The entrepreneur can decide to base this discount on the quantity of the purchase or on the amount due in payment. There are two types of quantity discounts i.e. cumulative and noncumulative discounts.
Cumulative discounts are those price deductions that a customer will enjoy based on the volumes he/she purchases over a certain period of time. The entrepreneur can use this type of discount to encourage customer loyalty. Noncumulative discounts are based on the volume of an individual order; the higher the volume purchased the greater the percentage discount offered. This discount is very applicable in businesses where large order purchases are most preferable.
Trade discounts are those reductions from the base price that are offered to customers/buyers as compensation for the marketing effort they'll undertake. These are also known as functional discounts because they are meant to encourage the beneficiaries who'll deal with the product down the chain of distribution.
For instance, an entrepreneur producing a certain item may quote a retail price of $500 with trade discounts of 30% and 10%. A retailer dealing in the product will be required to pay the wholesaler $350 i.e. 30% less of $500. The wholesaler will then pay the entrepreneur $315 which is 10% less of $350. In deciding to use this discount the entrepreneur should be clear that the two discount percentages are not meant to be summed up, i.e. 40% in the illustration provided, but these are individually calculated from the amount that remains after the deduction of the previous percentage.
Cash discounts are the deductions from the base price that customers accrue for settling their bills in a timely manner i.e. within a specified timeframe. This discount can only be computed after both quantity and trade discounts have been implemented. Customers earn more discounts if they settle their bills within a few days after an invoice has been issued and less discounts for the vice versa. Cash discounts draw the customer's attention to three fundamentals i.e. the discount as a percentage, the timeframe within which this discount can be enjoyed, and the time after which a bill will be deemed overdue.