Cashbacks not always a good deal

Getting a partial refund for big ticket items may sound great, but not everyone is smiling.
 
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01 .Cashback schemes

bin and cashback brochures

Retail and manufacturing marketing execs are certainly onto a winner with cashback schemes, but consumer benefit is not as guaranteed. By arming yourself with the knowledge to make cashback work for you, you may avoid some of the problems our readers have experienced.

In this report you will find:

In brief

  • Retailers and manufacturers love cashback as it increases their sales and profits.
  • It can work for consumers too – if you jump through hoops, follow strict rules and are prepared to wait.
  • Some people experience delays and costs, simply forget to redeem their vouchers or have perfectly valid claims denied.

At face value, all you need to do is return a voucher to the manufacturer to get $100 off the tag price of that plasma TV or computer you’ve always wanted. Who isn’t attracted to the idea of getting something for nothing?

CHOICE hasfound there’s more to cashback promotions than meets the eye. While industry doesn’t like to disclose what percentage of claims is paid out, international research suggests the redemption rate could be anything from 1% to 80%. And numerous consumer complaints indicate inordinate waiting times, tricky terms and conditions and valid claims being denied despite consumers producing evidence that proves everything was submitted on time.


Seven ways to make cashback work for you

  • Don’t be manipulated. Cashback isn’t really a gift or prize, but rather a marketing tool used to increase the sales and profits of manufacturers and retailers. They know many people won’t make a valid claim and employ tricky terms and conditions that catch people out.
  • Check the product and price are right first. This includes shopping around and comparing prices in other shops, rather than being dazzled by the cashback deal. Retailers may print the after-cashback price in larger print than the regular price, but it’s a discount many people will never receive.
  • Know that there may be costs and inconveniences associated with making a claim, including postage, photocopying and internet use. And if something goes wrong, you’ll have to spend time on the phone and/or email chasing up your claim.
  • Read the terms and conditions very carefully and make sure you comply with them, otherwise your claim could be denied.
  • Keep proof of purchase and other information that the terms and conditions stipulate (including, for example, the barcode on the computer’s box). Handwritten receipts and photocopies of barcodes may not be accepted. Be sure to use neat handwriting on the claim form; according to one promotion we saw, “incomplete, indecipherable or illegible claims will be deemed invalid.”
  • Use registered post so you can prove you returned the information on time. It could be a couple of extra dollars well spent.
  • Know where to complain. If you don’t receive the money, first contact the manufacturer and if your complaint isn’t dealt with satisfactorily, ask for it to be escalated. If that doesn’t work, you can also raise the issue with the retailer that sold you the product and cashback deal. Retailers are also responsible for cashback offers they sell and promote and they cannot distance themselves from the offer when redemption problems occur. Next, lodge a complaint with your state or territory’s Consumer Affairs or Fair Trade department.

Our verdict

Cashback schemes should not have onerous terms and conditions designed to catch consumers out. We - and consumers - would rather see a straight price discount on small items. Otherwise consumers are just spending time and money (postage expenses) on claims, which is inefficient for everyone.

 
 

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The idea is quite simple: A retailer might advertise a computer for $1000, but as an incentive for you to buy it, the manufacturer provides a $100 cashback voucher. In theory, then, the computer is really costing you $900.

However, to get the $100 back, you’ll need to register your claim by returning the completed voucher with additional details to prove where and when you bought the computer. It’s important to read and follow the manufacturer’s terms and conditions; there’ll be a deadline for receipt of the claim information and you may need to include the barcode printed on the cardboard box your computer came in. Then you’ll need to wait before you receive the money, which may be sent as a cheque or paid directly into your bank account.

In many cases, this process works fine. But there are plenty of complaints from consumers to suggest numerous exceptions to the rule have occurred.

The traps

The cashback system is premised on the fact that many people (though only the manufacturer knows how many) will never make a successful claim. Some of the most common reasons include:

  • They forget to return the claim form and other proof of purchase.
  • They lose the necessary documentation.
  • They make a claim that’s deemed invalid – for example, because it’s late or incomplete.
  • They spend so much time and effort chasing their claim that eventually they give up.
  • They make a perfectly valid claim that is rejected by the manufacturer.
  • They get stung by unfair terms and conditions of the cashback schemes.

