Rebates vs Discounts: What Are the Differences?
Whatever pricing strategy you decide to use for your products or services, it plays an important factor in the volume of sales you get, the revenue you make, and even the way your business is perceived by your customers.
In this article, we’re going to focus on rebates and discounts. Rebates are a retrospective payment from a supplier to a customer that ultimately reduces the cost of a product at a later date. Discounts are immediate, rebates are delayed. But like discounts, rebates come in a handful of varieties, such as volume rebates, product mixes and stocking incentives. Lets dive in to unpack these in detail!
What is a Discount?
Discounts are a powerful pricing tool to motivate buying behaviours, typically applied at the point of purchase to reduce the buying price for a set amount of time: when you shop, you pay the discounted value straight away.
The purpose of a company offering a discount is to increase short-term sales, move out-of-date stock, reward valuable customers therefore creating better relationships, and make sure sale targets are met. Customers may also choose your product or service over your competitors if the price is discounted enough.
Just be cautious how you apply your discounts, lowering your prices might bring in customers, but if you don’t execute your sale properly, you could cut into your profits and even damage your brand and reputation.
You may be surprised to learn there are different types of discounts. Most of us are familiar with discounts from our consumer lives, where we receive a percentage off a purchase. That’s a cash discount. When you go to your local DIY store and see that hammers are 25% off, you receive that 25% discount when you make your purchase.
Also common are volume discounts and trade discounts, but we see those less as consumers. Volume discounts pop up when you buy a certain quantity of a product—these are your “buy one, get one” offers. That free item is discounted down to zero dollars. Trade discounts are the realm of manufacturers, occurring when manufacturers reduce the retail price of a product when selling to a wholesaler.
What is a Rebate?
Rebates are an incentive program in which a supplier offers their customers a monetary reward for reaching designated purchasing goals. After the target specified in the agreement is met, customers can claim a percentage of the purchase price back for a better deal on their order. If you’re a supplier offering rebates to a customer, you’re dealing in supplier rebates. If you’re a customer receiving rebates from suppliers, you’re dealing in customer rebates.
This is where rebates fundamentally differ from discounts as purchases are made at full price, and the savings occur only after the target is met. This strategy allows you to avoid any of the negative associations of a price cut (whether temporary or permanent) while still reaping the benefits of increased sales.
Rebates are widely used by distributors across the globe to facilitate advantageous trading relations and stronger strategic partnerships. On average, distributors have rebate programs with 50 of their top 100 manufacturers, representing two-thirds of sales and an incredible 60-100% of net profit. This makes rebates one of the most important incentives in a distributor’s strategic toolkit.
With rebates, you can:
- Increase reliability and consistency of sales
- Boost sales on targeted SKUs
- Drive a higher margin
- Create stronger trading relationships and customer loyalty
Rebates don’t just come in one variety. In fact, there are many different types of rebates. There are opportunities for trading partners to create and execute on more nuanced deals. These different types of rebates allow you to drive the behaviors you want to see in your trading partners.
The simplest example of a rebate and most popular is a volume rebate program which rewards trading partners for purchasing higher volumes of a product. Volume incentives — also called tiered incentives or incentive bands — are a great method to help your company increase margins. Instead of offering a trading partner a flat rate rebate, tiered incentives allow you to offer more rebates for more products purchased.
Example of a volume rebate:
Other rebate examples include mix incentive programs, promotional, loyalty and marketing incentives, logistics rebates for bulk purchases and special pricing agreements. All of these types of rebates can be explored in our white paper: Rebate Management Basics: Understanding Which Incentive Type is Right for Your Business
What Are the Main Differences Between Rebates and Discounts?
You may be thinking that rebates sound an awful lot like discounts. In some ways, you’re not wrong. Both discounts and rebates give money back to a purchaser. The main difference between the two is when that money goes back to the purchaser.
Rebates Vs Discounts: Which One Will You Choose?
Rebates and discounts can both be effective price incentives for businesses looking to boost sales, but rebates have their own benefits and a unique reputation. While discounts are often associated with a drop in demand or quality, rebates do not have this connotation, allowing you to boost your sales while maintaining your reputation.
Rebates also keep the price point at a more stable level, as it avoids “lowering the bar” for future negotiations. This means both you and your customer have greater flexibility for negotiations year over year, even when price increases. Rebates are a long-term sales strategy whereas discounts are meant for the short term. A discount may only last for a week, but rebate agreements may remain the same year after year.
Whichever type of incentive you decide to choose, make sure you have the right tool for the job. If your managing complex rebates, we have created the ultimate rebate management system to solve all your problems. We can help you and your trading partners keep each other honest. You’ll share a single source of truth for your rebate calculations, meaning fewer disputes and a happier relationship. Plus, you’ll both see updates in real time, tracking your progress toward goals and more. Schedule a demo here