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    Explained: The math behind your cashback

    Explained: The math behind your cashback

    Explained: The math behind your cashback
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    By CNBCTV18.com Contributor  IST (Published)

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    Getting cashback is very common these days when it comes to using credit cards, e-commerce sites and online payment platforms.

    Every company incurs heavy expenditure on sales promotional techniques like offering a discount. In this competitive and digital era, companies are using new techniques to market their products, boost their sales and reward customer loyalty. A time-tested method to reward loyalty and generate repeat sales is cashback.
    Getting cashback is very common these days when it comes to using credit cards, e-commerce sites and online payment platforms. But the important question is, what is a cashback, and how does it help both the merchants/online stores and their customers? Put simply, cashback is a small percentage of the amount spent on a purchase that a person gets back.
    How does cashback work?
    Cashback is a strategy used by a company to promote its brand and capture a larger market share, especially in the long run. In the case of credit card usage, some credit card companies offer their cardholders 1-10% cashback on every purchase whereas (depending on customers buying habits). For example, some companies give 2 percent cashback on select restaurants, whereas up to 5 percent cashback on selected shopping stores. They offer cashback either in the form of cash crediting their account of their cardholders or reward credit points.
    On the other hand, when merchant sites receive payment through credit cards, the credit card companies get a small percentage of that payment from merchants in the form of merchant fees. The credit card issuers share this fee with select customers as cashback.
    Talking about cashback sites, they work on the principle of affiliate marketing. They partner with various companies to help them in selling their products or services. For making every sale through their website/app, they get a fixed commission from their respective partner company, and the cashback websites share a portion of that commission with their customers in the form of cashback.
    While in the case of e-commerce sites or digital payment companies, the cashback percentage is never fixed and not always in cash. Sometimes, it’s in the form of points, coupons, or wallet money which can only be used on their website or their select partner companies. The best advantage of using a cashback site is that earnings/cashback can actually be taken into a bank account directly.
    Discount vs Cash-back
    Both discount and cashback rewards seem similar, i.e., cause a person to pay less than the actual cost but both work in absolutely different ways. Experts say that discounting a product boost sale only in the short term. Using discounting techniques for the long term leads to the devaluation of your products, i.e. hurting the brand value.
    Offering discounts for a long time makes a company lose its credibility. Therefore, for increasing sales in the long term, efficient techniques like cashback offers are needed. It not only prevents the devaluation of your brand but also give financial incentives to your target customers. That leads to customer satisfaction and increased brand loyalty.
    The psychology behind the cashback strategy
    Although the strategy of cashback offers seem simple, it is much broader in reality. To redeem the cashback, a person has to spend again on the same website. In return, he again gets the cashback, and the cycle goes on. Through this, the company retains its customers for the long term and maximizes its sales than any other strategy.
    In addition to that, cashback usually comes with some terms and conditions. Many a time, you are eligible for cashback only when you make a purchase of a certain amount, say Rs. 1000. It means you won’t get any reward if you make a transaction of any amount less than Rs. 1000. Besides this, cashback is capped most of the time, not always though.
    For instance, you will get a cashback of 10 percent up to a certain amount, say Rs 500. It means if you purchase something worth Rs 10000, you will get only Rs. 500 and not Rs 1000 because the cashback has been capped at Rs. 1000. These are the things that make cashback offers a little complicated and technical. Having said that still cashback offers are a sure shot way to save money always.
    Conclusion
    Hundreds of companies are using the cashback strategy across the world because it is better than any other traditional sales promotional technique. Put simply, cashback promotions are just another way to encourage people to buy a company’s products and rewarding loyal customers by incentivizing them.
    The author, Ankita Jain is CO-Founder at GoPaisa.com. The views expressed are personal
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