With recurring expenses, I often advise people to start small and upgrade later if necessary. The rationale behind the advice is easy to illustrate with internet service.
Home internet is often priced based on the max speeds the service provider will deliver. Usually, max speeds are described as some number of megabits per second (Mbps). A cable company’s price structure might look something like this:
- 40 Mbps – $30 per month
- 150 Mbps – $45 per month
- 300 Mbps – $60 per month
- 600 Mbps – $75 per month
- 1,000 Mbps – $100 per month
The problem
Most people want internet that feels fast, but not many people have a clear sense of how many Mbps it takes for a connection to feel fast. People who are uncertain often end up choosing a speed that falls in the middle of the options available. If that speed is sufficient, they generally stick with it. If the speed turns out to be too slow, they upgrade. With this approach, people won’t get clear feedback if they purchase faster speeds than necessary. People often spend years paying extra for high speeds they don’t benefit from.
In my opinion, over-purchasing happens more often than necessary because service providers encourage it. For example, one of the Xfinity internet options available to me right now involves a max speed of 60 Mbps. Xfinity explains that the speed is “good for up to 5 devices at the same time.” This is silly. 60Mbps might only support 5 devices if they’re all streaming ultra-HD video at the same time. For more realistic situations, a 60 Mbps connection can support far more than 5 devices. Xfinity knows this, but Xfinity has an incentive to encourage customers to purchase more expensive service than necessary.
I expect Xfinity’s cost structure is effective for the company since it allows them to engage in a weak form of price discrimination. In most markets, different people are willing to pay different amounts for the same product or service. If business owners can find a way to charge more money to the people who are willing to pay more, their businesses will be more profitable. Something like this occurs with internet service. People with tight budgets tend to start with cheaper, slower options. People with more money tend to purchase higher speeds than they need and often overpay for service without recognizing it.
The solution
Overspending is often easy to avoid. When services allow easy upgrading without any extra fees (as is often the case with internet), I advise people to start with the cheapest option that they think might be adequate. If you start with a low-speed tier for internet services, there’s a good chance you’ll find it satisfactory. If not, you can upgrade to the next speed tier.
The same solution works in other industries. Not sure how many gigabytes of data you need on your cell phone plan? Start with a small amount. If you hit your monthly allotment, add more data.
Not sure whether cheap, prepaid service will perform as well as postpaid service? Try prepaid service for a month. If you like it, stick with it. If not, switch over to postpaid service.
Starting small is a good idea in situations where services with recurring bills are easy to upgrade. While companies often penalize people who downgrade services, upgrading services is often easier. Companies are generally happy to have their customers pay more each month. That said, starting small isn’t always a good idea. For example, an internet service provider may offer discounted, introductory rates that customers are ineligible for when upgrading.
