Dear CMO:

I am a chronic user of euphemisms. Home-grown acronyms completely crack me up. (In my Sony days, we used to say the company stood for, “Soon Only Not Yet”, which holds true to this day, now that you think about it). In current news, I absolutely love the phrase, “undocumented worker”. It makes it all sound so accidental.

And in today’s marketing review, I completely got the giggles when I heard your team refer to rebates as “promotions”. Just because you make beer out of hops doesn’t make it a vegetable. You guys are funny.

Anyway, since we’re on the topic, rebates are not promotions. Rebates are promotional crack. Yes, I know, you say you can quit any time. But when you see those kids who rebate their products, be smart and cross to the other side of the street. You just know where they’re going to end up.

Time for another quick cautionary tale. Once upon a time, when computers had 3.5 inch disk drives in them, we had a data media format called the floppy. Data media was a cheap product back in those days. The problem was that the guys marketing them thought that making them even cheaper was the way to drive greater consumer take rate. To be fair, this has a grain of truth – you can temporarily steal some share away from someone else – and the cautionary tale really begins here. Because the game theorists take charge of what happens next.

The first brand lobs out the first rebate. And the second, third and fourth brand conduct a perfectly executed tit-for-tat response by counter striking with rebates of their own. The consumer looks at all of this and buys the one on sale today. They’ve all got rebates on them. The street price has just dropped.

What does the marketing guy do next? He does something bold. He puts a bigger rebate on the box. Now, he reasons, the real action will begin. The rebate is upped, and incredibly, the other brands ratchet up their rebates, as well. The equivalent of an old western bar fight then erupts. Chairs are splintered over people’s backs, guys get thrown over the zinc bar, and bottles are cracked over heads.

Then, we get to the nuclear option. Marketing then launches a net-to-zero rebate. The product is now free after rebate. The product now costs nothing to buy. The consumer now expects the product to cost nothing, is conditioned to buy only when it costs nothing, and the breakage on the program goes to practically nothing.

Lastly, just before the curtain falls, Marketing Director Faust signs the ultimate deal with the devil and does a “net-to-less-than-zero” rebate. (It happened. I didn’t make this up). The brand in question, which was no doubt shortly thereafter dragged down beneath the stage with flames licking up towards the footlights, actually paid the consumer more money back in the rebate check than the product itself cost in the first place.

The morality play is now over. This was just a cautionary tale. It’s not too late. You can save yourself.

There is a very interesting bit of research on the correlation between price paid and actual product utility. Guess what? Less cost equals less product usage. You didn’t stimulate people to actually use your stuff at all. All you did was bleed your company dry. Add value instead. Add reasons to charge more for your product. Be compelling, attach yourself to something bigger than yourself — this is what value-add means in real life and in the channel.

Rebates mean brand deterioration, as well. Once you’ve convinced your public that your product has no economic value, it’s worthless. Unless you have a massively profitable company and can absorb an incremental variable expense that will likely add upwards of 40% to your costs, you’ve just gone upside down on your P&L. And you’re finished.

Rebates are great when you’re priced too high and need to bleed down inventory before the price protection kicks in when you drop the price. They’re the comma between the first and second pricing actions. Rebates are not promotions. They’re too expensive, are damaging to your brand, and they train your buyers to salivate like dogs in front of a slab of bacon.

The bacon is your P&L.

Change your ways. Consider this memo your, “It’s a Wonderful Life” moment. It’s not too late.


Copyright © 2006 Stephen Denny