Dead net sales income refers to the income a retailer earns after considering any discounts the retailer receives from its supplier. Some suppliers provide vendor allowances, trade credit and other deals, so using the supplier's list price to calculate income requires adjustments for these factors. The retailer adds the effects of these supplier concessions into the cost of goods sold, and it subtracts this net cost from its sales revenue to get dead net sales income.
Dead net sales income is more useful for a retail chain that has strong negotiating power. A big box store that has 10,000 locations across the nation may purchase the majority of a single supplier's products, so the big box store may be able to obtain favorable contract terms even if the supplier does not discount its list price. If a small business simply purchases products at list price and doesn't use supplier financing or receive allowances, measuring dead net income is not as helpful.
Dead net sales income benefits suppliers that offer generous contract terms. If one supplier charges the big box store $5 list price for each tie, but offers a $1 vendor allowance to help the big box store sell more ties, this tie is cheaper than a tie a competing supplier offers for $4.50 without a vendor allowance. If the big box store simply considers the list price when it makes a purchasing decision, it ends up purchasing a tie that costs it more money.
Dead net sales income also includes the effects of product returns and exchanges. If a shopper at the big box store buys a tie and it rips, he may return it to the big box store. If the tie rips before the big box store sells it, it may offer the ripped tie to customers at a discount. The big box store can negotiate a price discount from the supplier to cover the losses it expects to incur because of these ripped ties, and it considers this discount when it calculates dead net sales income.
Using dead net sales income in purchasing negotiations can irritate suppliers. A supplier may prefer to negotiate using list prices, so it can offer an allowance as an incentive to convince the retail store to sell an older model of a product, or advertise a lesser known product. According to Arizona State University, a retail store that negotiates using dead net sales income may reject all trade allowances and simply ask for the lowest price, reducing the supplier's bargaining power.
- Arizona State University; Recent Trends and Emerging Practices in Retailer Pricing; Ruth N. Bolton et al; 2005
- Arizona State University: More Focused Competitors May Be Albertsons' Undoing
- Grocery Trade Review; Metro-A&P Overview: A Good Start; Kevin Grier; December 2005
- Pricing Society: The Critical Role of Executing Rebates, Allowances, and “Dead Net Pricing”