The PC Optimum Program’s deck is stacked, and not in your favour. If you’re destined to lose, is there any point in still playing? Part of the problem is trying to pin an accurate value on what the PC Points are worth. It’s more complicated than just stating “X point are worth Y dollars”. That may be true, but in the larger scheme their real value is ultimately affected by how much it costed you to get those points. How much did it cost you by the way? What’s that? You don’t know? Hmmm…
Rewards programs can be problematic like that. They give you so many points for so many dollars spent, then provide you with what appears to be an arbitrary value for those points.
Where the PC Optimum Program succeeded so successfully in this (and I’m looking at YOU, Shoppers Drug Mart!) is where others have failed. They have created a perceived, inflated value of what appears to be a transparent rewards system. It lets you easily exchange your points for “free” goods. Simple, right?
Well, most things in life are not free. So the question then becomes, “What is the hidden cost of free?”
We’re going to find out!!!
Note: I’ll be focusing on Shoppers Drug Mart (SDM) for the rest of the article as they provide the best bonus events of any store in the PC Optimum Program.
PC Optimum… Tell Me Your Value!!!
Here’s the tricky part. The PC Optimum website doesn’t actually provide a real “value” for their points other than this verbatim statement on their front page, “Every 10,000 points is like $10 worth of free stuff. Redeem your PC Optimum points at special events to get even more value.”
If you don’t see the catch in that statement, I’ll tell you; “is like $10 worth of free stuff” is a lot different than saying “is $10 worth of free stuff”.
You also don’t know what the actual value of those points are without knowing how much you initially spent to obtain those points. And therein lies the rub.
The Better Deal
Which of the following options would you choose:
a) getting $5 off of a purchase
OR
b) getting $50 off purchase
Most, if not all of you, would choose “b”. That seems like the obvious correct answer, right? But what if I told you that “a” is for a purchase of $20, and “b” is for a purchase of $1000? What’s the better deal now?
Answer “a” would be correct. “A” gives you 25% off, which provides a much higher return value than option “b” at 5% off. So, without knowing how much you’re spending on something, trying to derive any real value from a discount becomes inconsequential and misleading.
Conventional Wisdom on Value… And Why It’s Wrong!
There are plenty of in depth and glowing reviews of the PC Optimum program online, with lots of details on all the bonus events and more. Most of it I agree with. However, one major aspect which all these reviewers get wrong is how they calculate what the points are worth.
You’ll see various descriptors like: “rate of return”, “cashback”, “X% in rewards”, or “X$ Free Stuff”. No matter the term, the same method of calculation is always used and it ends up providing an inflated and distorted value of what you’re actually getting.
Why is this issue so important? Because as a customer, the whole point of why you’d want to use this program is to get more value for your money. And if you don’t know what value you’re actually getting in the first place, how would you know if you’re being ripped off?
These reviewers always include the 20x points event for their examples as they provide the most bang for your buck at 300 points per dollar spent instead of 15 points. The following method is how they’ve been calculating the PC points’ value:
–The monetary value of the points you can redeem is divided by the amount you spent to accumulate those points.–
I.e.: You spend $100 on goods, and receive 30,000 pts. (aka $30 “free” goods)
Therefore: $30/$100 = 30% “rate of return” or “rewards”
Sounds pretty good right? 30% return…30% rewards….30% cash back….etc…
Except it’s not. It’s one big fallacy.
Calculating Errors
There are a few major things wrong with the method of calculation that these reviewers are using:
1) It’s done with pre-tax dollars. Tell me, when is tax NOT considered important? If the CRA thinks taxes are important, then they very well must be! Applicable taxes need to be included both on the $100 that you spent, and the $30 that you redeemed. At full 13% HST (Ontario) levels, this is $13 and $3.90 respectively.
2) The term “Rate of Return” is used inappropriately to describe PC Optimum value. It is actually an investing definition that is reserved for investments or assets that produce repeated returns; however, groceries are not assets. They are consumable and degradable (aka value losing) items. Like your car, they constantly depreciate in value. “Rewards” is a much more appropriate term for something valuable (points) that you receive based on one-time transactions.
3) Dividing 30 by 100 is not an accurate way to determine the value of the $30 of “free” goods you received. You didn’t spend $100 and get $30 of free stuff. What you ACTUALLY did was get $130 worth of goods, but only paid $100 for them. So really, you should be dividing the points you redeemed by the value of your total goods. This might seem like semantics, but the end result is a lot different. 30/100 = 30%. However, 30/130 = 23%. That’s a 7 percentage point decrease in your “rate of return”.
4) The bonus redemption events (where redeemed points can be worth much more) are not taken into account.
Cash Back vs Points
I want to focus a point 3 from above for a minute. Why change the way that the points’ values are calculated? Well, there are two types of reward programs out there: “Cash Back” programs and “Points” programs. PC Optimum belongs to the latter, along with Air Miles, Aero Plan Miles, etc.
