Discounts are reductions applied to the basic sale
price
A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...
of goods or services. Allowances against price may have a similar effect
Discounting practices operate within both business-to-business and business-to-consumer contexts.
[Iyengar, R. and Jedidi, K.]
A Conjoint Model of Quantity Discounts
''Marketing Science'', Volume. 31, No. 2, March–April 2012, pp 334-350, , accessed on 21 January 2025 Discounts can occur anywhere in the
distribution channel, modifying either the manufacturer's
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 is the price at which its manufacturer notionally recommends that a retailer ...
(determined by the manufacturer and often printed on the package), the retail price (set by the
retail
Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is the sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholes ...
er and often attached to the
product with a sticker), or a quoted price specific to a potential buyer, often given in written form.
There are many purposes for
discounting
In finance, discounting is a mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee.See "Time Value", "Discount", "Discount Yield", "Compound Interest", "Effici ...
, including to increase short-term
sales
Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. A period during which goods are sold for a reduced price may also be referred ...
, to move out-of-date stock, to reward valuable customers, to encourage
distribution channel 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, personal selling, direct marketing and publicity/public relations. Sales promotion uses both media and non-media marketing ...
. Many are
price discrimination
Price discrimination (differential pricing, equity pricing, preferential pricing, dual pricing, tiered pricing, and surveillance pricing) is a Microeconomics, microeconomic Pricing strategies, pricing strategy where identical or largely similar g ...
methods that allow the seller to capture some of the
consumer surplus.
Dealing with payment
Trade discounts
''Trade discounts'' are deductions against 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 is the price at which its manufacturer notionally recommends that a retailer ...
or catalogue price which are charged by a
wholesaler
Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and related subordinated services. In ...
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 the
secondary se ...
to a
retailer
Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is the sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesal ...
or supplier who then deals with the end customer. The discount then enables the retailer to charge the end customer the list price and cover its own costs/profit.
Prompt payment discount
''Cash discounts'' are reductions in price given to the
debtor
A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...
to motivate the debtor to make payment within specified time. These discounts are intended to speed payment and thereby provide
cash flow
Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money.
*Cash flow, in its narrow sense, is a payment (in a currency), es ...
to the firm. They are sometimes used as a
promotional device. A UK survey undertaken by the
British Chambers of Commerce found that 13% of UK businesses offered prompt payment discounts (PPDs).
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".)
Taxation treatment
Before 2014, suppliers in the United Kingdom were permitted to add
VAT to the discounted price, even if payment was not made within the discount period and therefore due in full. This provision generated a shortfall in
taxation revenue and also meant that UK practices were not in line with the EU's
VAT Directive of 2006, which specified that value added tax was to be levied on the actual price paid. Proposals were put forward in the
budget of 2014 to amend the UK's
taxation law in this respect. In the telecommunications and broadcasting sectors (where there was no obligation to provide a VAT invoice), the law was amended from 1 May 2014, while in other sectors of the economy, the change was effective from 1 April 2015.
[HMRC]
VAT: prompt payment discounts
published on 19 March 2014, accessed on 27 December 2024
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 transactions.
Partial payment discount
Similar to the trade discount, this is used when the seller wishes to improve
cash flow
Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money.
*Cash flow, in its narrow sense, is a payment (in a currency), es ...
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 may fall in this category. Retailers organize big discounts on almost every season in order to make space for new inventory for the upcoming season.
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.
Spaving
Spaving is a
marketing strategy
Marketing strategy refers to efforts undertaken by an Organizational structure, organization to increase its sales and achieve competitive advantage. In other words, it is the method of advertising a company's products to the public through an est ...
. Consumers are encouraged to spend money to gain access to savings. Spaving offers include free shipping at a certain threshold and
buy one, get one free
"Buy one, get one free" or "two for the price of one" is a common form of sales promotion.
Marketing strategy
The economist Alex Tabarrok has argued, that the success of this promotion lies in the fact that consumers value the first unit sig ...
.
Dealing with trade
Bargaining
Bargaining
In the social sciences, bargaining or haggling is a type of negotiation in which the buyer and seller of a Goods and services, good or service debate the price or nature of a Financial transaction, transaction. If the bargaining produces agree ...
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 sysops, system administrato ...
. 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 that is lower than the usual.
Wholesaling is selling goods in large quantities at a low unit price to retail merchants. The wholesaler will a ...
. The rationale behind them is to obtain
economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of Productivity, output produced per unit of cost (production cost). A decrease in ...
and pass some (or all) of these savings on to the customer. In some industries, buyer groups and
co-operatives have formed to take advantage of these discounts. Iyengar and Jedidi note the popularity of quantity discounts being offered to both business purchasers and consumers.
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 seller's expectation is that they will impose an implied
switching cost
Switching barriers or switching costs are terms used in microeconomics, strategic management, and marketing. They may be defined as the disadvantages or expenses consumers feel they experience, along with the economic and psychological costs of swi ...
