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Unit 11: Wholesale Purchasing and Negotiation with Vendors

Whenever quantity discounts are offered, buyers should always check to see if by ordering Notes
more, the total purchase price may be lower. Many times, retailers can make a quick profit from
utilizing quantity discounts by selling the extra merchandise to a diverter to sell in a gray
market. The diverter, which is not an authorized member of the marketing channel but still
functions as an intermediary, will be able to purchase these goods cheaper from the retailer than
it can from the manufacturer and sell this excess merchandise to other retailers than it can from
the manufacturer and sell this excess merchandise to other retailers. However, many authorized
retailers are upset when diverters provide other retailers with such merchandise. Some retailers
have dropped cosmetic lines Kmart, where most of its cosmetics are diverted, started to carry
the line. In addition, Costco has a vice-president of “diverting’ who purchases more than $200
million worth of merchandise from unauthorized vendors.
Consider the previous retailer that needed only 18 computers and purchased 20 computers.
Here the retailer sold the two computers to a diverter for $3,500 each. As a result, the retailer was
better off by $9,330 than it would have been had it bought only 18 computers at $5,795 each
(18 × $5,795 = $104,310; 20 × 5,099 = $101,980 – $7,000 = $94,980). The diverter could now profit by
selling these two computers to another retailer for $4,000 each. Today diverters are important
members of the retailer’s channel, especially in the grocery and computer fields. Not all
manufacturers or retailers feel the same way about them. Nonetheless, it was the manufacturers’
pricing policies that enabled diverters to function economically.

Seasonal Discounts

Seasonal discounts are given to retailers for making purchases out of season. If the retailer is
willing to store and pay for off-season merchandise, the vendor may reduce the cost of the
products to the retailers. The benefits to the vendor are that it has a sure order for those products,
and it does not have to store all the products, it is manufacturing until the appropriate sales
season. The vendor saves money on storage and overrun costs; the retailer, for its part, platforms
the storage function for the vendor but gets a reduced price for the merchandise it will sell in
season.

Example: If a sporting goods retailer purchases baseball bats during the off season, the
manufacturer may provide the sporting goods store with a discount.

Cash Discounts

Cash discounts are sometimes given to retailers to encourage them to pay early or pay with
cash. Thus, the terms of a vendor-retailer contract may read “2/10, net 30,” indicating that a 2
percent discount will be provided to the retailer if the merchandise is paid for within a ten-day
period. If the retailer does not pay within the specified limit, there is no discount. In any case, the
total amount due is payable in 30 days. Many retailers take advantage of this type of discount to
save money. Even good investments do not return that much money to investors (2 percent for
10 days).

Allowances

Often suppliers provide retailers with discounts called allowances for retailer cooperation during
IMC execution.

Example: If a retailer advertises the vendor’s products in its retail ads, the vendor may
provide the retailer with an advertising allowance.

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