Discount gives the condition of lowering the price of a product or security than its par value. Typically, the discount value is equal to the difference between the par value of the security or product and the price paid for it. For example, if the par value of a bond is $100 and it is currently sold for $90, then we can say that the bond is selling at a discount and the discount value is $10.
Discounts are often termed as allowances that bring reductions to the basic price. The discounts can reduce the manufacturer’s list price, retail price or the list price of a product. The main purpose of discount is to increase the sale of a product for the short time. In order to clear the out-of-date stocks the manufacturers often offer discount on their products.
The discounts and allowances are also the major forms of sales promotion taken by the manufacturers.
Some of the most common types of discounts and allowances are:
Cash discounts for prompt payment
Cash discounts for preferred payment method
The cash discounts for prompt payment are intended to speed up the payment and hence provide liquidity to the firm. These discounts are generally used by the firm as a promotional device. The quantity discounts are the price reductions that are given for the large purchases. The major principle behind this discount is to pass the savings on to the customers. Two types of quantity discounts are – cumulative quantity discounts and non-cumulative quantity discounts.
The cash discount for preferred payment method offers discounts to the customers who pay in cash in order to avoid paying fees on the credit card transactions. The trade discounts are the payments offered to the distribution channel members on the performance of some function. Forward dating method ensures that the purchasers don�t have to pay for the goods until the invoice date.
The seasonal discounts are the price reductions that are given when an order is placed in a slack period. The promotional allowances are actually the price reductions that are given to a buyer for some promotional activity performance. ales.
Last Updated on : 1st July 2013