Rebates are an increasingly common – but often misunderstood – form of incentive program. While many educational resources focus on how businesses can use rebates to accomplish a wide range of goals, we think there’s room for a bit more clarity on the fundamentals: namely, what is a rebate? In this blog, we’ll be answering your burning questions about rebates: what are they? How are they different from discounts, and are they the right tool for your business?

Let’s take things back to basics.

What is a Rebate?  

Rebates are a unique type of incentive program that businesses can use to influence customer behavior. A rebate is a deal in which a supplier or vendor offers to return a portion of a customer’s purchase price if they buy a certain amount (usually of a specific product) in units or dollars.

Rebates are used by many businesses at every stage of the supply chain. Our recent report found that 2 in 3 manufacturers offer annual rebate programs to influence long-term behavioral changes in their customers, while distributors have rebate programs with 50 of their top 100 manufacturers – representing two-thirds of sales and an incredible 60-100% of net profit.

Supplier vs. Customer Rebates

Rebates are a two-way street, with benefits and responsibilities for businesses on both sides of the arrangement. When managing rebates, it can be helpful to divide them into two categories: supplier rebates and customer rebates. The difference is a simple matter of perspective: 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.

Rebates vs. Discounts

Rebates differ from discounts in a few distinct ways. The main difference is simple: while discounts reduce the price before the point of purchase, rebates reduce the price after the point of purchase. In a discount scenario, the customer buys the product at an already reduced price. With a rebate, the customer buys the product at full price and claims a portion of their purchase price back after the fact.  

Rebates and discounts can both be effective 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.

How Rebates Help Your Business

Rebates benefit both sides of the equation: the supplier offering them and the customer receiving them. They also benefit companies at every stage of the supply chain, from manufacturers to distributors and all the way down to retail and end customers. At the top of the funnel, we find that when manufacturers make fuller use of rebate incentives, they typically achieve a 1.64% margin uplift. That’s an extra $164,000 for every $1m in profit.  

But the benefits don’t stop there – while distributors using spreadsheets to manage rebates typically fail to collect 1% of rebates owed (an average of $218,829 annually), distributors using dedicated rebate management software typically earn 1.82% more rebates — or an extra $182,000 on every $10m of rebate income.

Are Rebates Right for You?

While the benefits of rebates are indeed real, you may still have doubts about whether or not rebates are right for your business. Many businesses entering the world of rebates are initially concerned with their ability to keep up with the complexity and time commitment of rebate management. Far too many first-time rebate users turn to spreadsheets and manual processes to manage their rebates but quickly find themselves buried under a mountain of data and too burned out to get back on top of it.

This is why choosing the right tools to support your incentive strategy at the outset is so important; building your processes and teams around an unsustainable strategy is a surefire way to doom your rebates to inefficiency and eventual decay. However, employing an automated software to handle redundant, time-consuming and error-prone tasks has shown very promising results for companies managing rebates. In fact, we find that companies using a dedicated software solution to manage rebates typically spend 40% less time on month-end activities.

Are you ready to revamp your incentive strategy with rebates? Check out our new blog, How to Get Started with Rebate Management, for next steps.