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Everyone likes getting money back, so if your eyes light up at the term “rebate,” you’re not alone. Rebates come in many forms, including tax, sales, and stock rebates. But what is a rebate? Find out a little more about rebates in business with our entry-level guide.
A rebate is, by definition, a sum of money that is paid back to you. You’ll most commonly have experienced this in the form of a tax rebate, i.e., a situation in which you have paid too much tax and are due a repayment. A tax rebate can be paid automatically, but you may also be required to go through a refund process. As a business, you may need to define ‘rebate’ a little differently. To a large extent, this depends on your industry.
Rebate in stocks
When it comes to stocks and shares, investors will define rebate as a portion of dividends or interest earned by the owner of stock. It’s also a term used in short selling, which is when a trader borrows stock to deliver to a buyer. In this situation, a rebate will be paid to the original lender. Rebates are not awarded to individuals, however. Instead, stock rebates are the domain of large institutions and traders with broker or dealer status.
What is short selling?
Short selling is when an investor borrows stock, sells it, and buys it back with the intention of returning it to the original lender. Short selling is based on the buyer’s analysis of the stock and belief that it will go down in value, so that when the time comes to buy it back, they pay less than they originally sold it for. Short selling is extremely high risk but can be equally high reward. The interest gained on the stock in the time between borrowing and returning is known as a rebate.
Rebate in sales
In sales, a rebate is when a portion of the sales cost is returned to the customer. It is a type of sales incentive that can encourage customer loyalty. A rebate works differently to a discount as it is applied once the sale has been completed, not at the point of sale.
In offering a rebate, a company will reach out to a customer and request personal details so that the rebate can be made. In this way, sales rebates are also a solid market research strategy. Rebates don’t always have to be in cash, they can also be completed using vouchers or coupons.
Sales rebates as long-term sales tools
Rebates have a longer lifespan than a discount, meaning they can be a better sales strategy. Discounts are applied once at the point of sale and usually have a limited window of use. A rebate can be offered to a customer over a longer period of time. Despite the extra admin that a customer may have to carry out to get their rebate, the prospect of money back can easily give a company the edge over competitors.
Other benefits include the ability to earn interest on the money before the rebate claim is complete. There’s also the possibility that a customer will not act on the offer of rebate, meaning they have been drawn in by the prospect of money back, made a full-price purchase, and not continued to claim their rebate.
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