Paying for saving: when is it worth it? Case studies of Costco and AMC Stubs

I belong to a zillion money saving and rewards programs, most of them completely free.  I don't understand why anyone wouldn't belong to a free program that saves or makes them money.  Target RedCards, library cards, Freegal, no-fee reward credit cards, Swagbucks, Recycle Bank, MyCokeRewards, ShopKick, FreeCycle, frequent flyer programs etc. all save or make you a ton of money and don't cost you a dime.  No-brainers.

Does it ever pay to pay to save? It's a good question. There are some programs out there that require me to pay for the privilege of saving money or accumulating rewards, each of these having different formats and business models.  What do I mean by that?

Take a Costco membership. This is a money-saving program for which I pay.  For $50 per year, you get the privilege of buying items at bulk discounts.  There are also many items available at Costco that don't come in bulk and are just low-priced.  When you buy a Costco membership, you make the assumption that over the course of the year, the money that you will save from buying in bulk will exceed $50.  Think about that for a second.  What do you buy on a regular basis from Costco?  Does buying in bulk work for you or do you end up wasting or not using what you've bought? Have you compared the price to purchasing the same items in stores like Walmart or Target on sale and with coupons?   Do you buy these items enough times over the course of the year to exceed $50 in savings?  My husband and I actually sat down and did these comparisons and crunched a bunch of numbers, and yes, we found that our Costco membership was well worth the price. Just buying our tires from Costco alone paid for the annual membership.  With their discount tire pricing, free rotations and road hazard warranty, we saved well over $300 per year.  (That's mostly because I tend to get more flat tires than a Nascar driver.)

You can also up the ante and get the Costco Executive Membership for $100. The advantage over the $50 membership is that you get 2% of your total purchases back in Costco credit at the end of the year.  You assume that 2% of your purchases will exceed the extra $50 that you pay for the privilege.  So, if you spend less than $2,500 at Costco over the course of the year, it wouldn't pay to upgrade to the Executive Membership.

But the Executive Membership comes with a safety net!  If you spend, let's say $1,200 over the course of the year at Costco and get back only $24, Costco will reimburse you for the $26 difference at the end of the year.  So, frankly, I can't figure out why all Costco members don't upgrade to an Executive level, when there is everything to gain and nothing to risk.

Costco also has the perk of being a national chain.  So we can take advantage of Costco membership when we are visiting family in New York and Atlanta, or my husband is working in Omaha, or I get a flat while driving my car through Wyoming.  It's also nice to be able to use my membership online to buy things like checks or order photo prints.

Now what if a competitor to Costco, like, say, Sam's Club, suddenly decided to completely drop their annual membership fee?  Would we jump ship?  Almost certainly, under the condition that Sam's Club could provide comparable merchandise and services at the near-same level of low pricing as Costco. Why pay for a privilege when you can get the identical privilege for free?  But if they couldn't, then we'd stick.  But Costco's services and savings would have to be much, much better than Sam's Club, both quantitatively and qualitatively, to keep us as members.

So let's lay down some rules. It pays to pay for saving money when:

1. The amount you save/make on average exceeds the amount you pay.
2. There is no comparable program offering identical privileges for free.

I think these are very important rules in deciding when to pay to save. They might strike you as being very obvious, but I think that's a sign that they are very good rules.  And while the following two rules are not decisive factors on whether it pays to pay, they are very strong incentives:

3. There is a "safety net" or a guarantee to refund what you've paid if the first rule doesn't work out.
4. You can use the money-saving privileges even if you change your location (moving or traveling) or online.

When doesn't it pay to pay?

Let's talk about movies.  If you go to the movies at all, it pays to join a frequent-watchers program. AMC Theaters recently decided to replace their free AMC MovieWatchers program with AMC Stubs, which cost $12 a year ("only a dollar a month!" shrieked the AMC employee who tried to sell it to us last time we went out to a movie).  So, according to their website,  you pay $12 a year for these privileges:

• $10 AMC Stubs Reward for every $100 you spend
• Free upgrades on concessions anyday, anytime
• Online ticket purchase fees waived
• Access to your online ticket stub collection

The last two on these list are really not privileges at all.  If you are still paying online ticket purchase fees, just stop.  They are a royal waste of money.  And I don't care to see my "online ticket stub collection" whatever that is.

