Mail-in Rebates and Optimism Bias

Rebates

Another common sludgy business practice involves mail-in rebates. In the usual setup the seller of some product offers to return a portion of the sales price to the customer after the sale. The standard economic analysis of this kind of promotion is that it is a way to practice price discrimination. Although the term makes it sound nasty and possibly illegal, in many contexts price discrimination is common and well accepted. Booking an airline ticket or hotel room well in advance can secure a lower price, though it does not always do so. This policy “discriminates” between highly price-sensitive consumers who are willing to plan and commit ahead of time, and those who are less price sensitive, such as those on expense accounts. There is nothing pernicious about price discrimination as such, and in fact the practice lowers the cost to price-sensitive consumers because they are cross-subsidized by the last-minute travelers who pay full price.

The way price discrimination usually works is that in order to get the lower price, the consumer has to do something, such as book early or take a flight at an inconvenient time. Think of this as a hurdle the consumer has to jump over to get the deal. In the case of rebates, the hurdle consists of the sludge involved in redeeming the coupon. The amount of sludge involved can be considerable. It is not uncommon for the seller to require the consumer to send by mail (yes, with a stamp) the original receipt for the purchase plus the part of the packaging that includes the bit of scanner code used to identify the product. Often this piece of cardboard is located in a particularly inconvenient spot. Keep your box cutter handy.

After mailing in your materials (better make a copy, just in case) and waiting a couple of months, if you have done everything right and your letter did not get “lost,” you will receive a check in the mail, which of course you need to remember to deposit. Not surprisingly, only a small proportion of rebates are successfully redeemed, roughly 10 to 40 percent.

Why do firms bother to offer rebates? Or put another way, why do customers fall into this trap? A good analysis of this question appears in a paper we would nominate in a contest for best title of an academic paper: “Everyone Believes in Redemption.” 4 In an experimental study, the authors found that people were unrealistically optimistic about the likelihood that they would jump through all the necessary hoops. People thought there was about an 80 percent chance that they would do so within the thirty days they were given. The actual redemption rate was around 30 percent. It is an overstatement to say that everyone believes in redemption—but most people certainly do.

In the same study, the researchers made three efforts (with different groups of people) to de-bias people—that is, reduce the massive difference between their predicted and actual redemption rates. In the first intervention, they informed participants, very clearly, that in previous groups redemption rates were below one-third. In the second, they issued two clear reminders, one soon after purchase and another when the deadline for redemption was near. In the third, they made redemption far simpler by eliminating the requirement that people print out and sign a certification page.

As it turned out, none of the three interventions reduced people’s optimism! In all conditions, people still thought there was about an 80 percent chance that they would mail in the forms. Moreover, the first two interventions had no effect on what people actually did. When hearing about the behavior of other groups, people apparently thought, “Jeez, those other groups are idiots. I would never do that.” There is a general (sad) lesson here. Telling people that some activity is dangerous (running up large credit card bills, binge drinking, unprotected sex) is like informing someone that people often oversleep. It is not much help. To wake up on time they need an alarm—maybe even a Clocky.

The only effective intervention in this study was to use our magic elixir: Make It Easy. Making it easier to mail in the form, and thus reducing sludge, significantly increased people’s willingness to act. The redemption rate rose to about 54 percent, which means that the disparity between belief and behavior was cut in half. This is concrete evidence of the potentially significant effect of sludge reduction on increasing people’s welfare. But, of course, marketing firms are not likely to adopt this policy because that would defeat the entire purpose of the rebate, which is to take advantage of people’s overly optimistic intentions, and even their belief in (a certain type of) redemption.