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What Is a Purchase Discount?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 March 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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Purchase discounts are offers to lower overall price of orders placed by buyers. The purchase discount may be in the form of a fixed amount that applies to each unit purchases, or a percentage discount that is applied to the entire order. In return for extending the discount, the buyer agrees to comply with the requirements stipulated by the seller.

When structuring a purchase discount, a supplier may choose several different approaches. One approach has to do with the timely receipt of payment for the goods and services purchased. In this scenario, the products are billed at the published price per unit, with the invoice extending some sort of discount off the total amount of the invoice, if payment is received by a certain date. For example, if the buyer submits the payment within ten days of purchase, he may apply a ten-percent discount to the amount due. This type of incentive allows the seller to generate collected revenue on the order sooner, and thus make use of the funds immediately. At the same time, the buyer enjoys a purchase discount off the usual cost, and can divert the savings into some other area of the operation.

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Another approach to the price discount has to do with the amount of the order. Sometimes referred to as a volume discount, this type of price break requires that the buyer purchase higher amounts of a specific item. In return, the unit price for each item is reduced by some amount. This is an approach that is sometimes used in the printing industry. In return for ordering five thousand business cards rather than a thousand, the customer may save as much as thirty percent off the standard cost.

A third strategy that involves a purchase discount has to do with the establishment of an ongoing agreement between the buyer and the supplier. In this scenario, the buyer agrees to purchase specific goods or services from the supplier for an extended period of time, often periods of anywhere between a year to five years. During that time, the buyer is expected to purchase a minimum number of units in exchange for a purchase discount on the published purchase price. An arrangement of this type allows the buyer to continue receiving those goods or services at a very competitive price, even if the cost increases over the duration of the contract. The supplier can look forward to at least a minimum amount of revenue generated over the contract period, making it much easier to structure an operating budget from year to year.

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