Definition of Trade Discount
A trade discount is the price reduction manufacturers give retailers or wholesalers when those buyers purchase goods or products. Wholesalers and manufacturers produce catalogs for their vendors and customers to order goods from. The prices in the catalogs are called the manufacturer’s suggested retail prices, or list prices. Regardless of these prices, manufacturers give retailers or wholesalers purchasing a large unit of products a discount from or a percentage off the list price.
How Does a Trade Discount Work?
Manufacturers usually offer a trade discount to high-volume sellers and dealers or when manufacturers want to establish a new channel for distribution.
For instance, company A sells a product to company B. Company C manufactures a new version of the product and wants to persuade company B to change its supplier from company A to company C. Company C may take it a notch higher by selling the product to company B at a 50 percent discount — a trade discount. Also, most manufacturers give a trade discount when they want to sell a large unit of products that have been in stock for a while at a low price. For instance, imprinted tote bags for a trade event might cost $1.12 each for 250 to 499 units, and 97 cents for 500 to 999. Wholesalers or retailers that purchase large quantities might ask for a lower price after consistent patronage to keep doing business with the producer.
Trade Discount vs. Cash Discount. What’s the Difference?
Most retailers or wholesalers confuse trade discounts with cash discounts, even though they are very different. Whereas a trade discount is given on the list price, the cash discount is given by the manufacturer on the invoice price. Manufacturers give cash discounts as an incentive to motivate buyers when they pay their bills on time.
Advantages and Disadvantages of a Trade Discount for Small Business
A trade discount can help a small business save money when it buys a large volume of goods from suppliers, although suppliers can ask for payment by a specific time. Trade discounts lower the operational costs of a small business. Since small-business owners often spend a big chunk of their capital on inventory, production equipment and economic resources, vendors and suppliers help them to earn their money quickly by offering a trade discount. Likewise, trade discounts help to increase the purchasing power of a small business. Purchasing power is the number of goods an individual or corporation can purchase at a certain price. Small companies save money through vendor trade discounts and divert the funds to other inputs or resources. More importantly, suppliers, manufacturers, businesses and vendors increase their goodwill in the market through the use of a trade discount.
The downside of granting a trade discount is the money lost by the manufacturer. Over time, the small discounts will add up to significant amounts of money. One way to reduce the problems associated with trade discounts is to offer the discount to only some customers, such as their best customers and or businesses they have a good working relationship with. This tactic will help to minimize risk while making your trade discount pay off over time.