Trade discounts: definition, types and tiered pricing
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Do you know how much your discounts actually take away from your profit margin?
Schedule a meetingLearn about our MPS pricing solutionA trade discount is a price reduction granted to a customer based on the volume purchased, their loyalty, or their status. It appears on the invoice and immediately reduces the net price. It belongs to the family of trade discounts, along with rebates, refunds, and cash discounts, and volume discounts are the most common form in B2B.
The Essentials in 6 Questions
A price reduction granted to a customer, visible on the invoice.
Sales teams, pricing, B2B distribution.
Upon order , according to conditions set in advance.
Within the pricing conditions and customer schedules.
Encourage volume and loyalty without lowering the list price.
Net price = catalogue price × (1 − discount rate) .
Discount, rebate, allowance, cash discount: what's the difference?
Four trade discounts, which are distinguished by their reason and by the time they are granted.
| Reduction | Pattern | When |
|---|---|---|
| Discount | Purchase volume, loyalty, customer status | On the invoice, at the time of ordering |
| Discount | Quality defect, delay, non-conformity | Afterwards, to compensate |
| Discount | Revenue achieved over a period | At the end of the period, often annually |
| Discount | Advance payment | Upon settlement, before the deadline |
In large-scale retail, benefits granted outside the invoice fall under the back margin, see front margin, back margin .
How do you calculate a trade discount?
The net price is obtained by applying the discount rate to the catalogue price; several successive discounts are not cumulative.
| Need | Formula |
|---|---|
| Net price after discount | List price × (1 − discount rate) |
| Discount amount | List price × discount rate |
| Successive discounts | Price × (1 − discount 1) × (1 − discount 2): 10% then 5% equals 14.5%, not 15% |
of catalogue price excluding VAT, for a purchase cost of €75 excluding VAT.
net price after 10% discount.
margin: it goes from €25 to €15 per unit.
A discount is always read in terms of margin, not just turnover: a 10% discount can remove 40% of the margin.
The sliding scale pricing
The unit price decreases in stages as the quantity ordered increases.
| Quantity ordered | Unit price excluding VAT | Discount |
|---|---|---|
| 1 to 49 units | 10,00 € | 0% |
| 50 to 199 units | 9,50 € | 5% |
| 200 units and more | 9,00 € | 10% |
Volume discounts encourage larger orders and reduce processing costs per unit. The tiered pricing structure is based on customer cost structure and purchasing habits, and is then incorporated into the general terms and conditions of sale. In B2B, it is linked to customer segmentation .
The 3 common mistakes with discounts
Unmanaged discounts, added-up discounts or discounts that are never reviewed: they reduce the margin without anyone noticing.
- Granting discounts on a case-by-case basis , without a grid or validation: the differences between comparable customers end up being seen and becoming the norm.
- Adding discounts together instead of chaining them in calculations, or forgetting off-invoice discounts, distorts the actual net price.
- Never measure margin leakage : from the catalog price to the price collected, successive discounts widen the gap, which the price waterfall makes visible.
Frequently Asked Questions
Short answers to the most frequently asked questions about trade discounts.
What is a trade discount?
A trade discount is a price reduction granted to a customer based on the volume purchased, their loyalty, or their status, such as being a reseller or a key account. It appears directly on the invoice and reduces the net price paid at the time of ordering. It differs from a rebate, which compensates for a defect, a discount, granted retroactively based on sales volume, and a cash discount, linked to early payment. In B2B, discounts are often set in advance using a tiered pricing structure or a sliding scale.
What is the difference between a discount, a rebate, and a refund?
Discounts, rebates, and allowances are three types of commercial reductions distinguished by their purpose and timing. Discounts reward volume, customer loyalty, or status and are applied to the invoice at the time of order. Rebates compensate for a problem: quality defect, delivery delay, or non-conforming product. Allowances are calculated at the end of a period, often annually, based on the sales volume generated with the customer. In addition, there is the early payment discount, a reduction granted for payment before the due date.
How do you calculate a trade discount?
To calculate a trade discount, multiply the list price by the discount rate: discount amount = list price × rate. The net price is obtained directly by list price × (1 − discount rate): €100 with a 10% discount gives €90. When several discounts are applied consecutively, they multiply and are not added together: 10% then 5% gives €100 × 0.90 × 0.95 = €85.50, or 14.5% in total, not 15%. The calculation is done before tax; VAT is then applied to the net price.
What is a sliding scale pricing system?
A tiered pricing structure is a price grid in which the unit price decreases in increments as the quantity ordered increases: for example, €10 per unit up to 49 units, €9.50 from 50 to 199 units, and €9 per unit thereafter. It encourages larger orders, thereby reducing preparation and delivery costs per unit. The tiered pricing is calibrated to the customer's cost structure and typical order volumes, ensuring that each tier remains profitable. This is the most common form of B2B pricing.
What is the impact of a discount on the margin?
The impact of a discount on profit margin is much greater than on revenue, because the discount is entirely deducted from the margin. For example, a product sold for €100 (excluding VAT), purchased for €75 (excluding VAT), generates a €25 margin; with a 10% discount, it sells for €90 and generates only €15, a 40% reduction in margin. To compensate, you would need to sell approximately two-thirds more volume. This is why each discount must be calculated in terms of margin before being granted, and monitored over time.
How to manage discounts in B2B?
To manage discounts in B2B, we replace the case-by-case approach with rules: a discount schedule for each customer segment, a tiered pricing structure based on volume, and thresholds beyond which an exceptional discount must be granted. We then measure the difference between the list price and the actual price received, including both invoiced and off-invoice discounts, using the price waterfall model. This difference often reveals discounts granted out of habit, without any corresponding volume requirement, which can be corrected without losing customers.
Key Takeaways
- The discount reduces the price on the invoice ; the rebate is granted after the fact .
- Successive discounts multiply , they do not add up.
- A discount is judged by margin : a 10% discount can remove 40% of the margin.
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