Controlling Rebate Spending
It is no secret that spending in the rebate category has reached a crescendo. The good news is that it is controllable – in at least two categories – the face value of the rebates- and all affiliated program expenses related to fulfilling the rebate requests.
First, it shouldn't be assumed that the face value for any given rebate campaign is an absolute requirement and not negotiable. It is usually a dollar amount that has been determined by mutual agreement between sales and the retail partner. If it has been concluded that a $10.00 rebate is desirable, it is imperative to determine what dollar amount is optimal. If the product has a leadership position in its category, it isn’t necessarily mandatory to match every competitor’s offer dollar for dollar just because that was the negotiated deal – it may very well be that an $8.00 rebate would be just as effective with no negative impact on lift. Testing various values is not just recommended, it is a requirement.
Three additional opportunities for controlling the total expense of conducting a rebate are the following: 1) modifying offer structure or complexity; 2) controlling the quantity of mail-in certificates (rebate offers) distributed and; 3) managing the offer duration (the length of time for which the offer is valid).
Attempting to control liability via offer complexity is a very risky strategy as it often results in consumer alienation – and even potential defection. Some suggest that if a sponsor makes an offer difficult enough to comply with, they’ll still get feature space and some sales lift but without as much liability, as consumers will have difficulty with offer compliance. Unfortunately, today’s promotionally responsive consumer is very well aware of this and usually won’t participate. Two consequences are likely: the consumer reads the fine print and chooses not to buy your product because it’s too much of a hassle- or they try to comply with the offer by mailing in what they think you want and later become very frustrated when you send them a non-compliance letter. Then, they start to complain – to anyone who will listen - attorneys general, the Better Business Bureau, the sponsor’s president, television stations, hot lines and the like. If it is desirable to quantify the true cost of disqualifying your consumers, it might be worthwhile to compare the amount saved to the consumer’s potential lifetime value to your brand.
A more desirable tool to limit financial liability may be to control the quantity of mail-in certificates distributed.
Most manufacturers have an option to choose where and how their rebate offers are advertised. The control point is the response vehicle (the call-to-action) and is usually referred to as a mail-in certificate. These can appear on package, in the package, on-, near- or at-shelf as “take-ones”, in magazines, FSIs, newspapers, direct mail or online. Generally, each method of distribution will result in a different percent of respondents, depending on the medium and any additional advertising support. So if the mail-in certificate is an inherent requirement of the offer (they usually are), the key is to control how many of them are distributed. If a manufacturer sells one million products during the promoted period, but only circulates one hundred mail-in certificates (offers), the maximum liability is one hundred times the face value of the rebate- plus processing fees. So it is imperative to learn the response rate by advertising medium to calculate and manage financial exposure.
Another common method for controlling liability is to limit the duration of the offer or the length of time during which the offer is valid. A simple rule of thumb is: the longer the promotion period, the greater the opportunity for rebate submissions. Remember that on pack and in-pack offers will not only require longer durations to avoid the perception of dated product, but this also means they will have the least opportunity for breakage due to that requirement.
A less visible but still significant category for controlling financial liability lies in the ancillary expenses related to the administration, execution, and fulfillment of a rebate program. Assuming that a sponsor has performed their due diligence in fulfillment vendor selection, it is still imperative for regular reviews of the expenses for validating and fulfilling consumer requests, but also of the related charges- such as customer service for handling consumer inquiries. The inquiries, by phone or mail, may consist of complaints of non-receipt and order status inquiries. It is important to quantify all costs associated with this category regardless of where the mail or calls are reviewed. This can include expenses incurred by the fulfillment partner, complaints to a retailer, or to the sponsor’s in-house call center or consumer affairs department. Additionally, a certain degree of scrutiny should be given to the process, controls, rationale and expense related to appeasements and replacements for requests of non-receipt. If there aren’t well defined guidelines, sponsors can spend a considerable amount of their overall budget issuing original rebates and replacement checks to the same consumer even though the original check had been received by the time the replacement was issued. This is avoidable!
Continuous evaluation of the efficiency index of the total dollars spent on promotions is one of the most commonly overlooked disciplines in this space. This is not simply a review of the supplier’s rate card, line items, or contract pricing- but also the total dollars – most especially in rebates
Where there is intense competition, marketers will often conduct program after program without ever taking the time to determine whether or not their promotions are as efficient in the current environment as they were when they began using them.
In order to effectively manage promotional spending, performing in-depth analyses of every dollar spent is critical; not doing so is forfeiting the opportunity to adjust the strategy to maximize the return on that investment.
Quantifying the efficiency of a rebate strategy will often entail analyzing the following:
- The methods by which the offer was communicated and the mail-in certificates were distributed
- Quantity of mail-in certificates available in total and as a percent of products sold
- Quantity of respondents as a percent of products sold and as a percent of mail-in certificates distributed
- Ratio of valid respondents to invalid respondents
- Invalid reason codes and percent by type
- Quantity of customer service calls in total and as a percent of offer respondents
- The reason codes for those calls and the percent by category
- Dollar amount of rebate offered as a percent of selling price of product sold
A rebate program’s peak efficiency will have been achieved when the maximum amount of promoted products have been sold with the least amount of rebate dollars expended, and at the highest degree of customer satisfaction.
Billions of dollars are spent annually on rebates, most particularly in the wireless, technology and retail sectors. With mixed messages emanating from the retail sector as to the preference of rebates, instant discounts, or EDLP (every day low pricing), it is critical to perform continuous efficiency analyses so finance, marketing and sales are on the same page when interactions begin with all of the channel partners. It simply would not be prudent to go into any negotiating sessions with key customers without the benefit of a comprehensive understanding of the existing promotional spending and the impact it has on products sold.
It is nearly impossible to effectively manage data that is not continuously evaluated or measured; access the information available and create a win-win-win for you, your channel partners and your consumers.
If you are interested in reducing your rebate expense, click on any "Ask Hal" button on this website.