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Discounts and allowances are reductions to a basic
price A price is the (usually not negative) quantity of payment or Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
of goods or services. They can occur anywhere in the
distribution channel Distribution (or place) is one of the four elements of the marketing mix The term "marketing mix" is a foundation model for businesses, historically centered around product, price, place, and promotion (also known as the "4 Ps"). The marketi ...
, modifying either the manufacturer's list price (determined by the manufacturer and often printed on the package), the retail price (set by the
retailer Retail is the sale of goods and Service (economics), services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturing, manufacturers, dire ...
and often attached to the
product Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or set of deliverables that contribute to a business solution Mathematics * Pr ...
with a sticker), or the list price (which is quoted to a potential buyer, usually in written form). There are many purposes for
discounting Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee.See "Time Value", "Discount", "Discount Yield", "Compound Interest", "Efficient ...
, including to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage
distribution channel Distribution (or place) is one of the four elements of the marketing mix The term "marketing mix" is a foundation model for businesses, historically centered around product, price, place, and promotion (also known as the "4 Ps"). The marketi ...
members to perform a function, or to otherwise reward behaviors that benefit the discount issuer. Some discounts and allowances are forms of
sales promotion Sales promotion is one of the elements of the promotional mix. The primary elements in the promotional mix are advertising, sales, personal selling, direct marketing and publicity/public relations. Sales promotion uses both media and non-media mar ...
. Many are
price discrimination Price discrimination is a microeconomics, microeconomic pricing strategies, pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in Market segmentation, different markets. Price ...
methods that allow the seller to capture some of the
consumer surplus In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities: * Consumer surplus, or consumers' surplus, is the monetary gain ...
.


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 Wholesaling or distributing is the sale of goods or Merchandising, merchandise to retailers; to manufacturing, industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and relat ...
or
manufacturer Manufacturing is the creation or Production (economics), production of goods with the help of equipment, Work (human activity), labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary secto ...
to the
retailer Retail is the sale of goods and Service (economics), services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturing, manufacturers, dire ...
at the
list price 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 (business), product is the price at which its manufacturer notionally recomme ...
or catalogue price. ''Cash discounts'' are reductions in price given to the
debtor A debtor or debitor is a legal entity, legal entity (legal person) 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 counter ...
to motivate the debtor to make payment within specified time. These discounts are intended to speed payment and thereby provide
cash flow A cash flow is a real or virtual movement of cash, money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are exp ...
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 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 accrued debt (i.e., promise to the credit card issuer, card issuer to pay them for the ...
transactions.


Partial payment discount

Similar to the Trade discount, this is used when the seller wishes to improve
cash flow A cash flow is a real or virtual movement of cash, money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are exp ...
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

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 In the social sciences, bargaining or haggling is a type of negotiation in which the buyer and seller of a Goods and services, good or service debate the price or nature of a Financial transaction, transaction. If the bargaining produces agree ...
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 In product development, an end user (sometimes end-user) is a person who ultimately uses or is intended to ultimately use a product. The end user stands in contrast to users who support or maintain the product, such as sysops, system administrato ...
. 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

These are price reductions given for
bulk purchasing Bulk purchasing or mass buying is the purchase of much larger quantities than the usual, for a unit price that is lower than the usual. Wholesaling is selling goods in large quantities at a low unit price to retail merchants. The wholesaler will ...
. The rationale behind them is to obtain
economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of Productivity, output produced per unit of time. A decrease in unit cost, cost per u ...
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 Disability is the experience of any condition that makes it more difficult for a person to do certain activities or have equitable access within a given society. Disabilities may be Cognitive disability, cognitive, Developmental disability, dev ...
.


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.


Employee discount

A discount offered by a company to
employee Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract A contract is a legally enforceable agreement between two or more Party (law), parties that creates, define ...
s 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 Military service is service by an individual or group in an army or other militia, air forces, and naval forces, whether as a chosen job (volunteer military, volunteer) or as a result of an involuntary draft (conscription). Some nations (e.g ...
. 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.


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 Public transport (also known as public transportation, public transit, mass transit, or simply transit) is a system of transport for passengers by group travel systems available for use by the general public unlike private transport, typical ...
, 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 Freedom Pass is a concessionary travel scheme, which began in 1973, to provide free travel to residents of Greater London Greater London is an Metropolitan and non-metropolitan counties of England#Greater London, administrative area in ...
). 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.


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 uch-and such but for you..." In
Australia Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by ...
,
New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 List of islands of New Zealand, smaller islands. It is the ...
, 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 Hawaii ( ; haw, Hawaii or ) is a U.S. state, state in the Western United States, Western United States, located in the Pacific Ocean about from the U.S. mainland. It is the only U.S. state outside North America, the only state that is ...
, 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.Honolulu Magazine, June 2009
/ref> 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 A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make purchases. The term ''#Plastic card, plastic card'' includes the above and as an identity document. These are similar to a credi ...
similar to a
payment card Payment cards are part of a payment system issued by financial institutions, such as a bank, to a customer that enables its owner (the cardholder) to access the funds in the customer's designated bank accounts, or through a credit account and mak ...
, 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 A voucher is a bond of the redeemable transaction type which is worth a certain money, monetary value and which may be spent only for specific reasons or on specific goods. Examples include house, housing, travel, and food vouchers. The term vouc ...
, 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


References


Further reading

* Shell, Ellen Ruppel, ''Cheap: The High Cost of Discount Culture'', New York : Penguin Press, 2009. {{DEFAULTSORT:Discounts And Allowances Pricing Payment terms Distribution (marketing) Sales promotion