Developing and using trade terms - Sales Management

Any company that is selling through a network of sub- distributors, dealers or retails will have to develop a local pricing structure that matches trade terms on offer from other suppliers to the market. In the same way, industrial and business- to- business product suppliers will need to compete through the package of trade terms, as this is one of the key factors influencing buyer's decisions, along with price, quality, availability, warranties, after -sales service support, training and technical support, product functionality(benefits addressing needs) and design.

It is part of the sales manager’s role to establish that any local trade terms are both competitive with other suppliers and consistent with the market pricing and distribution policies of his or her company. Hence we will provide some commentary on the typical role of trade terms in influencing market activity through the distributor.

What the trade looks at

There are various typical forms that trade terms take, outlined in Table, which also highlights the particular concerns of the local dealer or buyer, and the supplying company.

Credit

The credit a company will give is normally influenced by:

  • local custom and practice of the trade
  • competitive terms of trade
  • cost of credit from the company versus alternative sources (e.g. bank)
  • credit provided to the company from the sales manager’s own network of input suppliers (and at what cost)
  • state of the local economy, including:
    • need for stockist's to extend credit or hold stock
    • employment
    • interest rates and inflation
  • strategic marketing considerations, e.g.
    • expanding distribution and/or product usage
    • pipeline stock pressure
    • expanding display
    • building market share
    • blocking competition.

The sales manager will be concerned that his or her company is providing adequate trade credit where that influences performance against marketing strategies and objectives, such as expanding product trial and distribution, or improving display for retail products.

The sales manager should recognize the time value of money in all transactions that extend credit at any level of the distribution chain.

Trade-terms-and-their-objectives

Discounts

Discounts are a tool for use in trade dealer and account management and are normally related to:

  • the need for improved cash flow
  • influencing sales volumes through
    • maintaining distribution
    • expanding the base of distribution
    • minimizing out-of-stocks
    • building market share
    • Dealer or account stock holding policies.

Many suppliers offer discounts not related to any of the above, but as:

  • an incentive to buy (not specific to volume performance or marketing objectives)
  • custom and practice for a particular account.

Discounts given without specific contractual performance conditions are hard to remove and non-motivational in building sales volume and market share.

Types of motivational discounts

There are two main types of motivational discounts (with various application formats)used by suppliers in many markets, designed either to improve the cash flow or to encourage increased sales and loyalty. To be controllable and motivational discount sand rebates should be for specific performance achievements, and retrospective rather than ‘off invoice’ except where related to a sliding case rate scale.

Minimum orders

The basis of calculating a minimum order is normally to set it at a level where the margin contribution will at least cover the direct costs of distribution and servicing the customer account. It is very common for companies not to know servicing and distribution costs, and therefore to set minimum orders too low, with the result that many orders are actually loss making.

Guidelines for establishing minimum orders

From the practical perspective the sales manager might develop an approach to minimum orders using the following guidelines.

  • Calculate the cost of distribution, order processing, and related sales and marketing costs, and estimate the optimum minimum order to cover these.
  • Set call frequencies at time intervals to justify orders of the optimum minimum.
  • Smaller outlets will need to review stock cover in line with prescribed minimum orders.
  • Trade credit can be used to finance an increase in stock holding.

The objective is to use trade terms fairly and equitably to motivate growth in volume and distribution.


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