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12 Common Types of Discounts

Explore the different sales discounts that your business can offer in retail or e-commerce industries to attract new customers and encourage customer loyalty.

12 Common Types of Discounts

Indeed Editorial Team

Updated July 22, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Leveraging sales discounts in your retail or e-commerce business can help drive sales, attract new customers and encourage customer loyalty. There are dozens of discount types for every business that provide incentives for customers to buy your products. With so many options, narrowing down the appropriate discounts for your business is important to creating the most effective sales. In this article, we discuss 12 types of discounts and the benefits they offer to customers.

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What are discounts?

Discounts are promotions that businesses offer to their customers that reduce the cost of items or services, often by a percentage or using specific criteria. For example, a store may offer a 50% discount on particular products. Businesses can use discounts to shed unwanted inventory, promote new items for sale or attract customers. These discounts also provide value to the customers, who may find it easier to make these purchases due to the lower prices.

Related: Types of Sales Promotions (With Examples)

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12 discount types businesses can use

Discounts can encourage customers to buy more, talk about the business and continue using the brand's products and services. Here are 12 discount types used by retail and e-commerce businesses:

1. Buy one, get one free discounts

A buy-one-get-one-free discount, also called a BOGO discount, typically encourages customers to purchase two of the same item. Sometimes the free item is not the same as the featured item and represents a product of equal or lesser value. As part of this promotion, the customer receives one of the items for free.

This discount can help businesses move inventory and encourage customers to increase their order size. Customers may also perceive more value because they receive two items for the price of one. This discount type works for both retail and e-commerce settings, though sometimes e-commerce shoppers still pay a shipping fee on the free item.

2. Percentage sales

A percentage sale is discounts an item based on a percentage of its value. Businesses sometimes set percentage sales based on specific criteria. For example, a business may offer a 30% discount on purchases for customers who are members of its loyalty program. A business could also provide a 25% discount on orders when customers purchase three or more items.

The effectiveness of percentage sales may rely on customers' perceptions. People tend to view a percentage as being more valuable than a promotion with a static price attached. For example, saying an item is 50% off may sound like a more significant discount than saying it is $5 off, even if they amount to the same dollar value.

3. Early payment discounts

In some situations, businesses may offer early payment discounts to encourage customers to fulfill their payments within a specific period. An early payment discount may also encourage customers to avoid missing payments by giving them an incentive to pay before the due date. For example, a supplier may offer a discount on a buyer's purchase order if they agree to pay the invoice within 10 days rather than the 30-day final deadline. This discount type can also apply to customer retail credit cards, loyalty rewards programs and other paid subscription services.

4. Overstock sales

When a business holds a surplus of stock of a product, it creates a loss. When sitting on shelves, these products do not generate income and cost the business money while taking up storage space. Businesses often host an overstock sale to move inventory at a discounted price and recover some of those costs. While an overstock sale may not recover all of what the business spent on acquiring the products, it can help mitigate some losses from the additional stock.

Related: What Is Inventory Turnover?

5. Free shipping discounts

Businesses use free shipping discounts to encourage customers to make online purchases. These discounts help make the online shopping experience easier and less costly. Some brands put a minimum order cost or quantity threshold to help reduce the cost of free shipping. For example, you can offer free shipping only on orders over $50. This discount can also help businesses stay competitive. If a customer finds a product for the same price from two stores, the option that offers free shipping typically makes more financial sense for them.

6. Price bundling

Often used by phone and internet service providers, price bundling allows customers to bundle several services under the same plan for a discounted price. This discount often gives customers more services for a lower price, helping the business increase the number of people using multiple services.

Retail businesses can also use this discount method, sometimes called cross-selling. This technique motivates customers to purchase complementary items and increases their purchase quantity. For example, a store may sell laptops and accessories. It can offer customers a discount on a laptop case when they purchase a laptop.

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Types of discounts — AccountingTools

There are several types of discounts that customers can earn, usually to attract new customers, retain old ones, enhance financing options, or manage inventory.

AccountingTools

AccountingTools Types of discounts

May 11, 2022

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What are the Types of Sales Discounts?

There are multiple types of discounts from sales that customers can earn. They are typically employed to either attract new customers, retain old ones, enhance financing options, or manage inventory levels. These discounts are noted below.

Buy One, Get One Free

This discount may require a buyer to receive two of the same inventory item, or it could allow for a free item that differs from the initial purchase. This discount is used to clear out inventory, or in general when the gross margin on a product is high enough to still generate an adequate profit for the seller.

Contractual Discount

A standard discount percentage is included in an existing contract between the buyer and seller. For example, the contract may state that all purchases made receive an automatic discount of 8%. Under this arrangement, the discount is taken from the sale price at the point of sale - there is no delay.

Early Payment Discount

Customers can take a small percentage discount when paying the seller, if they pay within a certain number of days. These discounts tend to have a high effective interest rate, and so are a good deal for customers, if they have sufficient cash available to take advantage of the offer.

Free Shipping

The seller grants free shipping if a discount code is used, or if orders occur within a certain period of time. This is linked to the order date rather than the shipment date, since the shipment date could be delayed.

