Rebate (marketing)

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A sales advertisement for a 12 pack of Pabst beer showing only the after rebate price.

A rebate is an amount paid by way of reduction, return, or refund on what has already been paid or contributed. It is type of sales promotion marketers use primarily as incentives or supplements to product sales. The mail-in rebate (MIR) is the most common.

A MIR entitles the buyer to mail in a coupon, a receipt and barcode in order to receive a cheque for a particular amount, depending on the particular product, time, and often place of purchase.

Rebates are offered by either the retailer or the manufacturer of the chosen product. Large stores often work in conjunction with manufacturers, usually requiring two or even three separate rebates for each item. Manufacturer rebates are sometimes valid only at a single store. Rebate forms and special receipts are sometimes printed by the cash register at time of purchase on a separate receipt or available online for download.

Rebates are heavily used for advertised sales in retail stores in the United States, such as Best Buy and Staples. However, Best Buy, in April 2005, announced that they would be eliminating all mail-in-rebates^[1]. In 1992, mail in rebates were not usual in the UK, the so called 'Hoover Free Flights'^[2] fiasco perhaps giving evidence of its pitfalls.

Personal computer components and electronics seem to have a large portion of rebate sales. For example, an item might be advertised as "$39 after rebate" with the item costing $79 OTD (out-the-door) with a $40 rebate that the customer would need to redeem. The turnaround time is generally four to eight weeks, though some rebates note a period of eight to twelve weeks.

Most rebates are handled under contract by rebate clearinghouses that specialize in processing rebates and contest applications. The source of their fees is not readily discernible with conflicting reports from different sides. Roger D. Andersen, former CEO of Young America, a rebate clearinghouse claims that "Young America receives the same fees whether a submission is valid or invalid," giving them no incentive to unfairly invalidate customer rebates.^[3] Young America is currently under investigation by the state of Massachusetts for keeping unclaimed rebate checks. ^[4]. Frank Giordano, founder of TCA Fulfillment, claims "We get paid for every redemption request we enter in the system. If we don't put it in the system, we don't get paid." ^[5]. TCA is also notable for a "Rebate Redemption Guide" that was sent to prospective clients touting the low redemption rates that they would have with TCA as their rebate fulfillment center, promising 20% less than their competitors. ^[6]

In the United States, Connecticut state regulations section 42-110b-19(e) require retailers who advertise the net price of an item after rebate to pay consumers the amount of that rebate at time of purchase^[7]. Rhode Island has similar legislation (Gen. Laws 6-13.1-1)^[8]. Otherwise, the after-rebate price cannot be advertised as the final price to be paid by the consumer. For example, retailers in Connecticut can only advertise "$40 with a $40 rebate," not "Free After Rebate," unless they give the rebate at the time of purchase.^[9][10][11]

[edit] Rationale

Rebate forms often ask for the same type of information-proof of purchase in the form of a receipt and/or UPC code and contact information of the purchaser.

Rebates have become very popular in retail sales. Retailers and manufacturers have many reasons to offer them:

• Customers tend to notice price increases and react negatively. Rebates offer retailers the benefit of giving customers a temporary discount on an item, to stimulate sales, while allowing it to maintain its current price point. This method avoids the negative backlash that could be perceived with a price being lowered and then raised later. ^[12]
• Rebates also allow companies to "price protect" certain product lines by being selective in which models or brands to be discounted. This allows retailers and manufacturers to move some product at lower cost while maintaining prices of successful models. A straight price reduction on some models would have a domino effect on all products in a line. ^[13]
• During the turnaround time, the company can earn interest on the money.
• If the turnaround time crosses into the next fiscal year or quarter, a rebate offer can inflate sales in the current period, and not have to be accounted for until the next period-and then it could be attributed as a cost reducing sales or expense for the next period giving companies an accounting advantage with their Wall Street projections.
• Extended warranties and other price-dependent factors always use the initial purchase price, not the price after the rebate. This is normally because if the company has to refund the customer the "replacement value", it would be the before rebate "in-store" price.
• Rebates can also be used to collect consumer information as it is required by most rebate forms for consumers to fill in personal or household information. This information can be used by producer or retailer to analyze consumer behavior.
• Once the UPC has been removed from the box, retailers can refuse to accept a return of the item.
• Not all buyers will meet the criteria to receive the rebate. Companies often require the original UPC barcode, receipt, and additional information, which a buyer may forget to include when redeeming the rebate. Companies almost always add other caveats to the rebate as well, such as the redemption having to be postmarked by a certain date. It works in the company's favor if buyers do not act quickly to redeem. However, a University of Florida study notes that shorter redemption periods actually increase the redemption rate in the consumer's favor because it gives them less time for procrastination to set in.^[14]
• Not all customers will actually mail in the rebate coupons (in the case of a mail in rebate) and thus giving the manufacturer/retailer a higher profit.
• New companies that want to make a break into a market can offer substantial rebate savings on their new product as a means of capturing a customer's attention. Zeus Kerravala, vice president at the Yankee Group, has said "For companies that haven't been in a particular market, the rebate that essentially refunds the customer's money is a great way to get people to pay attention to them, This is especially true in consumer electronics, where brand name does matter. It's a good way to get customers to take a chance on a new brand."^[15]

[edit] Benefits for consumers

Some rebates are paid in the form of a debit card that may carry restrictions on how it can be used.

