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Discounts and allowances are reductions to a basic
price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by ...

price
of goods or services. They can occur anywhere in the
distribution channel Distribution (or place) is one of the four elements of the marketing mix. Distribution is the process of making a product or service available for the consumer or business user who needs it. This can be done directly by the producer or service pr ...
, modifying either the manufacturer's list price (determined by the manufacturer and often printed on the package), the retail price (set by the retailer and often attached to the product with a sticker), or the list price (which is quoted to a potential buyer, usually in written form). There are many purposes for discounting, including to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage
distribution channel Distribution (or place) is one of the four elements of the marketing mix. Distribution is the process of making a product or service available for the consumer or business user who needs it. This can be done directly by the producer or service pr ...
members to perform a function, or to otherwise reward behaviors that benefit the discount issuer. Some discounts and allowances are forms of
sales promotion Sales promotion is one of the elements of the promotional mix. The primary elements in the promotional mix are advertising, sales, personal selling, direct marketing and publicity/public relations. Sales promotion uses both media and non-media mark ...

sales promotion
. Many are
price discrimination Price discrimination is a microeconomic Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted b ...
methods that allow the seller to capture some of the
consumer surplus In mainstream economics, economic surplus, also known as total welfare or Marshallian surplus (after Alfred Marshall), refers to two related quantities: * Consumer surplus, or consumers' surplus, is the monetary gain obtained by consumers because ...
.


Types

The most common types of discounts and allowances are listed below.


Dealing with payment


Prompt payment discount

''Trade discounts'' are deductions in price given by the
wholesaler Wholesaling or distributing is the sale of goods or merchandise Merchandising is any practice which contributes to the sale of products to a retail consumer A consumer is a person or a group who intends to order, orders, or uses purchased ...
or
manufacturer Manufacturing is the creation or Production (economics), production of goods with the help of equipment, Work (human activity), labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector ...

manufacturer
to the
retailer Retail is the sale of goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or p ...
at the
list price The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product (business), product is the price at which its manufacturer nominally recommend ...
or catalogue price. ''Cash discounts'' are reductions in price given to the
debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that ...
to motivate the debtor to make payment within specified time. These discounts are intended to speed payment and thereby provide
cash flow A cash flow is a real or virtual movement of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...
to the firm. They are sometimes used as a promotional device.


= Examples

= * 2/10 net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 2% discount if they pay within 10 days of the invoice date. * 3/7 EOM - this means the buyer will receive a cash discount of 3% if the bill is paid within 7 days after the end of the month indicated on the invoice date. If an invoice is received on or before the 25th day of the month, payment is due on the 7th day of the next calendar month. If a proper invoice is received after the 25th day of the month, payment is due on the 7th day of the second calendar month. * 3/7 EOM net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date. If an invoice is received on or before the 25th day of the month, payment is due on the 7th day of the next calendar month. If a proper invoice is received after the 25th day of the month, payment is due on the 7th day of the second calendar month. * 2/15 net 40 ROG - this means the buyer must pay within 40 days of receipt of goods, but will receive a 2% discount if paid in 15 days of the invoice date. (ROG is short for "receipt of goods.")


Preferred payment method discount

Some retailers (particularly small retailers with low margins) offer discounts to customers paying with cash, to avoid paying fees on
credit card #REDIRECT Credit card #REDIRECT Credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for ...

credit card
transactions.


Partial payment discount

Similar to the Trade discount, this is used when the seller wishes to improve
cash flow A cash flow is a real or virtual movement of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...
or liquidity, but finds that the buyer typically is unable to meet the desired discount deadline. A partial discount for whatever payment the buyer makes helps the seller's cash flow partially.


Sliding scale

A discount offered based on one's ability to pay. More common with non-profit organizations than with for-profit retail.


Forward dating

This is where the purchaser doesn’t pay for the goods until well after they arrive. The date on the invoice is moved forward - example: purchase goods in November for sale during the December holiday season, but the payment date on the invoice is January 27.


Seasonal discount

These are price reductions given when an order is placed in a slack period (example: purchasing skis in April in the northern hemisphere, or in September in the southern hemisphere). On a shorter time scale, a
happy hour "Happy Hour" sign on a pub in 1 + 1 free)">Buy_one,_get_one_free.html" ;"title="Jerusalem. (in Hebrew: all draught beers, Buy one, get one free">1 + 1 free) Happy hour is a marketing term for a time when a venue (such as a restaurant, Bar (esta ...
may fall in this category. Generally, this discount is referred to as "X-Dating" or "Ex-Dating". An example of X-Dating would be: * 3/7 net 30 extra 10 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date plus an extra 10 days.


Dealing with trade


Bargaining

Bargaining Bargaining or haggling is a type of negotiation Negotiation is a dialogue between two or more people or parties intended to reach a beneficial outcome over one or more issues where a conflict exists with respect to at least one of thes ...
is where the seller and the buyer negotiate a price below the original selling price.


