Economics of Coupons and Rebates

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Introduction

According to the Business Dictionary.com (2010), a rebate is defined as “Return of a portion of a purchase price by a seller to a buyer, usually on purchase of a specified quantity, or value of goods within a specified period” (Para, 1). This is not similar to a discount in that it is given at a time the full payment of the amount on the invoice has been made whereas the deduction of a discount is carried out before payment is made. On the other hand, a coupon can be defined as a document that can be given out for exchange to obtain a discount (financial) or rebate at the time one is purchasing a product. The notion that one who sells engages in employing such vehicles of promotion as coupons and rebates to bring about price discrimination is now very much common. Coupons offer a way of discriminating the price to the buyers who tend to be very much sensitive to the price. Through issuing of the coupons, a seller can separate the buyers into two major categories and thus end up charging a price that is lower to those customers that are sensitive to price than the rest of the customers. The rebates actually work in the same way. The coupons and rebates are sued interchangeably to bring about improvement in readability. Coupons and rebates are very important tools that are used by business organizations to improve their financial performance and this paper is going to look at these important tools in detail in terms of how, when and why they came about, the differences between the two, the trends in their distribution and the economic effects they have on the consumers as well as the manufacturers.

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History and origin of Coupons and Rebates and their trends

Coupons and rebates came into existence in the United States of America in the late 19th century. In the year 1887, there was the incorporation of the Coca-Cola company with Asa Candler. Asa Candler was brought in as one of the business partners. There was the transformation of the Coca-Cola Company from a company that was not very much profitable into a company that turned out to be very much profitable and this was realized through employing the advertising techniques that were very much innovative (Anonymous: History of Coca-Cola, 2010)

This expansion of the Coca-Cola Company was a result of the creative marketing that was employed by Candler which encompassed the employees of the company together with the sales representatives getting involved in the distribution of complimentary coupons for the company. These sales representatives and employees mailed the coupons to the potential clients and these coupons were as well put in magazines (Anonymous: History of Coca-Cola, 2010).

The Coca-Cola Company offered syrup for free to the soda fountains in order to cover the costs of the free drinks. In the period that started from the year 1894 and ended in the year 1913, among a total number of every nine Americans, at least one of them had been able to obtain a free Coca-Cola. The total free drinks that were issued out at that time were eight million and five hundred thousands. An announcement was made by Candler to the shareholders by the year 1885 that the Coca-Cola drink was consumed in all the regions of the United States of America (Anonymous: History of Coca-Cola, 2010).

Widespread distribution of coupons and rebates in the United States of America was realized in the year 1909 at the time there was the conception of the notion by C.W Post to offer assistance in the selling of the breakfast cereals among other commodities. In the present day, over 2500 consumer packaged commodity companies engage in giving out coupons as a way of offering discounts on the commodities. Considering the case in the United States of America alone, in the course of this year (2010), there has been a generation of over 3.5 billion dollars by consumer packaged commodities (teddemet.com, 2010).

In considering the coupon trends Anonymous: Rebates and coupons (Not dated) point out that the redemption rates of the coupons have gone down slightly even if there has been an increase in the number of the methods of distribution. The number of coupons distributed by the manufacturers has increased and this has been carried out using electronic methods to target customers. According to Anonymous: Rebates and coupons (Not dated), in the year 1998, the face value of the coupons that were distributed increased by 10 percent to a figure of 0.6 US dollars. In considering the trends in the rebates, the popularity for this is going among the manufacturers because many of the clients don’t cash in. It is reported that only about five to ten percent of the consumers engage in redeeming their rebates (Anonymous: Rebates and coupons, Not dated).

Differentiating between coupons and Rebates

In differentiating between the coupons and rebates, as on one hand coupons provide transactions upfront, with the buying of commodities, on the other the redemption of rebates can be carried out at the time when the purchase has already been made. At the time the consumers or clients realize the redemption costs that are uncertain, this difference turns out to lie in the time there will be the resolution of uncertainty. In regard to the coupons, the resolution of the uncertainty is realized at the time purchase has not been made. On the other hand, in regard to the rebates, the resolution of the uncertainty is realized at the time the purchase has already been made. Consequently, it is indicated that rebates bring about the realization of much more efficiency in surplus extraction but on the other hand coupons provide control which is more tuned finely over which customer to serve.

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In identifying the circumstances under which either coupons or rebates are optimal, according to Lu and Moorthy (2007), it is pointed out that “these conditions turn on the gap between the “low” reservation price consumers’ valuations and their highest redemption costs” (Para, 2). In the case where this gap is large, the rebates are optimal but in the case where the gap is small, the coupons become optimal. Avoiding the risks by the consumers brings down the level of attractiveness. This level of attractiveness for the rebates may also be brought about by the delay that may come about between the time of redemption of the rebates and the time for payment of these rebates. However, the reduction in the level of attractiveness that is associated with the delay between the redemption and payment of rebates comes in only when the level of impatience among the consumers is higher than that of the seller.

