Help me understand the finer points of why rebates exist

Factual Questions
1

Like most certified geeks, rebates are a fact of life for me. Today, I happily marched out of CompUSA holding my 320GB hard drive that was originally $150, but was advertised at $80 after rebates. Sweet!

I have always held the cynical assumption that rebates exist solely as a way of lowering the seller’s cost of advertising a lowball price: in other words, they make some hoops for the consumer to jump through, and if 50% of the buyers don’t make it through all of the hoops, that $70 discount on the HD only cost CompUSA $35 per unit. (this guy seems to agree)

But this explanation doesn’t seem satisfactory to me.

  1. Why would they bother making it easier to submit the rebate? I did this one online in two minutes. Isn’t it in their best interest to make the process more arduous?

  2. What’s the deal with the $20 off the top at the register and the $50 rebate? Why not make the first bit a $20 rebate (more chance for folks to screw it up).

  3. Why are rebates so prevalent in consumer electronics, but not so common elsewhere? Why not have rebates on DVDs, tires, hotel rooms, power tools, or other items?

  4. It always seemed to me to be some sort of shell game where different financial buckets are involved (e.g. store, manufacturer, reseller, etc.), but I never could figure out why it is done this way.

  5. I guess they could be mining my data, but I have never gotten telemarketing calls, unwanted spam, or junk mail because of rebates.

  6. They could make their checks far more difficult to identify, but they don’t. Hell, all they need to do is take a page from the book of slimy junk mailers and tart up their checks like free magazine offers and everyone would toss them out without a glance.

What I am missing is a more thorough understanding of how rebates work.

2

some thoughts here

3

Rebates to me are more about promoting sales.
Sometimes to get rid of slow moving or old merchandise.
To take business from the competition but hold the GRP for advertising purposes.
Other gimmicking sort of things.

4

Ahh, the wonderous world of rebates. The most confusing thing I ever dealt with in my life as a marketer.

First off, remember that people only react to the big price in the ad. If the item is $150 with a $50 rebate, all they see is the $100 final price.

Second, any rebate requires some work on your part. A huge majority of customers never bother – even never bother to go online. However, they can’t make it TOO hard to get the rebate, otherwise the rebate wouldn’t even be a lure.

Third, there are multiple buckets involved. Typically the manufacturer kicks in some, and the retailer kicks in some more. Sometimes, however, it’s just the manufacturer. That doesn’t make it a shell game. There are a lot of different marketing programs that involve multiple buckets.

As for why consumer electronics, I guess two things come into play. One, consumer electronics offer numerous opportunities for bundling, upselling and lots of other profit-boosters. How many times have you, a certified geek, happily marched out of the store having saved a buncha bucks on something, and also picked up a spindle full of blank media, a software upgrade, MP3 player and heaven knows what else? If all you want is a set of tires, chances are good you’ll resist the urge to buy a new battery at the same time, even if the tires come with a rebate.

Second, consumer electronics are costly enough to make a rebate worthwhile. Would you really make a special trip to the store to buy a $14.95 DVD with a $7 rebate – especially if you didn’t really want the DVD in the first place? But to save half on a $150 hard drive, by gosh, that’s a deal! Never mind that the 120GB hard drive that’s regularly priced at $80 might serve you just as well.

Contrast that with a refrigerator or a hotel room. I can only fit a 36" refrigerator in my kitchen. No matter what the rebate is, I’m not going any bigger. As for hotels, they want to build frequency – that’s why they have frequent stayer programs.

5

In some states, it’s no longer legal to advertise the net price after rebate. Well, technically it’s legal, but they have to give you the rebate amount at the register, which makes it the same as a sale.

6

Rebates started under price controls during the Nixon administration. The auto industry thought them up. It was a way to sell a car at a lower price without the lower price being subject to the price control regulations. The American public has been annoyed since then.