Trade discount

Trade discounts, also called functional discounts, are payments to distribution channel members for performing some function. Examples of these functions are warehousing and shelf stocking. Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked. Trade discounts are most frequent in industries where retailers hold the majority of the power in the distribution channel (referred to as channel captains). Trade discounts are given to try to increase the volume of sales being made by the supplier. The discount described as trade rate discount is sometimes called "trade discount". Trade discount is the discount allowed on retail price of a product or something. for e.g. Retail price of a cream is 25 and trade discount is 2% on 25.


Trade rate discount

A trade rate discount, sometimes also called "trade discount", is offered by a seller to a buyer for purposes of trade or reselling, rather than to an
end user In product development, an end user (sometimes end-user) is a person who ultimately uses or is intended to ultimately use a product. The end user stands in contrast to users who support or maintain the product, such as sysop A sysop (; an abbrev ...
. For example, a pharmacist might offer a discount for over-the-counter drugs to physicians who are purchasing them for dispensing to the physicians' own patients. A seller supplying both trade or resellers, and the general public will have a general list price for anybody, and will offer a trade discount to bona-fide trade customers.


Trade-in credit

Trade-in credit, also called trade-up credit, is a discount or credit granted for the return of something. The returned item may have little monetary value, as an old version of newer item being bought, or may be worth reselling as second-hand. The idea from a seller's viewpoint is to offer some discount but have the buyer showing some "counter action" to earn this special discount. Sellers like this as the discount granted is not just "given for free" and makes future price/value negotiations easier. Buyers have the advantage of getting some value for something no longer used. Examples can be found in many industries.


Dealing with quantity

These are price reductions given for
bulk purchasing Bulk purchasing (or "mass buying") is the purchase of much larger quantities than the usual, for a unit price A product's average price is the result of dividing the product's total sales revenue by the total units sold. When one product is sold ...
. The rationale behind them is to obtain
economies of scale In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis ...

economies of scale
and pass some (or all) of these savings on to the customer. In some industries, buyer groups and co-ops have formed to take advantage of these discounts. Generally there are two types:


Cumulative quantity discount

Cumulative quantity discounts, also called accumulation discounts, are price reductions based on the quantity purchased over a set period of time. The expectation is that they will impose an implied switching cost and thereby bond the purchaser to the seller.


Non-cumulative quantity discount

These are price reductions based on the quantity of a single order. The expectation is that they will encourage larger orders, thus reducing billing, order filling, shipping, and sales personnel expenses. If one has to buy more than one wants, we can distinguish between the surplus just not being used, or the surplus being a nuisance, e.g. because of having to carry a large container.


Dealing with customer characteristics

The following discounts have to do with specific
characteristic Characteristic (from the Greek word for a property, attribute or trait Trait may refer to: * Phenotypic trait in biology, which involve genes and characteristics of organisms * Trait (computer programming), a model for structuring object-oriented ...
s of the customer.


Disability discount

A discount offered to customers with what is considered to be a
disability A disability is any condition that makes it more difficult for a person to do certain activities or effectively interact with the world around them (socially or materially). These conditions, or impairments, may be Cognitive disability, cogn ...

disability
.


Educational or student discount

These are price reductions given to members of educational institutions, usually students but possibly also to educators and to other institution staff. The provider's purpose is to build brand awareness early in a buyer's life, or build product familiarity so that after graduation the holder is likely to buy the same product, for own use or for an employer, at its normal price. Providers also offer student discounts as means of offering a product within the budget of a student, which would otherwise be too expensive, thus gaining extra sales. Students may be able to get discounts on products, services, entertainment, and more. Educational discounts may be given by merchants directly, or via a student discount program.


Employee discount

A discount offered by a company to
employee Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profit, not-for-profit organization, co-operative or ot ...

employee
s who buy its products. In 2005, the American automakers ran an "employee discount" for all customers promotional campaign in order to entice buyers, with some success.


Military discount

A discount offered to customers who are or were members of a
military service Military service is service by an individual or group in an army An army (from Latin ''arma'' "arms, weapons" via Old French ''armée'', "armed" eminine, ground force or land force is a fighting force that fights primarily on land. In th ...
. Types of military discounts include discounts for active-duty military, veterans, retired military personnel, and military spouses or dependents. In the United States, military discounts frequently require proof of ID to show eligibility such as a DD Form 214, DD Form 215, or DD Form 217 from any branch of the Armed Forces, TRICARE Cards, Veterans Affairs Cards Uniformed Services Privilege and Identification Cards (USPIC) or other official documentation. Eligibility for military discounts can also be verified online or via mobile by verification companies like SheerID.


