Trade Discount

Trade Discount

What is a Trade Discount?

Definition

A trade discount is the amount of price reduction that a manufacturer offers to wholesalers that buy its products. It is usually calculated in percentage terms. Many manufacturers provide larger trade discounts for bigger purchase volumes.

What does trade discount mean?

To increase sales, manufacturers offer wholesalers and other bulk buyers a discount off the list price. This is referred to as a trade discount.

This type of discount applies to business-to-business (B2B) sales. It usually is not offered to retail customers. Manufacturers use this tool to retain their large customers and to keep them from diverting their business to the competition.

You shouldn’t confuse the term “trade discount” with “cash discount.” The former is a discount off the list price for buyers who purchase in bulk. A cash discount, on the other hand, is the reduction in price that is offered for paying early.

Example of trade discount

Stenton Inc. is an apparel manufacturer that sells its products to wholesalers and retailers. The company has traditionally offered a trade discount to bulk buyers. Wholesalers are entitled to 25% off the list price while retailers get a 15% trade discount.

However, of late, sales have been flagging, and the marketing department of Stenton Inc. recommends that the trade discount should be linked to the volume of purchases instead of being maintained at a fixed percentage. Consequently, the company alters its trade discount structure.

It offers a discount of up to a maximum of 32% off the list price on the largest orders. Buyers who purchase smaller volumes get lower discounts. The minimum discount is reduced from 15% to 12%.

After a six-month period, the company conducts a review of its sales. It observes that although the total trade discount that it has given has remained the same in dollar terms, its sales have increased as buyers have changed over to making larger orders.

Summary

A trade discount is a reduction in price that a manufacturer is willing to bear in exchange for selling goods in bulk. It is generally offered in B2B sales transactions.