I file for every possible rebate as though I’m playing a game. If I don’t file, the seller wins. If I do file, it costs the seller more than the value of the rebate. If enough people file for the rebate they will quit offering them and just lower the price.

7

Price controls had little to do with it: the original auto rebates were to make the car cost less while still preserving the dealer’s profit. The dealer got the full price; the automaker sent the rebate.

8

Seems like thre are several reasons. One is the low redemption rate (people forget or give up), but there’s also information gathering (if they fill out the card, we can build a database), control of retail price, minimal retailer involvement, and several other reasons, all of which probably have their place. Here are some illustrative cites.

“The Trouble With Rebates,” New York Times Technology Review, September 16, 1999: Technology - The New York Times

And see, REDEMPTION OF MAIL-IN REBATES DECLINES WITH INCREASED TIME ALLOWANCE ("John Gourville, a marketing professor at Harvard University, said Silk’s research is important because it demonstrates that rebates work in some counterintuitive ways. “The fact that shorter redemption cycles result in increased rate of redemption goes against industry practices, theories of rational decision making and common sense.”)

R.I. law gives consumers rebates on spot (“In many cases, [companies] assume consumers are going to forget all about it,” allowing the businesses to keep the money, Kennedy said. “Offering a deal and then making the consumer jump through hoops to get it is inappropriate and not all that great a deal.”)

Rebate (marketing) - Wikipedia (lists several reason why rebates are offered)

http://pcworld.about.com/magazine/2203p135id114150.htm

http://www.motivationshow.com/article110

9

Wrong. Rebates were first offered by auto companies after the governement instituted price controls. They figured that they could cut the price to the consumer without lowering the retail price. Therefore, with inflation (which was the reason for price controls) they wouldn’t expose themselves to to a future situation of having to sell a car at a price that was unprofitable. At the time they didn’t know which way things were going. They hedged their bet by offering rebates rather than lowering the price. When the automakers realized that the rebates were a successful marketing tool they then started to use them to preserve dealer profits after price controls were lifted. We have been stuck with them ever since.

Price controls had everything to do with the implementation of rebates. Other industries picked up on them as a marketing tool.

10

I think giving “instant rebates” with costly items like cars is a sales tactic that goes back along way… Apparently my Welsh Grandad used use it when selling livestock 60+ years ago (there is a welsh word for it I can’t recall). The principle is you think about the 5 pounds your getting back not the 500 pounds your spending on the cow. Its admittedly more effective in these days of widespread credit (as your getting $500 to spend right now but the $20000 is spread over 36 payments).

IMO the whole “mail-in rebate” thing is based on the fact the significant number of people will forget to mail in the rebate, So you can advertise your product as “X minus Y” bucks whereas you are actually going to have pay out far less than “Y” bucks. Not to mention of course all those Y dolllars in a your companies’ bank account for a month will be worth a fair more due to in intrest alone.

11

I’ve read that the companies that process rebates make contractual promises to the vendors that hire them, promising the success rate for consumers getting the rebates will stay below some agreed-upon limit.

>Sometimes, however, it’s just the manufacturer. That doesn’t make it a shell game.
Doesn’t that just mean it’s a shell game with the prize all under one shell? The consumer still understands that there’s a piece of his purchase price moving around unseen.

12

I stumbled onto this paper ( http://www.people.vcu.edu/~dddavis/working%20papers/DM2004.pdf ).

13

You also have to factor in the fact that it takes the manufacturer quite awhile to “process” and issue the rebate check. All the while, they are collecting interest on your money. It’s a total win-win for them. They get your money to play with for a period of time, and if you forget to ask for it back…

14

The only things I’ve ever seen rebates (or “cashback”, as it’s sometimes known here) for are printers and laptop computers, and even then it’s very rarely and only for small sums of money- $25-$100, usually.

A disturbingly high (I’d estimate probably 75-85%) of customers in our store know little to nothing about computers, and probably 35% don’t have internet access in the first place. They’re not interested in HP offering $50 cashback if they buy a $250 multifunction printer- they’d rather buy a $79 multifunction printer and be out the door than dicking around on HP’s website to get a cheque for $50 mailed to them two or three months from now.

