What is a trade discount?

A trade discount lets a seller publish one list price and still sell to different channels at different prices. The distributor who resells your goods needs room to make a margin. The trade discount is that room.

Trade discount vs other discounts

• Trade discount: off the list price, by type of buyer. It appears on the quote and invoice as a lower price.
• Volume discount: off the price for buying more on one order. See how to negotiate volume discounts.
• Volume rebate: money returned after a period, once a target is met.
• Cash discount: a small reduction for paying early, such as 2% off for paying within 10 days on an invoice otherwise due on Net 30 terms ("2/10 net 30").

A trade discount is not a favour for one deal. It is a standing price for a kind of customer.

How a trade discount works

1. The seller sets a list price for each product.
2. It decides discount levels by channel, for example distributor, wholesaler and end user.
3. Each customer is placed in a level and gets that price.
4. The quote and the invoice show the discounted price.

Some sellers give a chain of discounts, such as 30/10. That means 30% off the list price, then 10% off the result. It is not 40%.

An example from product sales

Say a coatings manufacturer lists a 20 litre drum at $100. Its distributors get a 30% trade discount, so they pay $70.

A large distributor also gets a second 10% step for stocking the full range. The price is $70 less 10%, which is $63. That is a total reduction of 37%, not 40%. The distributor resells at $85 to its own customers and keeps $22 a drum.

How to set trade discounts

• Base them on the margin the channel needs to work, not on guesswork.
• Keep the number of levels small, so the rules are easy to explain.
• Put each customer in a level, and write down why.
• Do not let reps invent a new trade discount per deal. That is a negotiation, and it belongs to a price list or an approval.
• Review the levels once a year.

Related terms

• Customer price list: a set of prices fixed for one customer or group.
• Volume rebate: a payment back after hitting a target.
• Distribution agreement: where trade terms for a distributor are often agreed.
• Gross margin: what is left after the discount and cost of goods.
• Sales quote: where the discounted price is shown.

How PromptLab handles it

Build a customer price list for each channel level and pick it on the quote, so the distributor's prices come from the right list. A quote also takes line discounts for the odd exception. Editing a list's prices reprices every quote linked to it, so a price change goes in a new list.

Frequently asked questions

What is a trade discount?

It is a reduction from the list price given to a class of buyer, such as a distributor or reseller, so they can resell at a margin.

How do you calculate a trade discount?

Multiply the list price by the discount percentage and subtract. A 30% discount on a $100 list price is $30 off, so the buyer pays $70.

What is the difference between a trade discount and a cash discount?

A trade discount depends on who the buyer is. A cash discount is a small reduction for paying early. The trade discount comes off first, and the cash discount applies to the result.

What does 30/10 mean in discounts?

It is a chain of two discounts. Take 30% off the list price, then 10% off that result. The total is 37%, not 40%.

Is a trade discount shown on the invoice?

Usually the invoice shows the net price after the discount. Some sellers show the list price and the discount on separate lines. Either way, the buyer pays the net.