Finance:Discounts and allowances

Short description: Purchase

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).

There are many purposes for discounting, including to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function, or to otherwise reward behaviors that benefit the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

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

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. 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

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.

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. 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.

Age-related discounts

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.

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. 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.

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." 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. 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

• Promotional allowances (Trade-in 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. Trade-in allowances are most common in the automobile industry, but they are also given for other durable goods.
• 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

• Net 30
• Ticket systems

Further reading

• Shell, Ellen Ruppel, Cheap: The High Cost of Discount Culture, New York : Penguin Press, 2009. ISBN:978-1-59420-215-5