What is a trade discount?

A trade discount refers specifically to a reduction in the list price of a product or service, typically given to retailers or wholesalers. This kind of discount is often extended to businesses purchasing products in bulk or for resale purposes, allowing them to purchase inventory at a lower cost. Trade discounts are commonly used in the supply chain, as they facilitate smoother and more profitable transactions between suppliers and retailers.

This discount is distinct from other types of discounts, such as those offered to customers for loyalty, time-sensitive promotions, or discounts for immediate payment. The trade discount is not dependent on a customer's loyalty or payment method; rather, it is based on the nature of the business-to-business transaction. Understanding trade discounts is crucial for accounting and pricing strategies, as they can significantly affect the overall pricing structure and profitability for both buyers and sellers.