3/31/2007

Rebates, don’t you just love them?

Did you ever get so annoyed with getting the rebate on something you purchased that you just gave up? I found a really nice article about this kind of pricing strategy that companies use:
http://money.cnn.com/magazines/fortune/fortune_archive/1994/12/12/80037/index.htm
The cynicism in this story is hilarious, but the author also brings up a good point. Why don’t sellers just keep it simple and cut prices instead? Yes it’s true that people are initially attracted by the lower price, only not to collect the rebate because it is too much of a hassle. I must say that I have figured out a long time ago not to be persuaded by such offers. Experience has taught me that companies always make things too difficult for me. I would rather search for a place where I actually get the discount right away. But there still are a lot of people that can be tricked with this pricing strategy. This article explains that such pricing strategies are partly driven by what is called the ‘prospect theory’. This theory is based on the idea that: ‘People judge the loss of any given amount as more painful than they judge the gain of an equal amount as pleasurable’. The rebate is viewed as a reduction in a loss, but after the deal is done the rebate all of a sudden starts looking like a gain, and therefore less important. That is why so many people don’t bother to collect. Furthermore rebate pricing is a form of price discrimination. The people that are more sensitive to money will put up with the hassle, whereas the less price sensitive consumers will not. In this way the seller can take away some of the consumer surplus. So apart from the vengeful types that become so annoyed that they will do anything to collect the rebate and might never do business with the seller again, in general this pricing strategy works. Or might the number of negative impacts outweigh the benefits?

7 comments:

TR said...

I definitely think that this strategy works. There are many people who take advantage of such rebates. I know that if I am promised a rebate and don’t get it, I will fight and fight until I do get it. I am sure there are people that would rather not get the rebate because they figure it is not worth their time, but I think that people who buy a product with a rebate offer really want the rebate. There are those people who buy the product simply because they want the product. The rebate has no effect on them. They would buy it with or without the rebate. The people who buy the product because of the rebate will do everything to get it. I believe that more people who want the rebate will purchase the product than people who don’t care for it. Therefore, I think that this strategy really does work.

Madeline said...

This argument is similar to the other post about the telephone excise tax refund. Some people value their time more than the small dollar amount of a rebate. This really is the perfect way to price discriminate without making people mad. I have only redeemed one rebate in my life. I completed a rebate to get $60 a couple of months ago, but never before. I have, of course, purchased things for which there was a $3, $5, even $10 or $20 rebate and never even considered sending it in. I happily paid the higher price. If I would have walked in the store and the person in line in front of me paid $10 less than I did for the same product, I would not be happy. But as it was, we both paid the same amount at the register, and both of us walked out happy. The store was able to keep more of my money and attract someone who was a little more price-sensitive at the same time. Brilliant!

Jacob said...

I agree with you that companies make getting the rebate such a hassle that it is easy to eventually just give up and cut your losses. I am still hoping to receive a $5.00 rebate on some pens I bought 6 years ago! I also agree with you that it is an exceptionally good pricing strategy. I will likely buy a product with a rebate versus a similar product with no rebate. I think that the rebate pricing strategy will be around for a long time.

Dr. Tufte said...

-1 on Joseph for a poorly formatted link.

Other than that, this is one of the best posts of the semester - in the sense of covering the ManEc bases.

Jacob: I thought I was bad pining over a $30 Staples rebate for a year.

BTW: Corporate Staples did the wrong thing - fighting me over the money, while the manager at the local one correctly realized that it might hurt his business and honored it out petty cash when I complained.

Sophie said...

This article definitely hit home for me. I always am drawn to goods that have rebates, but often find that I end up never taking the time to redeem them. I absolutely would love if companies eliminated rebates and just started using price reductions, but I doubt this will happen because of the loss of profit this would cause these firms. I guess I am simply guilty of liking my gratification instantly. Blame it on my age!

William said...

Dr. Tufte,
It seems to me that there are obvious benefits that are attributed to rebates. If there were not then companies would not have them. Obviously having a rebate is more attractive than not having one, even if you do not use the rebate. However, as mentioned it is imperative that companies honor their rebates and not make their customers unhappy. Customer satisfaction is so important in the retail business that companies cannot afford to lose their customers over rebates. Companies must realize that their customers are the reason why they are in business. If they do not understand this important concept then this can damage their reputation and over time they will be forced to shut down.

Dr. Tufte said...

My understanding is that the big benefit of rebates is that quantity demanded is more elastic to the offer of a rebate than revenue is. This is the economist's way of saying people buy because of the rebate and then forget to cash them in.