The following points highlight the six most common types of price discounts. The types are: 1. Quantity Discounts 2. Trade Discounts 3. Promotional Discounts 4. Seasonal Discounts 5. Cash Discounts 6. Geographical Discounts.
Type # 1. Quantity Discounts:
The basis for quantity discounts lies in the general notion of economies of scale. If a seller of a product can sell more of a product to a given buyer, various cost savings may occur. It can produce more and thus reduce unit costs of production. Distribution and marketing expenses are also reduced.
Such a discount is granted for volume purchases (measured in rupees or units), either in a single purchase (non-cumulative) or over a specified period of time (cumulative, deferred or patronage discount).
The simple non-cumulative quantity discounts serve to encourage orders, but lead to fewer orders over a given time period.
This ordering policy benefits the seller in that he has few orders to process, ship and invoice, thereby reducing total costs for these activities. Cumulative discounts do have these benefits because the discount is based on total volume of purchases over a given time period (usually from a month to a year in duration).
However, such discounts do tend to tie a buyer to a seller over the discount period, if the buyer is anxious to obtain the discount.
However, the nature of the product makes it advantageous to place small orders, for example, perishable products and large consumer durables, or heavy equipment and machines. For these kinds of products, buying in small quantities is practical and a cumulative discount schedule is beneficial to both parties.
Type # 2. Trade (or Functional) Discounts:
Trade discounts are usually provided to middlemen for the functions they perform in the distribution of commodities. For this reason, trade discounts are often called functional discounts. For example, book sellers in India get such discounts from publishers at the rate of say 20%, 25%, 33V3% on order of say 5-50, 51-100,101 and above, respectively. Such successive discounts represent a system of graded incentives.
For example the New Central Book Agency of Calcutta provides a normal trade discount of 20% on all orders but UBSPD and other leading distributors (wholesalers) get 30% because they, in their turn, offer 25% discount to their retailers. On bulk orders of 100 and more copies an additional discount of 5% is given to UBSPD.
The justification for trade discounts is that different distributors perform different functions within the distribution channel and should be compensated accordingly. For example, some wholesalers provide storage facilities for the manufacturer, help the retailer set up displays, extend credit to the retailer, as well as perform personal selling services for the manufacturers.
Type # 3. Promotional Discounts:
Such discounts are given to distributors as “an allowance for the distributors’ efforts to promote the manufacturer’s product through local advertising, special displays, or other promotions. These allowances may take the form of a percentage reduction in the price or they may be an outright cash payment either to the distributor or to the promotional vehicle, e.g., a local newspaper”.
Type # 4. Seasonal Discounts:
Business conditions never run smooth. To the periodic fluctuations in the levels of business activity, the name business cycle is given. And, in reality, industries that are characterised by significant but regular fluctuations in volume may offer a discount to consumers who purchase the goods (or service) at non-peak hours.
For example, hotels in Darjeeling are available at a discount in the winter months. Again, electric fans are often offered at special reduced prices at times other than the summer months.
The more elastic the demand for a product, the heavier price discount it gets, for example, warm clothes in summer, long distance telephone calls at night, and noon show films, etc. These discounts represent ways of taking into account various demand factors and the position of the demand curve in determining the appropriate price.
Type # 5. Cash Discounts:
A cash discount is a reward for the payment of an invoice or account within a specified time period. For example, the Calcutta Electric Supply Corporation provides a discount to all customers who pay their bills on or before a scheduled date. From the seller’s viewpoint, immediate payment is preferred so that the seller can invest the money for the period. Thus, the seller may offer a discount for an immediate cash payment.
Type # 6. Geographical Discounts:
Geographical discount structures refer to price differentials based on buyers’ (or markets’) location. They’ are important when transport costs are high relative to the selling price, since the manufacturer can then gain from differences in transport costs due to varying distances between the locations of plants and the customers.
Geographical pricing methods may assume several forms as follows:
A. Uniform delivery price:
1. Postage stamp pricing method;
2. Zonal pricing method.
B. Basing point pricing:
1. Single basing point;
2. Multiple basing points;
3. Full freight equalisation.
C F.O.B. Pricing:
1. Uniform F.O.B. price with no freight absorption;
2. Regulated F.O.B. price with limited freight absorption;
3. Unregulated F.O.B. price with unlimited freight absorption.
To sum up:
(1) The buyer is often offered a discount from the list price of the product.
(2) Price discounts provide a method of encouraging buyers to buy in bulk and at non-peak hours.
(3) Discounts are also given to induce the buyer to purchase in cash rather than on credit.
(4) Discounts are given to various intermediaries (wholesalers, retailers, etc.) as a means of paying them for functions they perform in getting the product through the distribution channel from producer to consumer.