Cash discount … trade discount … what’s the big difference? And how is that even relevant to your business?
A cash discount is when your posted prices are the prices your customers pay when they pay in cash, while card-paying customers pay those prices plus an extra service charge. On the other hand, a trade discount refers to any discount you agree to when purchasing goods from a manufacturer or wholesaler.
Both discounts sound sexy, and both can definitely save you, the merchant, money. But do you have to choose one over the other? How do they stack up against each other? Let’s break down how they’re different – and which is better for your business.
Who Do They Apply To?
Despite sounding similar, cash discounts and trade discounts do NOT benefit the same group of people.
Cash discounts are customer-oriented: your listed prices are the prices your customers pay for the goods or services you offer. The “discount” applies to customers that pay you in cash. Keep in mind that this discount really isn’t a discount; cash prices are set at your regular prices, while credit card prices slightly increase thanks to an added service fee.
On the other hand, trade discounts do NOT apply to your customers directly. As mentioned before, merchants often negotiate trade discounts with wholesalers or manufacturers. Merchants receive trade discounts for purchasing large quantities of goods at one time. Wholesalers agree to trade discounts because they incentivize merchants to continually buy goods from them – and at cheaper prices.
So you’ve got all that…but how exactly do merchants make money through these discounts?
How Do They Benefit the Merchant?
Let’s start with the trade discount this time, since it’s a little more straightforward to understand. The merchant negotiates a discount with a wholesaler, so that discount is the amount of money the merchant saves by going with that wholesaler. If the manufacturer’s suggested retail price (MSRP) for a basket of goods is $1,000, yet you negotiate to purchase that same basket for $750, then you’re saving $250. Simple, right?
Cash discounts (from the merchant’s perspective) are a little more complicated. First, your cash discount program is sure to increase the number of cash transactions you handle on average. Cash transactions don’t cost the merchant anything to process – you just receive it and deposit it into your merchant account. However, you have to pay fees every time you process a credit card. Merchants with a high volume of transactions per month can rack up hundreds and thousands of dollars in monthly fees.
It sounds like trade discounts are the better investment, right? Turns out there’s a way you can eliminate nearly 100% of your credit card processing fees and save a MASSIVE amount of money using cash discounts. How? You have to choose a credit card processor that’s willing to eat those processing fees for you. Click here to see how Quantum Electronic Payments can help you get your money back through our highly recommended QRev program.
Cash discounts and trade discounts are BOTH strategies you can use to cut costs and increase profit. In fact, you can (and should) take advantage of both discounts as much as possible. Look for wholesalers who will offer you favorable prices on goods (trade discount), and scout out a payment processor who will set you up to run a compliant and cost-reducing cash discount program (cash discount).
Once again, Quantum has helped businesses across the country start up profitable cash discount programs through our Qrev program. Click here to find out how you can become our next big success story!