Trade discounts and allowances are price reductions given to middlemen (e.g. wholesalers, industrial distributors, retailers) to encourage them to stock and give preferential treatment to an organization's products. For example, a consumer goods company may give a retailer a 20% discount to place a larger order for soap. Such a discount might also be used to gain shelf space or a preferred position in the store. Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked with the product.
Trade discounts are most frequent in industries where retailers hold the majority of the power in the distribution channel (referred to as channel captains). Trade discounts are given to try to increase the volume of sales being made by the supplier. The larger the purchase, the larger the discount. It is important that these discounts are fair and offered to all channel members equally to avoid channel conflict. Some challenges include channel stuffing, where manufacturers induce channel members to buy far more products than they can sell in a reasonable period. Another challenge is diverting, which is when companies sell to channel members at a cheaper rate rather than pass on savings to consumers.
A trade rate discount is offered by a seller to a buyer for purposes of trade or reselling, rather than to an end user. For example, a pharmacist might offer a discount for over-the-counter drugs to physicians who are purchasing them for dispensing to the physicians' own patients. A seller supplying both trade or resellers and the general public will have a general list price for anybody, and will offer a trade discount to bona fide trade customers.
Other trade sales promotion methods include trade contests, which are contests that reward retailers that sell the most products, and point-of-purchase displays, which are used to create the urge of "impulse" buying.
Hair Salons and Trade Allowances
Hairdressers can go to the manufacturer to get a discount for buying in bulk. They can get shampoos and other hair products at a cheaper rate and sell them to consumers at full prices.