CPM Promotional Pricing & Discount Management 1 — Questions and Answers
Question 1: Which type of discount is granted to a buyer who purchases a large quantity in a single order?
- Cumulative quantity discount
- Non-cumulative quantity discount (Correct answer)
- Seasonal discount
- Trade discount
Correct answer: Non-cumulative quantity discount
A non-cumulative quantity discount is applied to a single large order, incentivizing larger individual purchases rather than total volume over time.
Question 2: A company offers a 10% price reduction during off-peak months to stimulate demand. This is best described as a:
- Cash discount
- Trade discount
- Seasonal discount (Correct answer)
- Promotional allowance
Correct answer: Seasonal discount
Seasonal discounts are used to shift demand from peak to off-peak periods, helping balance production and inventory loads.
Question 3: The 'waterfall effect' in pricing refers to:
- Prices declining naturally as products age
- The cumulative impact of discounts, allowances, and concessions eroding the invoice price (Correct answer)
- A cascade of price cuts triggered by a single competitor's move
- Revenue flowing down through distribution channels
Correct answer: The cumulative impact of discounts, allowances, and concessions eroding the invoice price
The price waterfall illustrates how list price is eroded by successive discounts, allowances, and off-invoice items to reach the actual pocket price.
Question 4: A 'pocket price' is defined as:
- The price listed in a company's public price book
- The actual revenue received after all discounts and concessions are deducted (Correct answer)
- The minimum acceptable price set by management
- The price paid by the end consumer at retail
Correct answer: The actual revenue received after all discounts and concessions are deducted
Pocket price is the true net revenue a seller receives after subtracting all discounts, rebates, freight, and other off-invoice items from the invoice price.
Question 5: Which discount structure is most effective at locking in long-term customer volume commitments?
- Non-cumulative quantity discounts
- Cumulative quantity discounts (Correct answer)
- Promotional allowances
- Cash discounts
Correct answer: Cumulative quantity discounts
Cumulative quantity discounts reward total purchases over a period, encouraging customers to consolidate buying with one supplier to reach threshold tiers.
Question 6: A 2/10 net 30 cash discount term means the buyer receives 2% off if they pay:
- Within 2 days of the invoice date
- Within 10 days of the invoice date (Correct answer)
- Within 2% of the full invoice amount
- After 30 days with a 2% penalty
Correct answer: Within 10 days of the invoice date
2/10 net 30 means a 2% discount is available if payment is made within 10 days; the full invoice is due within 30 days.
Question 7: From a profitability standpoint, why are off-invoice discounts often considered more problematic than on-invoice discounts?
- Off-invoice discounts are taxed at a higher rate
- They are harder to track, leading to underestimation of true price erosion (Correct answer)
- They require regulatory approval unlike on-invoice discounts
- Customers prefer on-invoice discounts so off-invoice ones fail to drive volume
Correct answer: They are harder to track, leading to underestimation of true price erosion
Off-invoice discounts (rebates, freight allowances, co-op funds) are often not fully captured in pricing systems, making it difficult to measure true profitability and pocket price.
CPM Promotional Pricing & Discount Management 1
Which type of discount is granted to a buyer who purchases a large quantity in a single order?