A trade discount is a discount that is cut from the retail or published price of an item. It helps to increase the demand for the goods. Customers who purchase goods in larger quantities including wholesalers, retailers, and industrial users tend to receive trade discounts. In general, the larger the purchase, the bigger the trade discount.

In general, there are two types of merchants or demanders of goods in the market, the wholesaler and the retailer. Wholesalers are those who usually purchase goods from manufacturers and producers and sell them to retailers and large consumers. While, retailer merchants are those who purchase goods from several sources, including wholesalers, producers, manufacturers, and agent middlemen such as brokers and manufacturers’ agents. They mainly sell goods to the ultimate consumers.

Wholesalers normally tend to buy in larger amounts than the retailers, and the retailers tend to buy in larger amounts than the consumers. Manufacturers, wholesalers, or other types of sellers frequently grant substantial reductions from the list price quoted in their catalogs to allow for price differentials. Such reductions based on the list price are called trade discounts. Merchants do not need to reprint the catalog when offering trade discounts, and the trade discount is not fixed as it depends on the market situations that control the price fluctuation.

Besides being offered to customers who purchase in bulk, trade discounts also are offered based on customer location, order size, and the customer credit rating. Customers may have the opportunity to receive multiple trade discounts known as chain discounts. When a chain discount or series discount is applied, each subsequent discount is deducted from the balance of the previous discount.

Among economic reasons, merchants offer trade discounts are:

1. 1. To create healthy competition between firms
   2. To finish old/ unused stocks.
   3. To have a quick sale of the stocks before the expiry date.
   4. To encourage sales in terms of bulk or large amounts.

4.2.1 The Formula

The trade discount for a single discount can be computed using the following formula:

Trade discount = List price x Discount rate

Where the selling price is the difference between the list price and the trade discount given, it can be written as:

Selling price = List price – Trade discount

Whereas, the trade discount for chain discount, assumed for three discounts, can be computed as:

Trade discount = List price x [1- ((1-First discount rate)(1-Second discount rate)(1-Third discount rate))]

With the following selling price:

Selling price = List price – Trade discount