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Price Dis­counts: 6 Most Common Types of Price Dis­counts

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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).

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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.

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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.

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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:

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A. Uniform delivery price:

1. Postage stamp pricing method;

2. Zonal pricing method.

B. Basing point pricing:

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1. Single basing point;

2. Multiple basing points;

3. Full freight equalisation.

C F.O.B. Pricing:

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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.

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(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.

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