Saturday, November 27, 2010

Kickback Schemes

Rewards Cards are becoming an increasingly annoying hassle to deal with.  You are better off shopping with a merchant that offers lower prices and fewer gimmicks.

Frequent Flyer Miles.  Customer Rewards Club.  Frequent Shopper Club.  Cash Back.  Bonus Reward Coupons.  S&H Greenstamps.  The list goes on and on.  Everyone, it seems, wants you to "sign up for savings!" by joining some customer loyalty "rewards" program.

There are many reasons merchants use these cards and schemes, and none of them work in your favor:

1.  Customer loyalty

2.  Selling Demographic Data

3.  Distracting the Consumer from the Basic Bargain

4.  Most Consumers Never Take Advantage of the Schemes

Let's take a look at each of these and understand why they work against you as a consumer.

1.  Customer Loyalty:  At first, this seems like a win-win for both the consumer and the retailer.  If you are loyal to one airline, they cut you a break in prices, and you end up getting a better deal than you would have, if you had to cross-shop airlines all the time.  But the problem is, the use of "frequent flyer miles" and other loyalty programs end up causing you to shop price less and thus avoid bargain-seeking, which is what a "loyalty" program hopes to accomplish.   So you buy an airline ticket for $250, because it is with "your" airline and they give you "miles".  But that means you forego a similar flight on a competing airline for $99.  Is loyalty such a good thing?

Similarly, if they can prevent you from shopping at a competing grocery store by offering you minimal benefits in a loyalty program, it will prevent you from comparing price and quality, but instead merely accepting prices at the store of your choice.

They throw pennies at you, hoping you will spend dollars in bad bargains.  Being "Loyal" to one supplier can be handy, but often if you become captive to that supplier, they will end up abusing you.  It is only when you have one foot out the door that they will offer you real bargains.

2.  Selling Demographic Data:  Many of these loyalty programs have a hidden agenda.  When you swipe that "loyalty card" it logs who you are, where you live, and what you bought.  Did you buy baby food?  They can infer you have children.  Did you buy dog food?  They can infer you have a pet.  Both bits of data are valuable and salable.

Is this such a bad thing?  That if you buy baby food, you will end up getting a subscription offer to Parenting magazine in the mail?  Perhaps not.  But it underscores that the retailer is no longer keeping their eye on the ball - the main deal being selling the products they are selling.  Instead, they now run a demographic sales office on the side.

WalMart and other low-cost chains eschew these tactics.  To them, the only demographic data of interest is what is selling in their stores.  In other words, they are only interested in sales data for their own use - not as a sideline data marketing service.  And since they don't have to manage and operate these sort of schemes, they keep their eye on the ball - retailing - and offer low prices to everyone on the same basis - loyalty or not.

3.  Distracting the Consumer from the Basic Bargain:   In any economic transaction, the more complicated you can make a deal, the easier it is to rip off the customer.  And one sure way to do this is to take a basic economic transaction and tie it in with some other, unrelated transaction.  So you open a savings account, and the bank gives you a toaster.  A toaster?  What gives?  The idea of getting something for "free" might distract you from the fact that the bank's interest rates are lower than the competitors.

Similarly, grocery stores offer pennies off on the price of gas if you buy a certain amount of groceries there.  So you dick around with saving receipts, swiping "loyalty cards" and spending hundreds of dollars in groceries at a store to get..... 50 cents off on 10 gallons of gas.  Big deal.

But that is the nature of these beasts.  Again, they throw pennies at us, hoping we spend dollars.  So you get caught up in getting "cash back" on a credit card, not realizing that one month's interest on the debt is more than the "cash back" from a year's worth of purchases.  Or you get the equivalent of a $99 plane ticket after spending tens of thousands of dollars on a "miles" credit card, with an interest rate of 20% or more.  If you miss even one payment, that $99 flight is very, very costly indeed.

If you can distract the consumer from the basic bargain by dangling out some unrelated bargain, chances are, they will not as carefully scrutinize the basic bargain[1].  One car dealer recently made headlines by offering a free automatic rifle with the purchase of a pickup truck.  Of course, the rifle is not "free" but folded into the cost of the truck.  But many people fall for this sort of thing, thinking they are getting something-for-nothing, and thus do not negotiate as sharply as they would, because they are distracted by the free item being dangled out of their reach, like a carrot or a distracting baby toy.

