Mail-In Rebates

MAIL-IN REBATES….Over at TCS, Arnold Kling writes with appropriately dripping vitriol about the “mail-in rebate” scam that long ago took over the retail computer business:

Last month, I bought a laptop at a CompUSA in Rockville, Maryland. I did not know nor care about any mail-in rebates. However, as I was standing at the cash register waiting for the stockboy to bring the box, I was accosted by two salesmen as well as the register clerk, who told me that I was entitled to a lot of free merchandise, because of a special sale that week. The catch was that I would have to pay for the merchandise and then wait for the rebate.

….So far, I have received denial letters for every single rebate.

My experience isn’t quite that bad, but I’ve had plenty of dismal encounters with rebates. It’s a scam.

From an economic standpoint, however, it offers an instructive lesson. One of the business world’s standard frustrations is that although different people are willing to pay different amounts for the same product, most products have only a single price tag. This means you’re (a) losing some price sensitive (but still profitable) customers that you could get with a lower price but (b) you’re leaving money on the table from current customers who would willingly pay more than the listed price.

Most businesses can’t do much about this. Airlines are the best known exception, putting in place Byzantine rules designed to extract (for example) higher fares from last minute business customers and lower fares from holiday travelers, all for the exact same service.

Mail-in rebates accomplish the same thing. A $50 software package can be sold profitably to more people if it comes with a $20 mail-in rebate. Price conscious consumers who wouldn’t pay $50 will buy it and fill out the rebate form, while wealthier consumers who can afford the $50 price will buy the software and never bother hassling over the rebate. In fact, there are really three categories of customers here:

  • Those who don’t care about the rebate and just pay the $50.

  • Those who want the lower price, mail in the rebate, but then give up when the rebate is denied. Basically, these people are tacitly accepting a 50-50 chance of getting the rebate and paying an average of $40 for the software

  • Those who really want the rebate and will continue harassing everyone they can find until they get it. Nearly all of these people eventually get the rebate and end up paying $30 for the software. (There are exceptions, of course. Arnold is obviously in this category, but he still didn’t get his rebate.)

The real question, of course, is why the mail-in rebate scam affects the computer industry so much more than other industries. I suspect it’s partly due to path dependence ? it just started up there and has never gone away ? and partly because it’s a loser strategy for industries that care about customer satisfaction. The computer industry, needless to say, has never worried itself overmuch about that.

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