Transcript 2.05d Determine Discounts and Allowances that can be used to

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 inhouse 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
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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