Hong Life CalculatorsUnderstanding the cashback effective discount calculator — concept and principle
Cashback offers sound simple, "get 10% back", but 10% back is not the same as 10% off. This calculator shows the real discount the buyer receives and the expected cost to the seller, who pays only for the cashback that customers actually redeem. It works with any currency.
How it is calculated
Effective discount to the buyer = c ÷ (100 + c) × 100, where c is the cashback percentage.
Expected cost to the seller = price × c/100 × redemption share/100
Seller cost as % of price = c × redemption share ÷ 100
- Price paid: the amount charged at checkout.
- Cashback (%): the share of the price returned as cash, credit or points.
- Share of customers who redeem (%): how many buyers actually claim or spend the cashback.
The principle
The buyer's effective discount assumes the cashback is spent on more of the same goods. You pay 100 and receive 10 back, so for 100 you end up with 110 worth of goods. The discount is what you saved divided by what you received: 10 ÷ 110 = 9.09%, not 10%. A cashback of c% is therefore always slightly weaker than a c% price cut. For the seller, unclaimed rewards cost nothing; this unredeemed part is often called breakage. The seller's expected cost is the cashback rate multiplied by the redemption share.
Worked example
- Effective discount: 10 ÷ (100 + 10) × 100 = 9.09%.
- Cashback promised on a $200 purchase: $200 × 10% = $20.
- Expected seller cost with 70% redemption: $20 × 70% = $14.00.
- Seller cost as a share of price: 10 × 70 ÷ 100 = 7%.
How to read the result
For buyers: compare the effective discount with other offers. A 10% cashback (9.09% effective) is worse than a straight 10% discount and only slightly better than 9% off, and it is worth less still if the credit expires or can be used only in one store. For sellers: the expected cost (7% here) is lower than the headline rate because some rewards are never redeemed, but do not plan on low redemption, since strong reminders and easy redemption raise it.
Common mistakes
- Treating 10% cashback as identical to 10% off.
- Ignoring expiry dates, minimum spends and caps, which lower the real value.
- Assuming redemption stays low after making rewards easier to use.
Frequently asked questions
Is 5% cashback better than a 5% discount?
No. 5% back is worth 5 ÷ 105 ≈ 4.76% off when the reward buys more goods, so the straight discount is slightly better.
What if the cashback is paid in cash I can spend anywhere?
Then you can also view it simply as getting 10% of your price back, so your net cost on this purchase falls by 10%. The 9.09% figure answers a different question: the discount on everything you end up buying.
What is breakage?
The value of rewards, gift cards or credits that customers never redeem. It lowers the seller's actual cost.
Sources: Farris, Bendle, Pfeifer & Reibstein, Marketing Metrics (Pearson) — promotions and redemption rates · Kotler & Keller, Marketing Management (Pearson) — sales promotion