A trade discount is a variable reduction on the wholesale list price. Manufacturers and wholesalers typically publish a single price list rather than notifying prices to each different customer. Offering a specific trade discount to a customer is a way of varying the sale price for that particular customer. Trade discounts can be an important tool to promote business-to-business (B2B) sales. Let’s take a look at some of the key advantages.
Publishing a price list and then offering trade discounts is an effective way to market your products to a range of different customer types. Wholesalers are in the business of cutting product costs, so as a wholesaler you will typically need to compete strongly on price. That said, selling to smaller businesses and retail consumers can be an additional, low-risk revenue stream, but only if it is not at the expense of high volume purchasers. Trade discounts allow you to easily offer a relatively high list price to the world at large, while maintaining the ability to offer variable discounts to high volume customers.
Publishing a list price and offering trade discounts can enable a business to maintain high pricing with customers who are willing to pay. If your list price is public but your trade discounts are negotiated privately, you may be able to increase trade discounts to sign up or retain business without compromising the rates being paid by less motivated customers.
Even B2B customers like to feel like they are getting a great deal. Trade discounts often help a business to build goodwill as a preferred supplier. A customer who perceives that it is getting a significant discount from a supplier is likely to include more of that supplier’s product in its inventory mix.
Building customer goodwill means that the customer is less likely to shop around, as the customer is already getting a great deal. And when prices increase, a customer who is getting a significant discount may be more accommodating and less hasty to respond.
Increased Revenue from Trade Discounts
A key reason that businesses discount is to increase revenue. Compared with cash discounting, trade discounting is more likely to increase revenue as it decreases the cost at the time the purchasing decision is made and does not rely on early payment or other conditions being met.
Moreover, almost all businesses have to contend with certain fixed overheads such as warehouse rent, management salaries or utilities. Trade discounting and price differentiation offer the ability to ramp up revenue to cover these overheads while profiting from customers who happily spend a higher cost per item.
If conditions change, you may want to increase the return on each unit your business produces and sells. Trade discounts provides additional flexibility in this regard. Because different customers enjoy different discounts, you may be able to effectively raise prices for lower-paying customers, thus closing the gap with higher-paying customers. If you did not price products using the list price and trade discount model, you may have been required to raise prices for all customers, increasing the negative impact on customer demand.
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.