For many businesses, discounts are a common tool to attract business, clear out slow moving inventory and reward loyal customers. For a business that is mostly in the business of manufacturing inventory, rather than in the retail space, discounts are a key tool to tailor service and pricing to your customers’ specific needs. Let’s take a look at trade discounts.
What is a trade discount?
A trade discount, at its simplest, involves taking a given percentage off a wholesale list price. Businesses typically publish (or at least produce) a price list that effectively sets out the maximum price that they are likely to charge a customer. Wholesalers deal with a wide range of clients, all of whom are likely to have a different product demand and willingness to pay.
It is often easiest to negotiate discounts from a price list with customers, rather than negotiating the price of each individual product with every single customer. So, for example, a frequent, reliable customer may pay 75% of the product cost, while a customer who is difficult to deal with may pay 100%. In some situations, price lists may have qualifying conditions and customers who do not meet these may rarely be offered products at a markup on the price list. For example, a difficult customer with expected order volumes below a minimum point may be offered pricing at 110%.
Advantages Of Offering Trade Discounts
The most obvious advantage of offering trade discounts rather than variable pricing is that negotiations with customers tend to be simpler. Generally, you will only need to negotiate one percentage discount rather than individualised pricing for each different product. In some cases you may need to negotiate discounts on several categories of product, but this is still likely to be a simpler process than negotiating line item by line item.
Another benefit of trade discount negotiation is that there is typically less haggling over individual products – this haggling can seem desperate and can sour otherwise constructive commercial relationships.
Keeping pricing secret
In the business to business context, it is preferable to keep pricing information generalised so that your negotiating position with new customers is not compromised. Trade discounts facilitate this – if businesses need to publish some indicative pricing, they are able to do so without revealing the true price charged to large volume or valued customers.
The accounting treatment of trade discounts
Unlike, for example, a cash discount, trade discounts are not reflected in the accounting record and do not factor into a business’ tax calculations. The main reason for this is because a trade discount can be seen as a way of changing the price charged for inventory, rather than a discount in the true sense.