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Discounts and allowances
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Discounts and allowances are reductions to a basic price of goods or services. 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).
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Encyclopedia
Discounts and allowances are reductions to a basic price of goods or services. 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). The market price (also called effective price) is the amount actually paid. The purpose of discounts is to increase short-term sales, move out-of-date stock, reward valuable customers, encourage distribution channel members to perform a function, or otherwise reward behaviors that benefit the discount issuer. Some discounts and allowances are forms of sales promotion.
Discount and allowance types
The most common types of discounts and allowances are listed below.
Discounts and allowances dealing with payment
Prompt payment discount
This discount is intended to speed payment and thereby provide liquidity 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. It should be noted that 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. It should be noted that 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 receipt of goods by the purchaser. (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.
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 7th.
Seasonal discount
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.
Discounts and allowances dealing with trade
Bargaining
Bargaining is where the seller and the buyer negotiate a price, which the buyer hopes is lower than the marked price.
Trade discount (also called functional discount)
These 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-in discount
This can be a way of reducing the price. By offering more for a trade-in than it is actually worth, the net effect is to reduce the effective price earned by the seller. The advantage of this is it encourages replacement sales without altering the list price or the perceived value.
Trade rate discount
A discount offered by a seller to a buyer in a related industry. 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.
Discounts and allowances dealing with quantity
These are price reductions given for large purchases. 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 (also called accumulation discounts)
These 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 personal expenses.
Dependence of price on quantity
An extreme form of quantity discount is when, within a quantity range, the price does not depend on quantity:
- if one wants less than the minimum amount one has to be pay for the minimum amount anyway
- if one wants an amount between two of the fixed amounts on offer, one has to pay for the higher amount
These also apply in the case of a service with "quantity" referring to time. For example, an entrance ticket for a zoo is usually for a day; if one stays shorter, the price is the same. It is a kind of pass for unlimited use of a service during a day, where one can distinguish whether or not, when leaving and returning, one has to pay again. Similarly a pass can be for another period. In the case of long periods, it is obvious that one can leave and return without paying again.
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.
Discounts and allowances dealing with customer characteristics
The following discounts have to do with specific characteristics of the customer.
Disability discount
A discount offered to customers with a disability. Depending on the type of business or setting, what is considered a disability may vary.
Educational discount (also called 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 rationale is to build brand awareness early in a buyer's life, and/or to build product familiarity early so that when a student graduates, he/she is more likely to buy the same product for work at its normal price.
Employee discount
A discount offered internally to the employees of a company that sell goods and/or services. This is used to entice more people interested in the goods and/or services of the company to work for the company to receive the discount, and then for the hired employees to put their wages right back into the company by purchasing the goods and/or services. Other perceived benefits of this discount include:
- reaching out to potential employees that could be knowledgable in the goods and/or services the company offers by offering a discount on what they like.
- reduce employee theft by making the hired employees feel they are already getting the items at a great price.
- keep current employees from leaving if they cannot also leave the discount they are receiving behind.
Military discount
A discount offered to customers who are and/or were enlisted in military services.
Senior discount
A discount offered to customers who are of a certain old age, which depending on the type of business or setting, may vary.
Toddler discount (also known as a child discount, kid discount)
A discount offered to customers or customers with children of a certain age or younger. (E.g. Kids eat free.)
Coupons
A discount, either of a certain specified amount or a percentage to the holder of a voucher, usually with certain terms. Commonly, the terms involve the terms of other discounts on this page, such as being valid only if a certain quantity is bought or only if the customer is a senior. Coupons can be distributed in places like newspapers, brochures, and the internet. See coupon.
Rebates
A refund of part of sometimes the full price of the product following purchase, though some rebates are offered at the time of purchase. See rebate.
Other discounts and allowances
- Promotional allowances - These are price reductions given to the buyer for performing some promotional activity. These include an allowance for creating and maintaining an in-store display or a co-op advertising allowance.
- Brokerage allowance - From the point of view of the manufacturer, any brokerage fee paid is similar to a promotional allowance. It is usually based on a percentage of the sales generated by the broker.
See also
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