The whole money back thing makes absolutely no sense. If you are going to sell something for $500, then say you will give $100 back after purchase, why not just make the product $400? Is it some sort of sleezy marketing scheme? ELI5. Please! Make this make sense.
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I see so many responses here about breakage (people not following through) and consumer manipulation. While these may be used to justify or criticize money back purchases, they are not the primary rationale.
First we need to understand the general purpose of promotions. They are designed to boost sales over a defined period at the expense of margin. It is essential that after the promotion ends, consumer behavior goes back to the original price point. If the merchant changes consumer perception so that they believe the product is actually worth the lesser amount, this does long term damage to sales (and the brand), so that the promotion gives a short term benefit but ultimately fails in the longer term.
The dynamics here depend on the particular product (is it a luxury or a necessity?), the market (how price sensitive are the consumers?), and the overall economic environment. But to keep things simple, each promotion has its own mechanism for guarding against price and brand erosion.
In a money back purchase, the goal is that by separating the purchase (for $500) from the cash back ($100) into two separate activities, you better protect the price of the product. So after the promotion is over, most people are still willing to value and buy it at $500. If, in contrast, the merchant prices the product at $400, then both research and common sense show that there is less of a chance for consumers to buy at $500 in the future, because they don’t like getting ripped off paying $500 for a $400 product.
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