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What makes more sense?

  1. Giving buyers a discount on pricing based on everything they would buy. (I suppose they could potentially buy more?)

  2. Raising the price on items but giving customers a rebate if they buy "x" amount, so the more they buy the higher the rebate?

Who comes out in the end? The buyer or seller in each scenario? Why?

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Does it have to be mutually exclusive? I say that targeting a win-win situation makes more sense. Increase sales by offering a reasonable discount/rebate, and allowing buyers to save by buying in "bulk." –  George Marian Jul 29 '11 at 4:49
    
Can you explain what you mean in #1 a little more? Especially the part about 'based on everything they would buy' –  JohnFx Jul 29 '11 at 14:40
    
How would things change if the manufacturer had a lock on the market. Ex: you could only get this product from that one mfg? I was torn putting this question here or in the math stack exchange, as I feel it is a mix of both. Almost trying to get the math behind this to try to figure out what is better when based on given condition/variables. –  ScaleOvenStove Jul 29 '11 at 15:46
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3 Answers

up vote 3 down vote accepted

Discounts usually reflect backend payments to retailers or incentives for retailers to buy certain quantities of items. There are many reasons to offer discounts, some of which may be non-obvious. Products like breakfast cereal have fluctuations in demand, but the high fixed manufacturing costs and long sales cycle make it difficult to change production. So the manufacturer offers supermarkets a deal in the middle of the summer when kids aren't going to school to buy a bunch of cereal. Discounts like that are supply-side incentives.

Other discounts are at the retailer level to generate cash, attract customers (loss leader) or clear out old inventory. If a supermarket has too much perishable chicken on hand, it will slash the price. Even if they lose money, some money is better than spoiled chicken that you need to pay to have hauled off to the dump!

A rebate is there to stimulate demand, without affecting the sales channel. A rebate gives a price-sensitive consumer an incentive to buy products they normally wouldn't. A computer manufacturer may offer a rebate if you buy a printer with a computer. A beer company may give you a rebate to buy pretzels, hotdogs, and a larger case of beer.

Manufacturers like rebates because you "help out" the price-sensitive consumers, but folks who aren't price sensitive or find it a burden to fill out a form don't get the discount. They also reduce returns, which are a huge issue -- especially for products sold at discount retailers with 90-day return policies.

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In marketingeese rebates are a form of market segmentation that allows the company to "capture the consumer's surplus". In English that means that you can price something high enough that people who aren't as price conscious will pay top dollar for it, but also give those who are thrifty the ability to get a lower price through a little extra work (that the other segment won't bother with) and not lose their business. Effectively this lets you put a "The most you can afford" price tag on items in a store. –  JohnFx Jul 29 '11 at 14:47
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Rebates tend to favor the seller as not all buyers will remember/bother to pursue the rebate.

Other than that distinction, it comes down to the eligibility rules. It doesn't matter if you call it a rebate or a discount. (A rose by any other name...)

If we are talking about large enough savings, there is also the opportunity cost. Say I stand to save $1000 on a purchase. Again, the discount is desirable from my perspective since I save the money now, not 6-8 weeks later when I finally get the rebate check.

If it isn't an instant rebate (ultimately a discount), I don't bother.

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I wrote an article about it in my blog a while ago. The bottom line is that the rebates are not given on every purchase and to every buyer, while the discounts are. So for the buyers- discounts (aka instant rebates) are much better than mail-in-rebates that have limitations and take a long time to get back.

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