There are advantages and disadvantages to offering trade discounts. Among other things, trade discounts can improve cash flow, grow market share and improve customer loyalty. These discounts are also a great tool for inventory control, especially if a company runs into issues such as excess stock.
At the same time, offering trade discounts in certain circumstances may reduce profitability, with small discounts adding up over time. Below, we examine why and how you should provide trade discounts, assessing the best ways to do so.
Offering a trade discount can speed up the rate at which the customer pays you. For example, you could allow a customer to deduct 1 percent on an invoice by paying the full amount in 10 days instead of the standard 30 days. There are obvious benefits of doing this, including the fact that this will improve cash flow, giving you more working capital.
The more working capital you have, the less you will need to rely on borrowing or getting funding from elsewhere. Of course, another advantage of these types of discounts is that the earlier you get paid, the less risk there is; as time goes on, the potential for bad things to happen increases.
Additionally, trade discounts that offer a reduced price for buying in bulk, for example, have the benefit of increasing sales volumes. You could offer the customer a reduced price if they buy more than one of the same item. While you may be earning less money per item in such transactions, you will make up for it in volume.
Trade discounts are also an excellent avenue for dealing with the problem of obsolete or excess stock. By encouraging customers to buy multiple items at once, you allay the problem of excess stock and this can be an excellent tool for inventory control and management.
Despite these positives, trade discounts can be used in ineffective ways which may backfire. Small discounts over long periods of time add up, and this might mean a reduction in profitability.
If overused you may end up providing too many discounts, and this may prove unprofitable. The key is in finding the right balance between the two extremes. For instance, it might be a good idea to offer large discounts to only a select few of your most loyal customers. This will help with customer satisfaction and retention, and it also provides an incentive for new customers to return. If offering a trade discount is not viable for your business, consider discount pricing instead.
Should you make the move?
Offering a trade discount is an effective method for increasing sales, improving cash flow and driving up sales volumes. It is also an effective way to promote customer loyalty, attract new customers and to provide incentives for faster payment. Lastly, it is an effective tool for inventory control procedures, especially regarding the problem of obsolete stock.
Businesses should implement trade discounts where necessary, but always with caution. Too many discounts can result in decreased profitability, but a lack of discounts may also alienate an otherwise loyal customer base.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.