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Tuesday, June 19, 2007

The Meaning of "Reward"

I have bought a number of things from Best Buy and signed up for their "Reward Zone" program when I bought my first item, which happened to be an expensive TV set. They send you your Reward Zone card, which, of course, just adds to the other crap one has to carry around. Best Buy pushes the word "reward" whenever possible, even having a special web site called MyRewardZone.com. Notice the "My." The "My" is you.

The way it works is that if you spend X amount of money you get Y amount of reward zone points. When you get 250 such points, they mail you a $5 off coupon. This means that they are, in essence deciding for you when your points will be converted into a certificate. You can't accumulate them over several years and end up with large enough coupon to buy some big ticket item. There are other businesses that would allow you to do that. Frequent flier miles work that way. I was told that a $3,000 TV purchase would earn one a $50 dollar gift certificate. This tells us that we are getting a whopping 1.67% return on our "investments" in Best Buy products. Color me "unimpressed."

There is, of course, an expiration date on these gift certificates. This means that they decide when to spend your Reward Zone points and then they tall you when you have to redeem the coupon. If you happen not to want to buy anything right then -- who needs $5 off on a $2,000 TV set? -- your coupon will expire and those points you had accumulated will have vanished into the ether. It is clear that Best Buy is the only one getting a reward -- if the coupon expires they lose nothing and if you spend it on something you don't really need, they will make some money. We have here a SpendMoneyatBestBuyZone program.

This is a bit different from a rewards program run by several grocery chains in our area. According to the one we use, one gets a one time ten or twenty cents off per gallon for every $50 dollars or so we spend in the store in a given month. The amount off will continue to grow over the month until you decide to buy gasoline. So, you are making the decision when to spend your "cents per gallon off" benefit. There are two differences between the "rewards" that our grocery chain is offering from that offered by Best Buy. The first is that we actually need to buy both food (what gets you the reward) and gasoline (where the reward comes in) each month whereas we do not need to buy MP3 players or HDTV's or movie DVDs or any other electronic product each month. This is a huge difference in the nature of these rewards systems.

This brings me to another major misuse of language we ran into when buying a car recently. (Yes, we are doing our best to stimulate the economy.) We were offered the opportunity to purchase an extended warranty. I gather that people financing cars with banks and see thei cost of an extended warranty in monthly terms and may not find adding another $20 or so dollars per month onto the payment (paying interest on the retail cost of the extended warranty, of course). We used a combination of cash and our line of credit to get our car and thus, from the perspective of the car dealer, we were buying the car with "cash." Apparently people like us tend to balk at paying some $500 more for an extended warranty. We were also offered the opportunity to pay big bucks for a program whereby some company or the police (I wasn't listening too closely to this since I knew I would turn it down) can determine exactly where your car is when it is stolen and the police can go pick it up and maybe arrest the chop shop people or the thief "red handed." When we said, "No," the salesman reminded us how much we were spending and wondered why we wouldn't want to "protect our investment."

This is a curious use of "investment." I would not call anything that is guaranteed to depreciate 5 or 10 or 20% the moment one purchases it and which will ultimately become worthless an "investment." An extended warranty is purely and simply an insurance policy but, for some reason, the salesman didn't chose to use that word. We have some actual investments, namely money we have put in mutual funds. However, there is no way whatever that one can protect an investment like that other than by securing the services of a good adviser who has a plan that emphasizes preserving capitol in down times at least as much as increasing it during good times.

Extended warranties are insurance programs for us but licenses for printing money for those who sell them to us. I no longer ever buy extended warranties for I realized one day that they represent a special case of gambling. I just bought the computer I am writing this blog on. The salesman said that I got a one year warranty but could pay $120 more dollars to extend the warranty by two years. I pointed out that the retailer was betting that my product would not fail for at least three years. I, on the other hand, would be betting that my product would fail in its second or third year. Think about that a minute. That's a crazy bet, especially in the case of electronic goods. In my experience, if a TV or MP3 player or computer is going to fail, it is most likely going to fail fairly early in its life. If it survives for a year, the odds are very good it will survive for a number of additional years. We still have a TV set that I bought some 15 years ago that is still working. One we bought around 10 years ago is still working. It is a replacement for one that failed early on during the initial warranty period.

When you buy an extended warranty you are betting against the house. The manufacturer knows how long his products last on average and gears its extended warranty plan to terminate during the useful life of the product. They are betting you that their product will not fail during the extended warranty period. In the case of my computer, I would have been betting that the computer would fail, not in the first year, but in the second or third year. That's a crazy bet to make. It is much smarter to bet with the house. The house always wins. Well, almost always.

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2 Comments:

Blogger Courtney said...

Actually, you can specify what increment you would like for your Reward Zone, by logging into the site you mentioned. I believe it only goes up to $20, however. It's not a perfect solution, but it helps.

Also, it maybe be a very small ROI percentage, but it's better than zero, no? I agree the expiration dates are a bit too restrictive, but overall I like the system. I enjoy shopping at Best Buy anyway, and with this plan I essentially get free money every once in a while. I don't see how that can be a bad thing.

3:47 PM

 
Blogger Ben said...

Yeah, you guys do know you can change your preference so that certificates are not issued until you decide, right?

8:48 PM

 

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