Importance of discount policies

It is a common practice to allow deductions or discounts from prices quoted on commodities. In some forms these discounts are little more than matters of strategic marketing practice. In others, they are special favours granted to customers for the purpose of building good will or increasing the volume of sales. Unfortunately, many business enterprises use the discount system in an effort to meet competition by selling terms instead of goods. Others use it so haphazardly or so preferentially that in many cases they alienate good will.

Over long periods of time certain discount practices become customary in a given trade. Although custom may appear to limit the manufacturer's freedom of choice with respect to discounts, such is not always the case. The important factor is to base discount policies upon sound logic as well as upon trade custom, to adopt a definite policy on each type of discount and to make that policy known to the trade. The policies are concerned with the following types of discounts :

• Trade
• Cash
• Quantity
• Geographical
• Forward dating

Trade discounts

Trade discounts are granted extensively in product lines such as hardware, furniture, and drugs, where it has become traditional to quote "list" prices that are somewhat higher than actual prices. A so-called percentage trade discount is then allowed from these "list" prices. Several reasons are advanced to justify trade discounts. First, if a considerable variety of products is offered for sale it is necessary to issue an extensive catalogue containing prices.

To issue a new catalogue every time prices are changed is extremely costly. It is easier and less expensive for the seller to send out supplementary discount lists showing the changes in discount percentages. In the second place, a trade discount has the supposed advantage of concealing actual net prices from competitors. If the supplementary discount sheets can be confined to the seller's customers for a time, the seller may secure a temporary price advantage.

In numerous lines a string or chain of trade discounts is used, such as 10, 10 and 5. Obviously, any system of extended trade discounts complicates billing and checking invoices. Although often employed to facilitate price changes, such discounts sometimes were actually used to permit the seller's salesmen to quote different prices to different buyers. However, such practice when discovered led to ill will among customers and now is prohibited.

Trade discounts to different types of buyers

Another use of the trade discount is to distinguish between different types of buyers. One discount may be given to the wholesaler or jobber, and another to the retailer. But fair decisions with respect to the status or class of particular buyers may be difficult. The chain store will probably demand the jobber's discount as well as the retailer's discount, and may even demand it irrespective of the amount of goods purchased.

Definite standards should be set up and adhered to in distinguishing types of buyers. Distinctions made between similar buyers are held illegal if they are made irrespective of differences in the grade, quality, or quantity of purchases, or in costs of selling or transporting purchases.

Cash discounts

Cash discounts are also commonly granted by manufacturers and wholesalers of consumers' goods. Such discounts encourage a purchaser to make prompt payments, and enable the manufacturer or wholesaler to do a larger volume of business on the same amount of capital. By stimulating prompt payment they also help to eliminate some of the risk in extending credit.

A buyer who takes advantage of cash discounts receives in effect a rate of interest on his money much in excess of the prevailing rate in the money market, Because of their strong financial position and ability to pay cash, the larger companies can readily take cash discounts. Their purchasing departments schedule the checking and approving of invoices so that payments may be made in time to secure the discounts.

The rate of cash discount must be covered in the quoted price if losses are to be avoided. Cash discounts should not exceed the rate of payment necessary for the use of money between the date of payment stipulated and the date the invoice is due, plus an estimated compensation for lessened risk. Any excess above these two factors is price-cutting.

Unfortunately, many buyers have adopted the practice of taking unearned cash discounts. They stretch "two per cent—ten days" into fifteen, twenty, or thirty days. Although it requires considerable courage on the part of a seller to refuse to honour cash discounts unfairly taken, this general tendency should be checked.

Buyers also appear to have become "term grabbers" in many instances. As a result, some lines show a complete lack of any uniform treatment of cash discounts. A survey made by the research department of the National Association of Credit Men indicated that among 26 leading concerns in the knit goods industry there were no less than 17 different sales terms, varying all the way from 1 per cent 10 days to 3 per cent 10 days, 21/2 per cent 30 days, and 2 per cent 60 days.