Rebates give customers an avenue to a better value by redeeming the rebates. The amount of time and effort required in comparison to the savings potential is a weight to measure for each individual consumer. The very fact that some consumers do not redeem their rebates is what allows companies the ability to offer such value pricing in the first place that many consumers do capitalize on. Deal hunter sites frequently tout the benefits of rebates in making technology affordable: "Rebates are the meat and potatoes of the ultimate tech deal, no matter what you are buying… They are paying you money to buy their stuff. All you have to do is take it."^[16]

Industry advisers note that if mail in rebates go away, they will not be replaced by "instant rebates" of the same value amount because of the loss of the tangible benefits listed above (fiscal accounting, price protection, etc.) Steve Baker, vice president of industry analysis for NPD Group, comments that "It's a case of be careful of what you ask for. You may see some great deals go away." ^[17]

[edit] Redemption rate inconsistencies

It is difficult to get an account of redemption rates from most rebate companies, partly due to a reluctance on the part of rebate fulfillment houses to release confidential business information. Among different sources, radically different numbers on both ends of the spectrum can be cited. Part of the reason is that most "redemption rates" don't distinguish whether they are calculated as part of total sales or incremental sales.

• PMA, a marketing firm, estimated that in 2005 $486.5 million worth of rebates were redeemed. The redemption rates averaged 21.1% when calculated as a percentage of total sales, and 67.6% when calculated as a percentage of incremental sales. They go on to note “These statistics reveal that redemption rates calculated as a percentage of total sales can be misleading when diluted by non-incremental sales, consequently making redemption rates appear lower than they truly are.” ^[18]
• Not all buyers remember to mail the coupons, a phenomenon known in the industry as breakage, or the shoebox effect. Though it can be used interchangeably with breakage ^[19] slippage is the phenomenon when a consumer has their rebate fulfilled but they lose or forget to cash the check. Some rebate companies could tout a higher "redemption rate" including the breakage, while not calculating the potential slippage of uncashed checks.

Rebate checks

[edit] Some redemption estimates

• BusinessWeek recently estimated a return rate of 60 percent. Some estimates have been as low as 2%. For example, nearly half of the 100,000 new TiVo subscribers in 2005 did not redeem their $100 rebates, allowing the company to keep $5,000,000 in additional profit. ^[20]
• PC Data in the Reston, VA estimates between "10 and 30 percent". ^[21]
• PlusNetMarketing in Wilmington, DE quotes 80% ^[22]
• Carol de Ville, the vice president of sales of Marco Sales and Incentives notes “In some cases, we do have redemption programs that go as high as forty to fifty per cent, but generally it’s about one to five per cent”. In the same article, John Challinor, advertising manager for Sony Canada remarks that “The industry average is less than ten percent....and it can be as low as one percent. ^[23]
• NPD Group, a marketing firm, estimates 50% to 70% ^[24]

[edit] General complaints

At some big box stores, personal computers are regularly sold with sizable rebates attached, making the advertised price more attractive to buyers. It is common, though, for these rebates to be conditional upon signing a long term contract with a particular ISP, to which some customers may object. Hardware manufacturers have come under fire, also. Dell, for one, has been the subject of rebate complaints involving misprinted receipts, potentially confusing expiration dates, and service representatives who are slow to react. Rebate issues began to clog Dell's customer service forums, leading the company to shut down that portion of the website ^[25], and refocus its energy on new online customer care solutions. CompUSA used rebates regularly until it started closing its remaining stores in December 2007.

Cell phone service companies, including major players like Verizon Wireless and T-mobile, as well as third-party retailers like Radio Shack, Wirefly and others have received growing attention due to complex rebate redemption rules. Both carriers and retailers make customers submit rebate claims during a 30-day window, often 6 months after cell phone activation. ^[26]Some authorized dealers have responded by trying to make rebate requirements more transparent, explaining that the carrier will withdraw payment from them if a customer quits service before the end of the contract.

Typical UPC barcode required for rebate submission

[edit] Rebates as a form of price discrimination

A common complaint against rebates is the claim that rebates can be used as a form of “price discrimination” against the less “sophisticated” lower classes who are less likely to redeem rebates than a more educated middle class. ^[27] Sridhar Moorthy, marketing professor at the University of Toronto also advocates a “price discrimination” theory between “people who are price-sensitive and people who are not price-sensitive.” ^[28]. A different view, as taken by the BusinessWeek article, is that rebates can be viewed as a “tax on the disorganized” that is paid by those who do not submit their rebates as opposed to those who do.

Foreign buyers are also discriminated as they will often not be able to provide a domestic address for the check to be mailed in.

[edit] Recent trends

Some retailers have taken a step forward with offering consumers new ways to submit their rebates easily over the Internet, completely or partially removing any mail in requirements. Staples, Walgreens (as a trial in some states, see current list on their rebate site), Circuit City, TigerDirect and Rite Aid currently offer an online submission option for all or some of the rebates they offer. These special rebates are usually identified as such and have instructions for full or partial online submissions. This is touted as a more accurate processing of the rebate, reducing the potential for human or mechanical error and in many cases eliminating the postage costs associated with traditional mail in rebates, although some require the UPC or Proof Of Purchase to be mailed in. Most of these retailers still let consumers submit rebates by mail.

In 2006 OfficeMax stores announced that they were eliminating mail-in rebates from their sales promotion in favor of instant rebates for their sale prices. The decision came after a year of working with rebate vendors and manufacturers to improve the rebate process and receiving "overwhelmingly negative feedback" from their customers about their rebate program. ^[29]

[edit] References

[edit] External links

• Rebate Report Card — rebate complaints and company rankings by consumers.
• The Great Rebate Runaround -- Business Week, November 23, 2005