How Does a Rebate Work?

by Gregory Hamel; Updated September 26, 2017

What is a Rebate?

A rebate is a price incentive that a business places upon a certain product or service which has the net effect of reducing cost to the consumer. Rebates can come in any number of different forms such as flat-rate rebates, which are automatically subtracted from a purchase price; mail-in rebates, which force the consumer to do some legwork; or conditional rebates like buy one, get one free. Rebates are sometimes called cash refunds, or cash back, since they often come as a reimbursement from the money spent on a purchase.

Rebates as Marketing

Businesses use rebates as a marketing tool in order to make sales of the rebated product as well as other products. Shoppers almost always want to think they are getting a good deal on whatever they buy. When a store advertises a large rebate, it can draw customers in to buy the item, even if the seller is still pulling a profit or only offering a rebate to liquidate the item to make space for other products. While the shopper is in the store purchasing the discounted item, she is likely to purchase other things that are not rebated. So even while a business might take an overall loss on a rebated product, it can gain overall if a rebate causes it to make sales on other products. Generally, rebates are set so that businesses make some profit or break even.

Other Considerations

While rebates are nice when they appear on items that one already plans on purchasing, buying things simply because it has a rebate on it can be unwise. Oftentimes deeply discounted items have such big rebates due to low quality or because securing the rebate is troublesome. It is conceivable that some businesses create absurdly high list prices in order to offer large rebates that make their products appear like a good deal. Special rebates made for bulk purchases can also be helpful for common items, but again, this is a strategy employed by businesses to get people to buy more of something than they might need in a reasonable time horizon. For instance, buying mass quantities of food to get rebates can be a bad idea if one cannot use up all the food before it goes bad.

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About the Author

Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.