Manufacturers, who rely on channel partners to distribute their products (e.g., retailers, wholesalers), often 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 food 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 does not match the MSRP. However, the crucial point to understand is that marketers must factor in what resellers expect to earn when they are setting trade allowances. This amount needs to be sufficient to entice the reseller to handle and possibly promote the product.