Living Economics

Rebate Coupons
Mail-in rebate coupons succeed in promoting sales at relatively low cost because of low redemption rates.

Most people hate filling out forms and try to rush through the process. But there is one form that they will try to fill out very carefully for fear of getting rejected. A rejection could mean a payment denial of as much as $100. This is, of course, the dreaded mailed-in rebate redemption form commonly associated with consumer electronics items. Its exacting requirements provide good training for college applications and completing the Federal income tax return.

Rebate coupons are ingenious promotion tools. The rebate value is big enough to entice more buyers. But procrastination and the onerous filing requirements discourage 40% of the buyers from ever filing. Of those who do file, 20% is disqualified due to sloppy paperwork. That means only 48% of the buyers successfully redeemed their rebates. And some percentage of the mailed checks is thrown away as junk mail and never cashed.

The local government is happy because sales tax is collected on the full price of the rebate items.

No wonder rebate coupons are popular with manufacturers. The total annual face value of 400 million rebates is estimated to be $6 billion. The un-redeemed value of the rebates amounts to $2 billion. The unredeemed rebate reduced the expected rebate expense of TiVo Inc. enough to help lower its estimated first-quarter loss from $9.1 million to less than $1 million in the same period from the previous year (BW 12/5/2005).

Mail-in rebate is an extension of the familiar discount coupons for supermarket grocery items. There, the trouble of clipping the coupons and organizing them for checkout redemption also results in very low redemption rates (about 2.3% as reported in WSJ).

The use of mail-in rebates and discount coupons tells us that it is expensive to price discriminate. The built-in redemption hurdles needed to limit price discount to only those customers who are more price sensitive are costly to implement. In 1994, it cost about $1.22 per redeemed coupon (WSJ 5/10/1994). Similarly, fulfillment houses must be hired to process mailed-in redemption requests.

Although price discounting may not serve the purpose of permanently switching brand loyalty in mature products based on open standards, manufacturers cannot unilaterally stop the practice without losing market share to competitors. In other words, price discounting may be a collectively inferior but stable solution to a basically prisoner's dilemma game.

However, mail-in rebates may be useful in reducing the amount of merchandise return. Retailers can legitimately refuse a return after the box is cut up by removing the UPC. They are also useful to introduce me-too products into a crowded market and selectively discount less successful lines without creating a domino effect on more successful related lines via permanent price cuts ("Rebate" in Wikipedia.).

Although mail-in rebates may not disappear, the redemption hurdles might be lowered for competitive reasons. Staples has introduced online Easy Rebates which greatly simplifies the redemption process. Other big-box stores such as Best Buy and Rite Aid have also introduced similar steps (Smart Money).

References:
  • Business Week. 12/5/2005. "The great rebate runaround."
  • "The Great Rebate Debate." smartmoney.com. [Updated 4/17/2007; cited 8/9/2007]
  • WSJ. 5/10/1994. "Marketing: awash in coupons? Some firms try to stem the tide."
  • "Rebate (marketing)". [Cited 8/9/2007].
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