Rebates are an increasingly common – but often misunderstood – form of incentive program. While many educational resources focus on how businesses can use rebate programs to accomplish a wide range of goals, we think there’s room for a bit more clarity on the fundamentals: namely, what is a rebate? In this blog, we’ll be answering your burning questions about rebates: what are they? How are they different from discounts, and are they the right tool for your business?

Let’s take things back to basics.

What is a Rebate?  

Rebates are a unique type of incentive program that businesses can use to influence customer behavior. A rebate is a deal in which a supplier or vendor offers to return a portion of a customer’s purchase price if they buy a certain amount (usually of a specific product) in units or dollars.

Rebates are used by many businesses at every stage of the supply chain. Our recent report found that 2 in 3 manufacturers offer annual rebate programs to influence long-term behavioral changes in their customers, while distributors have rebate programs with 50 of their top 100 manufacturers – representing two-thirds of sales and an incredible 60-100% of net profit.

How Do Rebates Work?

Rebates are financial incentives offered by manufacturers, retailers, or service providers to encourage purchases. These programs typically involve agreements specifying the conditions under which rebates are earned, such as meeting sales volume targets, achieving specific growth percentages, or purchasing certain product categories. Once the agreed-upon criteria are met, the distributor or retailer submits claims to the manufacturer or supplier, often accompanied by required documentation like sales reports or purchase data. 

The rebate provider then verifies the claims, processes them, and issues the rebate, which may come in the form of a credit, direct payment, or future discounts. Rebates are a strategic tool in B2B relationships, helping to incentivize behaviors, align supply chain goals, and foster long-term partnerships while also providing opportunities for both parties to enhance profitability.

7 Benefits of Using Rebates

Rebates offer significant advantages for businesses, whether as manufacturers, suppliers, or distributors, and play a strategic role in improving sales, customer relationships, and financial performance. Here are some key benefits:

1. Incentivize Purchases: Rebates motivate customers to buy more products or reach higher purchase volumes by providing financial rewards, making them an effective tool for driving sales growth.
2. Strengthen Partnerships: Offering rebates fosters stronger relationships between manufacturers and their partners, as it creates opportunities for collaboration to meet mutual goals.
3. Drive Strategic Behavior: Rebates can be tailored to align with business objectives, such as promoting specific product lines, clearing inventory, or incentivizing sales in underperforming regions.
4. Improve Profit Margins: By using rebates instead of upfront discounts, businesses can maintain higher initial sales prices while offering financial incentives that are contingent on meeting certain criteria.
5. Enhance Cash Flow Management: Rebates allow businesses to reward performance after a sale is complete, which can help manage cash flow more effectively compared to immediate discounts.
6. Gain Insights Through Data: The submission and processing of rebate claims generate valuable data on sales performance, purchasing patterns, and customer behavior, helping businesses refine their strategies.
7. Boost Market Competitiveness: Rebate programs can give businesses a competitive edge by offering appealing financial benefits that attract and retain distributors or retailers.

Rebates are a versatile and powerful tool in B2B markets, providing a win-win solution that benefits both the provider and its partners.

Supplier vs. Customer Rebates

Rebates are a two-way street, with benefits and responsibilities for businesses on both sides of the arrangement. When managing rebate programs, it can be helpful to divide them into two categories: supplier rebates and customer rebates. The difference is a simple matter of perspective: if you’re a supplier offering rebates to a customer, you’re dealing in supplier rebates. If you’re a customer receiving rebates from suppliers, you’re dealing in customer rebates.

Rebates vs. Discounts

Rebates differ from discounts in a few distinct ways. The main difference is simple: while discounts reduce the price before the point of purchase, rebates reduce the price after the point of purchase. In a discount scenario, the customer buys the product at an already reduced price. With a rebate, the customer buys the product at full price and claims a portion of their purchase price back after the fact.  

Rebates and discounts can both be effective incentives for businesses looking to boost sales, but rebates have their own benefits and a unique reputation. While discounts are often associated with a drop in demand or quality, rebates do not have this connotation, allowing you to boost your sales while maintaining your reputation. Rebates also keep the price point at a more stable level, as it avoids “lowering the bar” for future negotiations.

Types of Rebates

Rebates are powerful tools for boosting sales and building strong business relationships. By leveraging different types of rebates, businesses can incentivize purchases, streamline operations, and enhance profitability. Here are five common types of rebates:

- Volume Rebates

Volume rebates reward customers for buying in bulk, using tiered thresholds to offer higher rebates as purchases increase. For example, a $1 rebate might apply for 1–10,000 units, while 20,000+ units could yield a $10 rebate. Retrospective rebates apply the highest earned rate to the entire order, maximizing savings, while non-retrospective rebates encourage higher-tier purchases within specific thresholds.

- Product Mix Incentives

Product mix rebates encourage buying a combination of high-margin and low-margin products. For instance, a distributor might offer discounts for purchasing gravel alongside higher-margin flagstones, boosting overall sales and profitability while providing customers with valuable savings.

- Promotional Rebates

Promotions provide short-term incentives, offering rebates on additional units to clear excess stock or introduce new products. These programs drive immediate sales while helping businesses manage inventory efficiently.

- Logistics Rebates

Logistics rebates reward bulk purchases, such as entire pallets or lots, to optimize shipping and supply chain operations. They can also incentivize buying from specific factories to keep consistency while cutting costs.

- Stocking Incentives

Stocking incentives offer rebates to retailers who maintain minimum inventory levels. With buyback options to mitigate risk, these programs ensure products stay available while strengthening retailer partnerships.

Each rebate type serves unique business goals, making them versatile tools for driving growth and customer satisfaction.

How Rebates Help Your Business

Rebates benefit both sides of the equation: the supplier offering them and the customer receiving them. They also benefit companies at every stage of the supply chain, from manufacturers to distributors and all the way down to retail and end customers. At the top of the funnel, we find that when manufacturers make fuller use of rebate incentives, they typically achieve a 1.64% margin uplift. That’s an extra $10 million for every $1m in profit.  

But the benefits don’t stop there – while distributors using spreadsheets to manage rebates typically fail to collect 1% of rebates owed (an average of $218,829 annually), distributors using dedicated rebate management software typically earn 1.82% more rebates — or an extra $182,000 on every $10m of rebate income.

Are Rebates Right for You?

While the benefits of rebates are indeed real, you may still have doubts about whether or not rebates are right for your business. Many businesses entering the world of rebates are initially concerned with their ability to keep up with the complexity and time commitment of rebate management. Far too many first-time rebate users turn to spreadsheets and manual processes to manage their rebates but quickly find themselves buried under a mountain of data and too burned out to get back on top of it.

This is why choosing the right tools to support your incentive strategy at the outset is so important; building your processes and teams around an unsustainable strategy is a surefire way to doom your rebates to inefficiency and eventual decay. However, employing automated software to handle redundant, time-consuming and error-prone tasks has shown very promising results for companies managing rebates. In fact, we find that companies using a dedicated software solution to manage rebates typically spend 40% less time on month-end activities.

Are you ready to revamp your incentive strategy with rebates? Check out our new blog, How to Get Started with Rebate Management, for next steps or book a demo to get started today.