Loyalty points, reward programs and credit cards revisited!

As a result of my last blog, I received some questions about loyalty programs and points and their true costs – including some from my nephew Derek.

Points, miles or whatever, they all have a value – so somewhere money is changing hands – and the only source is consumers – all of us – whether or not we collect points/miles or ?? we are paying something towards the prizes or awards that are claimed. In order not to offend any vendor or card company, I will use the name MERCHANT for the store/business/retailer/restaurant, POINTSPLUS as the name of the program and C-CARD for the credit card that may be used.

MERCHANT hopes to increase repeat purchasing in their business. They decide to have a business relationship with POINTSPLUS. POINTSPLUS says happy to have you on board, here are the costs. For your customers to get 100 points, you have to generate enough revenue to send to POINTSPLUS a total of $1000 plus a handling fee of 20% – so 100 points to the customer means it will cost you $1200.00. PP will do all administration, redemption etc. So now MERCHANT has to figure out how many points to allocate for each $1.00 spent in their business. If MERCHANT decides to add 2% to all prices, then 2% divided by $1200 means MERCHANT will need to add approximately 1.6 cents – call it 2 cents to every item sold and for every $60000 in gross revenue, MERCHANT will have collected $1200 in extra revenue. Doesn’t sound like much but they charge this extra cost to every customer – whether or not they collect POINTSPLUS – everyone pays it on every item.

Now for C-CARD costs. C-CARD has 3 kinds of cards – Bronze, Silver and Gold. Bronze is just a simple charge card – nothing extra included. Silver allows cardholders to collect flyer miles at the rate of 100 miles for each $1200 spent and Gold gives cardholders flyer miles plus automatic rental car insurance and lost luggage insurance. C-CARD charges MERCHANT a percentage of sales charged at 3 different rates depending on which version of card a customer uses. Bronze cards result in a charge of 1.5% to MERCHANT, Silver cards are 3.7% and Gold card use results in a charge of 4.7%.

MERCHANT knows they are not allowed to charge users of the different cards a different price, and the C-CARD user agreement doesn’t allow MERCHANT to give customers a discount if they pay cash, so MERCHANT has to add another 4.7% – to cover their maximum cost – to EVERY item they sell!!

So the POINTSPLUS loyalty program adds 2 cents to everything and C-CARD adds 4.7% then the merchant needs to add at least another 1% to cover their additional costs of trying to adminsiter all of this internally on their books – so now it is 2 cents plus 5.7% – to ALL customers whether or not the use any credit card at all or they belong to POINTSPLUS. Remember in-house programs and charge cards (usually from department stores) work exactly the same way!!

Hope this clarifies things and remember, There Ain’t No Such Thing As A Free Lunch!! Cheers

Ian Whiting

Ian R. Whiting CD, CFP, CLU, CH.F.C., FLMI (FS), ACS, AIAA, AALU With more than 40-years of experience in the industry, Ian has qualified 3 times for MDRT, completed LUATC in 1979, the LUAC Financial Planning Skills Course and attended numerous Schools in Agency Management and Sales Management through LIMRA. He obtained his CLU in 1987 while also completed his IFIC qualification and completed his Fellowship in the Life Management Institute with a specialty in Financial Services in 1988. In 1989, he completed qualifications for his Chartered Financial Consultant designation. In 1992, he qualified as an Associate of the Academy of Life Underwriters (Head Office underwriter qualification) and in 1993 he completed his Associate, Customer Service designation program through LOMA. In 1997, he qualified as a CFP and also completed his courses and exams to obtain the Associate, Insurance Agency Administration designation. In 1999, he completed the study and examinations to qualify as a Trading Officer, Partner and Director for Mutual Funds with the BC Securities Commission. As a result, he is also qualified as both a Branch Compliance Manager and Head Office/Provincial Compliance Officer. He served for nearly 18 years with the Canadian Forces (Air) Reserve (reaching the rank of Captain) primarily working with Air Cadets and was award the Canadian Forces Decoration (CD) in 1982. Long known as a maverick and forward thinker in the financial services world, Ian enjoys the challenge of learning new material and planning for the future evolution of his chosen profession.