What Is a Functional Discount? Meaning and Examples

A functional discount is a reduction off the list price that a manufacturer gives a wholesaler or retailer for doing part of the work, such as selling, storing or keeping records. It is also called a trade discount. The reseller earns it by taking on a job the manufacturer would otherwise have to do or pay for.

What is the meaning of a functional discount?

Oxford Reference's Dictionary of Business and Management defines a functional discount as a price reduction a seller offers to trade channel members that perform certain functions, such as selling, storing and record keeping. Philip Kotler and Gary Armstrong's Principles of Marketing lists it alongside cash discounts and quantity discounts as one of the basic forms of discount pricing.

The word "functional" says what the discount pays for: a function in the distribution chain. A wholesaler who stores stock and delivers it to shops does work the maker would otherwise do. The discount is how the maker pays for it.

Is a functional discount the same as a trade discount?

Yes. Most marketing sources use the two names for the same thing. Some writers use "trade discount" for the general reduction a reseller gets off list price, and "functional discount" when they want to stress that the reduction pays for specific work. In practice one wholesale price usually covers both.

What it is not is a quantity discount. A quantity discount rewards how much the buyer orders; a functional discount rewards what the buyer does. A large retailer and a small one doing the same job should get the same functional discount.

Functional discount examples

A wholesaler that warehouses and delivers. For example, a drinks maker sells to a wholesaler at 30% below list because the wholesaler stores the stock and delivers to hundreds of shops.
A retailer that sells and displays. For example, a cosmetics brand gives a retailer 40% off list for stocking the range, giving it shelf space and training staff to sell it.
A chain of discounts. A price quoted as "list less 30/10" means 30% off list for the wholesaler's role, then 10% off that for a further function, such as stocking shelves. On a $100 list price that is $100 less 30% ($70), less 10% ($63). The discounts are applied one after the other, not added together, so the total is 37%, not 40%.

How is a functional discount calculated?

Take the list price and apply each discount in turn:

Step	Calculation	Price
List price		$100.00
Less 30% for wholesaling	$100 × 0.70	$70.00
Less 10% for delivery	$70 × 0.90	$63.00

The reseller pays $63. It then sells to its own customers at whatever price it sets, and its margin is the gap between that price and $63.

Are functional discounts legal?

Yes, when they pay for real work. In the US, the Robinson-Patman Act limits charging different buyers different prices. In Texaco v. Hasbrouck (1990), the Supreme Court held that a legitimate functional discount that is a reasonable reimbursement for a buyer's actual marketing functions does not break the Act. A discount with no link to the work done, or to the seller's savings, can. Outside the US the rules differ, so check before you build a price list.

Who should use a functional discount?

A brand that sells through other businesses as well as to consumers. If wholesalers, shops or distributors do part of your selling, storing or delivery, a functional discount is how you pay them for it. A store that sells only to consumers has no use for one.

How do you set up a functional discount on Shopify?

A functional discount belongs in a wholesale price list, not in a storefront sale. On Shopify that is a B2B catalog:

Create a company for each reseller in your Shopify admin.
Create a catalog and set an overall adjustment, such as −30%, or fixed prices per product.
Assign the catalog to the reseller's market or, on Shopify Plus, to the company location.

Shopify's Help Center says Basic, Grow and Advanced plans can have up to 3 active B2B catalogs across their B2B markets, while Shopify Plus allows unlimited catalogs and can assign them to specific company locations.

To undo it, remove the catalog from the market or company location; the reseller then sees the next price list that applies, usually your standard prices. On Basic, Grow and Advanced, a catalog is assigned to a whole B2B market, so removing it changes prices for every buyer in that market.

Discounty is for the storefront side: the sales, quantity breaks and codes shoppers see. It does not set wholesale price lists, but on the Discounty plan and up it can limit a Quantity discount or a code to a customer segment, such as your wholesale customers.

Questions

What is a functional discount in simple terms?

A lower price a maker gives a reseller for doing part of the work, such as storing, delivering or selling the product.

Trade discounts are also called what?

Functional discounts. The two terms usually mean the same thing: a reduction off list price for a reseller in the distribution chain.

What is the difference between a functional discount and a quantity discount?

A quantity discount rewards how much a buyer orders. A functional discount rewards the job the buyer does in the chain, whatever the order size.

Does a functional discount apply in ecommerce?

Where you sell wholesale as well as direct, yes. On Shopify it is set up as a B2B catalog with its own prices for business buyers, not as a storefront campaign.