Discounts and allowances

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Discounts and allowances are reductions to a basic price of goods or services.

Price quantity of payment or compensation given by one party to another in return for goods or services

A price is the quantity of payment or compensation given by one party to another in return for one unit of goods or services. A price is influenced by both production costs and demand for the product. A price may be determined by a monopolist or may be imposed on the firm by market conditions.

Contents

They can occur anywhere in the distribution channel, modifying either the manufacturer's list price (determined by the manufacturer and often printed on the package), the retail price (set by the retailer and often attached to the product with a sticker), or the list price (which is quoted to a potential buyer, usually in written form).

In marketing, a product is an object or system made available for consumer use; it is anything that can be offered to a market to satisfy the desire or need of a customer. In retailing, products are often referred to as merchandise, and in manufacturing, products are bought as raw materials and then sold as finished goods. A service is also regarded to as a type of product.

There are many purposes for discounting, including to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function, or to otherwise reward behaviors that benefit the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.

Sales Promotion is one of the elements of the promotional mix.. Sales promotion uses both media and non-media marketing communications for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability. Examples include contests, coupons, freebies, loss leaders, point of purchase displays, premiums, prizes, product samples, and rebates.

Price discrimination

Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets. Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand. Price discrimination, very differently, relies on monopoly power, including market share, product uniqueness, sole pricing power, etc.

Types

The most common types of discounts and allowances are listed below.

Dealing with payment

Prompt payment discount

Trade Discounts are deductions in price given by the wholesaler or manufacturer to the retailer at the list price or catalogue price. 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.

The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP), of a product is the price at which the manufacturer recommends that the retailer sell the product. The intention was to help standardize prices among locations. While some stores always sell at, or below, the suggested retail price, others do so only when items are on sale or closeout/clearance.

A debtor is an entity that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this debt arrangement is a bank, the debtor is more often referred to as a borrower.

Cash flow movement of money into or out of a business, project, or financial product

A cash flow is a real or virtual movement of money:

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. (ROG is short for "Receipt of goods.")

Preferred payment method discount

Some retailers (particularly small retailers with low margins) offer discounts to customers paying with cash, to avoid paying fees on credit card transactions.

Credit card card for financial transactions from a line of credit

A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts plus the other agreed charges. The card issuer creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.

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

Seasonal Sales promotion Sales promotion 2015 0001.JPG
Seasonal Sales promotion

These are price reductions given when an order is placed in a slack period (example: purchasing skis in April in the northern hemisphere, or in September in the southern hemisphere). On a shorter time scale, a happy hour may fall in this category. 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.

Dealing with trade

Bargaining

Bargaining is where the seller and the buyer negotiate a price below the original asking 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 (referred to as channel captains).

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. [1] 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. [2]

Dealing with quantity

These are price reductions given for bulk purchasing. The rationale behind them is to obtain economies of scale and pass some (or all) of these savings on to the customer. In some industries, buyer groups and co-ops have formed to take advantage of these discounts. 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 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 expectation is that they will encourage larger orders, thus reducing billing, order filling, shipping, and sales personnel expenses.

Dependence of price on quantity

An extreme form of quantity discount occurs when, within a quantity range, the price does not depend on quantity:

  • If you want less than the minimum amount, you must pay the minimum amount anyway.
  • If you want an amount between two of the fixed amounts offered, you must pay the higher amount.

This also applies in the case of a service where the "quantity" is time. For example, an entrance ticket for a zoo is usually for a day. If you leave in the middle of the day, the price is the same. Other examples are multi-day passes to amusement parks or season tickets to sporting events.

If one has to buy more than one wants, 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.

Dealing with customer characteristics

The following discounts have to do with specific characteristics of the customer.

Disability discount

A discount offered to customers with what is considered to be a disability.

Educational or student discount

These are price reductions given to members of educational institutions, usually students but possibly also to educators and to other institution staff. The provider's purpose is to build brand awareness early in a buyer's life, or build product familiarity so that after graduation the holder is likely to buy the same product, for own use or for an employer, at its normal price. Providers also offer student discounts as means of offering a product within the budget of a student, which would otherwise be too expensive, thus gaining extra sales. Educational discounts may be given by merchants directly, or via a student discount program.

Employee discount

A discount offered by a company to employees who buy its products.

In 2005, the American automakers ran an "employee discount" for all customers promotional campaign in order to entice buyers, with some success.

Military discount

A discount offered to customers who are or were members of a military service. Types of military discounts include discounts for active duty military, veterans, retired military personnel, and military spouses or dependents. In the United States, military discounts frequently require proof of ID to show eligibility such as a DD Form 214, DD Form 215, or DD Form 217 from any branch of the Armed Forces, TRICARE Cards, Veterans Affairs Cards Uniformed Services Privilege and Identification Cards (USPIC) or other official documentation. Eligibility for military discounts can also be verified online or via mobile by verification companies like SheerID.

