Define the four types of channel discounts and provide an example of each.
What will be an ideal response?
Sellers offer cash discounts to elicit quicker payment of invoices. The rational purchaser weighs the discount offered for early payment versus the value of keeping the money until it is due. Ideally the cash discount results in financial advantage for both parties. Cash discounts are stated in a typical format such as 2 percent/10, Net/40, which translates to the buyer receiving 2 percent off the total bill if payment is received within 10 days of the invoice date, but after that point there is no discount and the whole invoice is due within 40 days of the invoice date.
Trade discounts, also sometimes called functional discounts, provide an incentive to a channel member for performing some function in the channel that benefits the seller. Examples include stocking a seller's product or performing a service related to that product, such as installation or repair, within the channel. Trade discounts are normally expressed as a percentage off the invoice price.
Quantity discounts are taken off an invoice price based on different levels of product purchased. Quantity discounts may be offered on an order-by-order basis, in which case they are noncumulative, or they may be offered on a cumulative basis over time as an incentive to promote customer loyalty. From a legal standpoint, it is essential that quantity discounts are offered to all customers on an equally proportionate basis so that small buyers as well as large buyers follow the same rules for qualification. The later section on legal considerations in pricing extends the discussion about fairness in pricing practices.
Firms often purchase seasonal products many months before the season begins. For example, a retailer might purchase a winter apparel line at a trade show a year before its season, accept delivery in August, begin displaying it in September, yet cold weather may not hit until November or December. To accommodate such lengthy sales processes, firms offer seasonal discounts, which reward the purchaser for shifting part of the inventory storage function away from the manufacturer. Seasonal discounts are often expressed as greatly extended invoice due dates. In the winter clothes line example, terms of 2 percent/120, Net 145 would not be unusual.
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