I made a trip to Circuit City yesterday to pick up a new keyboard/mouse combo. (I finally got tired of tripping over wires, so decided to spring for a wireless setup).
I found my way to the keyboard aisle (yes, aisle– they stock about 20 different types), and after some comparison, I zoned in on a Logitech model (pictured at right). Nice features, including a few programmable keys and special image-editing keys. Most attractively, a rebate applied. Retail of $79.99 reduced to $39.99 after rebate. Nice! Naturally, the post-rebate number was featured in substantially larger type than the actual purchase price.
Later that day, as I waded through a pile of online rebate forms, clipping UPC codes, and filling out envelopes to try to claim my $40 refund (which, it turns out, was actually two separate $20 refunds, each to be mailed to a separate address), I was starting to think I might have been better off buying the model which cost $10 more, but no rebates to claim.
Naturally, this got me thinking about rebate programs, and why companies find it necessary to torment their customers with this stuff instead of just giving a discount.
Actually, there are good reasons, at least from the company’s point of view:
- Rebates preserve price integrity (better than jacking around the list price)
- The rebate lets the manufacturer insure that the discount is passed along to the consumer, and not held back by the distributor or retailer.
- The limited-term nature of the rebate program creates an incentive for the consumer to purchase immediately.
- In a sea of competing products, the rebate offer sign on the shelf draws attention to the product.
- Most importantly — the company offering the rebate knows that many rebates will never get redeemed at all.
How many never get redeemed? I thought I’d go looking…
According to the Consumer Reports Shopping Blog, 4 out of 10 rebates are not redeemed by consumers. 40%! That sounds high to me, and there was no source cited for the statistic, but I did some further web searches on the topic.
Estimates seem to be all over the place, at least in part due to different methodologies and definitions. I saw non-redemption numbers everywhere from 99% down to just 1%. But 40% seemed like a reasonable enough estimate.
Doing a little math with my recent purchase as an example…. I’m going to make a few off the cuff estimates for the sake of argument:
Logitech’s cost to make the keyboard/mouse kit: $15
Logitech’s price charged to Circuit City: $40
With those numbers, we can compute that, prior to any rebate, Logitech would have a 63% gross margin on the product. To compute the post-rebate margin, I use the formula:
[Sale price - Mfr cost - (Rebate * Redemption %)] / Sale price = Post Rebate Margin
Assuming a 70% redemption rate, Logitech’s margin is -8%. At 60% redemption rate (the inverse of Consumer Reports’ non-redemption average), Logitech’s margin is 3%. At a 30% redemption rate, Logitech’s margin is 33%.
So what’s the incentive for the manufacturer to pursue this program? Contribution margin, baby. Drive sales volume with the rebate program, run the smokestacks at full blast, and then hope the buyers skew towards slackers who don’t redeem rebates.
This is all well and good, but getting back to where I started off on this thing, the mathematical model I build above leaves out a softer number– what is the value of the damage to the company’s reputation in the eyes of consumers frustrated by having to jump through hoops to realize their expected sale price? Good luck computing that one, but I think it’s safe to say it’s not $0.
Interesting that highly admired companies (Apple, for example) don’t do rebates. The ones that do?
- Players in commodity-type markets (as a way to differentiate when all the products, such as wireless keyboards, start to look the same)
- Players who lag the market whether through inferior or undesired products and must buy share by any means necessary (ie. GM)
- Players with a short selling window, ie. Quicken’s annual Turbo Tax rebate comes to mind.
- The little guy who wants to buy a little of your mindshare.
Read more background on rebates at Wikipedia if you’re interested.