Trade discounts are often used as a means to increase sales. They are an excellent way to sell off large amounts of stock, especially useful in the case of obsolete or excess stock. Therefore, trade discounts can form a vital part of your inventory control processes. Below, we examine the key features of a trade discount, and how they can be used to your advantage.
Manufacturing Mentality
The basic assumption in manufacturing businesses is that the more items you produce, the more items you can sell. Moreover, this is intended to translate into increased profitability. However, in practice, this mentality can inhibit profitability by way of overproduction. Excess stock can have many knock-on effects for your inventory control processes, and this is where a trade discount may be useful.
Seeking to increase profits, businesses may keep producing more and more stock under the assumption that all of it will sell, thereby offsetting production costs. However, sales trajectories are rarely linear, and this approach can backfire if demand for the goods produced slows down or stops all together.
In this situation, businesses need a way to entice customers into buying more of their goods in order to offset production costs. If businesses in this situation cannot find a way to solve the problem of obsolete stock, they may end up donating the excess to charity or simply disposing of it. This is an avoidable last resort, which entails the loss of profit, time wastage and resource depletion.
Regaining Inventory Control
Trade discounts may go some way toward resolving the issue of excess stock. Often, a trade discount will offer a customers a selection or bundle of goods at a significantly reduced price than the cost of buying each item individually. This is an economical way to try and offset the costs associated with overproduction and excess stock, and it may help to prevent or delay the need to simply dispose of excess inventory.
For example, let’s say an electronics company has produced 300 laptops with the intention to sell all of them. Perhaps in the early stages of the products’ introduction, demand was high and therefore the company increased supply. However, after a few months similar products began to appear, sold by competitors for a cheaper price, and as a result demand for this particular brand of the product waned significantly.
The company has now spent a significant amount of money on the production of these laptops, but they have only managed to sell 20% of them. Sales do not appear likely to increase, since competition is now very strong. The company decides to offer a trade discount whereby customers get free software when they buy the laptop. Sales begin to increase, and slowly the problem of excess stock is resolved.
This type of trade discount will help the company in question to account for the original production costs of manufacturing the laptop, and it will also help to free them of the burden that is excess inventory. In this regard, trade discounts are an excellent method for inventory control, especially when companies urgently need to increase sales of excess stock.
