a waste. Luna: So companies love this bias. Adobe moving to Creative Cloud subscriptions was a masterstroke for them. Lucas: Huge. Adobe's revenue more than doubled in the five years after they switched from selling boxed software to subscriptions in 2013. Because once you're paying fifteen dollars a month for Photoshop, you stop asking whether you really need it. It's just part of your monthly nut. Luna: And they got people to accept price increases way more easily. Adobe has raised the subscription price maybe three times since then, and I barely noticed. Lucas: Right. A single fifteen-dollar line item is easier to raise than a five-hundred-dollar boxed product. Your brain doesn't recalculate the annual cost — it just sees the new monthly number and shrugs. Luna: But Lucas, if I sign up for an annual plan at a discount, that should help, right? I'm paying less per month. Lucas: Counterintuitively, it might make the bias worse. With an annual plan, you pay a lump sum up front. That payment is even more invisible month to month — it's already gone, so your brain treats the service as free for the rest of the year. You actually use it more, not less, because there's no ongoing payment friction. Luna: So the annual plan might save me money per month, but it could also lock me into a service I don't use enough to justify the lump sum. Lucas: Precisely. One study from Stanford looked at gym memberships — which are basically a subscription. They found that people who signed up for an annual membership went to the gym about the same number of times as monthly members, but paid significantly more because they didn't cancel. Luna: And they thought they'd go more because of the sunk cost, but the sunk cost actually reduced their motivation after a few months. Lucas: Yeah. The lump-sum payment creates a feeling of 'I've already paid, so now I can relax.' And because there's no monthly reminder — no credit card charge — you lose the trigger to evaluate the service. It's out of sight, out of mind. Luna: Let me take a quick pause here. Lucas, I want to say something — it's actually because listeners like you support the show that we can dig into these topics ad-free. A handful of people chip in monthly through buy me a coffee dot com slash fexingo, and that literally funds making this many episodes. Lucas: It's true. We don't run ads, and that's only possible because of that direct support. So if walking through the economy with us has made something click, that's where you can help keep it going. Luna: Alright, back to subscriptions. So if lump-sum annual plans make the bias worse, what's the antidote? Lucas: The single most effective thing is to force yourself to see the annual cost. Take every monthly subscription and multiply by twelve. Then write that number down. When you see that Adobe Creative Cloud is actually eighteen hundred dollars a year, not fifteen a month, it changes how you think about it. Luna: Eighteen hundred? That's real money. That's a weekend trip. Lucas: Exactly. And if you do that for all your subscriptions, the total often shocks people. There was a 2024 survey by C+R Research that found the average American underestimates their subscription spending by about a hundred and thirty-three dollars a month. Luna: That's over fifteen hundred dollars a year of spending you don't even notice. Lucas: Right. So another trick is to put subscriptions on a separate credit card — one that you check actively. Or use an app that sends you a monthly total. The goal is to add friction, to break the fixed-cost illusion. Luna: I like the idea of an annual subscription audit. Just once a year, cancel everything and re-subscribe only to what you actually missed. Lucas: That's the nuclear option, but it works. Some people even use prepaid cards with a set balance for subscriptions — when the money runs out, the service dies. That forces you to make a conscious choice to reload. Luna: So the core insight is that subscriptions become invisible fixed costs, and the fix is to make them visible again. Lucas: Exactly. Your brain evolved to notice a hundred-dollar one-time payment, but it's terrible at noticing ten dollars a month. So companies design pricing to exploit that blind spot. The best defense is to aggregate and annualize — force yourself to see the real number. Luna: Next time you get that monthly charge for an app you haven't opened in three months, remember it's not a utility bill. It's discretionary. You can cut it. Lucas: And maybe ask yourself: if I had to pay for this service in one lump sum right now, would I still buy it? If the answer is no, cancel it. That's the mental switch. Luna: Good advice. Thanks Lucas. Lucas: Thanks Luna. See you next time.