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 seller's expectation is that they will encourage larger orders, thus reducing billing, order filling, shipping, and sales personnel expenses.
If a purchaser has to buy more than they need to secure a discount, 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 characteristics of the customer.
Disability discount
A discount offered to customers with what is considered to be a
disability
Disability is the experience of any condition that makes it more difficult for a person to do certain activities or have equitable access within a given society. Disabilities may be Cognitive disability, cognitive, Developmental disability, d ...
.
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. Many brands like
Apple
An apple is a round, edible fruit produced by an apple tree (''Malus'' spp.). Fruit trees of the orchard or domestic apple (''Malus domestica''), the most widely grown in the genus, are agriculture, cultivated worldwide. The tree originated ...
,
Dell
Dell Inc. is an American technology company that develops, sells, repairs, and supports personal computers (PCs), Server (computing), servers, data storage devices, network switches, software, computer peripherals including printers and webcam ...
, give exclusive discounts to students on their tech products, so that the students get to learn from the latest technology available making their work lesser. Additionally, travel websites also offer student discounts to help make travel more affordable for students. Some websites may also offer other perks for students, such as free cancellations or additional loyalty points. Students can get discounts not only from tech and travel but also from lifestyle brands.
Employee discount
A discount offered by a company to
employee
Employment is a relationship between two party (law), parties Regulation, regulating the provision of paid Labour (human activity), labour services. Usually based on a employment contract, contract, one party, the employer, which might be a cor ...
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 or other militia, air forces, and naval forces, whether as a chosen job (volunteer military, volunteer) or as a result of an involuntary draft (conscription).
Few nations, such ...
. 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. In Australia,
DefCom Australia is a similar discount card.
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 transit, mass transit, or simply transit) are forms of transport available to the general public. It typically uses a fixed schedule, route and charges a fixed fare. There is no rigid definition of whic ...
, 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, for example:
*In the UK, 16-25
railcards offer 1/3 discount on rail travel, and other discounts, in exchange for an annual fee
*An Enhanced Partnership in the
north east of England offers fares of £1 for a single bus journey for all under 22s on any bus service in the region.
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, or 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).
In the United States, most grocery stores offer senior discounts, starting for those age 50 or older, but most discounts are offered for those over 60.
First responder or healthcare worker discount
Discounts specially offered to firefighters, ambulance workers, police officers and other emergency services personnel are called
first responder
A first responder is a person with specialized training who is among the first to arrive and provide assistance or incident resolution at the scene of an emergency. First responders typically include Law enforcement, law enforcement officers (co ...
discounts. Hospital staff may sometimes receive discounts as well. In the United Kingdom, the "Blue Light Card" is an example of a discount scheme available to staff working for emergency services, the
NHS
The National Health Service (NHS) is the term for the publicly funded health care, publicly funded healthcare systems of the United Kingdom: the National Health Service (England), NHS Scotland, NHS Wales, and Health and Social Care (Northern ...
,
social care providers and the
armed forces
A military, also known collectively as armed forces, is a heavily armed, highly organized force primarily intended for warfare. Militaries are typically authorized and maintained by a sovereign state, with their members identifiable by a ...
.
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 country comprising mainland Australia, the mainland of the Australia (continent), Australian continent, the island of Tasmania and list of islands of Australia, numerous smaller isl ...
,
New Zealand
New Zealand () is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and List of islands of New Zealand, over 600 smaller islands. It is the List of isla ...
, 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 ( ; ) is an island U.S. state, state of the United States, in the Pacific Ocean about southwest of the U.S. mainland. One of the two Non-contiguous United States, non-contiguous U.S. states (along with Alaska), it is the only sta ...
, 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 may be referred to in Hawaii or elsewhere as a resident discount.
Discount card
Sometimes a document, typically a plastic card
Plastic cards usually serve as identity documents, thus providing authentication. In combination with other assets that complement the data stored on the card, like Personal identification number, PIN numbers, they also serve authorization purpose ...
similar to a payment card
Payment cards are part of a payment system issued by financial institutions, such as a bank, to a customer that enables its owner (the cardholder) to access the funds in the customer's designated bank accounts, or through a credit account and ...
, 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
Coupons are associated with Sunday circulars and help consumers who struggle to make ends meet. A coupon is 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 money, monetary value and which may be spent only for specific reasons or on specific goods. Examples include house, housing, travel, and food vouchers. The term vou ...
, 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. Today coupons are not only printed in newspapers, and brochures. Coupons are offered to customers at the counter after they have paid for their purchase.
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.
Promotional allowance
Promotional allowances are also known as 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 payment terms for trade credit, which specify that the net amount (the total outstanding on the invoice) is expected to be paid in fu ...
* 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