Many businesses use trade discounts to simplify variable pricing, protect a market recognised price point, stimulate sales or reward customer loyalty. There are a number of sound reasons to consider giving trade discounts to specific customers. So, should your business consider a trade discount?
What are trade discounts?
To understand whether trade discounting is appropriate for your business, it is important to understand the difference between consumer discounting and trade discounting. In the consumer and retail context, we often think about discounts as fixed reductions in the price of a good or service. So, for example, a $5000 lounge suite may be on sale at a discounted price of $3500 – or 30% off. The 30% discount is available to all customers – albeit potentially with conditions, such as joining a loyalty scheme.
Trade discounts are similar, but differ slightly. Essentially, a trade discount involves a supplier of a product publishing a single price list (or, in some cases several classes of price list) rather than negotiating the pricing of each individual item with every customer. Suppliers are then able to offer certain customers a specific reduction in price – typically a certain percentage discount. Let’s look at three reasons to offer a trade discount.
Reason 1: You Want a Simple Way to Offer Variable Pricing
Chances are, your business has some customers who will happily pay higher prices than other customers. If you can identify these customers, one way to ensure that customers pay as much as they are willing is to negotiate pricing with each individual customer – working item by item. This can be tedious, and the large amount of haggling required can prevent you and the customer from forming a good customer-supplier relationship.
Offering trade discounts provides a ‘quick and easy’ solution. You publish a base price list, which you make available to customers. You then negotiate a discount with each customer. The discount you negotiate with each customer should, in aggregate, roughly approximate the discount you would have negotiated on each individual item. This strategy is less appropriate where you sell a range of products with significantly different margins as a savvy customer could take advantage of the across the board discount to purchase a large amount of low-margin product.
Reason 2: If Pricing is Commercially Sensitive
One of the ways that the B2B environment differs from the retail environment is that in the B2B environment, your pricing may not be widely known and may be commercially sensitive. For example, if competitors know the lower bound of your pricing, they may be able to more easily undercut you. Trade discounts are an appropriate response to commercial sensitivity – your business is able to publish a base price list that contains the information your business wishes to share with the world at large.
Reason 3: If Customer Loyalty is at Stake
Manufacturers and wholesalers often generate significant goodwill through the use of trade discounts. Businesses are just as receptive to discounts as individual consumers, so offering trade discounts can be a simple way to become a preferred supplier. A fixed percentage discount directly increases the customers’ own margin, so if your business offers trade discounts, your products are likely to make up a larger proportion of your customer’s inventory mix.