2.05d Determine Discounts and Allowances that can be used to adjust base prices

Discounts and Allowances

• Discounts and Allowances are reductions to the selling price of goods or services.

• They can be applied anywhere in the distribution channel between the manufacturer, middlemen (such as distributors, wholesalers, or retailers), and retail customer.

• Typically, they are used to promote sales, reduce inventory, and reward or encourage behaviors that benefit the issuer of the discount or allowance.

Discount

• These are usually used by sellers to encourage non-retail-customers in the distribution channel to perform some function, such as moving products more quickly through the channel.

• Trade Discounts are expressed as a percentage off the price, just as cash discounts are. – In some cases, a series of trade discounts (called

Chain Discounts) is offered to further induce the buyer.

Allowance

• Sellers use trade allowances to reward buyers for participating in promoting the seller’s products.– Examples of this are the in-store displays you encounter in

supermarkets and electronics stores, and featured ads in store advertisements.

– Also referred to as promotional allowances, these also include other discounts and rewards used by sellers to “convince” buyers to stock their product.

• While some in the industry question the ethical status of trade allowances (claiming they are tantamount to bribery), others consider them to be a legitimate cost of doing business.

Cash Discounts• These are typically used by sellers to encourage buyers to pay

earlier, improving the seller's cash flow. • Cash Discounts can be expressed in many ways, including 3/15 net

30 which means the full (net) amount is due in 30 days, but a 3% discount is available if paid within 15 days.

• Cash discounts can also be tied to different methods of dating, including: EOM Dating, which starts the payment clock at the end of the month;– Ordinary Dating, which starts the payment clock at the date of the

invoice;– ROG Dating, which starts the payment clock when the buyer receives the

goods;– X Dating, which starts the payment clock X days after the invoice date.

Quantity Discounts

• Sellers use the quantity discount to encourage buyers to buy more.

• This in turn can help the seller to reduce their own production costs, which can help reduce prices for the buyers. – Examples of quantity discounts include “buy five

for the price of four” and “buy one get one free” deals.

Cumulative discounts

• This method allows the buyer to receive a discount as more products are purchased over time. – For instance, if a buyer regularly purchases from a

supplier they may see a discount once the buyer has reached predetermined monetary or quantity levels.

• The key reason to use this adjustment is to create an incentive for buyers to remain loyal and purchase again.

Nonculumative Discounts

Trade Discounts

• The amount by which a manufacturer reduces the retail price of a product when it sells to a reseller, rather than to the end customer.

• The reseller then charges the full retail price to its customers in order to earn a profit on the difference between the amount by which the manufacturer sold the product to it and the price at which it then sells the product to the final customer.

• The reseller does not necessarily resell at the suggested retail price; selling at a discount is a common practice, if the reseller wishes to gain market share or clear out excess inventory.

Seasonal Discounts

• A discount put on goods that are out of season that may get people to pourchase them now when they are discounted. – Snow equipment for sale in summer is an

example.

Promotional Allowance

• Promotional allowances are reductions in the price of products that suppliers offer trade partners to carry out additional promotional activity in support of suppliers' products.

• The Internal Revenue Service includes promotional allowances in the general category of vendor allowances along with other trade allowances.

• Vendor allowances are a normal part of a company's marketing activities, but they are of keen interest to the IRS for tax purposes and the Federal Trade Commission for fair trade purposes.

Cooperative Advertising• In retailing, an arrangement between a manufacturer and a retailer whereby the

manufacturer will reimburse the retailer in part or full for advertising expenditures; also called co-op advertising.

• Ads and commercials are usually produced by the manufacturer and placed by the local retailer, using the store's name.

• Cooperative advertising is an important part of retailing and amounts to more than a billion dollars a year. It enables the manufacturer to advertise at the local rate for media, since all advertising is placed by the local retailer.

• This is usually cheaper than the national rate, and thus the manufacturer can buy more time and space for less money. Cooperative allowances are typically geared to sales, and the greater the sales, the greater the allowance given by the manufacturer to the retailer.

• Inevitably, co-op advertising means more advertising for everyone concerned, because more retailers will advertise if cooperative money is available.

• It is estimated that 75% of all cooperative money is spent on newspaper advertising, while 12% is spent on broadcast (8% on radio and 4% on television).

Rebates• A rebate is a form of price reduction or refund on a product that has already

been purchased. • It is commonly used as a sales promotion by many companies in order to

encourage customers to make a purchase. – There are typically two types of rebates used: an instate rebate, where the discount

is taken immediately at the store register, or a mail-in rebate, or MIR, where the customer must fill out documentation, and mail it in order to receive their refund.

• Rebates may be best illustrated with an example. – This sales practice is extremely common in computer stores, so imagine that one is

purchasing a computer. The computer is marked at $500, with a $200 mail-in rebate.

– If the customer chooses to purchase the computer, he or she will be responsible paying the full $500 purchase price at the register, then filling out the rebate form and mailing it back to the company.

– After that, the company will send the customer the $200 refund in the form of a check or, commonly, a gift card for the company store.

Push Money• Push money is a special incentive that is offered in exchange for

focusing sales efforts on a particular product or brand of products. • This incentive may take the form of a special commission for all

generated sales related to the specified product or brand, or come in the form of some other type of compensation, such as a paid vacation.

• The concept of push money may be successfully used with an in-house sales team to increase public awareness and demand for a given good or service offered by the company.

• This approach can also be used as part of the strategy to entice a retailer to promote a the product or brand above others that are also carried in its stores.

Reasons for Adjusting Base Prices

Types of Discount and Allowances that can be used to adjust base prices

Payment Terms used with Discounts

• Discount Term• A term could look like 2/10, n/30. The first set of numbers, 2/10, is the discount term.

The first number is a percentage, in this case 2 percent. The second number is a date, in this case 10 days. If the buyer pays the invoice in 10 days, he will receive a 2 percent discount.

• Net Terms• A term could look like 2/10, n/30. The second set of letters and numbers, n/30, is the net

terms. The letter "n" stands for net. This means the full amount is due. The second number is a day, in this case 30 days. In this example, the buyer owes the full amount in 30 days.

• EOM• Often a buyer may see a term that states net 10 EOM. (EOM stands for end of month.)

This means the buyer must pay the full amount of the invoice within 10 days of the end of the month.

How to calculate Discounts & Allowances

Procedures for determining discounts and allowances that can be used to adjust base prices