Wednesday, December 23, 2015

Calculating Loyalty Points

This will be a short post but I hope helpful.

There are many forms of currency that we earn when we make purchases including miles/credit card points, Portal points, cashback and loyalty points.  As readers know, these can add up to big products quickly.

Many are easy to figure out how to account for them.  If you get cashback, that's the simplest.  Some are more complicated like airline/hotel miles.  How do you value that?  Do you need to account for that?  You ask great questions.  Talk to your accountant ;)

Loyalty points though, I think are actually quite simple when you think about how they are earned and redeemed, but I think some people misaccount for them and my Tuesday posts don't help.

Let's take eBay Bucks as example.  How much are eBay Bucks worth?  The answer is nothing.  They are worth absolutely nothing, that is at least until you use them.

Here is an example:

Let's say you make a $1,000 purchase with 5x eBay Bucks and I earned $100 in eBay Bucks.  Then your eBay Bucks are ready to be used next month but you forgot to use them and they expire or eBay shuts down your account.  How much were they worth?  $0.  You didn't get any benefit from them all.

Here is an example if you were able to use the eBay Bucks.   Let's say you bought a $200 item for resale and you earned 50% profit ($100).  If you paid $100 of the price with eBay Bucks, you actually only paid $100 out of pocket.  I calculate that on this sale you earned $200 profit on a $100 purchase.  200% profit margin instead of 50% since your cost of good sold went down by $100.

The way I see it, you profit margin doesn't change when you are earn loyalty points, only when you redeem your loyalty points.  Is that how the IRS looks at it?  I don't know.  Ask your accountant.  This makes sense to me.

Anyone calculate differently?