Remember about 8 or 9 years ago when you were first looking around for a cell phone? You didn’t know which one to get so asked the sales person for the cheapest one. He pointed to a clunky hunk of machine and said that one was FREE. You couldn’t comprehend why it was free but you didn’t really care either.

It wasn’t until it was explained to you that the phone was free after a rebate that you raise your eyebrows a little, but you still swiped the credit card and off you went.

Then you had to fill out the rebate form…

Serial numbers, order numbers, credit card numbers, social security numbers, your cousin’s 5th grade teacher’s phone number, and a host of other identifiers were needed for the rebate to be completed. If you’re giggling to yourself right now it’s because you’ve done this before.

But rebates and coupons are almost always worth the trouble, but why do companies do it? When I see that I can get $0.50 off a box of cereal with a coupon it would have been just as easy for the cereal company just to sell the darned box for $0.50 cheaper and (in a contract) tell the retailer to use the discount. But noooo, you have to clip the damn piece of paper and keep track of it until you finally have time to make it to the store.

I used to think that rebates and coupons were just a ploy to market discounts without actually having to give everyone a discount, since someone will no doubt forget about the rebate or ignore the coupon. It could also be a trick to sell their new product to you or increase sales of an existing product temporarily. But I’ve determined it’s much more sinister than either of these.

Companies use rebates and coupons to sell you stuff cheaper without lowering the perception of the actual price. So say you’re working for Pepsi and sales of your 20oz sodas have tanked in the convenience sections of various stores. This is your cash cow and you need to stimulate sales. You could cut the price from the outrageously expensive $1.50 down to $1.00 and undercut your competition, or you could slap a $0.50 coupon on the inside of the label of any 20oz drink you sell.

Either way you will likely stimulate sales at a similar rate. The difference is with the price cut you risk consumers getting used to the $1.00 price point, and thus abandoning your product once it returns to $1.50. With the coupon people will think they’re just temporarily knocking $0.50 off the price of their beverage and will enjoy it while they can. The whole time they expect it to go back up to $1.50 at some point.

If you’re thinking I’m an idiot it’s only because consumer product companies have done such a fantastic job of hiding this truth from you. They have no intention of EVER cutting prices in any significant manner. They only want to cut them for a short time to stimulate sales and can’t risk you getting attached to the lower prices, rebates and coupons fit the bill there.

I must conclude with a disclaimer. Like all lessons this is a generalization. I can think of plenty of examples that go around what I’m saying but they’re merely examples that prove the rule.  Also, coupons and rebates are designed to advertise a price with some kind of hope that you’ll be too lazy to jump through the 1 to 100 hoops needed to get the advertised prices, but that is just an added bonus.  And yes, there are other tactics to increase sales without rebates and coupons, but most of those are on the retail level and not the manufacturer level, we’ll come back for those another day.

Photo: nathangibbs

categories: business, economics