Including discounts on invoices
Offering discounts on your products and services can be a great way to increase your profits, generate buzz, and retain customers. However, you need to ensure that you accurately communicate these discounts on your invoices to avoid confusion.Start invoicing for free
There are several different types of discount that you may want to offer to your customers. These can be split into two main categories: trade discounts and cash discounts, also known as prompt payment discounts.
This article explains how product or service discounts should be shown on an invoice and explores the different types of discounts you can provide. It also summarises how your business will benefit from offering discounts.
A trade discount is an amount by which a business reduces the catalogue price of a product when it sells it to a customer. For example, the standard price of a book may be £10, and the discounted price would be £8.
Not all discount types will apply to your business, so it’s important to choose discounts that are meaningful to both you and your customer. The most common types of trade discounts are listed below with explanations
Quantity discounts / volume discounts
Quantity discounts or volume discounts may be given when a customer places a large order. For example, if a company orders 500 custom t-shirts with their branding, you may want to offer a percentage discount.
Special discounts can be given throughout the year. For example, you may offer seasonal reductions on your products, or provide ‘limited time only’ discounts to entice customers to make a purchase.
Loyalty discounts, also known as ‘patronage discounts’ are discounts you can offer to repeat customers to encourage larger purchases. Loyalty discounts provide discounted rates for customers who have remained loyal to your company by making multiple purchases.
These discounts aren’t accessible to all customers. Loyalty discounts may be issued as percentage discounts or as specific price reductions.
A referral discount is a reward you can give to your advocates and happy customers when they successfully refer their family and friends to your business.
Referral programmes and discounts can benefit both your original customer and the friend they refer. Businesses may offer subsequent discounts to customers who have referred a friend, and even offer discounts for new customers who were referred.
An example of a referral discount may therefore be offering a £20 discount to a customer who referred a friend, and a 10% discount for the customer who was referred.
Prompt payment discounts (Cash discounts)
Unlike trade discounts which offer a reduction in the price of goods or services, prompt payment discounts, also known as cash discounts, offer discounts on the invoice price. A trade discount is applied to incentivise customers to make purchases, whilst a prompt payment discount is offered to motivate faster payments.
Want to know more about prompt payment discounts? Learn more here: “Applying cash discounts to invoices”.
How to show a discount on an invoice
There are different ways of offering a discount when you use invoicing software. Separate items can be discounted, or you can choose to apply a discount to the overall invoice.
Single line discounts
When you add an item to an invoice, most invoicing software allows you to add a discount to items separately. This is known as a ‘line discount’.
Line discounts are useful when it’s only select items that are on sale. For example, a customer may order 10 different t-shirts, but only 1 of these is reduced. Line discounts allow you to discount this item, without changing the prices of the others.
At other times, your business may wish to apply a general discount to an invoice. An overall discount may be given if you’re running special promotions, e.g., a Black Friday blanket discount across your entire business, or if you want to give a special (overall) price to loyal customers.
VAT invoices with discounts
VAT invoices are very simple when it comes to discounts. If you have given a discount on an invoice, then the VAT should also be charged at the discounted price. VAT is calculated based on the money that you actually receive, not how much you should have received.
So, if you normally charge £100 for an item, the standard UK VAT due would be £20 (i.e. 20%). However, if this item is on sale for £50, 20% VAT will be applied to the discounted price, and therefore, only £10 of VAT will be due on the item.
Determining how much discount to apply
Discounts can be given either as a flat rate (i.e, a specific amount off) or as a percentage. Depending on your industry, either may be common.
It’s up to you to determine how much discount is appropriate to apply. You want your prices to remain competitive, but most importantly, profitable. Therefore, it’s a good idea to conduct some market research within your industry to see what kinds of discounts, and how much, is commonly offered.
Completing market research will help you to develop a set of guidelines you can follow when offering discounted prices. This would also be helpful if you employ others to handle customer orders.
Be sure to know what your profit margin is and then calculate how much discount you would be willing to grant. Of course, exceptions may arise but a general framework would help if you’re providing a quotation to a customer on-site and want to make your price more appealing.
If possible, it would also be wise to include possible discounts when you consider your budget for each quarter. For example, if you commonly offer New Year discounts or have summer sales, factoring in these reductions will help you to have a better overview of your expected profits.
Benefits of offering discounts
Discounts can support your business in a variety of ways. They can be used to attract new or infrequent customers, and persuade indecisive customers to buy your products and services. This naturally improves your business’s cash flow and can enable you to reach sales targets during slower sales periods.
Moreover, providing discounts can help you to shift older stock to make way for updated product lines. In this way, seasonal sales can be a great way to convert your inventory into cash and remain up to date.
Invoicing software with discounts
SumUp Invoices is invoicing software that can help you apply discounts to your sales. With our simple invoice template, you just need to enter the customer and item information, and the system will do the rest.
You can choose to enter an overall discount on any invoice. This will be calculated automatically. When your invoice is ready, you can send it directly to your customer's email.
SumUp Invoices can also help you with your payments. Your invoice will automatically include a payment link so your customer can enter their credit card details instantly and securely online. You can also enter your bank account information if you prefer to receive bank transfers.Start invoicing for free