Economic effects of coupons and rebates to the consumer and manufacturers and why manufacturers offer them

Coupons and rebates provide several benefits to both the consumer and the manufacturer. On the side of the consumer, in general terms, he or she is able to obtain the highest utility at the cost that is deemed to be the minimal possible from purchasing a commodity. On the side of the manufacturer, this one is able to derive the highest profit possible at a relatively low cost of production. In considering coupons, advertisements with these are in most cases more effective at bringing about brand awareness as compared to the print advertisements that do not have coupons. According to Pride and Ferrell (2007) taking the case of China, the researches that have been conducted established that the coupons have a positive influence on the attitudes of the consumers towards particular brands. In general terms, in the case where there are large coupon cash offers, there is a greater generation of the recognition of the brand. The coupons offer rewards to the current users of a particular commodity and they also win back the consumers who used the product formerly and they also encourage people to engage in making large quantities of purchases of the products. This is on the basis of the economic principle that points out that people respond to incentives.

More so, since the coupons are taken back to the manufacturer, therefore they allow this manufacturer to carry out the determination of the level at which the products reached the market that was originally targeted. There is the use of electronic and paper coupons. The advantage of electronic coupons over paper coupons is that it encompasses lower per redemption cost, brings about enhancement of a higher ability in targeting, and enhancement in the realization of improvement in the capability of the collection of data. On the side of the consumers, there is a likelihood of those that are motivated to engage in considering information in a printable coupon in a manner that is more careful than in the electronic coupon. Through this careful analysis of the information, they can now be able to come up with rational decisions. Rational people think to the margin and it is through this that rational decisions can be made.

However, the use of coupons is not without its own drawbacks. Among the drawbacks are the issues of misredemption as well as fraud and this can turn out to be quite costly on the side of the manufacturer. Another drawback that has been identified is that coupons over time have lost value for the reason that there are large numbers of manufacturers who are offering them. Following this, the consumers have turned out to get used to make purchases without being given some incentives; be it a coupon, a rebate or any other incentive. More so, the level of loyalty for the brands among the consumers that use coupons has gone down greatly and most of them carry out the redemption of the coupons only for those commodities they normally purchase.

In considering the rebates, according to the Encyclopedia of Business (2010), rebates, which are in most cases known as refunds are used by business organizations as a promotional tool for their products and services. In the present day, business organizations that engage in utilizing rebates are many and they come from various fields which include those manufacturers that are playing in such fields as the household supplies, the automobile industry, the computer manufacturing industry, and health and beauty industry among other industries.

The amounts of money these companies use in rebates range from small amounts to very large amounts and these amounts are dependent on the retail price as well as on the kind of product for which the promotion is carried out. The use of rebates is to a high level, very attractive to the consumers. They provide a partial refund to the consumers for those purchases that they make which is tax-free since this is not considered as an income. On the part of the manufacturers, this has several advantages. One of the advantages, rebating induces the potential clients to the product of the manufacturer. Another benefit is that the rebates boost the visibility as well as the sales of a company. They also offer attraction from the retailers. The retailers in most cases assist in the promotion of the offer and they carry out the expansion of the space allocated to the products of the manufacturer in an appropriate manner. Therefore, the promotions offered by rebates can offer assistance to a company to enable it to realize an increase of its influence with the retailers and realize the development of brand loyalty of their products and go over again business among the customers (consumers) in the course of the long run and not just a short term incentive for the consumers to buy.

Conclusion

It can be concluded that rebates and coupons are very important tools for any business organization that enable it to win a competitive advantage. These tools are used to bring up the level of consumer loyalty. They may encourage repeated purchase by the customers, increase the level of the product awareness of the product a company may be offering and facilitate effective targeting of specific markets. All these factors among others enable a company to play effectively in the market.

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Reference List

  1. Anonymous, (Not dated), Coupons and Rebates. Motivation Network.
  2. Anonymous, (2010), The History of Coca-Cola.
  3. Business Dictionary.com, (2010), Rebate definition.
  4. Encyclopedia of business, (2010), Rebates, 2nd Edition. Web.
  5. Lu, Q., and Moorthy, S., (2007), Coupons Versus Rebates. Marketing Science, Vol. 26 No. 1, pp 67 – 82
  6. Pride W. M. and Ferrell, O., C., (2007), Foundations of marketing, 2nd Edition. Houghton Mifflin Co: New York. teddemet.com, (2010), Coupons.

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BusinessEssay. (2022) 'Economics of Coupons and Rebates'. 4 January.

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BusinessEssay. 2022. "Economics of Coupons and Rebates." January 4, 2022. https://business-essay.com/economics-of-coupons-and-rebates/.

1. BusinessEssay. "Economics of Coupons and Rebates." January 4, 2022. https://business-essay.com/economics-of-coupons-and-rebates/.


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