Price Adjustments: Trade Allowances
Manufacturers who rely on channel partners to distribute their products (e.g., retailers, wholesalers) offer discounts off of list price called trade allowances. These discounts function as an indirect form of payment for a channel member’s work in helping to market the product (e.g., keep product stocked, talk to customers about the product, provide feedback to the manufacturer, etc.).
Essentially the difference between the trade discounted price paid by the reseller and the price the reseller charges its customer will be the reseller’s profit. For example, let’s assume the maker of snack products sells a product to retailers that carries a stated MSRP of (US) $2.95 but offers resellers a trade allowance price of $1.95. If the retailer indeed sells the product for the MSRP, the retailer will realize a 33% markup on selling price ($1.95/(1-.33) = $2.95). Obviously this percentage will be different if the retailer sells the product at a price that is different than the MSRP, but the important point to understand is that marketers must factor in what reseller’s expect to earn when they are setting trade discounts. This amount needs to be sufficient to entice the reseller to agree to handle and possibly promote the product.