Using MSRP to enhance the ability of rebates to control distribution channels
Manufacturers have increasingly instituted widespread mail-in rebate programs in recent years. Two primary purposes for rebates are to: (1) more directly impact consumer demand by reducing net retail price, and (2) capitalize on consumers slippage behavior because not all consumers who intend to redeem the rebate at purchase time end up actually redeeming it. However, retailers can counteract the power of rebates to impact demand by simply raising the retail price by the amount of the manufacturers rebate. We show that by combining a manufacturers suggested retail price (MSRP) along with a rebate, the manufacturer can better control the channel by inhibiting the retailers ability to raise price, particularly when consumers exhibit loss aversion. As a result, incorporating MSRP with a rebate promotion plan increases the manufacturers profit. More surprisingly, the profit of the supply chain as a whole also increases, and the channel efficiency increases as well. In fact, contrary to results from the existing rebate literature suggesting that rebates should always be offered whenever slippage exists, we demonstrate that MSRP can actually be a more effective tool than rebates in managing retailer and consumer behavior when consumers do not have sufficient loss aversion and the slippage rate is low enough.
msrp rebates supply chain management marketing channel control