Price Breaks
Table of Contents
What are Price Breaks?
Price breaks (also called volume discounts) are pricing structures that allow customers to receive a lower cost per unit when they buy in larger quantities. This pricing strategy encourages customers to purchase higher volumes, which helps businesses increase their sales and profitability.
Price breaks are often structured as a series of tiers. The first tier may offer the customer the lowest price per unit for buying one item, and each subsequent tier offers increasingly lower per-unit prices for buying more. For example, a company may offer the following price breaks for bulk orders of their product:
- Tier 1 – Buy 1 item for $10/unit
- Tier 2 – Buy 10 items or more for $9/unit
- Tier 3 – Buy 50 items or more for $8/unit
- Tier 4 – Buy 100 items or more for $7/unit
In this example, any customer buying 10 or more items would receive a lower price per unit compared to the first tier. Customers buying 50 or more items would get an even lower price per unit, and so on.
Synonyms
- Quantity price breaks
- Volume discounts
Why Companies Offer Price Breaks (Volume Discounts)
Companies offer price breaks because it helps them make more profit in the long run. Customers are incentivized to purchase higher volumes, boosting the company’s average order value (AOV) and leading to increased revenue.
Price breaks also present an opportunity for vertical product differentiation — companies can gain additional market share by undercutting their competitors on price.
Additionally, price breaks can help build customer loyalty and encourage repeat purchases from buyers who want to take advantage of lower cost per unit.
It’s worth noting that a supplier would only offer a quantity price break if they benefit from economies of scale. Sectors like B2B manufacturing and wholesale often benefit from this pricing structure, but it’s not always beneficial for B2C businesses.
Benefits of Price Breaks
Price breaks offer numerous benefits to both sellers and buyers. Sellers enjoy increased sales and AOV, while buyers pay favorable prices for products they were going to order anyways.
Benefits for Sellers
- Larger average order value/deal size. Companies offering bulk pricing for higher purchase volumes boost their average deal size by rewarding customers for buying more.
- Better sales performance. When larger orders are a no-brainer for customers, sales metrics are easier to reach (and exceed).
- Revenue growth. The combination of larger deal sizes and better sales performance helps companies increase their top-line revenue.
- Lower inventory management costs. Between freight, storage, insurance, theft, taxes, and other inventory costs, research estimates the total cost of excess inventory to be anywhere from 25% to 32% of annual sales — a cost businesses mitigate by turning inventory over more quickly.
- Increased customer loyalty and repeat sales. Particularly in organizations monetizing off ad hoc purchases, price breaks keep customers around longer and increase customer lifetime value (CLV).
- Operational efficiency. Buyers who purchase higher volumes less frequently free sales, customer success, and warehouse management teams to serve additional customers and scale their operations.
Benefits for Customers
- Long-term cost reduction. When the quantity purchased meets the future demands of the buyer, it effectively puts money back into their pockets.
- Predictable budgeting and supply chain management. Break pricing encourages businesses to order specific amounts (or more) of their vendor’s goods, which makes it easier to set an order cadence and budget for future purchases.
- Better customer experience. When companies offer volume discounts, their customers don’t need to worry about extra costs related to purchasing and shipping small amounts of supplies each month.
- Strengthened supplier relationships. Customers and suppliers who share the benefits of economies of scale rely on each other to do business more efficiently.
How to Determine Quantity Price Breaks
In order to determine quantity price breaks, you can create a formula using Excel spreadsheets (or Google Sheets). This will help you easily calculate the appropriate discounts based on the volume of items purchased.
Here’s a step-by-step guide on how to create a formula for quantity price breaks in Excel.
Step 1: Set up your data
Begin by organizing your data in a clear and structured manner. Create a table that includes columns for the product, the minimum quantity for each price break, the maximum quantity for each price break, and the respective discount percentage.
For instance:
| Product | Min. Quantity | Max. Quantity | Discount % |
|---|---|---|---|
| Item A | 1 | 9 | 0% |
| Item A | 10 | 49 | 5% |
| Item A | 50 | 99 | 10% |
| Item A | 100 | 500 | 15% |
Step 2: Create the formula
To create a formula for quantity price breaks, you can use the IF function in Excel, combined with the AND function. IF allows you to perform a logical test, while AND checks if multiple conditions are met.
Here’s an example formula:
=IF(AND(B2>=MinQuantity, B2<=MaxQuantity), DiscountPercentage, 0)
Replace MinQuantity, MaxQuantity, and DiscountPercentage with the appropriate cell references from your table.
Step 3: Apply the formula
Select the cell where you want the discount percentage to be displayed, and enter the formula you created in Step 2.
Press Enter to apply the formula.
Step 4: Calculate the discounted price
Now that you have the discount percentage, you can calculate the discounted price by multiplying the original price by the discount percentage.
Use the following formula:
=OriginalPrice * (1 - DiscountPercentage)
Replace OriginalPrice and DiscountPercentage with the appropriate cell references.
Step 5: Copy the formula to other cells
Finally, copy the formula to other cells in your spreadsheet to apply the quantity price breaks for multiple items or different quantities.
How CPQ Helps Manage Pricing and Discounting
Benefits of Using CPQ for Pricing and Discounting
CPQ software uses rules-based dynamic discounting to automate price breaks. When sellers create a purchase order (or buyers place an order) in CPQ, the algorithm reads company pricing rules, compares them to the order, and applies discounts accordingly.
This eliminates manual calculations for businesses, reducing the time it takes to generate quotes and orders and preventing errors caused by human intervention.
How to Quote Quantity Price Breaks in CPQ
CPQ makes it easier to show discount schedules on company sales quotes. Every CPQ software does this slightly differently, but you’ll typically be able to see the current discount being applied and what further discounts customers can qualify for by purchasing higher volumes.
Briefly, here’s how:
- Define the product or product bundles, specifying the minimum and maximum quantities for each price break, and assigning the corresponding discount percentages.
- Choose a base price for the product or bundle.
- Create a pricing rule that applies discounts as the quantity increases, based on the values and conditions you specified earlier.
- Activate the discount rule in your CPQ solution so it will be applied to all quotes and orders going forward.
People Also Ask
What is the difference between a price break and a price tier?
The difference between a price break and a price tier is that price breaks are applied automatically based on the quantity of a product purchased, while price tiers refer to different pricing levels (which have different features that match the value of their respective tier) for different customer types.
What is an example of a volume discount?
An example of a volume discount would be a wholesaler offering lower prices for products purchased in large quantities. A company might offer a 10% discount when ordering between 100 and 500 items, and a 15% discount when ordering more than 500 items.