No Longer is the Rebate in the Mail

by Michelle Cowan
Digital Imaging Data Analyst

Best Buy recently announced that it will phase out the use of mail-in rebates across its US retail locations over the next two years. The retailer cited its increased focus on customer satisfaction as the primary reason. On a similar note, the Federal Trade Commission (FTC) ruled that CompUSA is ultimately responsible for the advertised mail-in rebates that QPS, Inc., a computer peripherals manufacturer, did not fulfill when it filed for bankruptcy. Given Best Buy's strength in the retail channel and the ruling's implied ramifications for resellers, we will likely see the number of mail-in rebate opportunities decrease throughout the retail channel.

Best Buy has the market prowess to withstand, even dictate, significant changes in the retail channel. Subsequently, its decision to drop mail-in rebates will impact the entire promotional landscape--to the detriment of manufacturers and the benefit of consumers. If given the choice between a gift card, instant rebate, or mail-in rebate, the consumer will typically choose the mail-in rebate last because its associated waiting period is frustrating. In contrast, manufacturers would choose the mail-in rebate first because its paperwork both provides invaluable consumer data and inhibits the majority of consumers from submitting the refund request, thus providing a profit cushion. Best Buy, which offers its own mail-in rebates, has decided that the possible benefits of offering mail-in rebates do not outweigh the potential damage to its image or frustration for its customers.

Following Best Buy's lead, however, poses a dilemma for retailers and manufacturers alike. Both now wonder if the retail channel will have a unified promotional offering, or a divided one. Should some retailers choose to continue advertising mail-in rebates, then those retailers that do not advertise mail-in rebates will face a series of challenges. Manufacturers will have to find a new way to promote their products at those retailers that do not support mail-in rebates. Likewise, retailers that do not advertise mail-in rebates will be hard-pressed to maintain competitive pricing on the products that would have previously been discounted with a mail-in rebate. In highly competitive markets, these mail-in rebates can discount advertised prices by $100 or more. Such a price discrepancy would greatly lower unit sales in the retail channel. To compete effectively, the retailer would have to offer an alternative promotion with the same value to the consumer. Unfortunately, that would mean increasing the cost to the manufacturer via market development funds.

Retailers that choose to support mail-in rebates would also face challenges. While manufacturers would support this decision, retailers would be liable for the mail-in rebates that the manufacturer does not fulfill. In addition, Best Buy's new policy prioritizes the customers' needs, adversely impacting the retailers that continue to offer mail-in rebates. Consumers' tolerance for mail-in rebates will diminish as they realize instant gratification at Best Buy, assuming that the promotional value was not decreased significantly when it was translated from mail-in rebate to some other promotional form. The only way for those retailers to offset consumers' preference for instant rebates will be to increase the value of the mail-in rebate, thereby increasing their own risk should the manufacturer choose not to comply.

One market that will be greatly affected by Best Buy's new policy is digital cameras. Mail-in rebates (inclusive of retailer and manufacturer rebates) rose 6% from March 2004 to comprise 14% of all advertised promotions in March 2005. This increase correlates to the shelf presence increase of bundled printer and digital camera offerings and digital SLRs in the digital camera market. Mail-in rebates on these products are often valued at $100 or more and are highly promoted to lower the perceived cost to the consumer. It is because of this reliance on mail-in rebates that these two market segments pose the greatest challenge for manufacturers. The manufacturers of these products will have to create other ways to increase product visibility, raise the average purchase price, offer "total imaging" solutions and lower the perceived cost to consumers. In a divided retail environment, retailers promoting the associated rebates face significant risk, and retailers not promoting these rebates face significantly higher price points.

Manufacturers in any competitive market are still apt to offer mail-in rebates online, although that value to the consumer will have to be translated in some other promotional form across the entire retail channel. A divided retail environment creates more frustration than necessary for all parties involved. By comprehensively translating the rebate across all retailers, consumers can still get the same value as before, and manufacturers can still sponsor key promotions and regulate pricing within the most competitive markets.

Manufacturers' solutions will depend on their objectives. To provide the same value to the consumer, manufacturers can offer instant rebates. To ensure large savings for the consumer without decreasing the perceived value of the product, manufacturers can offer retailer gift cards good for future purchases within a select product line. Manufacturers can receive consumer data by offering free gift promotions that require that the initial paperwork is completed in the retail store. To offer co-sponsored bundles, manufacturers can collaboratively increase their market development funds to the retailer.

The easiest solution for retailers is to follow Best Buy's lead and stop offering mail-in rebates. This would pressure manufacturers to offer alternative promotions across the retail channel. A consistent promotional strategy across the channel would help retailers stay competitively priced without requiring additional funds from the manufacturers. Most importantly, a consistent promotional strategy would ease the consumers' buying decisions and support future market growth in the retail channel.

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