The overall cost of the truck with the "free" rifle ends up being more than if you bought the truck from a competing dealer and strongly negotiated the price, and then bought the same rifle at a gun shop after negotiating strongly on price.  By combining two disparate items, they hope to confuse you into making a bad bargain.

4.  Most Consumers Never Take Advantage of the Schemes:   Retailers count on the fact that most consumers will never take advantage of all the discounts rebates, coupons, cash back, or free flights they offer.  So they can offer these things knowing full well that half of them (or more) will never be redeemed.

I have a separate wallet just for loyalty cards.  I have three for pet stores, three for office supply stores, and maybe four for grocery chains.  One for an RV store, and two for boating stores, one for a gas station.  If you buy anything at these stores, you have to use these loyalty cards or be overcharged by a few cents to a few dollars, depending on the size of the purchase, or miss out on "bonus points" credited to you for each purchase.  It is an enormous hassle to remember to bring these cards and use them.  And in most cases, people forget.

Some, like Camper World, SELL the loyalty card (the "President's Club") and the cost of the card is such that unless you spend a few hundred dollars a year there, chances are, you are not recouping the cost of the card.[2]

People forget to bring their cards, so they fail to take advantage of sale prices or get credit toward their free 10 cents of gas.  Or the rules for redeeming "loyalty points" are so convoluted and obtuse that most folks never figure them out or bother to redeem them.

For example, with Discover, you can only redeem your "bonus cash" in increments of $50 or more.  And they don't exactly beat you over the head to tell you that you have bonus cash to redeem.  It is incumbent on you to go to the website and request the redemption - or redeem it as a gift card in conjunction with one of their "partnered" retailers.  Gift cards, of course, being an inducement to get you to shop at that store and buy more goods (in excess of the gift card amount).   Why not just automatically apply the cash back to your card balance?  Well that would be no fun - for the Discover people!

Or maybe you shop at a store so infrequently that you never accumulate enough points to get anything on their loyalty scheme.  I have a card for the Flying J gas station and I am not sure why I use it or what the benefits are.  I have never received a penny from it, as far as I can tell.

Or, with the airlines, the miles "expire" over time, so you end up never accumulating enough for that trip to Dubuque you've always dreamed of.   You fly a few trips a year and your miles expire as fast as you accumulate them.  You are loyal to an airline and you get nothing in return.[3]
And because of all this, perhaps half of all these frequent flyer miles, rewards points, cash-back deals, loyalty discounts, or whatever, are never redeemed.  The merchants can offer a bargain, and most folks will never receive it.  They can play like they are the guys in the white hats, but in most cases, the bargains are illusory.

* * *

So what, as a consumer, can you do?  Well, in most cases, belonging to loyalty clubs and the like is never a really good bargain.  In most cases, the most expensive merchants uses these clubs to ensnare consumers with higher-priced bargains.

For example, for many years, I was a member of the "Hertz #1 Club" which is a bit of an ego trip, as you get driven on the bus directly to your car, which has your name in bright lights listed above it, with the trunk open, no less.  You are a special person!  Of course, the rental rate is no real bargain.

When I ran my own business, I found that an off-airport generic car rental place could rent me a basic ride for less than 1/3 the price.  And since the money was coming out of my pocket (you can't deduct your way to wealth!) it made more sense to shop for the best bargain than to go with the "loyalty" program.

Similarly, discount airlines like Southwest offer flights for alarmingly low prices.  But different airlines offer different fares on different routes.  So it makes sense to shop airfares for each flight than to just pick the airline you are "loyal" to.  A friend of mine always flies Delta, because they are members of the frequent flier program.  So they pay $250 to take a flight that I would pay $99 for on US Airways, out of "loyalty" to a program.  That makes no financial sense.

In most cases, I try to shop with merchants that don't require or use these sorts of programs.  Tracking and monitoring a dozen "loyalty" programs makes little or no sense, in terms of time management.  And the "rewards" from these various programs are a mixed bag.  In most cases, the benefits are very, very small.

And yet, I see "smart" people regale me about how they belong to this or that loyalty program, and how they will get cash back or a free flight out of it.  They spend hours of their time monitoring these programs, and hundreds of their dollars in excess charges at the high-priced merchant.  But tell the same person they could save $250 by shopping their homeowners insurance, and they will say they have no time.

