The Demise of Mail-In Rebates

"We get a huge number of complaints about mail-in rebates," says James Hood, editor of ConsumerAffairs.com, a consumer web site. "People buy products based on the promise that they'd get a rebate of X dollars. And when they don't, they justifiably feel they've been robbed."

Government agencies are aware of these concerns. In March 2005, the Federal Trade Commission (FTC) settled charges against retailer CompUSA for failing to pay thousands of rebates filed between September 2001 and July 2006. The FTC alleged that CompUSA falsely advertised that rebate checks would be received within six to eight weeks, whereas consumers reported delays of one to six months, and thousands complained about never receiving the rebates at all. CompUSA settled the FTC charges by agreeing to pay all past due rebates retroactively.

State governments are also siding with consumers in an attempt to ease the rebate process. Last month, for example, Rhode Island enacted a law that requires retailers to give customers any advertised rebates upfront and then complete the required paperwork themselves. A similar law is in force in Connecticut.

Now, some manufacturers and retail stores have taken note and announced they will reduce or altogether eliminate mail-in rebate promotions. "Government agencies are investigating and consumers are complaining," says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group (U.S. PIRG). "Companies that have any smarts realize this is a poor way to either book profits early or to increase sales."

Among these companies are Best Buy (BBY), OfficeMax (OMX) and Dell (DELL), which recently announced they would stop offering rebates, and instead lower the products' purchase price accordingly. The new OfficeMax policy took effect last month, while Dell plans to phase out rebates over the next 12 to 18 months. Best Buy eliminated nearly all mail-in rebates on computers and computer-related accessories in April and plans to phase out rebates on all merchandise by 2007. (For more details, see the table below.)

It's a trend that has been praised by consumer advocates like Mierzwinski, who has experienced the mail-in rebate frustration first hand: A laptop he purchased this year required him to file for five separate rebates in order to get the advertised $210 discount. "It's a sloppy system that drives people nuts and the smart companies are catching up to the fact that consumers are getting tired of them," he says.

But the decision to say goodbye to rebates — which all three companies say was enacted in the customers' best interests — has one unpleasant side effect: It will ultimately lead to higher product prices.

Why? Because of the dirty little industry secret that about 40% of mail-in rebates end up not being redeemed by customers, or are filed incorrectly and ultimately denied, explains Peter Kastner, vice president and research director at Boston-based consulting firm Aberdeen Group. "The manufacturers know that and they build their pricing models around the fact that they can offer rebates, but only a fraction of consumers will respond," he says.

So take this example: You're buying a PC with a $100 rebate offer. You go through the paperwork ordeal and eventually receive your $100 check. But if only 60% of the consumers who bought that product did the same thing, the manufacturer ended up keeping 40% of the rebates, or $40 for each $100 offer. "And that $40, believe me, is spoken-for profit, for marketing budgets, for paying the merchandisers to put out weekly fliers," Kastner says.

Just how much higher prices will go is hard to estimate — and the companies aren't saying. Both Dell and Best Buy reassured us they will work to keep their prices competitive. William Bonner, an OfficeMax spokesman, clarified: "An advertised mail-in rebate cost can appear to be the better deal until you consider all the fulfillment steps required — or the fact that most people don't even follow up with the rebate."

Kastner estimates that across the market for consumer PCs priced between $400 and $1,000, for example, prices may increase from $25 to $50 per product.

One thing's for sure: Spending that extra $25 may be worth it if you've had enough with the clumsy rebate system.