A price reduction to customers who pay their bills promptly is called
Options:
- trade discount.
- cash discount.
- seasonal discount.
- quality discount.
The Correct Answer Is:
B. cash discount.
Correct Answer Explanation: B. cash discount.
Cash discounts are offered to customers who pay their bills promptly. They are a percentage reduction in the invoice price given to encourage quicker payment. This is a common practice in many businesses to incentivize customers to settle their bills within a specified time frame.
For instance, a supplier might offer a 2% discount if the invoice is paid within 10 days; otherwise, the full amount is due within 30 days. The idea behind cash discounts is to motivate customers to pay faster, improving the seller’s cash flow and reducing the risk of overdue payments.
Cash discounts serve as a strategic tool for businesses to incentivize prompt payment from customers. By offering a percentage reduction in the invoice amount for early settlement, companies aim to improve their cash flow, reduce outstanding debts, and foster stronger financial stability.
This practice not only benefits the seller by ensuring a steady stream of incoming revenue but also cultivates a positive relationship with customers who value timely payments and the opportunity to save on their purchases.
Let’s break down why the other options aren’t correct:
A. Trade discount:
This type of discount is applied to the list price of a product and is typically used in B2B transactions. Trade discounts are commonly given for various reasons, such as bulk purchases, long-term relationships, or to certain classes of buyers like wholesalers.
However, the key distinction is that trade discounts are not directly linked to the promptness of payment. They are more about adjusting the base price for specific types of customers or transactions, rather than encouraging swift payment.
C. Seasonal discount:
Seasonal discounts are temporary reductions in the selling price of a product, and they are usually tied to specific times of the year or business cycles. These discounts are designed to boost sales during slow seasons or to capitalize on increased demand during peak periods.
Unlike cash discounts, which reward prompt payment, seasonal discounts are contingent on the timing of the purchase in relation to the time of year. They do not have a direct connection to the speed with which a customer settles their financial obligation.
D. Quality discount:
A quality discount is typically applied when there is some deficiency or imperfection in the product. This reduction in price compensates the buyer for the perceived lower quality of the goods. However, like trade and seasonal discounts, it is unrelated to the timeliness of payment.
Quality discounts address issues such as manufacturing defects, damages, or substandard materials, and they are not a method to encourage customers to pay their bills promptly.
In summary, while trade, seasonal, and quality discounts serve different purposes in pricing strategy, none of them are directly tied to the timing of payment. Cash discounts, on the other hand, are explicitly designed to encourage customers to settle their bills promptly, making option B the correct answer in this context.
In the realm of pricing strategies, cash discounts stand out as a method to encourage prompt payment from customers by offering a percentage reduction in the invoice amount. Unlike trade, seasonal, or quality discounts, which serve different purposes in pricing strategy, cash discounts are specifically aimed at incentivizing timely payment.
This practice helps businesses enhance their cash flow, minimize outstanding debts, and nurture positive relationships with customers who appreciate the opportunity to save on purchases by settling bills promptly.
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MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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