Rebate vs Discount: What's the Difference?
Two terms that are highly used in today's markets, mainly in the e-commerce world, are discount and rebate. Rebates and discounts are two different forms of price cuts that directly or indirectly boost the overall sales of a business. Though the terms may sound similar, there is still some difference between a discount and a rebate that is applied. Let’s explore them with examples in this article.
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What is a Rebate?
A B2B rebate is a financial incentive provided by manufacturers or suppliers to business customers, based on the quantity of goods purchased within a certain timeframe. It typically involves returning a portion of the purchase price to the buyer after they meet a predetermined purchase target.
Example of Rebate: ABC Electronics offers a rebate program to its business customer, XYZ Retail. The agreement states that if XYZ Retail purchases at least 1,000 units of electronics within a 12-month period, ABC Electronics will provide a 5% rebate on the total purchase amount. After purchasing 1,000 units by the end of the year, XYZ Retail qualifies for the rebate, and ABC Electronics returns 5% of the total purchase value, which amounts to a $50,000 rebate on their total spend of $1,000,000.
What is a Discount?
A seller offers it to the buyer in two different forms; trade discount and cash discount. It may be allowed either from the selling price (often referred to as the maximum retail price or catalog price) or as a deduction from the net amount payable.
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Trade Discount: It lifts large quantity purchases and is normally given to resellers.
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Cash Discount: This discount is given to the buyer to make him repay the amount early. The seller, through this discount, maintains his cash flow as well as keeps his working capital fit.
Example of Discount: Unreal Corp. sold goods worth 10,000 to Uncan Corp. @10% discount each. If payment is made within 15 days, a cash discount is allowed @5%. That is, 10% trade discount and 5% discount on that amount if the payment is made within 15 days after the sale.
| Factors | Discount | Rebate |
|---|---|---|
| Definition | Discount is the amount the seller provides to the buyer against the purchase price of goods or services. | Rebate refers to the refund or return of currency value given by a seller of goods to the buyer for other different reasons. |
| Reasons | To make the high quantity purchase, and receive cash in time along with earning boosted sales. | For several reasons that are not in favor of the buying cycle such as; poor quality, late delivery, etc. |
| Type of Transaction | Trade discount is available at both the cash and credit sale but, cash discount is offered only at the time of payment. | Rebate is offered on cash as well as on credit sale. |
| Impact on Invoice | Trade discount is deducted from the original price even before generating the invoice. Cash discount however is deducted from the final value of the invoice. | The rebate amount does not affect the original invoice because the amount is adjusted after selling. The effect can be viewed on the trading account as well as in the income statement. |
| Recording in book of accounts | In the case of a trade discount, it does not appear in the books of accounts whereas a cash discount is shown in the income statement as an expense. | It appears distinctly in the financial statements because it is offered after the sale has taken place. |
| Timing | It is available at the time of happening of an event i.e. before the sale or purchase has been affected. | It is granted after an event has been recorded i.e. after the sale or purchase has been executed. |
| Consideration | Trade discount is granted based on the quantity sold. A cash discount is granted based on the time at which the payment is made. | Rebate is granted based on all the reasons why a trade discount or cash discount is not granted. |
Refund Vs Rebate: Refund and rebate are sometimes used as interchangeable words. However, one other thing that should be noticed is that where a refund is usually granted in full, a rebate is usually granted in part.
Rebate
Uncan brand has had a mobile business for some years. For the model X which is one of the popular models in the market, the company has produced a new marketing strategy.
| Reason for Rebate | Delayed mobile sets X deliveries |
| Price of 1 set | 10,000 |
| Refund offered | 10% of the phone price |
| Eligible Customers | Each customer who has received the phone over a month after the order date |
| Required Steps | Self-registers on the company website, completes the survey, and confirms the sale of the X model. |
| Additional offer | These customers can also get into 10% discount on ABC earphones that are not doing too great in the markets. |
| Actual Cost to customers | 9,000 |
The above strategy shall be referred to as a rebate. This is a very common sales promotion strategy and strikes the demand side of any product. It can be identified with all characteristics such as a refund of some amount, the transaction happening after some time of the actual sale, and customers required to do something extra to claim the rebate.
Discount
ABC is a supermarket. There is low demand for breakfast items due to the prevailing pandemic situation. Formulates a very simple marketing strategy.
| Discount Offers | 5% off on all breakfast cereals 10% off on all ready-to-eat breakfast items |
| Eligible Customers | All customers buying the eligible products and the set number of units |
| Actual Cost to customers | This offer will be in the form of a reduced amount that is to be paid at the check out and therefore the customer pays less. |
| Example | The selling price of something that fetches 1000 will cost 900 and a breakfast cereal for 1000 will fetch 950. |
This is a simple trade discount strategy. Instead, it is still better to clear out the inventory at low prices rather than risk the quality of perishable goods. All customers can easily see the identifiable features of a discount, such as all customers qualify for the discount equally, the discount is reducing the bill amount, and all the benefits are received at the time of purchase.
Rebates and discounts are both valuable tools for businesses to attract customers and boost sales. However, it's important to understand the key differences between the two.
Rebates are typically offered after a purchase has been made, while discounts are applied at the time of purchase. Additionally, rebates are often used as a promotional tool or to address customer concerns, while discounts are more commonly used to encourage larger purchases or clear out inventory.
Businesses can optimize their pricing strategies and drive sales growth by using both rebates and discounts.
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