1.6 Trade Discounts
Most of the goods you purchase as a consumer are not bought directly from the manufacturer. The goods are distributed through a marketing channel – that is, a sequence of middlemen which move the goods to the consumer. In this section, you will examine the price calculations for a typical channel. Consider an industry (such as clothing) which distributes goods through wholesalers and retailers. Note that the manufacturer may sell to different levels of the channel, perhaps to retailers near the production facilities and to wholesalers everywhere else.
Manufacturers (and wholesalers) often produce a single price list of their products for their customers. This usually lists the prices (the list price) at the level a final consumer would pay. Clearly wholesalers and retailers cannot pay this price because they have to mark up the price they pay before they sell the product.
The price to be paid by these organizations is found by reducing the list price by a trade discount. The trade discount is given by a percent of list. Suppose, for example, that a manufacturer of men’s suits lists a suit at $300 (this is roughly what a consumer might pay). Then a retailer buying directly from the manufacturer might get a 25% trade discount and pay:
If retailers are expected to pay $225 for a suit, a wholesaler has to pay less for it, because the wholesaler’s customers are retailers. Hence the wholesaler must get an additional discount to stay in business. This is usually given as a chained discount; which is a percentage of the price after the first (retailer’s) discount is taken.
In the example above, this extra discount is 20%. So the wholesaler would pay the manufacturer:
As a single equation you would have 300(1− 0.25)(1− 0.20). This discount would be described to the wholesaler as list less 20%, 25%.
To get the final price (the net price), after all discounts, you can set up the following formula:
where:
- N = net price to be paid
- L = list price
- d1= discount rate 1;
- d2= discount rate 2
Note that (1-d1) and (1-d2) are the fractions of the price to be paid after the discounts are taken. Thus, in the example above:
- For d1, there remains 1 – 0.25 = 0.75 = 75% to be paid.
- And for d2 = 20% = 0.20, there is 1 – 0.20 = 0.80 = 80% of the remainder to be paid.
Sometimes there are additional discounts – special sale discounts, seasonal discounts, quantity discounts – that are treated the same way.
Check Your Knowledge 1.6
- A wholesaler is purchasing refrigerators from a manufacturer and is offered discounts of “list less 30%, 25%” on refrigerators with a list price of $700.00. What price would the wholesaler pay?
- A retailer purchased a television set from a wholesaler and paid $244.30 after getting a single discount on a set listed at $349. What single discount did the retailer get?
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