A loyalty reward costs you what it costs to produce, not its price at the till. A free coffee after ten stamps is therefore often a few tens of cents, and the menu price is only the maximum lost revenue. Always calculate excl. VAT, and allow for cards that never fill up.
Here is the difference between purchase cost and selling price, the effect of VAT, and how to calculate across the whole card rather than a single reward. The examples are worked examples in euros, with invented figures: replace them with your own.
Purchase cost or selling price?
There are two ways to look at the cost, and they give different answers.
- Purchase cost. What it costs you to give the product: ingredients, packaging, possibly a share of labour time. This is your real outlay if the customer would have come anyway.
- Selling price excl. VAT. What you would have taken if the customer had paid. This is your maximum loss, if the customer only came for the free product.
The truth is usually closer to the first, because customers often buy something else when they come for their reward. Calculate both to see the range.
How does VAT come into it?
Prices displayed in Belgium include VAT. The standard rate is 21%, with reduced rates, including 6% for many food products; the rate depends on the product and how it is sold. Check the applicable rate on the FPS Finance website. The VAT included in a price is not your income: to compare with your costs, divide the VAT-inclusive price by 1.06 or by 1.21 as appropriate.
Example 1: a coffee in a café
The range therefore runs from roughly 3% to 10%, and reality lies in between. Do not forget to check the VAT rate that actually applies to your product.
Example 2: a treatment at a hairdresser or beauty salon
For a service, working time is the main item. If it is already paid for, it weighs little; if the diary is full, giving a free treatment means giving up a slot you could have sold.
What is the effect of cards that never finish?
Not every card fills up. Customers move, change habits or forget the card. That is that many rewards you will never have to pay for.
Do not count on these unfinished cards to balance your books. Calculate first as if everyone completes their card, and treat the rest as a bonus.
How do you calculate across the whole card?
The most telling figure is the cost per visit. Divide the cost of the reward by the number of visits needed. In example 1: €0.60 / 10 visits = €0.06 per visit at purchase cost. Compare that figure with the gross margin you make per visit: as long as it stays well below, the card pays for itself easily if it brings customers back.
To test your own figures, do the calculation above with your own prices. To choose the card type and the effective discount, read stamps, points or cashback, and for the price of the tool itself, the price of a digital loyalty card.
Checklist
- Calculate the purchase cost of the reward, excl. VAT.
- Also calculate the selling price excl. VAT, to see the range.
- Divide by the number of visits to get a cost per visit.
- Compare with your gross margin per visit.
- Do not count on unfinished cards to balance the calculation.
- Check the accounting treatment with your accountant.
Plans are on the pricing page.