1. The Coupon Effect: The hard-core couponers will send in rebate coupons with receipts and get a discount, while the vast majority of people will say to hell with it. Thus, you gain an additional sale from the person who might not otherwise buy your product at full price. In economic theory, this optimizes your profits, as you sell product to each consumer at the highest price they are willing to pay. This is the least reason to offer rebates.
2. The Warranty Effect: A lot of people never think about this, but many rebates require that you cut the UPC bar code off the product box when mailing in the rebate. This prevents you from returning the item for a full refund - which would allow you to mail in rebate after rebate on the same item, purchased and returned again and again. But it also has a secondary function - it means that if the product (say, an electronic device) breaks during warranty period, you have to go to the manufacturer for relief, instead of merely returning it to the big-box store where you bought it - as they won't take it back without the bar code intact. Manufacturers are charged-back for returned items, so if they can make sure a sale "sticks" it is helpful to their bottom line. Fewer store returns means more profits. And that is why when you buy something that requires assembly, they exhort you to call their 1-800 number for those missing screws, rather than return the product to the store for a refund.
3. The Dealer Effect: Car rebates were started (at least on a large scale) when Chrysler went bankrupt the first time, in the early 1980's. Lee Iaccoca touted the "K-car" and offered a "rebate" to patriotic Americans who would buy one. You bought the car and a few weeks later, you'd get a check in the mail for $500 or so. Why not just lower the price of the car?
The reasons are varied - car pricing is irrational to begin with. GM, and in particular, Cadillac, puts joke prices on its products and then ends up selling them for one-third off the "list" price. The resale value on the cars is, of course, lower than this, and thus when auto magazines calculate "depreciation", GM cars come up dead last (or first, depending on your perspective), as the resale compared to the mythical "list" price is huge, compared to other car companies that list prices closer to reality.
Keeping list prices up placates dealers, who want to sell a "hot" car for list, or hope that your grandma will come in and pay sticker on a new Hupmobile. So rebates are a way of preserving these mythical list prices. They are also ways to move cars without having to complicate the already complicated math involved with dealers. Dealers buy cars from manufacturers and then finance them, which is why dealers like to move inventory - they have to pay interest on the cars for every day they sit on the lot. If prices were adjusted on a day-to-day basis, the accounting would be a nightmare. Easier to offer a "rebate" to move slow-selling cars at slow times of the year.
Of course, today, the rebates are often applied to the purchase price or down payment - and paid directly to the dealer or finance company. And often they are not called "rebates" anymore but "dealer cash" or "dealer incentives" or some such nonsense. Car dealers get all sorts of kickbacks from manufacturers - including bonuses for selling a large number of cars, which is why the volume dealers can sell for less than your local Mom and Pop shop.
4. Price Preservation: I touched upon this above with the Dealer Effect. By using rebates, you maintain your "list" prices and make it appear everyone is getting the same deal. The grand-daddy of rebates - and arguably the source of the phrase - was John D. Rockefeller. He had a deal with the railroads that if he shipped enough oil with them, he would get a rebate. At the time, oil shipments were the single biggest source of freight revenue and the New York Central and Penn Central would compete with each other for Rockefeller's business. Since they could not alter their listed freight rates, they competed by offering rebates.
Some claimed this was illegal - and an illegal kick-back to Standard Oil. Freight rates were supposed to be uniform - with each shipper paying the same amount per ton. Rebates were a way of adjusting rates without adjusting rates.
Price preservation has other uses as well. When you are selling a "premium" product (for example, liquor) you want it to have the cache of a premium brand. And part of that cache is the price you pay for it. There are a lot of expensive brands out there that are not much better than cheaper brands, but people buy them on the basis of status. "Look how much I can afford to spend!" the buyer is saying, even as he puts the purchase on an over-extended credit card.
Once a product appears in the bargain bin, the cache is ruined forever. It is damn hard to reclaim status for a product, once it is on closeout at K-Mart. But this creates a conundrum for the manufacturer if there is an oversupply of product or the product is slow to sell. By offering a rebate, you can sell the product to bargain status-seekers without disturbing the hallowed "retail price" - or at least that is the theory. The reality is, word gets around that you are discounting, and pretty soon, your vaunted "premium" brand is bargain-basement.
5. You Don't Have To Pay: Getting back to the subject of my posting, nine times out of ten, people take the rebate coupon at the retailer and promise to fill it out - and then forget to do it. Each time someone doesn't bother to process a rebate, you make money, so to speak. They bought on the premise that with the rebate they were getting a lower price. But since they never actually get that lower price, you make a sale at full price.
Better yet, once the rebate coup-ins are mailed in, you can throw away half the submissions with little or no recourse. People simply aren't going to raise a fuss about missing rebate checks - and they have no way of proving anything anyway, unless they spent a buck for certified delivery, and who in their right mind would do that?
So you offer a rebate, knowing full well most people won't send it in, and if they do send it in, you can claim there is some defect in the paperwork which allows you to decline payment if you acknowledge that you received it at all.
Buying a car at a dealer is a complicated transaction, and no matter how "astute" you are and how cleverly you try to play the deal, you always come out behind. Buying a car, for cash, from your neighbor next door, is a simple deal. You hand them cash, they hand you the title and the keys. You know how much you paid for the car. With a car dealer, between the financing, trade-in, and dealer "fees" you might have no idea at all. With leasing, even worse.
And so on down the line. When you buy your groceries based on getting five cents off a gallon of gas, you are complicating what should be a very straightforward deal - cash-for-food. And not surprisingly, the grocery store offering that deal is the most expensive in town. They want to distract you with the side-deal, so they can rummage through your wallet while you are not looking.
So why did I send in the rebate coupons in the first place? In part, as an experiment for this blog. Also, because, well forty bucks is forty bucks - but I had an inkling that I was going to get hosed from the get-go. If it was for fifty cents or a buck, I wouldn't have bothered. And in retrospect, I guess I learned a lesson - a "great deal" on a case of wine isn't such a great deal, if the rebate coup-in was just a sick joke on the consumer.
Next time, pay cash and get the lowest price!