The commercial discount is a mechanism put in place to attract and retain customers? This mechanism not only ensures customer loyalty, but it also helps boost sales within your business. However, when poorly assessed, the commercial discount can cause cash flow problems for an organization. To help you, here is in this article how to apply a commercial discount.
What is a commercial discount?
A commercial discount represents the reduction granted to one or more customers during a purchase. This reduction is not given randomly; it is based on various criteria, depending on each organization. Regarding the criteria, the discount can be granted to the customer if they purchase product X in large quantities. Additionally, the discount can be granted to all customers who have purchased products from a specific brand.
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However, it should be noted that there are different types of discounts that merchants can offer to their customers. You have the commercial discount, the rebate, the refund, and finally the cash discount. The commercial discount is given to customers who purchase a product in quantity. On the other hand, the rebate is granted when the customer buys a display product.
As for the refund, it is granted to loyal customers to encourage them in their initiative. However, in cases where the discount is given to a customer who pays their bills in advance, it is referred to as a cash discount.
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The commercial discount system is used to retain customers and attract more people. In some shops or businesses, the commercial discount is granted periodically or on special occasions.
How to calculate a commercial discount?
Most of the time, each seller is free to set a discount rate as long as their rate complies with the regulatory framework. However, it is difficult to define the limits of the various discounts. For this reason, it is essential to master certain elements to properly apply a commercial discount. These elements include the unit cost; the margin rate, and the reason for the discount.
Furthermore, it is important to remember that a commercial discount can be calculated in two different ways. Thus, you can calculate a commercial discount in value or calculate the commercial discount as a percentage.
Calculating a commercial discount in value
When the commercial discount is expressed in value, the seller offers the customer a discount price in euros.
The most commonly used formula to calculate a commercial discount in value is as follows:
Initial discount amount X 100 ÷ Initial selling price of the product
For illustration, if a business offers natural wigs at a unit price of £160 and decides to apply a discount of £20. All customers who purchased a wig from this shop will benefit from a discounted selling price of £140. By applying the formula mentioned below, we get: 20 X 100 ÷ 160 = 12.5%
Calculating a commercial discount as a percentage
When the commercial discount is expressed as a percentage, the seller must offer their customer a discount rate based on the initial selling price (including VAT).
In this case, the formula to apply is as follows:
Initial selling price X (1 – discount rate ÷ 100)
For example, if a seller offers makeup boxes at a unit price of £250 and decides to apply a discount of 10%. All customers who purchased a makeup box from this shop will benefit from a discount. By applying the formula mentioned above, we have:
250 X (1 – 30/100) = 175
However, if a manager calculates their commercial discount considering the amount excluding tax; they will need to add the VAT amount to the discounted selling price. Here, it will be up to the customer to pay the discounted amount plus the VAT fees. This is often not appreciated by customers. It would therefore be preferable to calculate the commercial discount considering the selling price (including VAT).