Trade Discount Explained in Simple Words

Trade Discount Explained in Simple Words

There is a thing called ‘trade discount’ in accounting. You can often encounter the products as sold at a trade discount, which is a pretty straightforward concept, although it means several things.

If products are listed as sold this way, then it means the producer of these goods allowed them to be purchased for a price smaller than originally intended for them. They usually do this to bolster the sales – all the more so, considering that this discount can change according to various factors.

What is a Trade Discount?

Trade discounts aren’t just applied to everything sold at a reduced price. It will only qualify as one, if:

  1. The product(s) is/are purchased in retail
  2. The product(s) is/are produced by a business
  3. The discount was specifically allowed and orchestrated by the business.

There is more, but if all of these are true, then you can quality the products purchased this way as purchased with a trade discount. One usually means products of big quantities, although the exact volume can differ. In fact, the size of a discount will often vary depending on just how much the buyer is willing to acquire.

This instrument of sales management is flexible. Businesses can introduce floating discounts that get bigger in proportion to the purchase volume – for instance, a 10% discount for 10,000 units, but a 20% discount for 15,000 units. The exact system of how these change depends solely on the business.

If the discount is provided by a retailer, then it’s by no means a trade discount. The producer can advise the retailer to sell bigger volumes for cheaper (because they want to sell more or as some sort of encouragement for a retailer), and that would qualify as this kind of discount.

All the products that end up being sold this way by the business itself are listed as sold at a trade discount alongside their reduced price. These discounted products can’t be listed as sold at full price.

Why introduce it?

It’s introduced by the businesses that produce goods to increase the sales of these very goods. It can take several forms.

In the cases where a company sells their goods directly to the individual customers, they can simply reduce the price, thus hoping the people will buy more of these products while the cost is reduced.

In the cases where retailers buy from the company and then resell it to the individual customers, the business will usually sell the product at a smaller price and simultaneously set the recommended list price for the retailer proportionally lower. Therefore, people will buy more, and the retailer will buy more to sell more.