As such, rebates aren’t a particularly effective sales tool here- it’s easier (from a marketing point of view) just to put the printer on sale for $200 and leave Head Office to get the difference from the manufacturer later.

15

Thanks a lot folks for the info. I guess I’m a bit surprised at how many people never send in rebates: (From Gfactor’s quotes) “‘Manufacturers love rebates because the redemption rates are close to none,’ said Ahron Schachter”

It does seem a bit slimy for marketing folks to promise a redemption rate below X%.

The interest is another noteable point. I have always been upset at paying NJ sales tax on the whole $150, though 70 comes back (Why do I get taxed on money that I get back?), but I never even thought about the interest. They must make buckets of money on the interest alone – no wonder the silly check takes 8 weeks to come in once you send out the paperwork. Not only does that increase the chances of it being overlooked, but they keep your money for >8 weeks.

I still can’t figure out why there is so little funny business with the check itself: as I said before, why not make it look like junk mail so that it’s even easier to throw out? The checks seem to be surprisingly straightforward and proper.

I’m with Spartydog on this: it’s a game, and I want them to pay. I could get in a lather about it, but it isn’t worth it. The only thing that really upsets me is that I imagine rebates affect some groups unfairly: I bet very few senior citizens or folks who speak limited English will ever jump through all of the hoops.

16

I’d also venture that the manufacturers are betting on a percentage of those who file never following through, and those who might challenge a never sent check not having their paperwork in order to back up the claim. The fine print states that the manufacturer isn’t responsible for lost paperwork. Who actually loses same is up for debate.

17

I’ve gotten a few rebate checks back that were easilly mistakable for junk mail. A couple were in fact post-cards with no envelope, and not obviosly cheque like.

One hidden cost of rebates to the manufacturer is the ill will generated when they deny the rebate. I, for example, no longer patronize Sony, or Microcenter for exactly this reason. In both cases, I jumped though every hoop, yet the rebates were refused. In neither case, the amount was worth the hassle of my time (as these companys no doubt figured) so I lost the rebate amount, but the companies have lost at least hundreds, and probably thousands of dollars of my future buisness. Obviously, it is about making this quarter’s numbers look good, future be damned.

18

Not to mention, IIRC, you will have to pay tax on the full price before any rebates.

19

In my experience almost half the rebates I applied for were just ignored. The tax angle here is substantial (nearly 15%) and I absolutely hate them. I have on occasion decided not to buy something because its price included a rebate. The manufacturers are playing head games. I wonder if they have any idea how much ill will rebates generate.

On the other hand, a coupld times I won. I got reimbursed by my employer for the sticker price and a couple months later pocketed a rebate. But it isn’t worth it.

20

Fry’s Electronics[sup]1[/sup] would sometimes actually give you two receipts if there was a mail-in rebate on a product, so you could retain one and mail in the other for the rebate (the rebate receipt listed the item individually if you had purchased several items). With Fry’s very liberal return policy, this always had me wondering if there were scenarios whereby somebody could return the damned thing to Fry’s and still send in the other receipt for a rebate check. The mail-in often requires you to include the bar code from the package, but given sloppiness by the retailer and the manufacturer I wouldn’t be surprised if somebody’s gotten away with it.

(Fry’s liberal return policy is coupled to an enormous propensity for simply repackaging returned items and placing them back on the shelves. Always look closely at your purchase before leaving Fry’s with it for the sticker that indicates they repackaged it.)

[sup]1[/sup] - Fry’s Electronics is a mostly California electronics / computer superstore. They have stores in some other states as well, but about half their stores are in CA. It’s a store people love to hate - they usually have a wide selection and pretty good prices, but the cluelessness of their employees is legendary, and their service is abysmal. They also collect a lot of flak for posting an employee at the exit to check your bags.