Definitions and Differences Between Discounts in

Distribution Management

Trade Discount:
Definition: A reduction in the list price offered by a manufacturer or
supplier to intermediaries (wholesalers and retailers) in the
distribution channel.
Purpose:
 Encourage intermediaries to stock and promote the
manufacturer's products.
 Increase sales volume.
 Compensate intermediaries for performing certain functions like
storage, promotion, and sales.
Key Characteristics:
 Offered as part of a seller's discount policy.
 Can be cumulative or non-cumulative.
 Not specific to the timing of payment.

Quantity Discount:
Definition: A reduction in the per-unit price offered by a seller for
purchases exceeding a predetermined quantity.
Purpose:
 Encourage buyers to purchase larger quantities, leading to
economies of scale for the seller.
 Reduce inventory carrying costs for the buyer.
Types:
 Cumulative: Applies to the total quantity purchased over a
period.
  Non-cumulative: Applies only to the current purchase.
Key Characteristics:
 Variable depending on the quantity purchased.
 May be used in conjunction with other discounts.

Promotional Discount:
Definition: A temporary reduction in the price offered by a seller to
stimulate sales during a specific period.
Purpose:
 Increase awareness of a product or brand.
 Clear out old inventory.
 Introduce a new product.
Types:
 Seasonal: Discounts offered during specific times of the year.
 Holiday: Discounts offered around major holidays.
 Clearance: Discounts offered on discontinued or overstocked
items.
Key Characteristics:
 Time-limited.
 May be offered in conjunction with other discounts.
 Often advertised and promoted heavily.
Cash Discount:
Definition: A reduction in the invoice amount offered by a seller to
customers who pay within a specified time frame.
Purpose:
 Improve cash flow for the seller.
 Reduce bad debt.
 Encourage prompt payment.
 Key Characteristics:
 Usually expressed as a percentage of the invoice amount.
 Time-sensitive, with a specific deadline for payment.
 Not offered on credit card transactions.
Discount Type Purpose Applies to Characteristics

- Reduces list price

- May be cumulative or
non-cumulative.
Encourage
- Offered as part of
Trade Discount intermediaries, Intermediaries seller's policy.
increase sales
-Not time-sensitive.
- Can be combined with
other discounts.

- Reduces per-unit price.

- Variable based on quantity

purchased

- May be cumulative or non-

Quantity Encourage large
Any buyer cumulative.
Discount purchases
- Offered to incentivize
larger orders.

- Can be combined with

other discounts.

- Temporary reduction in
price. - Used for specific
periods.

- Advertised to stimulate
Promotional demand.
Stimulate sales Any buyer
Discount
- May be combined with
other discounts.

- Can be product-specific or
store-wide.
 - Reduces invoice amount by
a percentage.

- Time-sensitive, with a
Improve cash flow, Customers paying payment deadline.
Cash Discount
reduce bad debt quickly
- Encourages early payment.

- Not applicable for credit

card transactions.
Discount Type Advantages
Increased sales volume: Encourage
intermediaries to stock and promote
products, leading to higher sales for both
seller and intermediaries.
Trade
Improved relationships: Build stronger
Discount:
relationships with intermediaries through
long-term agreements and consistent
discounts.
Economies of scale: Encourage bulk
purchases, leading to lower production and
storage costs for the seller.
Quantity
Discount: Reduced inventory carrying costs: Buyer
carries less inventory due to larger orders.
Increased short-term sales: Stimulate
demand and generate excitement about
products.
Promotional
Discount: Clearance of old inventory: Reduce losses
by selling slow-moving or outdated products.
Improved cash flow: Receive payment faster,
improving liquidity and reducing reliance on
financing.
Cash Discount:
Stronger supplier relationships: Build trust
and goodwill with suppliers through prompt
payment.
Disadvantages
Reduced profit margin: Seller receives
lower revenue per unit sold.
Less flexibility: Difficult to adjust
discounts quickly to respond to market
changes.
Potential misuse: Intermediaries might
sell products at discounted prices,
harming brand image.
Reduced profit margin: Seller receives
lower revenue per unit sold.
Risk of overstocking: Buyer might
overstock inventory, leading to financial
losses.
Reduced profit margin: Lower revenue
per unit sold during the promotional
period.
Can devalue the brand: Frequent
promotions can make products seem
cheap and reduce perceived value.
Unpredictable demand: Difficult to
forecast sales accurately during and
after the promotion.
Reduced profit margin: Offer a discount
on the sale price.
Administrative costs: Requires
additional bookkeeping and tracking of
payment deadlines.