Discounts and allowances

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

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).

There are many purposes for discounting, including to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function, or to otherwise reward behaviors that benefit the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

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.

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.

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. [1]

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. [2]

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. 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.

Dealing with trade

Bargaining

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 (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. [3] 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. [4]

Dealing with quantity

DVD films sold at a discount when 2 items are purchased 021 Discount book and DVD shop in Dordrecht, Netherlands.jpg
DVD films sold at a discount when 2 items are purchased

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.

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. [5]

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. Students may be able to get discounts on products, services, entertainment, and more. [6] Educational discounts may be given by merchants directly, or via a student discount program. Many brands like Apple, Dell, give exclusive discounts to students on their tech products, so that the students get to learn from the latest technology available making their work lesser. Additionally, travel websites also offer student discounts to help make travel more affordable for students. Some websites may also offer other perks for students, such as free cancellations or additional loyalty points. Students can get discounts not only from tech and travel but also from lifestyle brands.

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. In Australia, DefCom Australia is a similar discount card.

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, for example:

  • In the UK, 16-25 railcards offer 1/3 discount on rail travel, and other discounts, in exchange for an annual fee [7]
  • An Enhanced Partnership in the north east of England offers fares of £1 for a single bus journey for all under 22s on any bus service in the region. [8]
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. [9] Free or reduced-rate travel is often available to older people (see, for example, Freedom Pass). In the United States, most grocery stores offer senior discounts, starting for those age 50 or older, but most discounts are offered for those over 60. [10]

First responder or healthcare worker discount

Discounts specially offered to firefighters, ambulance workers, police officers and other emergency services personnel are called first responder discounts. Hospital staff may sometimes receive discounts as well.

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." [11] [12] In French this discount is known as prix d'ami . 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," meaning child of the land or a local resident. [13] It may be referred to in Hawaii or elsewhere as a resident discount.

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 loan 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 organizations as a source of short-term financing. It is granted to those customers who have a reasonable amount of financial standing and goodwill.

Sales promotion is one of the elements of the promotional mix. The primary elements in the promotional mix are advertising, personal selling, direct marketing and publicity/public relations. 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.

<span class="mw-page-title-main">Factoring (finance)</span> Financial transaction and a type of debtor finance

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.

<span class="mw-page-title-main">List price</span> Price that the manufacturer recommends for a retailer to charge

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 its manufacturer notionally recommends that a retailer sell the product.

<span class="mw-page-title-main">Accounts receivable</span> Claims for payment held by a business

Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. The accounts receivable process involves customer onboarding, invoicing, collections, deductions, exception management, and finally, cash posting after the payment is collected. 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.

<span class="mw-page-title-main">Coupon</span> Document, paper or electronic, to provide a discount on goods or services

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

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-upon prices for products or services the seller had provided the buyer.

Net 10, net 15, net 30 and net 60 are payment terms for 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.

<span class="mw-page-title-main">Receipt</span> 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 the 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 taxes withheld from wages. On the other hand, tips or other gratuities that are given by a customer, for example in a restaurant, would not form part of the payment amount or appear on the receipt.

<span class="mw-page-title-main">Credit note</span> Commercial document issued by seller to buyer

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 a buyer owes a seller under an earlier invoice.

<span class="mw-page-title-main">Business-to-business</span> Commercial transaction between businesses

Business-to-business is a situation where one business makes a commercial transaction with another. This typically occurs when:

<span class="mw-page-title-main">Revenue recognition</span>

The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned, no matter when cash is received. In cash accounting—in contrast—revenues are recognized when cash is received no matter when goods or services are sold.

In marketing, a rebate is a form of buying discount and is an amount paid by way of reduction, return, or refund that is paid retrospectively. It is a type of sales promotion that marketers use primarily as incentives or supplements to product sales. Rebates are also used as a means of enticing price-sensitive consumers into purchasing a product. 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 product manufacturer. Large stores often work in conjunction with manufacturers, usually requiring two or sometimes three separate rebates for each item, and sometimes are 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 as a PayPal payout.

In bookkeeping, accounting, and financial accounting, 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.

In finance, 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.

<span class="mw-page-title-main">Special journals</span> Specialized lists of financial transaction records

Special journals are specialized lists of financial transaction records which accountants call journal entries. In contrast to a general journal, each special journal records transactions of a specific type, such as sales or purchases. For example, when a company purchases merchandise from a vendor, and then in turn sells the merchandise to a customer, the purchase is recorded in one journal and the sale is recorded in another.

Trade finance is a phrase used to describe different strategies that are employed to make international trade easier. It signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade. Trade finance manifest itself in the form of letters of credit (LOC), guarantees or insurance and is usually provided by intermediaries.

<span class="mw-page-title-main">Supply chain finance</span>

Supply chain financing is a form of financial transaction wherein a third party facilitates an exchange by financing the supplier on the customer's behalf. The term also refers to the techniques and practices used by banks and other financial institutions to manage the capital invested into the supply chain and reduce risk for the parties involved.

There are many types of e-commerce models', based on market segmentation, that can be used to conducted business online. The 6 types of business models that can be used in e-commerce include: Business-to-Consumer (B2C), Consumer-to-Business (C2B), Business-to-Business (B2B), Consumer-to-Consumer (C2C), Business-to-Administration (B2A), and Consumer-to-Administration

The invoice price is the actual price that the end-customer retailer pays to the manufacturer or distributor for a product.

References

  1. Chopra, Srishta. "Library Guides: Math help from the Learning Centre: Payment Terms and Cash Discounts". libraryguides.centennialcollege.ca. Retrieved 2022-12-28.
  2. "Forward dating - Financial encyclopedia". www.finansleksikon.no. Retrieved 2021-05-10.
  3. "Business glossary". All Business. Retrieved 2009-02-07.
  4. "Example for Trade-In offerings in the Test- and Measurement Industry". All Business. Retrieved 2011-05-23.
  5. "Discounts for Disabled People". Gov.uk.
  6. "How to Get the Best College Student Discounts". Savingforcollege.com. Retrieved 2021-05-10.
  7. Rail Delivery Group, Get 1/3 off train travel with a 16-25 Railcard, accessed 13 February 2024
  8. Bradley, A., , Leader welcomes new £1 bus fare for young people and cheaper multi-operator adult tickets on the way, Newcastle City Council, published 22 March 2023, accessed 13 February 2024
  9. Example of government concession: UK residents over 75 are entitled to a free television licence
  10. Grocery stores with discounts for seniors: Grocery stores with discounts for seniors
  11. Mates' rates program at Intercontinental Hotels
  12. Kwik Fit 'mates rates' by DDB UK
  13. Honolulu Magazine, June 2009

Further reading