These are just some of the potential traps. Redemptions can take months to process and involve unnecessary and frustrating delays. There’s also the possibility that the computer or TV was overpriced in the first place, and even taking the cashback into account you still could have got a better deal elsewhere. The model may also be older or inferior, and about to be replaced by a better one.

Standard economic theory assumes we’re rational consumers, making decisions and buying things that maximise our individual self-interest. But another strand of economics, behavioural, looks at what happens in the real world and finds we often make financial choices that don’t make much rational sense.

“For a long time, the consensus of belief among economists and financial experts was that poor decision making is a random and unpredictable departure from rationality,” said Ian McAuley, lecturer in Public Sector Finance at the University of Canberra, and a Centre for Policy Development Fellow. “Systematic observations of behaviour, however, reveal some distinct and consistent patterns in our poor decision-making … behavioural economists refer to these patterns as ‘behavioural biases’.”

So where can we see irrational decision-making and behavioural biases at play, and what can we learn from them?

Real-world examples of irrational behaviour

  • Advertising The way ads and their wording are framed affects our decisions and perceptions. We’re much more likely to buy a food item advertised as “95% fat free” than one that “contains 5% fat”, even though both products are identical.
  • Insurance We find it hard to compare risks that have a low probability of occurring. Consumers may give as much attention to an event that only has a one-in-a-million chance as an event with a one-in-a-thousand risk. As a result, we tend to over-insure against certain risks and leave ourselves overexposed in others. Sometimes we’re overly optimistic, thinking an event will never happen to us, while other times we buy unnecessary insurance against risks for which we can easily cover ourselves, or against events which may be dramatic in impact but with very low probability, such as aircraft accidents.
  • Disclosure Aside from leaving consumers confused, the trend towards greater disclosure of the fees, risks and commissions associated with financial products can increase our trust, even when what’s being disclosed should set off alarm bells. For example, when sales agents disclose their commissions, behavioural economics says consumers make assumptions about the agent’s trustworthiness. Increased disclosure can also deflect consumers’ attention from what is most important. A US study found that disclosure of mortgage brokers’ commissions distracted mortgagees’ attention from the total cost of their loans.
  • “Confusopoly” Behavioural research shows that having too many options can lead people to make no choice at all. The advent of superannuation choice in 2005 gave investors the choice of hundreds of super funds. But fewer than 10% of those eligible have made an active decision, instead accepting their employer’s default super fund. “Confusopoly” leads us to stick with what we have or make no decision. The results of one experiment found that when presented with a choice of six different jams to taste, 30% of people went on to purchase one of them — but when faced with a choice of 24 jams, only 3% bought one. When faced with too much choice, we’re more likely to walk away and make no decision, or if we have to choose, take either a random pick or the default.
  • Mortgages and borrowings We tend to think only about immediate outlays and costs, while ignoring or discounting future financial commitments. In addition, we may be overconfident about our ability to make repayments in the future. These biases lead us to over-commit in borrowing. “Teaser” or “honeymoon” interest rates, and “repayment holidays”, exacerbate the problem.
  • Cashback A cashback voucher is seen as a gift; an offer of “$1000, with $100 cashback” seems more attractive than simply $900. So cashback can influence where we shop, what we buy and how much we pay — a concept well understood by the marketing industry.

How can we make better decisions?

We all make poor financial decisions from time to time. The best we can do is stop and take time to think about the way our choices are framed by salespeople as well as our own perceptions and biases.

“Possibly the most valuable quality we can draw from education, particularly early education, is scepticism, not only of the claims of salespeople, but also of our own impulsiveness,” said McAuley. “Behavioural research shows that when we stop and think, our decision-making generally improves … our errors arise not from ignorance, but rather from haste or more generally from using the wrong decision-making processes.”

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