Rebates vs discounts: which strategy helps your cash flow most?

Published Monday 22 September 2025

Table of contents

• What is a rebate?
• What is a discount?
• Key differences between rebates vs discounts
• When to use rebates
• When to offer a discount instead
• How to use rebates or discounts effectively
• Simplify rebate and discount tracking with Xero
• FAQs on rebates vs discounts

Key takeaways

• Rebates are post-purchase refunds, while discounts are price reductions at the point of sale.
• Both rebates and discounts can increase sales and attract new customers.
• Rebates can help you build sales and marketing lists.
• Discounts are easier to implement; rebates require extra work to set up and process.
• The right choice depends on your goals, brand image, and available time.

What is a rebate?

Let's define rebate: it's when a business gives a customer money back after a purchase – or right away, in the case of an instant rebate.

Types of rebates

There are 5 main types of rebates:

1. Manufacturer rebates – the customer buys from a retailer and then gets money back from the product's manufacturer
2. Mail-in rebates – the buyer claims a rebate through the mail by sending proof of purchase to the manufacturer or seller and receiving a check, gift card, or other incentive in return
3. Digital rebates – you claim the rebate online (more common than mail-in rebates these days)
4. Loyalty rebates – the buyer gets a rebate to thank them for being a loyal customer
5. Volume rebates – buyers earn these rebates by buying large amounts or multiple products

Why businesses use rebates

Bottom line: businesses use rebates to boost profits – even though a rebate means you give money back for a purchase.

But rebates help increase awareness of your products, drive sales at your specific business, and convince shoppers to try your latest product. And rebate programs are a good way to collect contact details from customers for your next marketing campaign.

What is a discount?

A discount is an immediate price reduction. If you offer 20% off a certain item, for example, that's a discount. Buyers get discounts through in-store sales or coupons, too. Popular types of discounts include percentages off, buy-one-get-one (BOGO) free, or early payment discounts.

Why businesses use discounts

Just like rebates, businesses use discounts to make money.

• Businesses may offer a discount on a popular product to attract shoppers, hoping they'll buy more once they're inside or on the website (this is often called a “loss leader” – a heavily discounted product that increases foot or web traffic).
• A business might have a storewide sale to boost awareness of their brand and attract new customers – also known as an “acquisition promotion”.

Businesses also use discounts to move inventory that isn't selling – even if they sell at a loss, they still have more money than when the product was sitting there. That's often called close-out pricing if applied to just a few items, or a storewide clearance event if the discounts apply across the board.

Key differences between rebates vs discounts

Both rebates and discounts save money – but in different ways. Check out the main differences.

Timing of the benefit to the customer

Buyers get a discount the moment they buy, but only receive a rebate later (with the exception of instant rebates, which function like discounts).

Customer experience

Discounts are typically easier to claim – they're either automatic or the customer shows a coupon or claims a discount in an app.

Rebates ask buyers to make an effort. They typically need to mail in a claim or enter a code online before they receive the rebate.

Effects on your brand

Discounts and rebates can affect your brand in different ways, depending on its market position. For example, if you sell luxury products, discounts might not be the right approach due to their connection with budget-focused shoppers. A rebate may be a better way to boost sales, move inventory, or attract customers, without devaluing your brand.

Financial effects

Discounts intrinsically reduce revenue – after all, 20% off is less than full price. But if you do them right, discounts should increase revenue in the short term by moving stale inventory or increasing sales of other items through the use of a loss leader. And discounts hopefully raise revenue in the long term as well, by attracting new customers and building awareness of your brand.

Rebates can give you all the marketing benefits of a discount (like more sales and new customers), but you get full price for the item right away – helping protect your cash flow in the short term. But rebates can have an unpredictable effect on your cash flow in the long term if you don’t know how many rebates will be redeemed or when.

When to use rebates

Rebates are a great way to preserve your cash flow while using financial incentives to drive sales. You get full price for the item right away, and paying out the rebates over time helps smooth your cash flow later on.

Think about using rebates if you want to:

• Encourage large purchases or upgrades – the promise of money back can convince customers to upgrade to a higher level or buy in bulk
• Gather customer data – if you need customers to share an email or mailing address to claim the rebate, you can market to them in future
• Save money – if shoppers don't claim the rebate, you get to keep that money, which never happens with a discount
• Get the benefits of a discount without hurting your brand – rebates don't always align with savings or budget shoppers in the way discounts do.

Keep in mind that price rebates take more work to set up and manage than discounts.

When to offer a discount instead

Discounts can be super effective, and they're easier to manage than rebates.

Consider discounts if you want to:

• Drive quick sales or boost cash flow – discounts often lead to an immediate increase in sales revenue
• Attract price-sensitive buyers – a discount is a great way to draw in customers who've shied away due to your prices in the past
• Use an easy process – applying a discount is as easy as hanging a sign and hitting the discount button on your POS

How to use rebates or discounts effectively

Make these sales tactics work for you by following a few simple principles.

1. Communicate terms and conditions clearly

Make your terms and conditions clear in your advertising – that helps maximize the impact of your marketing. It also minimizes the risk of arguments at the point of sale or customers trying to claim rebates they don't qualify for.

Check out the Small Business Administration’s tips on marketing your business successfully, whether you're offering a discount or rebate, or highlighting other aspects of your business.

2. Use software tools to track performance

Whether you're using discounts or rebates, use software like Xero to track their impact on your sales. Do they increase sales? Boost revenue? Help you build a customer list? If not, figure out what you can do differently next time.

3. Adjust and try again

If you're not happy with the results, make some changes and have another go. For instance, you might want to advertise on different channels, offer deeper discounts, or shorten your sales period.

Simplify rebate and discount tracking with Xero

Xero helps you track the costs of applying discounts and rebates. The software also helps facilitate early payment or bulk discounts on your invoices.

If you offer rebates, Xero helps you track how much you owe in unclaimed rebates. Then run cash flow reports to see how rebate redemptions will affect your cash flow.

Get one month free, and simplify how you manage rebates and discounts.

FAQs on rebates vs discounts

These sales strategies can be a bit complicated. Here are some common queries about rebates and discounts.

Do rebates hurt or help perceived value?

Rebates typically don’t hurt perceived value. Customers generally see the product's value as what they paid in store or online – then see the rebate as a bonus after the sale.

Discounts, however, can hurt perceived value. When a product is sold at a discount, customers often see the discounted price as its actual value, and may not be willing to buy it at full price if they know that discounts are imminent.

What’s an example of a rebate in marketing?

If you advertise rebates to draw in new customers, that's a rebate marketing example – for instance, advertising rebates online, on TV, on your website, or with in-store signage.

What does rebate mean in sales?

A rebate is when you claim money back or offer other incentives after a sale – it's a sales tactic used to increase sales.

Can I automate rebate tracking?

Yes – there are all kinds of software tools and apps that help you track your rebates. The right tools can even help you automate parts of this process.

Do rebates or discounts work better for service businesses?

Discounts tend to work best for service-based businesses. But you could consider volume rebates, where someone who uses your services x times can claim money back or get a discount on future services.