Quantity discounts

Quantity discounts are percentage discounts granted from a base price for purchases in quantities larger than those on which the base price is quoted. They pass on to the buyer the savings made possible to the seller through lower unit costs resulting from the handling of larger shipments. In the second place, the quantity discount rewards the wholesale middleman or larger retailer who takes over and performs the risk-bearing, financing, storing and transporting services.

In recent years business has been carried on with small inventories. The size of the order has become less and less of a distinguishing mark between the wholesaler and the retailer. Many retail organizations have become not only purchasers of large quantities of individual products, but have also undertaken to perform for themselves the services heretofore carried out by the wholesaler.

These purchasers have been exercising considerable pressure to secure quantity discounts in part irrespective of amounts purchased, because they assert that they are "doing their own jobbing." Thus, today, we find in some lines that quantity discounts are offered freely without regard to the position of the buyer in the marketing system.

Obviously, however, the seller who is dependent on the wholesaler or jobber for most of his help in distribution and marketing needs a definite policy of distinguishing between the retailer and the wholesaler so far as quantity discounts are concerned. In such cases a combination trade discount and quantity discount policy should be formulated.

Period-quantity discounts

The practice whereby it was possible for buyers to secure quantity discounts for purchases made within a certain period seems to be prohibited by the Robinson-Patman Act, as interpreted by the Federal Trade Commission. The Simmons Bed Company was prohibited from granting period discounts whereby, when a customer, within a stated period, had passed into a quantity-level entitled to a higher discount, the customer was given the lower net price not only on all further purchases during the period, but also retroactively on all his previous purchases during that period.

Inquiry of the Commission as to whether the extra discount might be allowed on only those lots bought after the customer had passed into the higher quantity-level, brought a response indicating that even this might be considered prohibited in some actual case brought officially before the Commission. In case of an actual contract to buy a definite amount, quantity discount probably would be legal.

Geographical discounts

The middleman who buys for resale and who is located at a considerable distance from the manufacturer is at a disadvantage. Because of the widely advertised uniform retail price he cannot raise his resale prices and yet he must pay greater freight charges than a middleman nearer the manufacturer's plant.

This situation can be met either by quoting to middleman dealers prices which include the freight to delivery points and adequately provide for the dealer's expenses and profits, or by quoting f.o.b. the production point and allowing a geographical discount which will be the equivalent of the freight charges.

When the geographical situation is such that it cannot be equalized readily by discounts, the practice of separating the whole market into zones and of fixing a different resale price for each zone is sometimes followed.

These geographical prices are uniform within the particular zone. Many sellers establish uniform resale prices over the east and central sections of the national market, but quote higher prices, say, west of the Rocky Mountains. This practice, of course, does not equalize prices over the whole country and very frequently results in the feeling of discrimination on the part of consumers as well as of dealers.

Forward datings

Forward datings may be considered a form of discount or a form of credit extension. The usual practice is to grant an extra period of time in which to make payment, instead of charging an order on the usual basis of payment, say 30 days from date of shipment. If a purchaser is a long distance away from a seller the usual terms granted may begin to apply only on receipt of the goods, or payment may be made only on receipt of goods. This practice is followed to equalize geographical distances and may even be classed with the practice of granting geographical discounts.

In some industries it is the custom to give forward datings on goods shipped during certain specified seasonal periods. The textile trades are outstanding examples of such policies. Orders are taken usually twice a year for delivery between six and nine months later. To encourage ordering so far ahead, to save the producer from the need of holding goods in stock a long time, and to secure funds to carry on operations, the mill or its commission agent offers to ship earlier than the time the buyer would like shipment to be made. As an inducement to accept this arrangement forward datings are given to compensate the buyer.

Out of this procedure has grown the general policy of fixing certain dates from which the terms of payment will run. Shipments are then made any time before those dates. Consequently, terms like a 2 per cent discount for payment within ten days of April 1st and October 1st are found on seasonal goods shipped during a specified preceding period. The principal uses of this forward-dating policy are to secure advance orders so that plant and equipment can be operated on a more economical basis, to encourage early placing of orders for seasonal goods, and to equalize geographical differences.

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