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Why I Like Rebates

Posted By Jim On 12/03/2006 @ 3:17 pm In Personal Finance,Shopping | 5 Comments

I know rebates are the scourge of mankind and I know that there’s been moves to curtail the use of them but I think rebates have their place for deal hunters and frugal shoppers. With the redemption rates of rebates in the pits (I’ve heard some surprising statistics) and reports of redemption centers being ridiculously strict in the interpretation of the rules, I still think that for the very diligent shopper and rebate sender, it’s still a benefit to have rebates.

Imagine if you’re a manufacturer of a widget that sells for $100 retail at any store and costs $60 to put onto the shelf (includes manufacturing, shipping, packaging, advertising, etc.). If you were to offer a $50 rebate, the consumer now believes the cost of the item to them is a mere $50 – it goes from regular priced to a steal. You hire Redemption Company A that boasts a redemption percentage on average of 10%. That means your expected payout on each $50 rebate is exactly $5. (expected payout is calculated by the probability of a successful redemption times the value of the rebate, or 10% times $50 = five dollars). On your $100 retail item with a $50 rebate, you as the manufacturer still expect to generate revenues of $95 per item which means a of $35 a piece.

What does this mean for diligent shoppers? It means that if you can get that rebate, you’re getting an item at a much cheaper price than the manufacturer intended – which is a win for you. Now, manufacturers may price a rebate such that even at 100% redemption they’re still making money, but that’s irrelevant because you’re still getting it cheaper than they anticipate (since they’ll be working with the redemption rate numbers plus fudge).

Why do I like rebates? It means better deals if I am reasonably confident of getting a rebate. If companies move towards automatic rebates with 100% redemption rates, you’re going to see the value of rebates fall dramatically. The expected payout goes from a percentage of the rebate amount to the entire rebate amount (100%).With the above $100 widget example, you’re now talking about the manufacturer giving a $5 automatic rebate instead of a $50 “hard to get” rebate, which is worse for the diligent shopper but better for average Joe shopper.


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