- Discounts and allowances
Corporate finance Working capital Capital budgeting Sections Societal components
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There are many purposes for discounting, including; to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function, or to otherwise reward behaviors that benefit the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.
Discount and allowance types
The most common types of discounts and allowances are listed below.
Discounts and allowances dealing with payment
Prompt payment discount
Trade Discount:Deduction in price given by the wholesaler/manufacturer to the retailer at the list price or catalogue price. Cash Discount:Reduction in price given by the creditor to the debitor is known as cash discount. This discount is intended to speed payment and thereby provide liquidity to the firm. They are sometimes used as a promotional device.
- 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.
A discount offered based on one's ability to pay. More common with non-profit organizations than with for-profit retail.
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 7.
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 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 discounts are given to try to increase the volume of sales being made by the supplier .
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.
Trade-In credit (also referred as Trade-up credit)
A discount or credit granted for the return of something in turn. 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, in turn, have the advantage of getting some value for some no longer used equipment. Examples can be found in many industries.
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.
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. Educational discounts are traditionally given by merchants directly, or via a student discount program such as NUS and Studentdiscounts.co.uk in the United Kingdom or Edhance in the United States.
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 knowledgeable 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.
In 2005, the American automakers marketed an employee discount for all promotional campaign in order to entice buyers, which saw some success.
A discount offered to customers who are and/or were enlisted in military services. The rationale may be that the servicemember is assumed to be on a limited budget, or it may be a way for the retailer to show support for members of the military.
A discount offered to customers who are above a certain age, typically 50, 55, or 60; the exact age varies with the business or setting. The rationale for a senior discount is that the customer is assumed to be retired, and/or have a limited income, and/or living on a budget.
Toddler discount (also known as a child discount, kid discount)
A discount offered to children younger than a certain age, very common with regard to admission fees to entertainments and attractions. Another form of this discount is a "kids eat free" type of promotion. Often there is a requirement that the child must be accompanied by an adult paying full price.
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 and New Zealand, discounts to friends are known as "mates' rates." In French this discount is known as prix d'ami.
Special prices offered to local residents
Common in tourist destinations, this discount is intended to promote local patronage. In Hawai'i, for example, many tourist attractions, hotels, and restaurants charge a deeply discounted price to someone who shows a Hawai'i drivers license or other proof that they live in Hawai'i; this is known as a "Kama'aina discount," after the Hawaiian word for an old-timer or native.
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.
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.
- ^ "Business glossary". All Business. http://www.allbusiness.com/glossaries/trade-rate/4945920-1.html. Retrieved 2009-02-07.
- ^ "Example for Trade-In offerings in the Test- and Measurement Industry". All Business. http://savings.tm.agilent.com/index.cgi?PageTradeList:ALIAS=trade_specials&User:LANGUAGE=en. Retrieved 2011-05-23.
- ^ Mates' rates program at Intercontinental Hotels
- ^ www.proz.com
- ^ Honolulu Magazine, June 2009
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