The influence of discounts and allowances

A very large proportion of sales made in the market are subject to discounts and allowances of one kind or another. The consumer is most familiar, perhaps, with the cash discount. A seller offers 2/10, net 30, which means that if the invoice is paid within 10 days of date, the buyer may take a 2% discount off the face of the invoice; but, in any event, the amount which is owed is due in full within 30 days.
The trade recognizes several other types of discounts and allowances. Probably the most important one is the so-called quantity discount. This is an inducement to purchase in larger quantities. It is usually expressed in percentages of sales price. For example, on the purchase of 100 cases, no discount; 101-500 cases, 1 per cent discount; 501-1,000 cases, 2 per cent; 1,001- 5,000 cases, 3 per cent; 5,001-10,000 cases, 4 per cent, and above 10,000 cases, 5 per cent.
The quantity discount can be either cumulative or non-cumulative. The cumulative discount allows the buyer to accumulate his purchases, for the purpose of computing the discount earned, over a stated and usually limited period of time: three months, six months, sometimes a year. The purpose of the cumulative discount is to permit the small and medium size buyer to earn the maximum discount, or at least a higher discount than would be earned if each individual purchase were taken separately.
Thus, for example, a medium size buyer buying once a month and purchasing only 500 cases each month, might, in the period of six months, accumulate a total of 3,000 cases, entitling him to a discount of 3 per cent, whereas on individual or non-cumulative purchases, he would earn nothing. In recent years, many manufacturers have tended to reduce or eliminate the sliding scale of discounts in favor of one over-all discount: carload (c/1), truckload (t/1), with no discount for less than carload (1/c/l) or less than truck load (1/t/l). However, the sliding scale discounts are still popular in many transactions.
A second type of discount is the so-called functional discount. This is an allowance made for the performance of a specific function in distribution. Thus, the wholesaler, regardless of his size, is entitled to a wholesale discount because he performs the functions of a wholesaler. On the other hand, a direct-buying retailer (supermarket, syndicate store, discount house or department store), although he might purchase a larger quantity than the wholesaler, would not be entitled to the wholesaler's functional discount.
The functional discount was more common in years past when there were fewer direct-buying retailers. With the growth of chains, supermarkets, department stores and discount houses, this type of discount has tended to be reduced or to disappear altogether.
Of growing importance in recent years have been two types of allowances: the advertising allowance and the freight allowance.
As the name implies, the advertising allowance is given by a manufacturer to a distributor in return for advertising support. In theory, this allowance is supposed to be paid only against actual performance, a payment for a service rendered. In practice, the allow¬ance may often exceed the value of the service rendered, thus becoming a price cut to the recipient.
It is very difficult to control the exact value of an advertising service rendered. Certain regulations, aimed at controlling these abuses, have been only partially effective. Since the allowance is usually based on volume of purchases, a large buyer has a natural advantage over a small buyer.
The freight allowance also, as the name implies, is an allowance made to the buyer for part or all of the freight cost of getting the goods into his hands. Some manufacturers sell "f.o.b. mill or factory," the price at the factory door, plus freight to buyer's place of business. Sometimes, manufacturers make a blanket percentage allowance for freight. Sometimes, they pay a definite part of the freight, whatever the cost. Sometimes, they absorb the entire cost of freight, and sell "delivered price."
The method of quoting price, delivered to the customer's place of business, is sometimes called "postage- stamp pricing," since, in sending letters through the mail, the price of the mail delivery is the same whether the letter is delivered locally or three-thousand miles away. Freight allowances can become important price concessions when merchandise is heavy and freight costs large.
Whatever discounts or allowances a manufacturer grants to buyers, they are direct or indirect reductions in price. An accumulation of discounts and allowances can give certain buyers a decided price advantage over competition; hence, such discounts and allowances have, for many years, attracted the attention of regulatory bodies.