Marina Dias,
Pricing Solution Consultant
January 2024 was marked by a retail sales drop at the sharpest rate since the CV-19 pandemic. Obviously, many retailers tried to use discounts and rebates as a means of bringing customers back to the stores. Hence, it was not always successful.
Choosing the proper mix of pricing tactics and strategies plays a pivotal role in attracting customers and driving sales. Rebatedeals and discounts are common approaches used by retailers eager to boost sales and keep customers loyal.
Even though there are some similarities between discounts and rebates, these two strategies are not the same. Generally speaking,discounts in marketingoffer immediate savings right at the point of purchase while rebates provide a partial refund after the online or offlinesale.
Understanding the differences between these strategies as well as knowing when to apply rebates and incentivescan greatly impact your bottom line. Let's explore the specific characteristics of rebatedeals and discounts and take a look at scenarios where they can be most effective.
What is a discount?
Discount is a reduction in the regular price of a product or service, intended to stimulate sales and attract customers. As mentioned already, discounts imply immediate savings for a buyerright when a purchase is made. This is the major distinction between a discount and a rebate.
Here are the three major types of discounts:
- Trade discounts:This is basically a B2B discount while it is negotiated between a manufacturer or product vendor and a retailer based on the product purchase volume. As a rule, retailers buying more products from a manufacturer receive larger discounts.
- Cash discounts:This is a B2C discount offered by a retailer to a shopper either offline or online. Cash discounts are applied when a buyer makes an immediate cash payment.
- Volume discounts:This is also a B2C discount which becomes available if a buyer purchases a specified quantity of a particular product. For example, a single SKU might cost $2 while five same products are offered at $8.
Besides those three major groups of discounts in marketing, you can also use a more detailed classification based on specific characteristics of a discount. Here are a few examples:
- Percentage Discounts:These are the most common type of discount, where a percentage is subtracted from the original price. For example, "20% off."
- Fixed Amount Discounts:A specific money amount is subtracted from the original price. For example, "Save $10."
- Seasonal Discounts:Discounts are offered during specific times of the year, such as end-of-season sales or holiday discounts. Markdown campaigns are often linked to seasons too.
- Discount Coupons:This type of discount is applied based on special vouchers or codes.
- Bundle Discounts:Discounts are offered when customers buy a bundle of products together. "Buy one, get one free" is an example of a bundle discount.
What is a rebate pricing?
Rebate pricingimplies a partial refund or cashbackoffered to a customer after a purchase is made, typically as a way to incentivize buying or to promote customer loyalty. Once again, while discounts reduce the price at the moment of purchase, rebates involve apostponed reimbursem*nt.
Rebates and incentives can be paid either in cash or as a lump sum. Rebate policy may differ based on diverse factors, e.g. product type, store geo, or customer profile. Here is a popular classification of rebates:
- Volume rebate:This approach requires customers to buy a specific quantity of a product to qualify for a rebate. It works like this: the more you purchase, the higher rebate you get.
- Bundle rebate program:This one requires customers to buy a bundle of a higher-priced item with a lower-priced one to receive a rebate.
- Promo rebate: This type of rebate program is associated mainly with markdown campaigns aimed at hitting a stock level. Shoppers can receive coupons and rebates for purchasing a product on sale.
Often, receiving a rebate cashbackrequires a shopper to make some extra efforts, e.g. filling out and submitting a special form. Typically not all customers complete the process which is why in the end they do not receive coupons and rebates. In the short term period, it could be beneficial for a retailer, yet in the long run, it is worth simplifying the process for shoppers. Otherwise, the rebate policy's complexity may negatively impact its effectiveness.
Rebates vs Discounts
Both discounts andrebate programsare common strategies used in retail to increase sales and enhance customer loyalty, but they differ in timing and application.
Here are the main similarities between discounts and rebates:
- Both Offer Savings:Both discounts and rebates provide customers with the opportunity to save money on their purchases.
- Used for Promotion:Both are often used as promotional tools to stimulate sales.
And these are the major differences between the strategies:
- Timing:Discounts are applied at the time of purchase, reducing the price paid immediately, while rebates are applied after the sale, often requiring customers to submit a claim to receive a refund.
- Customer Perception:Discounts are generally seen as more straightforward and easier to understand, while rebates can sometimes be perceived as more complex and less reliable.
- Cost to Retailer:Discounts directly reduce the revenue received by a retailer, while rebates are a deferred cost, as a cashback is postponed in time.
Which strategy is right for your business?
Both discounts and rebate pricingcan be used as a tool to stimulate salesor a part ofpromo campaigns. However, they can not be used interchangeably. This is why the proper mix of discounts and rebates appears to be the best strategy in retail.
The effective and comprehensive strategy should be based on the relevant, timely, and appropriate use of rebate programsand discounts. Simply put, the discounts are more relevant when the goal is to sell out a particular SKU or hit the stock level during a markdown wave.
Discounts can bring immediate results but if not managed wisely, they can undermine the price perception of a retailer. Also, there is always a risk of compromising margins when the sales volume increase is prioritized. Hopefully, the advanced pricing tools, like Competera platform, can leverage the power of big data and AI to find the optimal discounts, i.e. ones that allow sustaining particular sales volume while maximizing the margin.
At the same time, rebate programsare a powerful tool when it comes to CLV (Customer Lifetime Value) management while they can give a lasting and firm means of interaction with your loyal customers. Therebate meaning in marketing is significant:a well-elaborated system of rebates can make shoppers come again and again to your store which is hardlyachievable with one-time discounts.
Conclusion
While discounts offer immediate savings right at the point of purchase, rebate dealprovides a postponed money refund. Both discounts and rebates can stimulate sales, however, these tools are not the same and cannot be used interchangeably.
Eventually, the most effective strategy implies the combination of both rebatedeals and discounts when each tool has its specificpurpose and target. For example, discounts can be an effective part of a markdown campaign while rebateprogramscan help to keep customers loyal in the long run.
