Discounts and allowances
Discounts are reductions applied to the basic sale price of goods or services. Allowances against price may have a similar effect.
Discounting practices operate within both business-to-business and business-to-consumer contexts. Discounts can occur anywhere in the distribution channel, modifying either the manufacturer's list price, the retail price, or a quoted price specific to a potential buyer, often given in written form.
There are many purposes for discounting, including to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function, or to otherwise reward behaviors that benefit the discount issuer. Some discounts and allowances are forms of sales promotion. Many are price discrimination methods that allow the seller to capture some of the consumer surplus.
Dealing with payment
Trade discounts
Trade discounts are deductions against the list price or catalogue price which are charged by a wholesaler or manufacturer to a retailer or supplier who then deals with the end customer. The discount then enables the retailer to charge the end customer the list price and cover its own costs/profit.Prompt payment discount
Cash discounts are reductions in price given to the debtor to motivate the debtor to make payment within specified time. These discounts are intended to speed payment and thereby provide cash flow to the firm. They are sometimes used as a promotional device. A UK survey undertaken by the British Chambers of Commerce found that 13% of UK businesses offered prompt payment discounts.Examples
- 2/10 net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 2% discount if they pay within 10 days of the invoice date.
- 3/7 EOM - this means the buyer will receive a cash discount of 3% if the bill is paid within 7 days after the end of the month indicated on the invoice date. If an invoice is received on or before the 25th day of the month, payment is due on the 7th day of the next calendar month. If a proper invoice is received after the 25th day of the month, payment is due on the 7th day of the second calendar month.
- 3/7 EOM net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date. If an invoice is received on or before the 25th day of the month, payment is due on the 7th day of the next calendar month. If a proper invoice is received after the 25th day of the month, payment is due on the 7th day of the second calendar month.
- 2/15 net 40 ROG - this means the buyer must pay within 40 days of receipt of goods, but will receive a 2% discount if paid in 15 days of the invoice date.
Taxation treatment
Preferred payment method discount
Some retailers offer discounts to customers paying with cash, to avoid paying fees on credit card transactions.Partial payment discount
Similar to the trade discount, this is used when the seller wishes to improve cash flow or liquidity, but finds that the buyer typically is unable to meet the desired discount deadline. A partial discount for whatever payment the buyer makes helps the seller's cash flow partially.Sliding scale
A discount offered based on one's ability to pay. More common with non-profit organizations than with for-profit retail.Forward dating
This is where the purchaser doesn’t pay for the goods until well after they arrive. The date on the invoice is moved forward - example: purchase goods in November for sale during the December holiday season, but the payment date on the invoice is January 27.Seasonal discount
These are price reductions given when an order is placed in a slack period. On a shorter time scale, a happy hour may fall in this category. Retailers organize big discounts on almost every season in order to make space for new inventory for the upcoming season.Generally, this discount is referred to as "X-Dating" or "Ex-Dating". An example of X-Dating would be:
- 3/7 net 30 extra 10 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date plus an extra 10 days.
Spaving
Dealing with trade
Bargaining
is where the seller and the buyer negotiate a price below the original selling price.Trade discount
Trade discounts, also called functional discounts, are payments to distribution channel members for performing some function. Examples of these functions are warehousing and shelf stocking. Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked. Trade discounts are most frequent in industries where retailers hold the majority of the power in the distribution channel.Trade discounts are given to try to increase the volume of sales being made by the supplier.
The discount described as trade rate discount is sometimes called "trade discount".
Trade discount is the discount allowed on retail price of a product or something.
for e.g. Retail price of a cream is 25 and trade discount is 2% on 25.
Trade rate discount
A trade rate discount, sometimes also called "trade discount", is offered by a seller to a buyer for purposes of trade or reselling, rather than to an end user. For example, a pharmacist might offer a discount for over-the-counter drugs to physicians who are purchasing them for dispensing to the physicians' own patients. A seller supplying both trade or resellers, and the general public will have a general list price for anybody, and will offer a trade discount to bona-fide trade customers.Trade-in credit
Trade-in credit, also called trade-up credit, is a discount or credit granted for the return of something. The returned item may have little monetary value, as an old version of newer item being bought, or may be worth reselling as second-hand. The idea from a seller's viewpoint is to offer some discount but have the buyer showing some "counter action" to earn this special discount. Sellers like this as the discount granted is not just "given for free" and makes future price/value negotiations easier. Buyers have the advantage of getting some value for something no longer used. Examples can be found in many industries.Dealing with quantity
These are price reductions given for bulk purchasing. The rationale behind them is to obtain economies of scale and pass some of these savings on to the customer. In some industries, buyer groups and co-operatives have formed to take advantage of these discounts. Iyengar and Jedidi note the popularity of quantity discounts being offered to both business purchasers and consumers. Generally there are two types:Cumulative quantity discount
Cumulative quantity discounts, also called accumulation discounts, are price reductions based on the quantity purchased over a set period of time. The seller's expectation is that they will impose an implied switching cost and thereby bond the purchaser to the seller.Non-cumulative quantity discount
These are price reductions based on the quantity of a single order. The seller's expectation is that they will encourage larger orders, thus reducing billing, order filling, shipping, and sales personnel expenses.If a purchaser has to buy more than they need to secure a discount, we can distinguish between the surplus just not being used, or the surplus being a nuisance, e.g. because of having to carry a large container.