Types of discounts
/What are Sales Discounts?
A sales discount is a reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer. This approach is commonly used when a seller is in immediate need of cash. The inherent interest rate associated with a sales discount offer can be quite high, so more established organizations tend not to offer it to their customers.
There are multiple types of discounts from sales that customers can earn. They are typically employed to either attract new customers, retain old ones, enhance financing options, or manage inventory levels. These discounts are noted below.
Buy One, Get One Free
This discount may require a buyer to receive two of the same inventory item, or it could allow for a free item that differs from the initial purchase. This discount is used to clear out inventory, or in general when the gross margin on a product is high enough to still generate an adequate profit for the seller.
Contractual Discount
A standard discount percentage is included in an existing contract between the buyer and seller. For example, the contract may state that all purchases made receive an automatic discount of 8%. Under this arrangement, the discount is taken from the sale price at the point of sale - there is no delay.
Early Payment Discount
Customers can take a small percentage discount when paying the seller, if they pay within a certain number of days. These discounts tend to have a high effective interest rate, and so are a good deal for customers, if they have sufficient cash available to take advantage of the offer.
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Free Shipping
The seller grants free shipping if a discount code is used, or if orders occur within a certain period of time. This is linked to the order date rather than the shipment date, since the shipment date could be delayed.
Order-Specific Discount
A seller may be running a special deal on certain inventory items, or for all items but during a restricted period of time. In either case, a discount is applied to a specific order. If the discount is only for certain inventory items, then the discount is restricted to specific line items within the customer order.
Percentage of Sales Discount
A seller may offer a percentage of the total sale as a discount, once a customer’s purchase surpasses a certain threshold. For example, a seller might offer a 5% discount once a total order exceeds $100, and 10% if the order exceeds $500. This is a good approach for on-line retailers, who can encourage customers to place bigger orders, which allows retailers to ship in fewer boxes (thereby saving on shipping costs).
Price-Break Discount
A customer may qualify for an immediate discount on an order if the number of units ordered exceeds a threshold amount. If so, the discount is applied when the order is placed. The discount should not be applied at the point of shipment, since the seller may ship in a reduced quantity, which is not the fault of the buyer. This is a variation on a volume discount.
Seasonal Discount
A price reduction may be offered at certain times of the year when sales would normally be slow. For example, a hotel at a ski resort might offer low prices during the summer months when it would otherwise have few visitors.
Trade Discount
A trade discount is offered to retailers to stock the seller's goods. This discount is usually mandated when the buyer exercises significant control over the seller.
Trade-In Credit
A trade-in credit is offered on the purchase of a new product when an older version owned by the customer is traded in. The seller may not earn any profit from the returned item, but generates a new sale and also locks in the customer for another product cycle.
Volume Discount
Once a customer reaches a certain amount of sales volume during the measurement period (typically a year), a volume discount applies. This discount can be retroactive, covering all preceding sales during the measurement period, or it may only apply to all subsequent sales. In the first case, a credit or payment will be issued to the customer that relates to the prior purchases.