Discount

Discount is a reduction in the price of goods or services, usually offered to encourage purchases or as an incentive for early payments. It plays a crucial role in trade, retail, marketing, and business finance. In business mathematics, discounts are used in calculating final prices, managing accounts receivable, determining selling price, and planning promotional strategies.

Meaning of Discount

Discount is the difference between the marked price (list price) and the selling price of an article. It is generally expressed as a percentage of the marked price. Businesses use discounts to increase sales volume, improve customer loyalty, clear inventory, or ensure timely payments.

Formula:

Discount = Marked Price − Selling Price

Discount Percentage Formula:

Discount % = (Discount / Marked Price) × 100

 Key Terms:

• Marked Price (List Price): The original price printed or listed before any discount.

• Selling Price: The price at which the item is actually sold after applying the discount.

• Net Price: Same as Selling Price.

• Discount Rate: Percentage reduction applied to the marked price.

Types of Discount:

1. Trade Discount

A reduction offered by a manufacturer or wholesaler to a retailer. It is given at the time of purchase and does not appear in accounting books.

Example: If a wholesaler offers a 20% trade discount on goods worth ₹10,000, the amount payable is ₹8,000.

2. Cash Discount

Offered to encourage early payment of bills. It is recorded in financial statements and given only when payment is made within a certain period.

Example: “2/10, Net 30” means 2% discount if paid within 10 days; otherwise, full payment is due within 30 days.

3. Quantity Discount

Given to buyers who purchase in bulk. It reduces the effective price per unit to motivate higher sales volume.

4. Seasonal Discount

Offered during specific times of the year (e.g., festivals, off-seasons) to boost sales.

5. Promotional Discount

Given to promote new products, attract customers, or during store openings.

Formulae for Discount Calculations:

1. Single Discount

Selling Price (SP) = Marked Price (MP) − Discount

2. Discount Percentage

Discount % = (MP − SPMP) × 100

3. Successive Discounts

If two successive discounts of d1% and d2% are given, the net discount is:

Net Discount % = d1 + d2 − ((d1×d2) /100)

4. Cash Discount Application

Amount Payable = Invoice Amount − Cash Discount

Examples

Example 1 – Single Discount

Marked Price = ₹500, Discount = 20%

Discount Amount = 20% of 500 = ₹100 ⇒ Selling Price = ₹500 − ₹100 = ₹400 

Example 2 – Successive Discounts

Two successive discounts: 10% and 5% on ₹1000

$$\text{First discount}=₹1000\times 10\%=₹100\text{Price after first discount}=₹900\text{Second discount}=₹900\times 5\%=₹45\text{Final Price}=₹855$$

Net Discount %

= 10 + 5 − ((10×5) /100)) = 15−0.5 = 14.5%

Uses of Discount in Business:

1. Sales Promotion

Businesses use discounts as a marketing tool to boost product sales, attract new customers, or retain existing ones.

2. Inventory Clearance

End-of-season or clearance sales offer heavy discounts to sell off old stock and make room for new inventory.

3. Payment Acceleration

Cash discounts encourage customers to make payments earlier, improving cash flow and reducing credit risk.

4. Competitive Advantage

Offering strategic discounts helps firms compete better in the market without reducing product quality.

5. Customer Loyalty

Regular discounts to loyal customers improve retention and create long-term value.

6. Price Negotiation

Trade discounts form the basis for price negotiation between wholesalers and retailers in the supply chain.

Advantages of Offering Discounts:

• Boosts Sales Volume

Attractive prices increase demand and customer purchases.

• Clears Unsold Stock

Reduces holding cost by selling older or unsold products.

• Improves Cash Flow

Early payment discounts result in faster cash collection.

• Enhances Market Penetration

Discounts help new brands enter competitive markets more easily.

• Customer Engagement

Festive and seasonal offers improve brand visibility and footfall.

Disadvantages of Discounts

• Reduces Profit Margins

Frequent discounts may eat into profits and impact financial health.

• Creates Price Wars

Competing firms may continuously lower prices, damaging long-term brand value.

• Customer Dependency

Customers may delay purchases waiting for discounts, affecting regular sales.

• Devalues Brand Perception

Excessive discounting may signal poor product quality.

• Accounting Complexity

Managing multiple discount types increases the complexity of accounting and invoicing.

Real-Life Examples of Discount Use

• Retail: Flat 50% off during clearance sales.

• Online Shopping: Festive offers on electronics and fashion.

• B2B Trade: Wholesalers offering 20% trade discount on bulk orders.

• Banking: Early repayment discounts on loan EMIs.

• Utility Payments: Electricity boards offering 2% rebate for online bill payments.

Discount vs Rebate:

A clear understanding of discount types, formulas, and applications allows students, professionals, and entrepreneurs to make better decisions in financial transactions and business planning. Mastery of this concept is not only crucial for academic success but also for practical business management.