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Concessions, Purchasing Methods and Settlement Methods for Distributors

9.1.1  Concessions for Distributors

1. Discount

For discount coupons given out to consumers by the retailer, the discounted amount has to be reimbursed by the production enterprise to the retailer within the discount period.

2. Bulk Discount

Bulk discount refers to the provision of a certain amount of goods free of charge by the production enterprise to the distributor or by the wholesaler to the retailer based on the quantity of goods purchased.

3. Transaction Discount

This refers to a discount on the price offered by the production enterprise to the distributor or by the wholesaler to the retailer. Since such discount is offered within the distribution channels, it is called transaction discount.

4. Display Allowance

Display allowance is a specified sum of money given by the production enterprise to the intermediary for a certain amount of goods purchased as a reward for the support given by the intermediary.

5. Sales Allowance

Sales allowance is offered by the production enterprise to the intermediary based on the actual amount of goods sold within a specified period.

It should be noted that an ideal concession system should include concessionary policies for different distributors such as agents, wholesalers and retailers so that they will be motivated to sell the production enterprise’s products. The enterprise should avoid favouring one distributor over another as it will arouse discontent among the less favoured distributors. Also, many mainland enterprises presently offer incentives such as large bonuses or year-end rebates based on sales volume and not profits. The problem with such an incentive scheme is that distributors are tempted to use all kinds of improper means to boost sales including slashing prices or even sharing their bonuses and year-end rebates with downstream distributors. As a result, great confusion in the pricing system is caused.

9.1.2  Purchasing Methods of Distributors

1. Buy-out. Under this arrangement, the distributor takes full responsibilities for the sale of goods.

2. Credit Sales. The distributor is given a payment period (usually 30 or 45 days) or a credit limit for the goods. At the end of the period, payment has to be settled irrespective of whether the goods have been sold.

3. Consignment. The distributor is responsible for product display, sale, services and logistics support in accordance with the agency agreement and charges an agency fee (or commission).

9.1.3  Settlement Methods of Distributors

Distributors settle payment in the following ways: cash on delivery, monthly payment, 45-day payment, and payment on actual amount of goods sold.

Manufacturers usually demand a deposit from distributors.

The deposit is aimed at preventing distributors from price slashing, stabilising price levels and protecting the interests of the distributor as a whole. The guarantee will also put the manufacturer in a better position in negotiating with major clients. The manufacturer usually pays to the distributor each year interest on its deposit at a rate higher than the bank interest rates. Agreement is also made to the effect that when the manufacturer and the distributor cease cooperation, the deposit will be refunded to the distributor promptly.

The deposit is usually paid in phases. Under this arrangement, the manufacturer will make available a minimum guarantee amount of Rmb50,000 at the outset when the distributor places order for the first batch of goods. After that, every time the distributor purchases goods, it will have to pay 5% of the goods amount as deposit. Such practice is welcomed by distributors as they do not have to pay a deposit at the start and there is also a minimum guarantee. If the first batch of goods sells well, the distributor will continue to order goods and very soon the total sum of the deposit paid with each order will exceed the minimum guarantee and eventually the situation of the distributor owing the manufacturer money will change to the manufacturer owing the distributor money.

Content provided by Hong Kong Trade Development Council
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