Three discounts, one after another

Many distributors that sell to grocery shops do not have one discount; they have three. A trade discount everyone on the dealer list gets, a middle discount the sales office decides order by order, and an extra discount if the shop pays cash. Worked out on a calculator, the three are easy to get slightly wrong, and a shop owner who checks the invoice against his own sum will notice a difference of even a few rupees. This tour shows the sales office pricing one order with the scheme, step by step.

Step by step

1. Start the order for the shop. The sales office opens a new order for a regular shop on the dealer price list. The shop wants samba rice, red dhal, milk powder and cream crackers. Its credit left is shown at the top, so the office knows from the start how much can go on account.

2. Read the gross value first. Every line is quantity times dealer price, before any discount. Six bags of rice, four of dhal, two cartons of milk powder and five cartons of crackers add up to a gross of Rs 151,700. This is the figure every discount works from.

3. See the distributor's own steps. The scheme is the business's own setting, switched on only by the businesses that want it. In the sample, the first step is a fixed trade discount of 18% that applies to every order. The second is a middle discount the office chooses per order, anywhere from 0 to 8%. For this order the office chooses 4%.

4. Choose how the shop pays. The third step depends on the payment method. In the sample, cash takes another 5% off and cheque takes nothing. The office sets the order to cash.

5. Watch each step work on what is left. The trade discount comes off the gross. The middle discount comes off what is left after that. The cash discount comes off what is left after both. The screen shows each step with its percentage, the amount it takes and the subtotal after it.

6. Read the net, rounded once. The final net is rounded once, at the end, not at each step. That is what makes it agree with the distributor's own sheet to the cent.

7. Try switching to cheque. If the shop says it will pay by cheque after all, switch the payment method. The cash step disappears and the net goes up by that amount. Nobody needs to redo the sum.

8. Print the quote or invoice. The quote and the invoice print every step on its own line: gross, trade discount, middle discount, cash discount, net. The shop can check each line with a calculator and get the same answer.

The scheme on the tour's sample order

If the shop pays by cheque, step 3 does not apply and the net is Rs 119,418.24, which is Rs 5,970.91 more.

Why 18 + 4 + 5 is not 27

The most common mistake with stepped discounts is adding the percentages. 18% plus 4% plus 5% looks like 27% off. But each step works on a smaller amount than the one before. Multiply what is kept instead: 0.82 × 0.96 × 0.95 = 0.74784. The shop pays about 74.8% of gross, so the real discount is about 25.2%.

On this order, 27% off would have given a net of Rs 110,741. The correct net is Rs 113,447.33. A sales office that adds the percentages gives away Rs 2,706.33 on a single order, without meaning to. Across a month of orders that becomes real money. If you want to see how discounts eat into margin, our guide to markup vs margin works through it, and how to price products covers setting dealer prices with room for the discounts you give.

Where VAT fits

In the sample, these grocery lines carry no VAT, so the net after discounts is what the shop pays. Where a line does carry VAT, the discounts are shared across the lines first and VAT is then worked out on each line's discounted value. That keeps the tax on the invoice based on the price the shop actually pays, not the gross. If you are registered, our guide to VAT explains which goods are taxed and how a tax invoice should show it.

Tips for setting up a scheme

• Keep the fixed step for what every shop gets. If some shops get a different trade discount, that belongs on their price list, not in a step that applies to all.
• Set a sensible range for the middle step. 0 to 8% gives the office room to negotiate without letting one large order give away the margin.
• Make the payment step reward what you want. If cash or prompt payment helps your cash flow, the last step is where to reward it.
• Print the ladder. Shop owners trust an invoice they can check.

Common mistakes

Adding the percentages. Each step is on what is left. Let the scheme do the sum.

Rounding at every step. Three roundings can drift a few cents from your own sheet. The scheme rounds the net once.

Forgetting to change the payment method. If the shop pays by cheque but the order says cash, the invoice gives a discount the shop did not earn.

Using the middle step as a habit. If every order gets the maximum, it is no longer a negotiated discount. It is a lower price list, and should be set as one.

What to do next

Once the order is priced, it goes into the next morning's pick wave and out on the lorry. The net on the invoice is what the shop owes, so it is also the figure on its account and in money owed by age. If you sell on credit and are reviewing terms alongside discounts, read customer credit for wholesalers. The next tour in the distributor's day shows how to print that invoice cleanly on the office's dot-matrix printer.