Business Finance

ATTACHED IS THE case study . Below are the two students to reply to:

Pedro student 1 reply

Modules 7 & 8. The Great Rebate Runaround Case Study

About Rebates

Manufacturers employ the strategy of rebates to differentiate between the high paying consumers and low paying consumers and maximizing profit when there is a group of low paying consumers willing to pay full price if a rebate is offered.

Regarding rebates, as mentioned by Lu and Moorthy (2007) “What is immutable are the basics of promoting for price discrimination: The promotion vehicle must impose redemption costs on which consumers differ; it must offer rewards for people willing to bear the redemption cost.” On this forum, we will discuss and review their meaning for manufacturers, retailers and the consumer. We learned from Simchi-Levi, Kaminsky and Simchi-Levi (2008) that “The impact of rebates on a company’s bottom line can be starling”.

Rebates as an Example of Customized Pricing

Mail-in rebates are the way manufacturers influence demand in the consumer market. Rebates are also an incentive for retailers to order higher quantities from the manufacturers, which in turn increase manufacturers profit. Use of rebates can be view as customized pricing because it is targeted to those consumers that are sensitive to the full retail pricing; without the rebates those consumers would not buy the product directly in the retailer for the full price. It is important to recognize that this type of pricing strategy can reap even more rewards for manufacturers and retailers when it is a formal partnership between the two in the supply chain; according to Yue, Austin, Wang, and Huang (2006) “When the manufacturer offers more price deduction to customers, the retailer will increase local advertisement if the manufacturer provides the same portion of the local advertising allowance. We obtained the necessary and sufficient condition for the price deduction to ensure an increase of the manufacturer’s profit, and a search procedure for determining such an optimal price deduction is provided as well”.

Rebates vs Decrease Wholesale Prices

Rebates are part of the strategy to differentiate between customers (paying a high price and paying a low price) and to maximize profits for the manufacturers when there is a good percentage of consumers that are price sensitive (paying the low price) and are willing to take the time to redeem a rebate. This strategy is especially true for appliances and pricy electronics where we can find rebates that are over $100 dollars; decreasing the wholesale price is a trade channel discount that benefits the retailer. These retailers can apply a price strategy that only benefits the retailer’s bottom line and not the manufacturer. As mentioned by Gerstner and Hess “large manufacturer rebates may exist even in circumstances when all customers use them. Large rebates motivate an exclusive independent retailer to participate in a price promotion at a lower profit level compared to trade discounts”.

Best Buy Considering Eliminating Rebates

Best Buy is a retailer and one of the biggest in electronics; retailers do not profit as manufacturers do from rebates. Best Buy already possessed a pricing strategy that influences demand in customers in multiple channels; they have a strong presence in the market. They also achieved economies of scale and held buying power. As mentioned by Kauffman, Lee, Lee, and Yoo (2009) “Best Buy has mostly adopted the policy of matching across different channels to ensure that their customers pay the lowest prices available both off-line and online.”

Moreover, it will represent a loss for Best Buy to absorb the administrative cost for rebates when they already have a strategy that is efficient for them and their customers. The author believes this strategy is still relevant for some manufacturers; however, transparency in the process for rebates whether it is online or in a paper is needed. Again, as long there is the willingness from the consumer to pay the full price and complete the process (online or paper form) to receive the “refund” the manufacture rebate will continue as a price discrimination tool, differentiator and profit maximizer for the manufacturers.

References

Gerstner, E., & Hess, J. D. (1991). Who benefits from large rebates: manufacturer, retailer or consumer? Economics Letters, 36(1), 5-8.

Kauffman, R. J., Lee, D., Lee, J., & Yoo, B. (2009). A hybrid firm’s pricing strategy in electronic commerce under channel migration. International Journal of Electronic Commerce, 14(1), 11-54.

Lu, Q., & Moorthy, S. (2007). Coupons versus rebates. Marketing Science, 26(1), 67-82.

Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2008). Designing and managing the supply chain: Concepts, strategies, and case studies. Boston: McGraw-Hill/Irwin.

Yue, J., Austin, J., Wang, M. C., & Huang, Z. (2006). Coordination of cooperative advertising in a two-level supply chain when manufacturer offers discount. European Journal of Operational Research, 168(1), 65-85.

Hill Student 2 reply

The Great Rebate Runaround Case.

1. This case describes one reason manufacturers might want to offer rebates rather than decrease wholesale price. Explain why this can be viewed as an example of customized pricing.

Customized pricing is a selling strategy wherein manufacturers design their prices in a manner that they get the highest rates while satisfying the customers. The idea of setting a standard price for all products is quickly becoming phased out especially in the era of electronic commerce where one clicks a link and gets redirected to an online store where prices for the customers vary depending on factors such as credit card points or the buying habits. Rebates are a form of customized pricing since it brings in clients who won’t purchase a product at the retail price and those who would irrespective of the refund.

The secret behind rebates is that more than 40% are unclaimed thus giving retailers back a significant amount of money. The money collected from rebates gets interests that can be used to service other business expenses. As the author notes, most customers fail to get their rebates because they don’t provide the required information. Mail-in rebates require customers to provide authentication information to get the claim (Saha, Panda, Modak& Basu, 2015). Most customers lack some product details thus, ending up not getting the rebate. As such, the customer is satisfied with the product while the manufactures get maximum sale prices.

2. Even if all the rebates where redeemed, why might manufacturers still want to offer rebates rather than decrease wholesale prices?

Manufactures and stores know that most clients will not claim their rebate offers. Thus, businesses tend to provide them often. The rebate concept is based on the idea of customers paying the total product price upfront. As such, most customers can afford to pay for the total item price. About 40% of all rebates are not claimed. Suppliers and manufactures get approximately 2 billion dollars from the unredeemed rebates each year. A computer technician David S. Bookbinder says “After eight weeks of waiting he usually calls customer support number to look for his check.” (Simchi-Levi, Kaminsky& Shankar, 2008)

Manufactures input the rebates revenue in their cash books thus, increasing their cash flow. Therefore, there is increased profits and more substantial shareholder dividends. Moreover, since rebates are categorized as expenses, the manufacturers may get a tax break. Thus, it is more profitable for the manufacturer to give rebates instead of decreasing the general price.

3. Why do you suppose that Best Buy, rather than one of Best Buy’s big suppliers such as Sony or Panasonic, is considering eliminating rebates?

Sellers such as Panasonic or Sony though with some disparities, charge clients the same price per particular item. The world largest consumer products retailer, Best Buy, sell a similar item at a price that is not of precise concern to the supplier and thus the supplier doesn’t need to process rebates. On the top of the retail business is Best Buy and it’s contemplating to eliminate rebates since their price before rebate is similar or higher than the rebated prices of many other suppliers. Thus, Best Buy loses money on the items for which the rebate is cash checked or processed. Online research shows that customers have had numerous complaints regarding rebates. This can be viewed as one of the primary reasons for driving Best Buy to eliminate rebates. Moreover, rebates processing is a capital intensive investment that the company needs to service regularly. As such, the practice is deemed unprofitable.

References

Saha, S., Panda, S., Modak, N. M., & Basu, M. (2015). Mail-in-rebate coupled with revenue sharing and downward direct discount for supply chain coordination. International Journal of Operational Research, 23(4), 451-476.

Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., & Shankar, R. (2008). Designing and managing the supply chain: concepts, strategies and case studies. Tata McGraw-Hill Education.