Toddler discount, child discount, kid discount

A discount, or free service, offered to children younger than a certain age, commonly for admission to entertainments and attractions, restaurants, and hotels. There may be a requirement that the child be accompanied by an adult paying full price. Small children often travel free on public transport, and older ones may pay a substantially discounted price; proof of age may be required.

Young person's discount

Discounts are sometimes offered to young people below a certain age who are neither children nor in education. [3]

Senior discount

A discount offered to customers who are above a certain relatively advanced age, typically a round number such as 50, 55, 60, 65, 70, and 75; the exact age varies in different cases. The rationale for a senior discount offered by companies is that the customer is assumed to be retired and living on a limited income, and unlikely to be willing to pay full price; sales at reduced price are better than no sales. Non-commercial organizations may offer concessionary prices as a matter of social policy. [4] Free or reduced-rate travel is often available to older people (see, for example, Freedom Pass). In United States most grocery stores offer senior discounts, starting for those age 50 or older, but most discounts are offered for those over 60. [5]

Special prices offered to friends of the seller

A discounted price offered to friends of the salesperson, an attitude which is parodied in the stereotype of a salesman saying "It costs [such-and such], but for you..." In Australia, New Zealand, and the UK, discounts to friends are known as "mates' rates." [6] [7] In French this discount is known as prix d'ami. [8] In Spain this is known as "precio de amigo" in Spanish, or "preu d'amic" in Catalan. In German the term "Freundschaftspreis" is commonly used.

Special prices offered to local residents

Discounts are common in tourist destinations. In Hawaii, for example, many tourist attractions, hotels, and restaurants charge a deeply discounted price to someone who shows proof that they live in Hawaii; this is known as a "Kama'aina discount," after the Hawaiian word for an old-timer or native. [9] It is also known outside of Hawaii but in the Hawaiian islands as a resident discount.

Discount card

Sometimes a document, typically a plastic card similar to a payment card, is issued as proof of eligibility for discounts. In other cases, existing documents proving status (as student, disabled, resident, etc.) are accepted. Documentation may not be required, for example, for people who are obviously young or old enough to qualify for age-related discounts. In some cases, the card may be issued to anyone who asks.

Coupons

A discount, either of a certain specified amount or a percentage to the holder of a voucher, usually with certain terms. Commonly, there are restrictions as for other discounts, such as being valid only if a certain quantity is bought or only if the customer is older than a specified age. Coupons are often printed in newspapers, brochures, and magazines, or can be downloaded from the Internet.

Rebates

A refund of part or sometimes the full price of the product following purchase, though some rebates are offered at the time of purchase. A particular case is the promise of a refund in full if applied for in a restricted date range some years in the future; the hope is that the promise will lure customers and increase sales, but that the majority will fail to meet the conditions for a valid claim.

Other

See also

Related Research Articles

Trade credit is the credit extended by one trader to another when the goods and services are bought on credit. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing. It is granted to those customers who have a reasonable amount of financial standing and goodwill.

Factoring (finance) financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable to a third party at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. Forfaiting is a factoring arrangement used in international trade finance by exporters who wish to sell their receivables to a forfaiter. Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable. The Commercial Finance Association is the leading trade association of the asset-based lending and factoring industries.

The term pro forma is most often used to describe a practice or document that is provided as a courtesy or satisfies minimum requirements, conforms to a norm or doctrine, tends to be performed perfunctorily or is considered a formality.

Accounts receivable legally enforceable claim for payment to a business by its customer/ clients for goods supplied and/or services rendered in execution of the customer’s order

Accounts receivable are legally enforceable claims for payment held by a business for goods supplied and/or services rendered that customers/clients have ordered but not paid for. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset. It is one of a series of accounting transactions dealing with the billing of a customer for goods and services that the customer has ordered. These may be distinguished from notes receivable, which are debts created through formal legal instruments called promissory notes.

Coupon voucher

In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product.

Car dealerships in North America

In the United States and Canada, a car dealer may specialize in used vehicles, or be a franchised dealership, which is a retailer that sells new and sometimes used cars. In most cases Franchised Dealerships include certified preowned vehicles, employ trained automotive technicians, and offer financing. In the United States, direct manufacturer auto sales are prohibited in almost every state by franchise laws requiring that new cars be sold only by dealers.

In the broadest sense, merchandising is any practice which contributes to the sale of products to a retail consumer. At a retail in-store level, merchandising refers to the variety of products available for sale and the display of those products in such a way that it stimulates interest and entices customers to make a purchase.

An invoice, bill or tab is a commercial document issued by a seller to a buyer, relating to a sale transaction and indicating the products, quantities, and agreed prices for products or services the seller had provided the buyer.

net 10, net 15, net 30 and net 60 are forms of trade credit which specify that the net amount is expected to be paid in full by the buyer within 10, 15, 30 or 60 days of the date when the goods are dispatched or the service is completed. Net 30 or net 60 terms are often coupled with a credit for early payment.

