Types of discounts
/What are Sales Discounts?
A sales discount is a reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer. This approach is commonly used when a seller is in immediate need of cash. The inherent interest rate associated with a sales discount offer can be quite high, so more established organizations tend not to offer it to their customers.
There are multiple types of discounts from sales that customers can earn. They are typically employed to either attract new customers, retain old ones, enhance financing options, or manage inventory levels. These discounts are noted below.
Buy one, get one free. This discount may require a buyer to receive two of the same inventory item, or it could allow for a free item that differs from the initial purchase. This discount is used to clear out inventory, or in general when the gross margin on a product is high enough to still generate an adequate profit for the seller.
Contractual discount. A standard discount percentage is included in an existing contract between the buyer and seller. For example, the contract may state that all purchases made receive an automatic discount of 8%. Under this arrangement, the discount is taken from the sale price at the point of sale - there is no delay.
Early payment discount. Customers can take a small percentage discount when paying the seller, if they pay within a certain number of days. These discounts tend to have a high effective interest rate, and so are a good deal for customers, if they have sufficient cash available to take advantage of the offer.
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Free shipping. The seller grants free shipping if a discount code is used, or if orders occur within a certain period of time. This is linked to the order date rather than the shipment date, since the shipment date could be delayed.
Order-specific discount. A seller may be running a special deal on certain inventory items, or for all items but during a restricted period of time. In either case, a discount is applied to a specific order. If the discount is only for certain inventory items, then the discount is restricted to specific line items within the customer order.
Percentage of sales discount. A seller may offer a percentage of the total sale as a discount, once a customer’s purchase surpasses a certain threshold. For example, a seller might offer a 5% discount once a total order exceeds $100, and 10% if the order exceeds $500. This is a good approach for on-line retailers, who can encourage customers to place bigger orders, which allows retailers to ship in fewer boxes (thereby saving on shipping costs).
Price-break discount. A customer may qualify for an immediate discount on an order if the number of units ordered exceeds a threshold amount. If so, the discount is applied when the order is placed. The discount should not be applied at the point of shipment, since the seller may ship in a reduced quantity, which is not the fault of the buyer. This is a variation on a volume discount.
Seasonal discount. A seasonal discount is a temporary price reduction offered during specific times of the year to stimulate sales during typically slow periods. Businesses use these discounts to manage demand fluctuations, reduce excess inventory, or maintain steady cash flow. For example, a ski resort hotel may lower room rates in the summer to attract off-season travelers. Seasonal discounts help smooth out revenue cycles and can introduce new customers to products or services during quieter times. This strategy is common in industries such as tourism, fashion, and retail, where demand varies significantly by season.
Trade discount. A trade discount is a reduction from a seller’s list price granted to a buyer, often based on volume, customer status, or negotiated terms. It is reflected directly in the invoice price and reduces the recorded cost or revenue. Trade discounts are not recorded separately in the accounting records.
Trade-in credit. A trade-in credit is a reduction in the purchase price of a new asset in exchange for an old asset surrendered to the seller. For accounting purposes, the credit is treated as part of the consideration received for the old asset and affects the recorded cost of the new asset. Any difference between the trade-in allowance and the carrying amount of the old asset results in a gain or loss.
Volume discount. Once a customer reaches a certain amount of sales volume during the measurement period (typically a year), a volume discount applies. This discount can be retroactive, covering all preceding sales during the measurement period, or it may only apply to all subsequent sales. In the first case, a credit or payment will be issued to the customer that relates to the prior purchases.