Walking the Tight Rope

Rebates have always been a double-edged sword.

They can stimulate sales on high-cost, slow-moving products, but can dilute brand equity — and cut into profits if too successful.

“If manufacturers get some response, they’re happy. If they get too much, they’re not happy,” says Jeff Hausman, vp-marketing and client services at rebate specialist Howe Marketing Group, Palm Harbor, FL. “They only budget so much for a rebate.”

Historically, rebates mix the worst of both worlds: As price discounts, they commoditize a brand, but leave consumers grumbling because they’re troublesome to redeem. New streamlined fulfillment services may make redemption easier — and make shoppers happier — but there are still hurdles on price.

Rebates make many retailers cringe. Cash-back offers seem ho-hum compared to today’s slick promos. Plus, they’re often seen as a red flag that a product is outdated.

In January, several chains including CompUSA declared Apple Computer’s current iMac models to be “end of life.” That prompted Apple to offer $200 rebates on those allegedly obsolete models. Apple cut wholesale prices to dealers to cover the rebates, and some chains including Circuit City overlaid their own rebates on top of Apple’s offer. Suddenly it felt like a fire sale, and the discounted models seemed even less valuable to shoppers.

Critics say computer marketers rebate too heavily in general. Houston-based Compaq Corp. has assailed competitors including Dell Computer Corp., Austin, TX, and Gateway, North Sioux City, SD, for slashing prices so drastically that they’re hurting the entire industry.

“A lot of different retailers have 60 rebates on the sales floor. Ultimately, it’s a devaluation of the product,” says Beverly Ham, ceo of BDS Marketing, Irvine, CA. “There’s been a concentrated effort to eliminate rebates in many categories.”

That may change if the economy slows. Discounts do well in tough times, when worried consumers are more sensitive to price. Streamlined processing may make rebates more palatable to consumers.

One-stop Dropping

Bundling programs and Internet fulfillment are gaining ground. Howe Marketing works with retailers to bundle offers into a rebate booklet delivered monthly in-store and via circulars. Shoppers redeem them en masse through Howe.

“If a consumer shops in Food-For-Less, she sends the rebates all to Howe rather than Procter & Gamble and Warner Lambert,” Hausman explains. “Instead of getting five checks for $1, she gets one check for $5.”

Eckerd Drug Stores, Clearwater, FL, expects to send rebates to 10 million customers this year, with an overlay that lets shoppers donate all or part of their rebates to the Children’s Miracle Network. “The dollar is the magic number,” says Kim James, Eckerd manager of sales and promotion. “If consumers are going to send in a 34-cent stamp, they want at least a dollar in return.” Eckerd has used books since 1994.

Hausman says books make it easier to track redemption, a chronic problem with rebates. Books drop on a regular cycle — unlike tearpads, which hit shelves at the store manager’s whim — and track redemption as a percentage of total sales, not a percentage of tearpad circulation. “The average rebate program redeems at two percent of circulation,” says Hausman. “Our offers range between 10 percent to 12 percent of sales.”

Mass merchandisers are less fond of rebates, preferring to woo shoppers with everyday low prices. ShopKo likes Howe’s rebate book, but won’t expand beyond quarterly distribution.

“Rebates are the closest thing to a gimmick that we do and we’re an anti-gimmick company,” says Terry McDonald, senior vp-marketing at the Green Bay, WI-based chain. “[Our] Super Combo Rebates book works very well, but I doubt we’ll be doing it on a more regular basis.”

While some proponents say improving traditional outlets is the best way to fix rebates, others are betting on the Internet. Consumers are more receptive to rebates online than offline, according to PROMO’s Online and Offline Marketing Strategies. Fully 31.2 percent of Internet users respond to online rebates, compared to 29.3 percent of respondents offline, per the consumer survey, conducted last year by NFO Research, Greenwich, CT.

Online offers are easier for retailers, too: “The retailer doesn’t even have to participate” in manufacturer offers, says Source Marketing president Howard Steinberg.

Of course, some retailers like being online themselves. Office supply chain Staples brought its rebate program online in 1999 with the Rebate Center at staples.com. Shoppers can track the status of a rebate, print mail-in forms, and search for products by rebate number (as well as by brand, category, SKU, or UPC). BDS and promotion management firm Parago Inc., Dallas, handle. “The biggest advantage is that you can cross-sell and upsell online. It’s not limited to one product on rebate,” says Ham.

CyberRebate, Cedarhurst, NY, functions as retailer and rebate processor. CyberRebate buys products from manufacturers, then sells them online with hefty rebates up to 100 percent off. “This is not a manufacturer rebate,” says CyberRebate ceo Joel Granik. “We buy in heavy volume and we fulfill the orders.” The site claims to have handled more than $67 million in rebates.

CyberRebate sells a wide range of items including electronics, cosmetics, jewelry, and camping gear. It drew 4.5 million users in December and could see a sudden surge, thanks to a new slot on Yahoo’s shopping portal.

Packaged goods companies historically have shied away from rebates, but Procter & Gamble, among others, has stepped up its recent offers. A tight economy could woo even more.

“Rebates weren’t big in grocery stores, since the value of the goods wasn’t worth it,” says Hausman. “But in recent years, package sizes have gotten much bigger, making it a more sensible option.”

P&G ran a mail-in rebate for Olay cosmetics late last year, offering $2 back on any foundation, lipstick, or mascara, and $5 back on any two products.

Rebates weaken brand loyalty, and won’t bring consumers to new categories. “Consumers will switch brands, but they won’t try new types of products,” says Hausman. “Using coupons and rebates doesn’t mean you’re going to convince anyone to do anything differently.”

That doesn’t mean marketers won’t keep trying.