Order-Specific Discount

A seller may be running a special deal on certain inventory items, or for all items but during a restricted period of time. In either case, a discount is applied to a specific order. If the discount is only for certain inventory items, then the discount is restricted to specific line items within the customer order.

Price-Break Discount

A customer may qualify for an immediate discount on an order if the number of units ordered exceeds a threshold amount. If so, the discount is applied when the order is placed. The discount should not be applied at the point of shipment, since the seller may ship in a reduced quantity, which is not the fault of the buyer. This is a variation on a volume discount.

Seasonal Discount

A price reduction may be offered at certain times of the year when sales would normally be slow. For example, a hotel at a ski resort might offer low prices during the summer months when it would otherwise have few visitors.

Trade Discount

This is a discount offered to retailers to stock the seller's goods. This discount is usually mandated when the buyer exercises significant control over the seller.

Trade-In Credit

This is a discount offered on the purchase of a new product when an older version owned by the customer is traded in. The seller may not earn any profit from the returned item, but generates a new sale and also locks in the customer for another product cycle.

Volume Discount

Once a customer reaches a certain amount of sales volume during the measurement period (typically a year), a volume discount applies. This discount can be retroactive, covering all preceding sales during the measurement period, or it may only apply to all subsequent sales. In the first case, a credit or payment will be issued to the customer that relates to the prior purchases.

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Quantity Discount: Definition, Purpose, Pros & Cons

A quantity discount is an incentive offered to buyers that results in a decreased cost per unit of goods or materials when purchased in bulk.

ECONOMICS GUIDE TO MICROECONOMICS

Quantity Discount: Definition, Purpose, Pros & Cons

By DANIEL LIBERTO Updated March 30, 2021

Reviewed by ERIC ESTEVEZ

What Is a Quantity Discount?

A quantity discount is an incentive offered to a buyer that results in a decreased cost per unit of goods or materials when purchased in greater numbers. A quantity discount is often offered by sellers to entice customers to purchase in larger quantities.

The seller is able to move more goods or materials, and the buyer receives a more favorable price for them. At the consumer level, a quantity discount can appear as a BOGO (buy one, get one discount) or other incentives, such as buy two, get one free.

KEY TAKEAWAYS

A quantity discount is an incentive offered to buyers that results in a decreased cost per unit of goods or materials when purchased in greater numbers.

Enticing buyers to purchase in bulk enables sellers to increase their units per transaction (UPT), lower their inventories, and potentially reduce per-unit costs.

Discounts can have an adverse impact on profit per unit, also known as the marginal profit.

An alternative to quantity discount is linear pricing: charging the same price regardless of how many items the customer buys.

How a Quantity Discount Works

Retailers often get better deals if they order more of the same item. For example, the cost per unit for t-shirts might be $7.50 per unit if less than 48 pieces are ordered; $7.25 per unit if 49-72 pieces are ordered; or $7 per unit if 73 or more pieces are ordered.

Depending on the quantity discount, all pieces ordered must be delivered and paid for by a certain date. Alternatively, the purchases and payments can be spread out over a specified period of time.

By selling in larger quantities, the seller can increase their revenues per transaction (RPT). The vendor can also scale quantity discounts in "steps," with lower per-unit prices at higher quantities to encourage bulk buyers. For instance, a coat maker that employs "steps" in its pricing strategy could offer coats at $20 each, five for $90, and 10 for $160.

Advantages and Disadvantages of Quantity Discounts

Quantity discounting can be fruitful. The principal benefit is to increase total sales volume in order to realize economies of scale. Quantity discounts boost units per transaction (UPT). The resulting increased sales volume can lead to economies of scale in the form of purchasing goods and materials in bulk at a quantity discount from suppliers, and the ability to combine incidental per-order costs, such as shipping and packaging, into one sale. These economies of scale have the potential to reduce per-unit costs to the seller.

Quantity discounting can also come in handy when a seller is keen to lower its inventory. Taking such action can be particularly useful when the product in question risks going out of fashion or becoming obsolete, due to a technological breakthrough.

There are several caveats to this strategy, though. The main drawback of quantity discounts is that the discount squeezes profit per unit, also known as the marginal profit, unless sufficient economies of scale are realized to at least offset the discount offer.

So, if the per-unit cost for the coat company is $10, the company makes a $10 profit on every single $20 sale. However, if the company offers quantity discounts of $2 per coat for orders of five coats and $4 per coat for orders of 10 coats, then it makes only $8 in marginal profit on an order of five and $6 in marginal profit on an order of 10. That would of course change if the coat company is able to save money by, for example, buying in bulk from its suppliers.

Quantity Discount vs. Linear Pricing

When companies price their goods and services, they generally have two options: quantity discounting or linear pricing. A linear pricing strategy is simpler to manage for business owners than quantity discount pricing and makes it easier for them to maintain the marginal profit on each item.

For instance, a T-shirt company that employs linear pricing would sell a single shirt for $20, five shirts for $100, and 10 for $200. If each shirt costs $10 to make, each shirt will bring in $10 in marginal profit, regardless of how many are sold in an order.

The primary drawback of linear pricing is that it does not provide an incentive to buy in larger quantities. When customers order only single items, the price per transaction stays the same. Linear pricing also denies the business owner the opportunity to take advantage of economies of scale.

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