Dear Jeff,

I've tried different promotional and pricing strategies without a lot of luck. I'm considering offering rebates but that is something I know very little about. What should I watch out for?

-- Name withheld by request

Rebates can be an effective way to generate additional sales (and get a little "float" on some portion of the revenues), but there are costs: Both the cost of the eventual discounted price and the cost of administering the rebate program.

Deciding the amount of the rebate can be a little tricky, so before we deal with that, first some terms:

  • Lift: The increase in sales from a rebate program.
  • Breakage: The percentage of customers who don't seek to redeem their rebate, usually because they, well, just don't... but sometimes because they don't meet your rebate requirements (meaning they fail to submit within the specified time frame, don't provide the required documentation, etc).
  • Slippage: The percentage of customers who redeem the rebate but never actually cash the check (or use the gift card, etc.) Believe it or not, it happens.

Amount of Rebate

Obviously the greater the discount the greater the lift in sales: A $2 rebate on a $50 purchase isn't particularly enticing, but a $20 rebate probably is. Plus almost every rebate program involves some breakage and a tiny bit of slippage, so some percentage of sales won't actually occur at a discount because you'll never have to pay out that discount, making it a little easier to offer a sizeable rebate.

What degree of breakage and slippage will you experience? It's hard to know without experimenting. You can increase the breakage by making it difficult for customers to redeem their rebates: Short redemption periods, multiple forms to fill out, using mail-in forms instead of online forms. And you can also increase slippage by sending out rebates in envelopes that look like junk mail, by requiring customers to cash checks or use gift cards within an extremely short period of time, but those strategies could ensure a first-time customer will also be a last-time customer.

Where the amount of the rebate is concerned, the best thing to do is experiment. Offer a rebate at a level you're comfortable with even if 100 percent of eligible customers redeem; then any breakage or slippage is a little extra money in your pocket. Then adapt as you learn more about what works in your industry and for your customers.

Administration Costs

The answer depends on what kind of system you use to redeem rebates. Manual systems using mailed-in forms and mailed-out checks are easiest to set up but require the most labor. Automated systems, like having customers redeem their rebates online, take more effort to set up but require a lot less labor, especially if you decide to issue the rebate to a credit or debit card.

Generally speaking, if the volume of rebate sales will be low, don't put a lot of time into automation.

Keep in mind you can partly defray the cost of administration by setting up a smart redemption system. You can collect email addresses to add to your mailing list and offer discounts on other products. The redemption process is, like any other transaction, an opportunity to further build your brand and benefit from touching the customer.

Just be smart about how you engage the customer and ensure the customer benefits from whatever you offer. The worst thing you can do is come across as pushy--especially at a time when the customer's main goal is to get the money you owe them.