Free flights are sexy, cutting costs from your personal budget is not  Getting "cash back" on a credit card sounds like a bargain.  Cutting out $100 in the monthly cable bill does not.  So people find time to screw around with these penny bargains while walking away from dollar savings on the grounds that the latter is too difficult and/or too time consuming.

And in most cases, the "bargains" they get are de minimis.

For the Discover, card, for example, I've received $100 "cash back" on over $30,000 worth of credit card charges.  And since I carried a balance on more than one occasion, the "cash back" was more than offset by the interest charges.  I would have preferred a simpler card with a lower interest rate (which is what I have now) than to have a "gimmick" distracting me from the fact that a credit card is indeed a debt instrument.

Frequent Flyer programs are an example of always putting the carrot just out of reach.  It seems that every time I try to buy tickets on US Airways using frequent flyer miles, I am always a few thousand miles short (but I can "buy more miles" for only a hundred dollars or so) or that the flights are "blocked out".  In many cases, it turns out that my partner and I cannot fly on the same flight.  And because the miles "expire" over time, if you do not fly regularly (and use the miles regularly) there is little point in even playing the game.  You are better off just booking a cheap flight with a discount airline.  Upgrades to First Class were the only use I ever found for frequent flyer miles, and this was just an example of the airline selling something it was going to throw away anyway (an empty seat) in exchange for miles.

As for other "Loyalty" cards, I am not sure I have received anything of value at all, over time.  Walgreens promises a 10% discount - on store-branded items, but the discount is applied not to the purchase, but only to the next item you purchase, which makes no sense (but gets you to come back and buy more!).

Staples "Rewards" program is limited to paper and toner, and as I discovered, it is cheaper and less hassle to just order these things online anyway.  But that's the point of the program - to get you to stop shopping on price.

In most cases, the discounts offered are fairly trivial and not much better than what you would get shopping at a discount store.  WalMart doesn't have a "loyalty program" yet (and I hope they never will!) and it is one reason I like to shop there.  Everyone pays the same prices - there is no secret club or anything that gives you a special discount.  No cards to carry, no programs to monitor.

And it goes without saying that buying things online is a good way to save, and the best Internet merchants do not have these crackpot "loyalty" schemes that you have to screw around with.

Again, the more complicated you can make a simple financial transaction, the easier it is to deceive the consumer.  Loyalty programs, hidden discounts, coupons, frequent shopper cards, airline miles, cash back bonuses - all serve to distract the consumer from the basic bargain and also obscure what is the ultimate price for the goods.  Most people, when told they are getting a "discount" will go all ga-ga and fail to realize that the pennies extra they are paying on each item in the store negate the free toaster they get from the S&H Greenstamps.

Of course, as a consumer, you cannot walk away from money on the table.  If there is such a program at a store that you ordinarily would shop at anyway then it makes sense to participate.  But if your favorite merchant uses such schemes, perhaps that is a sure sign they are overcharging you.  Check out prices with competitors that do not uses these schemes, or check out prices online.  Remaining "loyal" to one merchant usually does not work out in your favor, but instead in theirs.

The retailer that presents a basic bargain - a good for sale at a marked, standard price - gets my business.  Cash back, loyalty card, frequent flier miles, whatever gimmick they come up with next - those will always be my second or tertiary choice.  If the choice is between a simple, understandable bargain, and a difficult, convoluted one, I pick the simple one every time, as it is usually the real bargain.

And real bargains are simple.  Complicated deals rarely work out in the consumer's favor.  That is why merchants make them complicated!


[1] The term "bargain" is used in Contract Law to define an agreement between two parties.   I pay you $5, you sell me your old hat.  We have a bargain.   To most "consumers" the term "bargain" implies some sort of discount or sale or freebie.   I am not using the term in that manner, anywhere in this blog, unless I describe something as a "good bargain" or "bad bargain."  A "bargain" by itself is value-neutral.

[2]  The Good Sam club owns Camping World, and if you are a Good Sam member, you are automatically a President's club member now.

[3]  When I stopped flying, my airline miles were slated to expire.  US Air sent me a letter saying they would keep my miles in effect, if I sent them about $100 or so.   The amount of miles I had were equal to one flight, which was about worth $100.  So I would have had to pay $100 for this "free" flight, that I supposedly "earned" with airline miles.  Having expiration dates on airline miles is the biggest scam around.  It means that the average traveler will likely never get a free trip to Hawaii in his lifetime.  It also means the "pudding guy" likely has lost all his miles by now....