Receipt written acknowledgment that a person has received money or property in payment

A receipt is a document acknowledging that a person has received money or property in payment following a sale or other transfer of goods or provision of a service. All receipts must have the date of purchase on them. If the recipient of the payment is legally required to collect sales tax or VAT from the customer, the amount would be added to the receipt and the collection would be deemed to have been on behalf of the relevant tax authority. In many countries, a retailer is required to include the sales tax or VAT in the displayed price of goods sold, from which the tax amount would be calculated at point of sale and remitted to the tax authorities in due course. Similarly, amounts may be deducted from amounts payable, as in the case of wage withholding taxes. On the other hand, tips or other gratuities given by a customer, for example in a restaurant, would not form part of the payment amount or appear on the receipt.

Credit note

A credit note or credit memo is a commercial document issued by a seller to a buyer. Credit notes act as a Source document for the Sales return journal. In other words the credit note is evidence of the reduction in sales. A credit memo, a contraction of the term "credit memorandum", is evidence of a reduction in the amount that a buyer owes a seller under the terms of an earlier invoice.

A rebate is an amount paid by way of reduction, return, or refund on what has already been paid or contributed. It is a type of sales promotion that marketers use primarily as incentives or supplements to product sales. The mail-in rebate (MIR) is the most common. A MIR entitles the buyer to mail in a coupon, receipt, and barcode in order to receive a check for a particular amount, depending on the particular product, time, and often place of purchase. Rebates are offered by either the retailer or the manufacturer of the chosen product. Large stores often work in conjunction with manufacturers, usually requiring two or even three separate rebates for each item. Manufacturer rebates are sometimes valid only at a single store. Rebate forms and special receipts are sometimes printed by the cash register at time of purchase on a separate receipt or available online for download. In some cases, the rebate may be available immediately, in which case it is referred to as an instant rebate. Some rebate programs offer several payout options to consumers, including a paper check, a prepaid card that can be spent immediately without a trip to the bank, or even PayPal payout.

A blanket order, blanket purchase agreement or call-off order is a purchase order which a customer places with its supplier to allow multiple delivery dates over a period of time, often negotiated to take advantage of predetermined pricing. It is normally used when there is a recurring need for expendable goods. Blanket orders are often used when a customer buys large quantities and has obtained special discounts. Based on the blanket order, sales orders and invoice items can be created as needed until the contract is fulfilled, the end of the order period is reached or a pre-determined maximum order value is reached.

Value-based price is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices. Where it is successfully used, it will improve profitability through generating higher prices without impacting greatly on sales volumes.

In bookkeeping, accounting, and finance, Net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales.

Dynamic discounting describes a collection of methods in which payment terms can be established between a buyer and supplier to accelerate payment for goods or services in return for a reduced price or discount. Dynamic discounting methods are used for business-to-business transactions when contractual or pre-established early payment terms may not exist or the payment date does not conform to agreed upon discount terms. Dynamic discounting includes the ability to agree upon terms that vary the discount according to the date of early payment. The earlier the payment, the greater the discount. In addition, it includes an ability for either buyer or supplier to propose an early payment date and discount for a one-time payment using electronic mail or specialized software. Through the use of dynamic discounting methods, buying organizations can increase the number and size of early payment discounts they receive and suppliers can get paid sooner at a lower cost of capital than alternative options. A range of concepts is available to implement dynamic discounting into supply chain finance (SCF): dynamic discounting can be seen as a comparatively simple form, whereby the supplier grants a cash discount for early payment of its invoices – the amount of the reduction and the time of payment are quickly and freely negotiable.

Special journals

Special Journals are designed to facilitate the process of journalizing and posting transactions. They are used for the most frequent transactions in a business. For example, in merchandising businesses, companies acquire merchandise from vendors, and then in turn sell the merchandise to individuals or other businesses. Sales and purchases are the most common transactions for the merchandising businesses. A business such as a retail store will record the following transactions many times a day for sales on account and cash sales.

The actual price paid to the manufacturer or distributor by the end-customer retailer, which is known as the invoice price. However, in many industries, the "invoice cost" actually varies from the "net purchase cost," or the actual price of a product. The invoice cost of a product is the price that the merchant pays for the product before marking it up to sell. The invoice cost is sometimes used in industries such as automobile sales to entice customers to buy.

References

  1. "Business glossary". All Business. Retrieved 2009-02-07.
  2. "Example for Trade-In offerings in the Test- and Measurement Industry". All Business. Retrieved 2011-05-23.
  3. Example of young person's discount: UK 16-25 railcard offering 1/3 discount on rail travel, and other discounts, for an annual fee
  4. Example of government concession: UK residents over 75 are entitled to a free television licence
  5. Grocery stores with discounts for seniors: Grocery stores with discounts for seniors
  6. Mates' rates program at Intercontinental Hotels
  7. Kwik Fit 'mates rates' by DDB UK
  8. prix d'ami (alternative to mates rates). Proz.com. [ unreliable source? ]
  9. Honolulu Magazine, June 2009

Further reading