14 July 2009

What’s The Deal With Rebates? (And How Can Your Business Use ‘Em?)

by Freddy J. Nager, Founder & Fusion Director of Atomic Tango LLC

"Let's talk about a sensitive subject: breakage..."

“Let’s talk about a sensitive subject: breakage…”

So you finally found that gadget you’ve been dreaming about — you know, the one with the 60″ screen, built-in WiFi, and ability to make a perfect crème brulee at the touch of a button. Better yet, you found it advertised at just the right price… but you didn’t notice the fine print. Only after getting to the store do you notice the word that causes blistering steam to blast out of your ears and nostrils…


Ah, the R-Word: for most consumers, that one word causes more irritation than “assembly required” and “batteries not included” combined.

Why can’t the store just cut the cost of the damn gadget? Why force their customers to endure the painstaking hassle of clipping and cutting and filling out and mailing?

Because, amigos, the hassle is the point.

Price Discrimination: Yes, It’s Legal

There’s this practice called “price discrimination,” where companies charge some customers more than others for the same product. “That can’t be legal,” you’re thinking. Well, you’re right: companies can’t practice price discrimination on legally-protected bases like race — but they can on behavior. Examples:

  • a bar’s happy hour gives discounts to patrons who come earlier
  • a buy-two-get-one-free deal benefits volume purchasers
  • a frequent flier program give deals to loyal customers

Rebates feed discounts to people who are so hungry for a deal, they’ll jump through flaming hoops to get them. Those customers who are too wealthy or too lazy to go through the process don’t get the deal — they pay full price.

In that way, a seller can advertise a competitive low price, but not have to give it to everybody. Indeed, even those who bought the product for the discount don’t always go to the hassle of redeeming the rebate.

For example, I recently bought a bottle of shampoo that promised a rebate greater than the actual price. “Cool,” I thought, “they’re paying me to use it.” When I got home, I discovered that redeeming the rebate required filling in a 3×5 card. I haven’t owned a 3×5 card since PostIt Notes were invented, and I wasn’t going out to buy 100 of them to get a few dollars back on shampoo. My laziness factor kicked in. The shampoo company won. For now.

Breakage: No, Not The Basis Of A “Seinfeld” Episode

Failure to redeem a rebate is called “breakage,” and can range from 2% of customers to as high as 80%. This “tax on the disorganized” occurs most often during the frantic holiday season. For example, according to a BusinessWeek report on rebates, in 2005, “About 50,000 of TiVo’s 104,000 new subscribers failed to redeem mail-in rebate offers [for $100], reducing the company’s expected rebate expense by $5 million.”

Yes, there’s serious money in breakage. And that’s not necessarily a good thing.

Some companies resort to sneaky tricks to ensure breakage, like making redemption instructions unclear, or providing insufficient time to redeem the rebate on a mail-ordered product.

I once ordered some “free after rebate” products from an online electronics retailer. The rebate forms required that I submit the product UPC’s within ten days of placing my order, but after I paid, I was informed that my free products would be delayed “up to two weeks.” In other words, I would not have the UPC’s in time. I immediately emailed the company and threatened to file complaints with the Better Business Bureau and the State of California. I got a rebate credited to my card the same day.

I don’t consider deceptive or difficult rebates to be marketing. In my view, that’s borderline criminal behavior — and simply being dumb about one’s brand. Yes, there’s money in breakage, but there’s even more money in building a large, trustworthy brand. I’ve never purchased from either the shampoo company or that electronics retailer again. By being honest and straightforward, you create long-term customers, and you’ll avoid smacking into the law, which could lead to embarrassing, brand crushing stories in the news.

The Value of Rebating

Rebates can be a worthwhile activity for all involved if they’re used for the following:

1. Ensuring That Discounts Are Passed Through To Your End Consumers: A company can suggest a specific retail price on their product (the MSRP), but in most cases, the final pricing call is up to the retailer. So if you cut your wholesale price and ask the retailer to pass on the savings, the retailer may just laugh, keep the retail price as is and enjoy the extra profit. Your alternative is to offer a rebate directly to the customer.

2. Learning About Your Customers: Companies should know as much as they can about their customers, even the stingy ones. So in order to get a rebate, customers may be required to answer questions about themselves. As long as the questions are relevant and not too invasive, most customers see that as a fair trade-off. Hence, a rebate can help you learn about your customers for less than the cost of hiring a national research agency. Just remember that it’s your most discount-hungry customers that you’re learning about here.

3. Shaping Behavior: Rebates can jump-start sales during quiet times, get consumers to sample new products, or unload products that are cluttering the warehouse. Because they’re strictly a promotion for that one product for that limited time, they don’t impact the company’s overall brand as do across-the-board price cuts. On that note, if you use rebates all the time for everything — as did the automotive manufacturers — consumers will come to expect them. That’s not the behavior you want. Use rebates sparingly and for a limited time only!

Now For Some Strategic Rebating (Without The Breakage)


Let’s consider some ideas that don’t stoop to encouraging breakage — and that might increase sales and enhance your brand. (Note: every state has different rebate regulations, so brush up on them before launching your campaign and implementing any of these ideas.)

1. Encourage Website Redemption: It’s the second half of 2009 already: enough with the snail mail. Enable your customers to redeem their rebates online by providing a unique redemption code. They’ll be grateful for the convenience. From a marketing standpoint, an online form will make it immensely easier for you to collect information about your customers — and to present them with other products and deals. It’s hard to get people to your store or site in the first place. A rebate presents that opportunity. Envelopes and stamps don’t.

2. Encourage Spending That Rebate With You Or Your Partners: If you have a store or ecommerce site, offer customers the option of a larger rebate in the form of credit. Be sure to make it a choice, not a mandate. For example, if the rebate on the gadget is $100, give customers the option of $120 in credit. This keeps the money in-house. If you have a promotional partner, offer the rebate in the form of a gift card with that partner. Alliances are a great way to boost your brand, and cross-incentivizing customers is a great way to share traffic.

3. Solicit Donations To Charitable Partners: You’ve used the rebate to spur a sale. Now, enable your customers to donate that money — or at least part of it — to a worthy cause. Your brand will score an equity boost, and your favorite non-profit scores a donation.

Can it work for B-to-B?

Finally, rebates aren’t just for business-to-consumer transactions only. Their ability to shape behavior should also be leveraged by B-to-B firms.

For example, getting on-time payments is critical for companies that rely on cash flow to finance their operations. When quoting a project fee, state your 30-day payment deadline (or whatever your standard), then offer a rebate if the payment is made early. If your client doesn’t take advantage of this rebate option — yes, B-to-B breakage — you’ve essentially earned a late-payment fee in advance.

Then There’s G-to-B…

Entire state governments are getting in on the rebate action by offering tax refunds in exchange for, say, filming a movie in their states. Considering all the Hollywood productions that are filming elsewhere, it’s clear that for a lot of people, rebates are not a dirty word.

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Shameless Plug: For professional consultation on pricing and other marketing strategies, contact Atomic Tango

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches graduate-level marketing communication courses at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

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