Does a membership program actually save you money, and if so how much? This is a question I pondered in some past posts.
And I have an update. But first, let’s start with a calculation of how much a certain membership program saves. In this case, the yearly membership is $48.00, and the savings is $10.00 per month. At first glance, it sounds like your savings over a year is $72.00 ($120.00 of savings minus the $48.00 of membership required to get the savings).
However, this is true only if the membership store has prices the same as their competitors. Some months ago I was using my monthly credit to buy an item for a tube of toothpaste that was less than $10.00. Because I used my $10.00 credit, the cost of the toothpaste was only $4.00 (1/12 of the yearly $48.00 membership). However, the same toothpaste was available from another store for $6.24 Therefore, a better calculation is that I saved $2.24 ($6.24 minus $4.00) that month. This would mean a yearly savings of $26.88 ($2.24 times 12) per year, not the hypothetical $72.00 calculated above.
While it made sense to compare the prices of identical items between the two stores, it didn’t occur to me to compare prices of items that weren’t identical. How does that work? Well, what about different sizes of the same toothpaste? Let’s take a look at that.
At the membership store, the tube of toothpaste contains 3.4 ounces. Given that my cost is $4.00, the cost per ounce is $1.18.
Now let’s look at one of their competitors. This store sells a package of 4 tubes of the same toothpaste for $25.99. The total ounces is 26 (6.5 ounces per tube). And for this one, the cost per ounce is easy to calculate: $1.00 per ounce.
(And, no, the membership store doesn’t sell toothpaste in packages of 4 tubes, so that’s not an option to compare against the above competitor.)
So, if you are willing to buy and store 4 tubes of toothpaste at a time, you come out slightly ahead ($1.00 per ounce vs. $1.18 per ounce) by buying the 4 tubes from the other store.
The lesson for me is that the value a calculation depends on the assumptions that the calculation is based on. And while the math of the calculation may be straightforward, ferreting out the relevant information to feed into the calculation is more an art than a mathematical process.