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Why Do Companies Give Cashback Offer? Research Team | Posted On Tuesday, September 10,2019, 08:12 PM

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Why Do Companies Give Cashback Offer?



Getting cashbacks from e-commerce sites, credit cards and e-wallets is quite common these days. The first question here is what is a cashback? How does it help you?

Cashback offers an interesting way to earn back some of the money you spend. The article below discusses the cashback offers in detail and the advantages and disadvantages.

What is Cashback offer?

A cashback is a kind of reward; given to the user for making payments through mobile wallets or credit cards. For example, a store is offering you a 15% cashback on purchase made through Paytm. Once the transactions through the digital wallet are made successfully, you get a cashback to your account that can be redeemed on your next purchase.

A cashback differs from a discount as it is an indirect way of enjoying a discount as it can only be redeemed on the next purchase. Cashbacks are generally given when the retailer or the app is tied to a third-party.

Cashback is a scheme which involves giving an extra amount back to the customer as a reward for transactions. The cashback is a certain percentage of the amount spent by the customer on the purchase. It is also an ideal way to promote brands and products and reward customer loyalty.

The cashback can be used for redemption on future expenses like electricity bills or other utility bills, mobile recharge, apparels and cosmetic purchases, purchase of groceries and other essentials. Cashback is a way that helps both the customer as well as the company. The customer enjoys money back and the company gains more customers and brand loyalty.

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Why Do Companies Give Cashback Offer?

Cashback is used as a strategy by many companies to gain customers and grab market share. But, the discounts plus cashback or the rewards and cashback offers have perplexed customers as they are not able to understand why such huge discounts are given on goods or services. Listed below are some of the points that help clear up the confusion and understand how cashback is an important market strategy for e-commerce sites:

Customer loyalty:

As the Indian economy is one of the major economies in the World; the focus of MNCs and start-ups is directed towards capturing the Indian market and making profits. Cashback is an attractive strategy to acquire market share. Many of these companies have spent a huge amount on advertisements and marketing, without acquiring customer loyalty.

Customers choose to shift to other companies as soon as they find the prices have reduced or a good discount is offered. With cashback offers; the companies make sure they retain their existing customer base as well as acquire new customers through tie-ups.

The cashback offers ensure the customers come back to redeem their vouchers. For example, if you have a cashback of Rs 1,500 on an e-commerce site or in your e-wallet, then you would go back to the site to make an additional purchase to redeem the money.

See Also: Investment Planning

Digital wallets:

Digital wallets have great potential and have eased the way payments are made. Digital wallets have enabled cash transfer from the user to retailers, e-commerce sites as well as for making personal payments.

Experts believe digital wallets have revolutionized the process of making cashless payments by launching easy to use and user-friendly app interfaces. The wallets enable UPI payments and are linked to the credit/debit card or your bank account. Payments are conducted securely and safely. Digital wallets are believed to be the future leaders in cashless payments.

In India, the market leaders in this segment are Paytm and Google Pay. Once people get used to making payments using these apps; there is no doubt these will prove to be the most convenient payments methods for customers. Customers do not need to carry cash or worry about small change while making payments. Cashback on these apps is the icing on the cake. You can pay conveniently as well as receive cashback on payments. Cashback on digital wallets helps improve market retention and customer loyalty.

See Also: Steps in the Financial Planning Process

Advantages and Disadvantages of Cashback offer:

Advantages of cashback offers:

  • Cashback offers are relatively cost-effective as it requires enterprises give back a percentage of the payment received. The enterprises can save a chunk of money spent on extensive promotions and marketing. Customers will often opt for an app or a site that offers cashbacks. Cashbacks are instrumental in helping a new brand or enterprise acquire a major proportion of the market.
  • Cashbacks are different from discounts. Discounts are paid upfront whereas a cashback must be paid in the future. The cashback payments are better than flat discount offers as it helps amplify the sales of certain products as well as protect the company’s profit due to non-redemption. 
  • Cashback offers generally come with a time limit. This way the e-commerce sites or the retailers can achieve their target sales and hold on to their profit margins.
  • Cashbacks can be availed across age groups and is a mechanism to lure the youth in India. This helps turn everyone into potential customers.
  • The cashback offers are the safest way to ensure a brand does not suffer reputation issues. Continued discounts on a certain brand may force the customer to have doubts on the reputation of the firm. Cashbacks help enterprises maintain brand reputation as well as reward the customers.

Disadvantages of cashback offers:

  • The cashback offers are extensively used by enterprises for market retention. It is believed that with time; this trend will fade away and no longer lure customers.
  • Cashback values must be set by the companies very carefully, otherwise they may end up in losses. The companies must strategize and make sure that even after the cashback value is deducted from the sale value; the company can retain the targeted profit amount. This is not very difficult to implement, but these companies must be cautious and should track profit margins carefully.
  • The redemption date and the terms of redemption must be carefully implemented. The fast-changing economic climate may lead to losses if redemption rules are not clear. The companies must make sure that industry knowledge is used and provide redemption offers with specified promotional information. The redemption coupons must have an expiry date and should be realistic.
  • The brands or companies must make sure the cashback points are reasonable. A poor percentage of cashbacks, will fail to lure customers. It is important to make sure the coupon value provided is a certain percentage of the product price and is in the completive range vis-a-vis other brands.

See Also: Importance of Financial Planning

Cashbacks can help you save a lot of money on online shopping, payments of bills through digital wallets and purchases made at retail outlets. To earn cashbacks, you can download a digital wallet or make use of cashback credit cards.

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