Dynamic Discounting vs Traditional Trade Discounting

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08 min read.

Discounts have been part of business negotiations for ages, typically offered by suppliers to their customers. Discounts are usually offered when a buyer pays before a specific cut-off date or purchases a large volume of goods. However, a new trend of dynamic discounting is on the rise offering a more flexible arrangement.

What is Traditional Trade Discounting?

Discount implies a deduction or concession allowed to a buyer at a specified rate from the price of the goods by the seller. There are primarily three types of discounts, discussed below:

Trade Discount – A deduction from the given retail price. The wholesaler usually offers it to the retailer with good and long-standing relationships with the wholesaler.

Cash Discount – Cash discount is the deduction from the price of goods when a buyer pays in cash or makes the payment on or before the due date.

Quantity Discount – A discount offered to the buyer from the retail price for bulk purchases. The buyers offer it to boost sales by encouraging buyers to purchase in bulk.

What is Dynamic Discounting?

Dynamic discounting works on the same principle of early payment discounts: pay early, pay less.

In contrast to traditional discounts, it’s more flexible, and as the name suggests, it’s simply dynamic.

Dynamic discounting is a supplier’s discount to the customer based on payment dates. Usually, sellers offer higher discounts for payments that are made earlier. The same discount doesn’t automatically apply to all the vendor invoices. A new discount is decided for every individual invoice, and such individual discount has a specific time frame.

Furthermore, for each invoice, a customer can request a discount for making payments earlier — just as the vendor could offer a discount of their own accord. So, if a supplier needs extra liquidity to pay an upcoming business expense or make an investment, they could request specific invoices to be paid early. Dynamic discounting follows the idea of traditional discounts for early payment and enhances it with flexibility.

Difference between Dynamic Discounting and Traditional Discounting

DifferenceDynamic DiscountingTraditional Discounting
Nature of discountDynamic discount is computed as a function of the time of paymentThese discounts are static. Payment terms usually don’t change
FlexibilityIt offers enhanced flexibility to suppliers as they can pick individual invoices to be paid earlier.It offers no such flexibility
Payment requestsVendors could request early payment at any point in time once the buyer approves the invoiceUsually, the supplier can make no such request.
Prior agreementThere are no prior agreements between the parties.There’s a defined prior agreement between the parties
Payment term changesDynamic discounting isn’t static, and terms can be changed at the discretion of the supplier.Usually, traditional discounting is static, and no changes are allowed
PurposeThe key purpose behind dynamic discounting is to offer an incentive for early paymentTraditional discounts aim to close a deal quickly or sell larger volumes

Benefits of Dynamic Discounting

Enhanced Flexibility – Vendors decide on invoices that are eligible for dynamic discounting. For vendors, dynamic discounting offers the flexibility to be paid before the invoice due date, often at more striking terms than traditional discounts. This enhanced flexibility allows buyers to encourage more suppliers to participate in this arrangement.

No Prior Agreements – Discounts don’t need to be negotiated by the parties in advance. Instead, the discount rates and payment terms are finalised based on supplier size, industry, etc. Vendors could request an early payment as and when buyers approve an invoice. Likewise, a buyer can also call the discount rates based on the existing business cycle and isn’t obligated by any previous agreements. 

No Rigidity – It is up to the suppliers to choose when they want to receive the payment for each invoice. A supplier could choose to accept the discounted payment the moment it becomes available or could wait to collect the entire payment on the original due date of the invoice. This discounting agreement isn’t static and is subject to change at the discretion of the supplier or buyer.

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