Age-related discounts


=Toddler discount, child discount, kid discount

= A discount, or free service, offered to children younger than a certain age, commonly for admission to entertainments and attractions, restaurants, and hotels. There may be a requirement that the child be accompanied by an adult paying full price. Small children often travel free on
public transport Public transport (also known as public transportation, public transit, mass transit, or simply transit) is a system of transport Transport (in British English), or transportation (in American English), is the Motion, movement of humans ...

public transport
, and older ones may pay a substantially discounted price; proof of age may be required.


=Young person's discount

= Discounts are sometimes offered to young people below a certain age who are neither children nor in education.


=Senior discount

= A discount offered to customers who are above a certain relatively advanced age, typically a round number such as 50, 55, 60, 65, 70, and 75; the exact age varies in different cases. The rationale for a senior discount offered by companies is that the customer is assumed to be retired and living on a limited income, and unlikely to be willing to pay full price; sales at reduced price are better than no sales. Non-commercial organizations may offer concessionary prices as a matter of social policy. Free or reduced-rate travel is often available to older people (see, for example,
Freedom Pass Freedom Pass is a concessionary travel scheme, which began in 1973, to provide free travel to residents of Greater London Greater London is an Metropolitan and non-metropolitan counties of England, administrative area governed by the Great ...

Freedom Pass
). In United States most grocery stores offer senior discounts, starting for those age 50 or older, but most discounts are offered for those over 60.


Special prices offered to friends of the seller

A discounted price offered to friends of the salesperson, an attitude which is parodied in the stereotype of a salesman saying "It costs uch-and such but for you..." In
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...

Australia
,
New Zealand New Zealand ( mi, Aotearoa ''Aotearoa'' (; commonly pronounced by English English usually refers to: * English language English is a West Germanic languages, West Germanic language first spoken in History of Anglo-Saxon Engl ...

New Zealand
, and the UK, discounts to friends are known as "mates' rates." In French this discount is known as ''prix d'ami''. In Spain this is known as "precio de amigo" in Spanish, or "preu d'amic" in Catalan. In German the term "Freundschaftspreis" is commonly used.


Special prices offered to local residents

Discounts are common in tourist destinations. In
Hawaii Hawaii ( ; haw, Hawaii or ) is a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspape ...

Hawaii
, for example, many tourist attractions, hotels, and restaurants charge a deeply discounted price to someone who shows proof that they live in Hawaii; this is known as a " Kama'aina discount," meaning ''child of the land'' or a local resident.Honolulu Magazine, June 2009
/ref> It is also known outside of Hawaii but in the Hawaiian islands as a resident discount.


Discount card

Sometimes a document, typically a
plastic card Plastic cards usually serve as identity document An identity document (also called a piece of identification or ID, or colloquially as papers) is any that may be used to prove a person's identity. If issued in a small, standard credit card si ...
similar to a
payment card : Payment cards are part of a payment system A payment system is any system used to settle financial transactions through the transfer of monetary value. This includes the institutions, instruments, people, rules, procedures, standards, and techn ...
, is issued as proof of eligibility for discounts. In other cases, existing documents proving status (as student, disabled, resident, etc.) are accepted. Documentation may not be required, for example, for people who are obviously young or old enough to qualify for age-related discounts. In some cases, the card may be issued to anyone who asks.


Coupons

A discount, either of a certain specified amount or a percentage to the holder of a
voucher A voucher is a bond of the redeemable transaction type which is worth a certain monetary value and which may be spent only for specific reasons or on specific goods. Examples include housing Housing, or more generally living spaces, refers to ...

voucher
, usually with certain terms. Commonly, there are restrictions as for other discounts, such as being valid only if a certain quantity is bought or only if the customer is older than a specified age. Coupons are often printed in newspapers, brochures, and magazines, or can be downloaded from the Internet.


Rebates

A refund of part or sometimes the full price of the product following purchase, though some rebates are offered at the time of purchase. A particular case is the promise of a refund in full if applied for in a restricted date range some years in the future; the hope is that the promise will lure customers and increase sales, but that the majority will fail to meet the conditions for a valid claim.


Other

* Promotional allowances (Trade-in allowances) - These are price reductions given to the buyer for performing some promotional activity. These include an allowance for creating and maintaining an in-store display or a co-op advertising allowance. Trade-in allowances are most common in the automobile industry, but they are also given for other durable goods. * Brokerage allowance - From the point of view of the manufacturer, any brokerage fee paid is similar to a promotional allowance. It is usually based on a percentage of the sales generated by the broker.


See also

*
Net 30 Net 10, net 15, net 30 and net 60 (often hyphenated "net-" and/or followed by "days", e.g., "net 10 days") are forms of trade credit Trade credit is the loan In finance, a loan is the lending of money by one or more individuals, organization ...
* Ticket systems


References


Further reading

* Shell, Ellen Ruppel, ''Cheap: The High Cost of Discount Culture'', New York : Penguin Press, 2009. {{DEFAULTSORT:Discounts And Allowances Pricing Payment terms Distribution (marketing) Sales promotion