The Rebate Pitfall: Why “Buy Baits” Work Better Than You Think

When you shop online and see a deal that promises a discount—if you enter a promo code before checkout—it’s easy to think you’re getting a bargain. But are you really?

Matthias Rodemeier (Bocconi Department of Finance) has tackled this question in a study published in the American Economic Journal: Economic Policy. His analysis of the behavior of over 600,000 customers of a major European furniture and homeware online retailer delves into the psychology behind why consumers often fail to claim their rebates, shedding some light on how we perceive these offers. It turns out that consumers are smarter about some pitfalls than others, and companies know exactly how to capitalize on that blind spot.

The study explores two key reasons consumers don’t redeem rebates:

• Inattention: Simply forgetting about the rebate or missing the redemption deadline.
• Hassle costs: The effort, time, and inconvenience involved in the redemption process (e.g., filling out forms, mailing documents, navigating complex online portals).

The psychology of the promo code

The experiment was designed with different promotional actions:

• Baseline (No Promotion): Products were offered at their regular price without any discount or rebate, serving as a control.
• Discount Condition: Products were offered with an immediate price reduction, automatically applied at the point of sale. This condition allowed researchers to measure demand when hassle costs and inattention were not factors.
• Rebate Condition: Products were offered with a rebate that consumers had to actively claim during the checkout process. This scenario introduced both inattention and hassle costs.
• Rebate with Reminder Condition: Similar to the rebate condition, but with an explicit reminder provided to the consumer during the purchasing journey, designed to mitigate inattention.

A crucial aspect of this study was its focus on “instant rebates”, where “the final buying and the redemption decision happen simultaneously.” Unlike traditional mail-in rebates, consumers had the opportunity to learn about the hassle of redemption right at the checkout. This design allowed the researchers to precisely analyze how consumers react to the immediate availability of a rebate and whether this immediate exposure influences their perception of hassle.

We know we’re forgetful, but not how lazy we are

Matthias Rodemeier’s most intriguing finding is probably how consumers perceive these two “frictions”. It turns out, we’re pretty good at anticipating our own inattention. If a company offers a reminder about a rebate at checkout, consumers are more likely to buy the product, knowing they’ll be prompted to redeem. This suggests we’re somewhat “sophisticated” about our own forgetfulness.

“The fact that we do not observe an effect of hassle costs on the buying probability implies that consumers are fully naive about hassle costs.”

However, when it comes to “hassle costs”, the story changes. The research shows that consumers tend to underestimate the effort required to redeem a rebate. They don’t anticipate how much of a bother it will actually be, and therefore, they don’t factor this hassle into their initial purchase decision. As the paper states, “The fact that we do not observe an effect of hassle costs on the buying probability implies that consumers are fully naive about hassle costs.”

Think about it: an automatically applied discount significantly boosts purchasing probability. But requiring consumers to actively claim a rebate leads to a substantial drop in redemption rates—around 25 percentage points in comparison to an automatically applied discount. This suggests that hassle costs are a major barrier to redemption. Yet, consumers don’t reduce their buying probability when faced with these hassle costs, indicating they underestimate this friction.

Exploiting consumers’ blind spots

This isn’t just an academic exercise. If people misunderstand the effort it takes to redeem a rebate, they make systematically worse financial choices. What’s more, firms can use this blind spot to their advantage.

As Rodemeier shows, rebates that require effort are 130% more profitable for firms than equivalent automatic discounts, precisely because most people don’t follow through. And since many shoppers don’t anticipate this failure, they buy as if the discount is guaranteed. 

In essence, businesses benefit from consumers’ tendency to overestimate their willingness to deal with hassle, leading to higher profit margins on products sold with rebates. While reminding consumers about a rebate can increase redemption rates, it doesn’t significantly impact profits because consumers, anticipating the reminder, adjust their buying behavior accordingly. “Thus, it is consumers’ naivete about hassle costs that makes instant rebates overall more profitable than discounts.”

The case for stronger protections

Consumer advocates have long criticized rebate programs as deceptive. Rodemeier’s study adds fuel to that argument. If people systematically underestimate redemption hassle, then simple fixes like on-screen reminders won’t be enough. Instead, the research suggests that firms should be required to automatically apply rebates, or better yet, regulators should consider banning the most misleading forms of these promotions altogether.

Matthias Rodemeier, “Buy Baits and Consumer Sophistication: Field Evidence from Instant Rebates”, American Economic Journal: Economic Policy 2025, 17(2): 30–59, https://doi.org/10.1257/pol.20230358