Discounts and Allowances: An Introduction
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.
There are several different types of discounts and allowances, as show below:
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.
(See more examples of cash discounts.)
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. (See more examples of trade discounts.)
Partial Payment Discounts
Similar in use to the trade discount, the Partial Payment Discounts is used where the seller wants to improve their liquidity/cash flow, but the buyer typically can't meet the discount deadline. By offering a discount on whatever partial payment the buyer makes, the seller gets a partial improvement to their cash position. (See more examples of partial payment 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.
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.