When I said yesterday that I subscribe to lot of magazines, there was a thought that crossed my mind. How do these magazines make a profit after giving such deep discounts when you subscribe them? You must have seen them right? A copy which costs Rs.100 on the stands, you can subscribe to it for Rs.1080 for a year – or Rs.90 per copy. Subscribing to 3 or 5 years, further reduces the price. How are they able to give such discounts?
To understand that, you would need to understand the time value of money. If I asked you “Do you want Rs.1000 today or Rs. 1000 a year from now?” What would your answer be? “Gimme the money today” right? Why? Because the money you get today is more valuable than the same money you will get in the future. Assuming a bank gives me 10% interest, you can take my money, put it in the bank and get back Rs.1100 in a year.
Now after understanding that, if the question was “Do you want Rs.1000 today or Rs.1100 a year from now?” Even if you invested in a bank you will get back Rs.1100 after a year. So there is no difference in getting the money today or a year from now – at least mathematically speaking.
But humans are not rational beings. Whenever I ask this question to my friends, I always get the answer “Better get it now. I am not sure what would happen in the future. What if you don’t give it to me?” The reason is: Certainty. What did we learn when we were kids? “A bird in hand is better than two in the bush”.
That is exactly what the magazine company also does. They give a reduced price for the same magazine, but your money is now in their bank. They can invest it or use it later and they are certain that you are locked into the subscription for the year. If you calculate the discount it would mostly match what a bank gives or even less than that. This same calculation holds true for the longer terms like 3 or 5 years. They may advertise it as 15% or 30%, but if you calculate the annual rate of interest it would be almost same as what you get in a bank.
So it doesn’t matter if you buy it every month from the stands or subscribe to it and get it for a year, you are not losing much. I would suggest subscribing – for the comfort of getting it delivered directly to your house.
So if you find a magazine that is not giving you any discounts for subscription, should you not subscribe? I would say “It depends, but I would subscribe even in that case.” If you look at it strictly on a mathematical sense, you are making a loss, but look at it from the comfort point of view. Not having to remember to walk down to the nearest newsstands every month, hoping they carry that magazine and instead if the company delivers it right down on my doorstep – I would pay for such a comfort. That is a fee that I am ready to pay.