My husband and I rarely buy anything at movie concessions, both because we keep kosher and because every fiber of my being bristles at paying $4.75 for 8 ounces of Diet Coke.  So for us, saving a dollar or two on concession food is just not a worthwhile privilege.  If you buy lots of refreshments at movie concessions on a regular basis, please reconsider. The markup on theater concession treats is about 1,000-1,300%.  Seriously.  If you're reading this blog and are trying to save money, think hard about that.

As far as the $10 reward, let's crunch some numbers.  Let's say, on average, a movie ticket costs $10.  Further, let's say my husband and I go to the movies every other Saturday night (we don't, but I think that's a reasonable what-if scenario).  So if we started the Stubs program on June 4, we'd get our first reward on July 30.  Two months is a long time to wait to get a reward. And the reward doesn't even cover the annual cost of the program!  You have to get to a two-reward level, which will take four plus months, to recover the membership fee.  And if you go to the movies less often than every other week, it will take even longer.  And if a movie ticket cost more than $10 at some AMC theaters, as it often does, the first reward won't even cover the cost of a ticket.  So far, I'm not impressed.

But eventually, as long as 2 people go to the movies 10 times over the course of the year (spending $200), you will get two $10 rewards and still come out ahead.  But I'm still not buying a membership in the Stubs program.  Why?  Because Regal Crown Club, Fandango, and social purchasing sites show how clearly AMC Stubs fails to meet the important criteria of deciding when it pays to pay to save:

1. Regal Crown Club offers similar rewards: you get 1 point for every dollar spent on movie tickets and you get a free ticket for every 150 points, or $150.  So the benefits don't come as quickly as with Stubs, where you need to spend only $100 for a free ticket,  assuming the ticket cost $10.  I much prefer getting an actual movie ticket as a reward than a dollar credit, because ticket prices vary by so much by theater. Also, and here is the kicker, there is no upfront cost to join Regal Crown Club.  No membership fee versus a $12 membership fee.  That pretty much sealed the deal for me.
2. Fandango runs sales and promotions all the time. All the time.  (Like 2 for 1 movie tickets every Friday, etc.) And again, there is no cost to join Fandango. Kicker #2.
3. Remember this $6 AMC Movie ticket deal from BuyWithMe?  The math:  this deal was nearly the equivalent of one and a half AMC Stubs rewards ($16 savings on four tickets, and it only costs you $24 to realize it).  Under AMC Stubs, you would have to spend $200 to save $20, or in theory, $160 to save $16 (though you can't redeem a portion of a reward, but okay, you get the point).  Living Social, Groupon and numerous other social purchasing sites routinely offer great deals on movie tickets, and if you are a regular movie-goer, you should be buying them.  Kicker #3 is that each of these deals exceed the benefits of AMC Stubs, with less spent and more saved.  Kicker #4 is that, again, it cost nothing to take advantage of these deals.

So I'm thinking that perhaps the marketing department at AMC Stubs needs to rethink the business model for their rewards program.  Because if you do the math, it doesn't pay to pay for AMC Stubs.

But are people joining AMC Stubs?  Why, yes, they are.  Because lots of people prefer platitudes to math.  Not you, I hope.

When you're deciding when it is worthwhile to pay for a money-saving program, run the program through our two rules, obvious as they might be.  Remember, it pays to pay for saving money when:

1. The amount you save/make on average exceeds the amount you pay.
2. There is no comparable program offering identical privileges for free.

Have you paid to save for anything recently or gone through a similar evaluation process?  Do you think I missed any important rules in deciding when it pays to pay to save?  Please comment below.

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