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CASHBACK SCHEMES

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DON'T BOTHER WITH THIS

A cashback scheme is occasionally not a scam, but is mostly a gross waste of time. This is how it works.

An article has a recommended retail price (RRP). Generally this is the maximum that a shopper will ever pay for it. The main cost components are:

  1. The wholesale price
  2. The GST
  3. The retailer's profit

These three components add up to the total maximum cost of the article. The wholesale price is already determined before the transaction, therefore does not figure in any negotiation as to the final price. The GST is a percentage fixed by government at 10% of the wholesale price plus retailer's profit and also does not significantly figure in any negotiation as to the final price.

Therefore the ONLY component that is able to be manipulated to determine a discount on the purchased article is the retailer's profit. Any scheme that promotes a bonus or a cashback system to purchasers MUST essentially draw these funds from the retailer's profit component of the transaction.

The usual arrangement in a cashback type scheme is that it operates essentially as a pyramid plan. These are the entities involved in a very simple scheme.

  1. The company running the scheme
  2. The intermediary or introducer
  3. The shopper

Ignoring the GST component for clarity, because it has negligible effect on any discount, here is an analysis of a typical cashback type transaction of an article priced at $1000 RRP.

Assuming that the fixed and non-negotiable wholesale price to the retailer is $600 and that the retailer wishes to retain $300 as profit, this means that the retailer has $100 with which to negotiate and any discounts or cashbacks that can be made can only come out of that $300. In other words, the retailer can offer a 10% discount to a shopper on that article.

Assuming that the retailer has an arrangement with the cashback company to pay a rebate of 10% of the article's RRP, being $100 and the cashback company retains half of that sum, being $50, what is left is $50 to be used as the rebate to the shopper and a percentage to the introducer. Assuming that the introducer receives 50% of the rebate, being $25, the shopper receives the remaining $25 as the rebate. In essence, the shopper receives a 2.5% discount on the $1000 article and pays $975 for it.

Analysing the transaction of the $1000 article, these are amounts that each entity earns:

  1. The wholesaler - $600
  2. The retailer - $300
  3. The cashback company - $50
  4. The introducer - $25
  5. The shopper - $25

The great fallacy with such schemes is that they advertise that they pay people to shop. For instance, one particular company, Cashback Systems, which, not unexpectedly seems to have gone out of business, stated on their website - "Welcome to CashBack, the programme that pays you CASH to shop". This is simply not true.

What they are actually doing is using YOUR MONEY to REFUND you a small proportion of it by steering you to retailers that give them and their introducers kickbacks - AT THE EXPENSE OF FAR BETTER DISCOUNTS THAT YOU COULD NEGOTIATE BY YOURSELF.

For instance, in the above analysis, the cashback company and the introducer earn $75 out of the $100 available.

However, if a shopper merely walked into that retailer and asked for a 10% discount on the article, there is no reason that the retailer would not agree to this, as there is $100 available as a negotiating buffer that the retailer does not have to remit to the cashback company.

Therefore, the shopper that is NOT involved in a cashback scheme can save $100 off the RRP of that article, simply because the shopper has cut out the cashback scheme and the introducer out of the transaction completely.

The things to remember are:

  1. Retailers that are involved in cashback schemes CANNOT offer the same discounts or may even not offer any discounts at all on the RRP of an article because they have to remit a percentage to the cashback company.

  2. Any funds going to third parties such as cashback schemes are ALWAYS at the expense of shoppers.

  3. The secret to successful discount shopping is to cut all the middlemen out and negotiate the best deals directly with the seller.

There is one exception. In the instance of purchasing cars, brokers can negotiate better deals than purchasers who walk into car showrooms to buy new cars. The reason for this is that the complex way that car dealers sell cars allow large purchasers such as fleet managers to negotiate massive discounts on bulk purchases of fleet cars. Brokers take advantage of this by either buying enough cars per month from dealers to be able to obtain hugely discounted fleet prices or they simply tack their individual orders onto established fleet purchasers with whom they have an arrangement to do so. So car buyers can actually save a lot of money by employing car brokers to purchase their cars for them.

The retail shopping environment does not operate like this. Simply put, nothing beats shoppers haggling directly with retailers. There are no middlemen to pay and shoppers can achieve far bigger discounts than if cashback type schemes are involved.

The other problem with cashback type schemes is that under their terms and conditions, they literally make participating shoppers absolve them from any liability whatsoever. Unless the law in the place where the agreement took place overrides any of the terms and conditions, participating shoppers have little or no recourse to compensation or damages if the cashback company defaults or causes problems.

CONCLUSION

Except for a number of reward points schemes, such as those that banks and credit cards operate, cashback schemes are usually a complete waste of time and should be avoided. The best way to get a discount on purchases is to just shop around and don't be scared to haggle and don't be scared to walk out if the store does not meet your expectations.