While they might seem similar, Cash Back programs provide a much more accurate way to gauge value, as they let you apply all that bonus cash value directly back onto your purchase through credit refunds or cash in hand. You also get cash back on what you pay in taxes too. This allows you to clearly see the actual value you’re getting.
Whereas Points programs only give points on pre tax purchases and require you to purchase additional goods to use your points. This creates a convoluted system in attempting to determine their value.
As the PC Points Program is by definition a “points” system, the term “cash back” cannot be initially used to describe it. So, to better and more accurately determine the value of the PC Optimum program, we’ll need to convert it to a “cash back” style system.
The Conversion
The following example illustrates the difference between $100 purchases for “cash back” and “points” programs, and how to convert the latter to the former.
Generic Cash Back Program via a Credit Card with 10% cash back rewards.
Spend $100 + tax ($13), get $11.30 cash back on the entire $113, which means you technically only spent $101.70. Therefore, $11.30/$113 = 10% (actual cash back).
Generic Points Program that gives you 10% of your purchase in points.
Spend $100 + tax ($13), get $10 in points on your $100 to spend on a future purchase. Tax on that future $10 purchase is $1.30. To convert to cash back style, divide the $10 in points by your TOTAL purchase amount. Therefore $10/$124.30 = 8% (actual cash back)
As you can see, getting 10% of your purchase in points provides a notably lower value than getting getting 10% cash back directly.
Creating a New Definition…aka Won’t the Real Cash Back Please Stand Up
The old calculation method used by reviewers referenced less accurate, defining terms like “Rate of Return”, “Rewards”, “Cash Back”. The new and more accurate method of calculation deserves a new term to describe value. Hence, we’re going to call this the “real cash back”. And to calculate the “real cash back”, always divide your total points redeemed, by the total value of goods you received. And don’t forget the taxes!
The New Vanilla Baseline and Its Cost
So what does “real cash back” look like for PC points at Shoppers Drug Mart? We’ll break it down into two shopping trip examples of purchased items: Essential goods and Non-Essential goods.
Essential goods are things that are classified as consumable products considered basic groceries (ie: bread, fruit, vegies, etc.). These are not taxed.
Non-essential goods include non-basic grocery items like snack food, and things like electronics, books, etc. These are taxed between 5% and 13%. We’ll use 13% for our example.
Also we’ll use $100 as a nice round number to begin with. And we’ll use 20x the points event as our other baseline due to the fact it’s so common, and if you aren’t shopping on any bonus events, the PC program gets massively devalued and becomes like any other rewards program. For these baseline examples, points will be redeemed at their normal redemption value. We’ll explore how bonus redemption events affect value later on.
Example 1:
Spend $100 of essential goods (aka, non-taxed)
20x points = 30,000 pts = $30.00
Total Spent: $100
Total Points Redeemed: $30
Total Value of all goods: $130
Total Redeemed / Total Value of Goods = $30/$130 = 23%
Therefore: $130.00 of total goods gotten for $100 = 23% real cash back
Example 2:
Spend $100 of non-essential goods (aka, taxed at HST levels)
Tax (HST) on $100 = $13
20x points on $100 = 30,000 pts = $30.00
Tax on $30 redeemed = $3.90
Total Spent with all Taxes: 116.90
Total Redeemed: $30
Total Value of all Goods: 146.90
Total Redeemed / Total Value of Goods = $30/$146.90 = 20.4%
Therefore: $146.90 of total goods gotten for $116.90 = 20.4% real cash back
Note: SDM doesn’t let you use your points to pay for taxes but will still charge you tax on your “free stuff”. That’s why tax is included on the redeemed points.
The Truth
So, we’ve been able to establish an accurate baseline for how much PC Points are actually worth. By converting the program from a “points” style to a “cash back” style system, we’ve been able to add some clarity to the program’s design.
But the end result is not the rosy 30% “return”, “cash-back”, or “reward”, that previous reviewers have stated. In reality, when you use the PC Optimum program during 20x points events and redeem your points at face value, you’re only really getting 23% and 20.4% real cash back for essential and non-essential goods, respectively.
The “return” has dropped by almost 30% from what everyone had previous defined it as. If you owned $60,000 worth of stocks in the stock market, and just realized that they lost nearly a third of their value in a downturn, you’d be like ‘Hold the Phone!!!!…. #$)!* *# $0 )!@#( “
To make matters worse, in order to get $30 of “free stuff”, it costs you at least $100 of overhead, with up to $13.00 tax, AND another$4.00 in taxes on the “free stuff” itself! That’s 13% of your redeemed points in taxes! Why in the hell are you getting taxed on something that’s supposed to be free!?!?
So, you’re $30 of “free stuff” actually costed you $117.00. And we haven’t even begun to explore how value is affected if what you’re about to buy with your points suddenly has a large price hike; or if what you’re buying to accumulate those points was already overpriced in the first place.
Nothing is free. There is always a cost.
But can that cost be minimized? Stay tuned for Part 3.
