Consumer’s Checkbook recently published a useful study of several U.S. membership programs, including what the break even point is for each of them. For example, one plan cost $5.00 per month. The plan benefit is that you get a $10.00 monthly credit. Therefore, their conclusion was that if you spend $5.00 each month, you recoup the cost of the plan, so therefore you break even.
This is largely true, but not exactly. The reason is that the calculation assumes that you would have bought the same item at the store with the membership program even if you weren’t a plan member. This assumption is especially weak if another store has the identical item for a lower cost. If items at the membership store have a higher price than you could have easily found elsewhere, $5.00 per month is not the break even point.
Here is an example: suppose item X costs $5.00 at your membership store, but another store has the same item for $3.00. When you check out at the membership store you don’t pay anything (because $5.00 of your $10.00 credit was applied against the $5.00 cost). However, you paid $5.00 for the membership. So, given just the above scenario, actually paid $5.00 for item X at the membership store versus $3.00 at the other store.
Note, though, with the above that you used only half of your $10.00 monthly credit. So let’s assume that instead of buying one at $5.00, you bought two for a total of $10.00. At checkout your cost is zero, since you have a $10.00 credit. Are you ahead, since the monthly membership cost $5.00 and you got a $10.00 credit? Let’s compare if you had bought the same thing at a competing store. You would have paid $6.00 for two of item X. The cost at your membership store was $5.00 (for the membership that gave you the $10.00 credit), vs. $6.00 at the non-membership store. Therefore, at this point you are $1.00 to the good with the membership program since you spent $5.00 there vs. $6.00 at the other store.
The above is a fictitious example, for illustrative purposes. What about a real life example? I noticed that the store in question sells two containers of dental floss in one package for a total of $10.29. A $10.00 credit would lower the price to $0.29.
An online vendor offers 3 of the same items in one package for $9.97, with no shipping cost. The items are exactly the same as at the membership store, except that 3 come in one package.
So, for the online vendor, we will prorate the cost of 2 to $6.65 so that we are comparing two items at the membership store to two items at the online store. Therefore, it looks like you would be ahead by $1.65 minus $0.29, or $1.36. Full calculation:
Membership store cost: $5.00 membership + $10.29 cost – $10.00 credit = $5.29
Online vendor cost: $6.65 (2/3 x $9.97)
Membership store savings = $1.36
There are other factors that are worth considering. For example, I haven’t calculated any sales tax, which might be applicable. Also, with the online vendor you can’t buy just 2 items, they come in a package of 3. If you only need 2, there are no savings for the third item.
How does this relate to hledger? Next week, I will show one way to use hledger to track how much, if anything, you would save using a membership plan. Note that I am not saying that it is worthwhile to track this; just that it’s a good way to explore how hledger works. Stay tuned!