Rebate Marketing Basics

Who doesn’t love the promise of “found money?” That’s the basic idea behind rebates, and it’s one reason why they can be so effective in both the B2C and B2B realms, regardless of whether the promised money is found or not.

A study by the Promotion Fulfillment Center, a provider of turnkey solutions in fulfillment, e-commerce, rebates, and other promotions services, found that 95 percent of consumers are interested in products that come with rebates, 80 percent look for rebates when making purchases, and 57 percent feel that rebates are easy to redeem.

The basics of rebate marketing

However, a high percentage of rebate offers are never redeemed, and in a significant percentage of cases where they are redeemed, the rebate check is never cashed. That lowers marketers’ costs for rebate programs, but it does not dilute their benefits.

“The strategic feature is the ability to engage and interact with the [customer] after the sale,” says Ed McMasters, director of marketing and communications at Flottman Company, which provides miniature folding and printing services for pharmaceutical, medical device, and consumer packaging industries. “It takes effort on the part of the purchaser to send in the required materials to take advantage of the offer. This demonstrates loyalty.”

While integrating rebates into an overall marketing strategy is a complex undertaking, the rewards can justify the effort. Research conducted by the Aberdeen Group identified several competitive advantages experienced by companies that use reward-based promotions such as rebates to drive engagement and purchases. Some of the study’s findings include:

•     Higher annual revenue and greater profitability per customer result from using reward-based promotions compared to using discounts. Surveyed companies reported an average year-over-year revenue growth increase of 36 percent attributable to reward-based promotions versus 28 percent attributable to discounts. Use of reward-based promotions also generated greater average profit margin per customer (24 percent for reward-based compared to 18 percent for discounts).
•     Businesses use reward-based promotions to achieve specific business goals, including fostering customer engagement, driving purchase intent, driving sales lift and/or purchase frequency, and minimizing lost revenue potential due to discounting.
•     Reward-based promotions elevate brand image. Forty-three percent of companies surveyed consider using reward-based promotions when they want to create the impression of a premium brand image rather than a price-driven discounter. When competing directly with a rival on brand image, 44 percent of businesses prefer to use reward-based promotions.

Program Choice and Structure Are Important

In the consumer arena, properly chosen and structured rebate programs can boost sales, increase market share, and more. The wrong program, or a poorly executed one, can have a negative impact on profit margin due to set-up, administration, and fulfillment costs. A report by American Express on achieving the business benefits of consumer rebate programs highlights some critical aspects of rebate program development.

•     Identify rebate program goals. Rebate programs are generally most effective when used to promote durable goods where price is an important consideration in the purchase decision. Rebates are common in categories such as appliances, electronics, and automotive, but they can also be used with lower-cost products. According to research conducted at the University of South Carolina’s Moore School of Business, redemption rates are lowest (often in the single digits) when the reward is less than $10.
•     Rebate programs should be designed with specific goals in mind, such as clearing out older inventory, rolling out a new product, increasing market share, or creating a price advantage in a competitive marketplace.
•     Determine the amount, type, and duration of the rebate. Rebate programs can be structured to offer a fixed value or an escalating amount tied to different purchase levels (e.g., $100 off the purchase of a major appliance, $250 off the purchase of two, or $500 off the purchase of three). The escalating reward strategy can also be effective in lower-cost categories as a means to push the rebate award above the $10 threshold and drive greater consumer interest.
•     Other factors to consider in determining rebate levels are the amount needed to make the offer enticing enough to drive customer purchases; the desired degree of sales lift; breakage, which is the percentage of buyers who will not bother to redeem the rebate; and slippage, the percentage of those who do redeem it but never cash the check or use the debit card.
•     Considerations in setting a rebate program’s duration should include the amount of inventory available, how big an increase in sales is expected, and any applicable state regulations. A rebate program’s call to action becomes less compelling over time and redemption rates tend to decline, but the duration should be long enough to provide a positive customer experience when it comes to making the purchase and completing the submission process.
•     Choose the best redemption process and supporting infrastructure. Manual redemption systems are the easiest to set up but the most costly and labor-intensive to administer. With a manual system, purchasers submit their redemption forms by mail or over the phone, and their rebate checks or gift cards are mailed to them. Automated systems that enable online redemption require more effort and initial cost to set up, but they are less labor-intensive and easier to administer after that. Keeping the redemption process simple and honoring the purchaser’s rebate claim quickly is a best practice that can help boost customer loyalty and polish a brand’s reputation. Many marketers outsource the redemption process and subsequent data collection to a rebate clearinghouse or fulfillment company.
•     Measure and optimize. It’s important to establish milestones relevant to a rebate program’s objectives and to track and report those data points. That enables marketers to not only measure the program’s success and tweak it where necessary but also to spot emerging consumer trends. Rebate programs represent additional customer touchpoints, and tracking performance metrics may help uncover new marketing opportunities.
•     To help in that effort, Flottman Company’s McMasters recommends including additional questions on the rebate form, such as what other products in the brand portfolio the purchaser likes or how the product on which the rebate is being offered might be improved. “You should include a request to join your social media outlets,” he says. That request can also be incentivized, with a contest offering an additional entry for each social media engagement, for example.

