Pricing It Right: Trade Discounts

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Trade discounts refer to a pricing strategy or incentive that a supplier might offer to a consumer to encourage loyalty and increased purchasing. There are many advantages to trade discounts for both the consumer and the supplier.

Advantages of trade discounts for the consumer

Lowered business costs

By taking advantage of trade discounts, especially for a small to medium-sized business, they effectively lower the business operating costs. Often, small businesses can leave themselves in a position of vulnerability because of the proportion of company capital tied up in inventory stock. If this capital is needed elsewhere to take advantage of deals or to pay bills that might be nigh overdue, then the company risks financial penalties, placing them more at risk.

Increased purchasing power

By paying less for the same inventory, the company will essentially have money remaining which can be used elsewhere to their advantage. This is termed purchasing power and can place the company back in a position of control by having money to foot immediate bills or pay for maintenance or process improvement costs for example. The result is the limited capital or income they have is put to the maximum possible use and will benefit their financial position greatly.

Opportunity to maximise profit

Intrinsically connected to the two points above is the third advantage of trade discounts for the consumer. When the consumer is able to purchase the same product at a cheaper price, they have two choices to make: pass the discount onto their customers or maximise profit by selling product at the same price despite a cheaper supply price. This is a great opportunity for a business to make more profit without inflicting a price increase on their customer-base. The net effect is the same as point number two; they increase their purchasing power from the increase in profits and when put to good use or invested, there are massive benefits.

Advantages of trade discounts for the supplier

Enrich customer relationships

Although the business world is about purchasing, sales, profits and numbers, it is also largely about fostered business relationships. A good deal is not the only thing that appeals to most consumers. Often people will return to a company that dealt with them respectfully, made them feel valued and that their money was respected by the provision of a quality product or service. Therefore, it is vital to look for ways to enrich these relationships and encourage loyalty in your consumers. One way to do this, is to provide trade discounts which can be personal and tapered to your customers’ individual requirements. By taking such a personable approach to your pricing strategy, it is possible to really make customers feel valued.

Cash flow and balance sheet improvement

When a company offers trade discounts, particularly for early payment, they have the potential to improve their cash flow dramatically. This in turn translates to more disposable income and less money tied up in inventory stock. With money on hand, suddenly companies can pay bills promptly and take advantage of good deals when they arise, all of which equate to cost savings and better business management. Another advantage of customers paying their credit bills with a company on time in return for trade discounts is the increased value of assets on their balance sheet and decreased value of receivables. This strengthens their financial position overall, something of importance to potential investors.

Pricing flexibility

By using trade discounts rather than generic special prices as a pricing strategy, companies retain control over who they want to provide with a discount and how much for. There is suddenly no need for expensive and generic signage which is a source of savings as well as ensuring companies can alter their inventory stock and pricing quickly and seamlessly.

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Melanie - Unleashed Software

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.

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