E-Smart Pricing

Recommended solutions to CASE: The Great Rebate Runaround

1) This article describes one reason manufacturers might want to offer rebates rather than

decrease wholesales price. Explain why this can be viewed as an example of customized pricing. Solution: The ultimate goal of customized pricing is to charge different segments of customers with different prices, which is called price differentiation. All customized pricing strategies all designed to build barriers between customer segments. In this rebate case, barriers are built by reducing the filing periods, complicating the rebate rules and delaying payment times. Given the barriers, customers are disorganized or not price sensitive will eventually give up. In this way, these customers are charged at the original price. For the customers who are organized and persistent, they will likely get the rebates even after a long waiting time. Therefore, they are charged at the discounted price. By complicating the rebate processing process, a company can build a barrier and achieve customized pricing.

2) Even if all rebates were redeemed, why might manufacturers still want to offer rebates rather

than decrease wholesale prices? Solution: This is because the rebate can only be realized when a product is sold. Consider two situations: one in which the order quantity is smaller than realized demand and another in which the order quantity is larger than realized demand. If the order quantity is smaller than realized demand, the two strategies provide the manufacturer with exactly the same profit. On the other hand, if the order quantity is larger than demand, the manufacture’s profit with rebate is larger than its profit under discounted wholesale 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 rebate? Solution: Customer satisfaction is the main issue. Retailers such Best Buy and Staples don’t get the free money resulted...