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Big Changes Coming to Retail Promotions
Changes to the retail landscape continue with OfficeMax and Dell being the latest companies announcing that they are getting out of the mail-in rebate business.
The OfficeMax announcement drew an entire column by San Jose Mercury columnist Mike Langberg, who announced that he would now avoid shopping at Office Depot and Staples. We’ve seen similar announcements by other large retailers and vendors. Best Buy is half-way through the process of eliminating mail-in rebates and months ago Intuit dropped rebates for TurboTax. Most European countries prohibit advertising a price different than the one rung at the register, so mail-in offers are rare “over there.”
No rebate, no purchase?
In June, we talked about rebate redemption rates and how manufacturers can make money with “net-to-zero” offers that result in free products after the rebate. Because only ten to fifty percent of buyers actually submit the rebates, most buyers pay the full, un-rebated price. Many consumers consider mail-in rebates a scam exemplified by complex submission requirements that allow manufacturers to reject claims and retain cash.
Dell announced they will phase out most mail-in rebates and short-term promotions (the confusing barrage of “free memory” and “hard disk upgrade” offers that are good today, but may be gone tomorrow) over the coming 18-24 months. The company claims that the actual price end users pay for a system will not change. What wasn’t addressed was how the manufacturers and retailers will create a consumer sense of urgency to buy without the limited-time promotions.
Is EDLP the answer?
This is more than a minor problem. Mail-in rebates allow a vendor to advertise a much lower price than with an instant rebate given at the cash register. If only 25 percent of buyers submit rebates, a $20 mail-in rebate costs the manufacturer the same as a $5 instant rebate, but a $20 discount is a far more powerful incentive to purchase than a $5 discount. An “everyday low price” strategy (EDLP in industry lingo) such as that employed by Wal-Mart can work, but it depends on higher volumes. This is not something that most retailers can simply dial in when needed. Unlike Nigel Tufnel, Dell can’t simply turn the volume up to 11 when it needs an extra push.
We can’t quit you
The problem with rebates is so bad that one retailer likened them to “a drug, but we can’t get the needle out of our arm.” We can’t get rid of rebates for the same reason we can’t get rid of spam (the junk email, not the canned meat)— they work. Revenue benefits are easily measured, but the negative impact on customer satisfaction is difficult to quantify. In addition, rebates reinforce undesirable consumer behavior? purchasing only when a rebate or sale occurs.
What’s the next big thing in promotions?
This problem is not Dell’s alone. I know of several companies that are re-examining the role of rebates in their promotional mix, either because they want to improve the customer experience or because big retailers like Best Buy and OfficeMax are eliminating this as an option. Even the retailers driving this change don’t have a well-articulated strategy for what they expect from manufacturers. Retailers will still want manufacturers to buy ad space in Sunday circulars and provide compelling promotions. How this is going to happen is unclear. We expect the big winners will take the path of innovation rather than trying to turn the clock back to the days before rebates. We’ll be watching the space closely, and you can expect additional announcements in the coming months.
Full disclosure: I am a dedicated rebate submitter who understands the economics and recognizes that all the people that do not submit claims are subsidizing deeper discounts for those of us that do.
Written by Bruce La Fetra
Tags: Marketing
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