Rebates vs Discounts: What’s the Difference?

The prices you set can affect the number of sales you get, your profits, and even your brand perception. That’s why it’s so important to make the right pricing decisions for your business.

Two popular choices when forming your pricing strategies are rebates and discounts. Both are incentives for shoppers to make purchases.

But they aren’t the same thing. There are key differences between these two strategies—which one is right for you?

What Is a Discount?

A discount is a deduction in the cost of a product, usually to encourage customers to make a purchase sooner than they would have otherwise, or to buy more of a product at the discounted price.

Discounts are applied at the point of purchase so that the shopper pays the discounted amount when checking out. It’s an immediate gratification for the customer and is available to all shoppers.

There are three main types of discounts:

1. Trade Discounts – This type of discount is between the manufacturer and the retailer. The higher the volume of purchases by the retailer, the larger the discount. A retailer who is purchasing less might receive a 15 percent discount, while a retailer with a higher purchase volume might receive a 25 percent discount.
2. Cash Discounts – This type of discount is between the retailer and the buyer. The discounted rate is applied only if the shopper makes an immediate cash payment. This type of discount occurs after the products have been purchased from the manufacturer.
3. Volume Discounts – This type of discount is between the retailer and the buyer. The discounted rate is applied only if the shopper purchases a certain amount of the product. For example, an item might cost $1.50 each or five for $6. This would save the shopper $1 while increasing sales for the retailer.

What Is a Rebate?

A rebate is a payment or refund that is paid retroactively after a purchase has been made. Often rebates are used as an incentive to purchase multiple items or more of an item at one time. This strategy can draw in customers who are interested in receiving cash back for expensive items they might not otherwise purchase.

Rebates can be paid in cash or in store value and can be paid in a lump sum or in payments. A rebate cannot be given until the purchase has been completed and paid for in full.

Rebates can rely on factors like location, type of industry, product groups, and more. Because of this, there are a few different kinds of rebates:

1. Volume – One of the most popular types of rebates, this strategy requires customers to purchase a certain amount of product before they are eligible for money back. Usually, the higher the amount purchased, the higher the rebate.
2. Product Mixing – Products with a higher price tag are often harder to sell. With this type of rebate incentive, shoppers are required to bundle a higher priced item and a lower priced item before they can receive their money back. For example, an electronics store may offer a rebate on bundling printers and laptops with a rebate on the cost of the printer.
3. Promotions – This strategy is generally applied to leftover stock items that retailers might be struggling to move. Customers are usually awarded a higher rebate the more units of a product they purchase.

Some retailers will require their shoppers to mail in their rebate requests or fill out forms online. Because this takes a little extra effort on the part of the shopper, retailers know that not all who participate in the rebate program will actually complete the final step and they won’t have to pay back the full rebate amount to every shopper. This helps protect profit margins.

Discount vs Rebates

The Similarities

• Both discounts and rebates are strategies used by retailers.
• Both discounts and rebates are meant to motivate shoppers to buy more, increasing sales for retailers.

The Differences

• A discount is a deduction in the purchasing price of the product. A rebate is a portion of the total purchase amount that is returned or refunded after the purchase has been made.
• Discounts are a short-term marketing strategy. Rebates are a long-term sales strategy.
• Discounts offer an immediate return to shoppers while rebates occur later, after the purchase is complete.
• Discounts are used as a marketing tool to increase sales and move more merchandise for a variety of different reasons. Rebates are a sales tool that encourages shoppers to pay a higher amount at the point of purchase.
• Discounts are available to all customers. Rebates are only available to shoppers who meet certain requirements.
• While discounts are generally very simple and straightforward, rebates can get quite specific and complex.

Which Strategy Is Right for Your Business?

It’s pretty clear that while these two strategies can get mixed up from time to time, they are very different in the way they operate and are implemented.

Using discounts is a short-term, straightforward marketing strategy that is used to increase sales fast. Using rebates is a long-term, often complex, sales strategy that is used to impact the size of a sale and move certain merchandise only when certain criteria are met.

Both strategies have their place in retail, which one could work best for your business?