Different Considerations in B2B

In the business-to-business space, rebates are a pricing best practice because they give sellers greater control than volume-based pricing (VBP), which is a common pricing practice across a number of industries, says Colin Carroll, a partner in the customer strategy and analytics practice at PwC, who specializes in pricing and commercial excellence.

VBP is based on the amount of product a customer says it intends to purchase over a coming period of time. Often, the actual volume ends up being significantly lower than that projection. Since the seller can’t retroactively change the customer’s price, its bottom line can be dented. Adopting rebate best practices ensures that rebate offers deliver the desired price, volume, and mix, and that the complexities of rebate administration do not outweigh the commercial benefits, Carroll says.

Rebates can be categorized by business objective and customer type, Carroll says. They can be used to achieve business objectives and to improve channel distribution effectiveness. Examples include:

•     Volume rebates, which are designed to limit the effect of customer over-promising on VBP. A tiered pricing plan based on different volume levels is established and invoice prices are fixed. When a buyer’s purchase volume pushes it into a lower-price tier, the difference on earlier purchases is rebated.
•     Growth rebates, a variation of volume rebates, are designed to drive revenue or volume growth in a particular product family. However, the rebate is paid only on a customer’s incremental volume, not total volume. Growth is effectively a condition attached to a volume rebate.
•     Retention rebates, which are rewards for continued business or customer loyalty. Any type of performance metric — product mix, growth, or volume — can be used to trigger the rebate, which is usually paid at the end of the year.
•     Mix rebates, which are designed to improve the customer and product mix in a supply relationship, can be used to encourage distributors to sell more volume of higher-mix or higher-margin products, or to increase sales to selected end users or end-user segments. While mix rebates may be used directly with end users, they “absolutely should be used with distributors and buying groups,” Carroll says.
•     Price-masking rebates, which are used to keep the “real” price from being visible in the market. Since a rebate is an off-invoice discount, it allows the supplier to issue an invoice at a price that is not the actual net price paid by the customer. B2B marketers can use price-masking rebates to avoid self-induced downward pricing pressure in competitive and transparent markets.

Compliance Is Key

Any rebate program, whether in the B2C or B2B realm, must be compliant with all relevant rules and regulations. For the most part, this is the bailiwick of state governments, and many have changed their laws in recent years. As a result, rebate offers that were acceptable a few years ago in certain states are now illegal, and an offer that is legal in one state may not be legal in another. Involvement at the federal level is rare but does occur in cases where restraint of trade or other anticompetitive issues might be at play.

Regardless of a marketer’s size, getting a rebate program right takes a commitment of time and resources, but the results are worth the effort, says Nate Masterson, CMO at Maple Holistics, a marketer of organic and natural beauty products. “In terms of their cost-versus-value advantage, rebate campaigns offer high returns with a usually negligible sacrifice. In point of fact, rebates don’t affect your products’ market price and may never be cashed in at all,” he says. “That leaves companies with tremendous growth opportunities.”

By Michael J. McDermott