The Surprising History of Rebates: What You May Not Know
Did you know: rebates have been around for a long time — since at least the 1800s. In the early days, they didn’t have a great reputation. During the 19th century, large industrialists like railroad tycoons used rebates to undercut competition and preserve or extend their own power within the market. Rebates were a price discrimination tool, and they actively hurt competitors. Yikes! That’s nothing like how businesses use rebates today.
Like they are today, rebates were used to encourage certain behavior among buyers. According to Britannica, “real estate firms in Europe gave rebates to buyers to encourage land improvements that would increase the value of adjoining unsold land.”
Throughout recent history, we see large vendors of all manner of goods offering rebates to purchasers who buy certain goods or services over the course of a fixed period of time. This is the heart of what a rebate is. What’s the difference between these rebates and the rebates used by the railroad industry? Simply put, these rebates are available to all customers. They’re not kept as a secret, and they’re not being wielded as a weapon against specific companies.
Let's dive deeper into the history of rebates.
Rebate Regulations and Laws were Born: Standard Oil Company and John D. Rockefeller
John D. Rockefeller formed the Standard Oil Company on January 10, 1870. While free-market capitalism led to the creation of numerous other oil companies, it also led Rockefeller to create unpredictable chaos in the industry, with oil refiners undercutting each other on prices, creating industry-wide fluctuations.
Rockefeller used railroad monopolies to his advantage and controlled market price levels, setting them very high to coerce the competition to contractually bind themselves to Rockefeller’s businesses in order to compete. These railroad rebates helped Standard Oil keep transportation costs low; other refineries could not compete.
These behind-the-scenes price agreements were only provided to the companies Rockefeller owned. His goal was to put all competition out of business — and that he did. His stranglehold on prices didn’t allow these companies to make a profit, and they couldn’t keep the lights on. By the late 1880s, Standard Oil controlled and incredible 90% of American refineries.
This control of the market caught the attention of journalist Ida Tarbell, known as “the woman who took on the tycoon.” She exposed the corruption of Rockefeller and Standard Oil. She raised awareness of the unfair, monopolistic business practices, including price fixing. Tarbell was instrumental in forcing the government to regulate the industry by demanding interstate regulation, bringing Rockefeller’s oil empire to its knees.
Tarbell’s investigative journalism was the talk of the town. Producers, buyers and shippers demanded open rates, eliminating the need for “the sin of the rebate.” Furthermore, the people declared, “No rebates, drawbacks or other arrangement of any character shall be made or allowed that will give any party the slightest difference in rates or discriminations of any character whatsoever.” The noise was heard loud and clear, eventually forcing the government to investigate and craft regulatory antitrust laws.
Sherman Antitrust Act
In 1890, the Sherman Antitrust Act was passed by the U.S. Government to protect consumers from the efforts of trusts, cartels and monopolies. The aim was to prohibit business practices designed to monopolize a market, and it forbade anti-competitive agreements that would force small enterprises and new entrants out of a market.
Those who violated the legislation would receive severe penalties. In fact, in 1911, the Supreme Court found Standard Oil in violation of the Sherman Antitrust Act. As a result, Standard Oil was split into 43 independent companies, some of which (Exxon and Mobil) are still well-known today.
Clayton Anti-Trust Act & Robinson-Patman Act
In 1914, the Clayton Anti-Trust Act was brought in to clarify and strengthen the Sherman Antitrust Act (1890) due to its vague language on topics such as price discrimination, price fixing and unfair business practices.
Over 15 years later, in response to the growing power of chain stores in the 1920s and 1930s, the Robinson-Patman Act was enacted in 1936, to prevent wholesaler distributors from giving preferable volume pricing to franchises over small businesses. If a wholesaler supplier sells products to a franchise at a discounted price not available to a smaller business, such as a volume price, they could be in violation of the Robinson-Patman Act.
The basis of pricing models used today supports the legislation contained in the Robinson Patman Act of 1936. For example, Special Pricing Agreements (ship and debits, chargebacks, etc.) are a creative variation of legal pricing practices that are utilized across the supply chain.
Rebates in the Modern Day
Although rebates didn’t have a great start, they are instrumental to success in today's supply chain. 2 in 3 manufacturers offer annual rebate programs to influence long-term behavioral changes and rebates represent an incredible 60-100% of net profit for distributors.
As market forces have eroded the supply chain over the years, there is still much concern around price fixing in many industries, due to the rapid expansion of online retailers such as Amazon. Suspicions of price gouging have caused deep distrust, while delays and stockouts combined with astronomical prices are causing tensions to spill over into disputes — sometimes rupturing trading partner relationships entirely.
Perhaps surprisingly when you consider their rocky start, rebates are the answer to the crisis. Today, rebates are seen by suppliers and customers as a strategic tool to help maintain loyalty and protect margins. Rebates are a positive, not a negative. Rebates help trading partners align and drive mutually beneficial behaviors. They create new opportunities for trading partners to work more closely together to increase sales and revenue.