Rebate vs. discount: what are the differences?
WHEN SETTING PRICES for your products or services, you always need to keep in mind the volume of sales you will get, the profits you will 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.
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 used are cash discount, volume discount and trade discount. 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 discount is also to entice people into buying in bulk and cash discount is provided to encourage early payment. This helps to maintain cash flow and venture capital.
The purpose of a company offering a discount is to increase short-term sales, move out-of-date stock, reward valuable customers therefore creating better relationships, and make sure sales targets are met. Customers may also choose your product or service over your competitors if the price is discounted enough.
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 discount (5%) if they pay within a 30-day period.
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 earn rebates such as those with volume or value-based targets, SPAs or claim-backs.
Rebates form a significant proportion of a company’s revenue and a very significant proportion of their profit margin. The rebate can actually be used an incentive to build loyalty and improve sales and market share.
Various industries including building supplies, electronics, retail and wholesale distribution 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 agreements can often be complex, as they are often very specific to the individual trading partners involved in order to maximise benefit to both parties.
A simple of example of a rebate is a fixed percentage deal is where a customer could receive a rebate on certain products upon completion of the deal. For example, if an annual rebate agreement included a 5% fixed rebate on a product costing $100, and this product is purchased 10 times (for a total of $1000) during the year, then the merchant would receive a $50 retrospective payment at the end of the year, effectively reducing the price paid to a total of $950, or $95 each.
However, rebates can also be tiered. For example, purchasing 100 units may qualify the merchant for a 5% rebate, but increasing purchases to 200 units may earn a 10% rebate.
What are the typical differences between rebates and 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?||When all rebate is claimed, payments can amount to many millions of dollars a year, significantly boosting the bottom line||Has more of an impact on cash flow if sell products in larger quantities|
|Is it complex?||Rebates can be quite complex meaning a rebate management system may be needed||Discounts are fairly straightforward|
|Who regulates it?||Regulated by Financial Reporting Standards (IFRS) or local generally accepted accounting principles (GAAP)||Regulated by the ASA and trading standards|
From the above, it is quite clear that discount and rebate are two very different forms of cost reduction. Discounts are a very common tool for increasing brand reputation and short-term sales. Rebates are set agreements, only available when specific criteria are met, which can have a significant impact on the bottom line.