Cashback is where a commission earned, for helping generate a sale, is given back to the customer.
Before trying to understand how cashback works you must first understand the business of affiliate marketing. Since the inception of the internet retailers have been involved in affiliate marketing to generate more sales from their online shops. A website will offer a percentage of the sale to an affiliate marketer for their help in securing a sale. Its almost like free advertising for the brand!
Well, a cashback website has similar agreements with brands much like affiliate marketers. The main difference is that cashback sites will give you their commission less a tiny percentage for running of the website. It is like buying items from your own affiliate links. You buy the item at the same prices but instead of a marketing company getting 10% commission, the cashback site may give you 8% then keep 2% for themselves. If you think about it everybody wins. The brand still get a sale, the cashback company get 2% and you get 8% that you would not have had otherwise.
At first I asked myself why would a brand be happy with giving away 10% back to the user? If you think about it though the thought of earning back cashback is an incentive to the person purchasing an item. They may get sales that they otherwise would not have. Also if they Google search for an item and see that one site has cashback they are more likely to pick it over another.