Rebate vs. discount: what are the differences?

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Rebate vs. discount: what are the differences?

The Deal EconomyJuly 10, 2020

Introduction

The price you set for your products or services is going to be an important factor in a lot of things: the volume of sales you get, the profits you make, and even the way your brand is perceived.

Rebates and discounts are distinct forms of cost reductions which directly or indirectly promote the overall sales of a business. Both pricing terms may sound similar, however, there is a considerable difference between discount and rebates which we explore in more detail below.


Discounts

What is a discount?

Discounts are typically applied at the point of purchase to reduce the buying price: when you get a bill, you pay the discounted value. It’s all very immediate. The discounted price is visible as of the precise moment that the purchase would have been made and therefore offers immediate satisfaction.

The most common discounts are cash discounts, volume discounts and trade discounts. Trade discount is the amount by which a manufacturer reduces the retail price of a product when it sells to a wholesaler. This can be an important pricing tool to promote B2B sales. Whereas, volume discounts encourage buying in bulk, and cash discounts are given for early payment, aiming to accelerate cashflow.

The purpose of a company offering a discount is to increase short-term sales, move out-of-date stock, reward valuable customers therefore creating better relationships, and make sure sale targets are met.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.

Discount example

Discounts are provided to business customers that pay for the services or goods provided within a specific period of time this is known as early payment discount. For example, a business may offer its clients a small percentage of discount (5%) if they pay within a 30-day period.

How rebates are used between a supplier and a merchant

Rebates

What is a rebate?

Rebates are a retrospective payment which ultimately reduces the overall cost of a product/service at a later date. This makes rebates different to discounts, as you pay the bill for the full amount then, at some point later in time, part of the amount may get returned to you. Often certain conditions may have to be met in order to get rebates such as volume-based, special pricing agreements (SPAs) or claim-backs.

Earnings or payments from rebate deals can form a very significant proportion of a company’s profit margin. Rebates are commonly used as an incentive, to build loyalty and improve sales and market share.

A wide range of industries including building supplies, electronics, retail and wholesale distribution regularly offer rebates based on certain locations, products or product groups and on certain types of transaction. This means that the rebates can get rather complex.

Rebate example

Rebate agreements can take many complex forms, as they are often designed to cater to the specific sales strategies of the individual trading partners involved.

A simple example of a rebate is a volume incentive, where a customer could receive a rebate for buying a certain volume of a certain product over the life of the deal. For example, an annual rebate agreement might state a 5% rebate, conditional on purchasing over 1,000 units of a product costing $100. This would trigger a rebate payment of $5 per unit to the customer, as long as they purchased over 1,000 units throughout the year, effectively reducing the price paid for the product to $95 retrospectively.

These kinds of rebates are often tiered. For example, if you purchase 1,000 units, you may earn a 5% rebate, but if you purchase 2,000 units you could earn a 10% rebate and so on.

What are the typical differences between rebates and discounts?

Rebates Discounts
Definition A retrospective payment used as an incentive to drive sales growth without simply reducing the quoted price by offering a discount A price reduction of goods allowed to customers who either make payment in a stipulated amount of time or purchase products in large quantities
Type of strategy Long term sales strategy Short term sales and marketing strategy
Who is it available to? Available to those companies who fulfil the specific criteria in the contract Available to all
When is it given? The rebate is given as a deduction in the list price provided the required conditions are satisfied The discount tends to be given for each item purchased by the customer
Is a contract required? Contracts are required No contract required
Does it have an impact on cash flow? Rebates delay cash flow to the organization who is further down the supply chain, because their suppliers hold onto any rebate payment until it is earned Discounts do not delay cash to the organization further down the supply chain, as the discount is applied directly to the purchase price
Is it complex? Rebates can be quite complex meaning a rebate management system may be needed Discounts are fairly straightforward

Therefore, from the above, it is quite clear that discount and rebate are two very different forms of cost reductions. Discount is a very common tool for increasing brand reputation and short-term sales. Rebates are a set agreement, only available when specific criteria are met, which can have a significant impact on the bottom line.

If you want to find out more about rebates, why not get introduced to our own rebate management solution, Enable?

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