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To encourage higher sales volumes, many organizations offer volume discounts—reductions in the price for purchasing larger quantities of the same product or service. This type of discount benefits both the buyer and the seller because it can help reduce costs while increasing sales revenue.
What is a Volume Discount?
A volume discount is a pricing strategy that offers buyers discounts on large orders of one product or service. It is one of the most common discounting methods used in business and is a great way to incentivize customers to buy more from you.
Volume discounts encourage bulk purchasing, which can help businesses save money by buying in larger quantities.
They also allow businesses to move inventory quickly and increase sales volumes.
For B2B companies and direct-to-consumer brands alike, volume discounts are a great way to boost customer loyalty, increase revenue per customer, and encourage repeat purchases.
By offering volume discounts in the right way, companies can maximize their profits while still providing customers with quality products and services at a discounted rate.
- Volume Discount Pricing: A pricing strategy in which discounts are applied to the purchase of a specified quantity.
- Bulk Discount: A discount offered when a customer buys large quantities of a product or service.
- Volume Discounting: A business strategy used to incentivize customers to purchase larger quantities of products.
Types of Volume Discounts
There are three main types of volume discounting: tiered, threshold, and package discounts.
Tiered Volume Discounts
A tiered volume discount is a pricing strategy that offers discounts based on the quantity of a product or service purchased. The higher the quantity, the greater the discount offered.
Examples of tiered volume discounts include:
- 10% off when you purchase 10 units or more.
- 20% off when you purchase 25 units or more.
- 30% off when you purchase 50 units or more.
Tiered pricing works best when there is a large difference between the single-item product price and the discounted price of multiple items.
B2B ecommerce and manufacturing businesses often use a tiered discount structure to incentivize customers to buy in bulk.
SaaS companies also use pricing tiers by decreasing the per-user-per-month cost of a software license for companies that need more user seats.
Threshold Volume Discounts
Threshold volume discounting is a pricing strategy that offers customers discounts when they reach a certain quantity of product or service purchased.
For example, a business might offer 20% off all orders over $500. This is a great way to encourage customers to buy more and get a better deal.
Common in B2C businesses (e.g., ecommerce), threshold volume discounting is also effective in B2B businesses as it encourages customers to buy more, which can help increase sales volumes and overall profits.
Package Volume Discounts
Package volume discounts are a pricing strategy that offers customers discounts when they purchase multiple products or services together. For example, an online store might offer 10% off when you buy two items from the same collection.
Package discounts are a great way to encourage customers to buy more and upsell related products or services.
Advantages of Offering Volume Discount Pricing
Volume discounts give businesses the opportunity to deliver greater value to their customers while improving their bottom line and ensuring the sustainability of their business growth.
Increasing Market Share and Brand Awareness
By allowing customers to purchase in higher volumes, companies effectively increase their share of their total respective markets.
And when companies use varied discounting strategies instead of a one-size-fits-all approach, they can cater to the needs of multiple market segments (e.g., SMB, mid-market, enterprise).
Since volume discounts are often advertised or shared among customers, they can also be used to spread awareness of a company’s brand and products.
Growing Sales Revenue
Volume discounting offers the potential for a business to grow their revenue by increasing sales volumes.
This can be especially beneficial for businesses that depend on recurring purchases as opposed to recurring revenue, as customers may be more likely to repurchase if they are offered discounts on their orders.
Generating Higher Profit Margins on Bulk Purchases
When properly implemented, selling a higher volume of a product or service can result in a higher profit margin than selling the same number of items individually.
A prime example of this exists in 7-Eleven’s Big Gulp pricing:
On the surface, a 20-cent increase might make a difference. But fountain soda drinks are known to generate remarkable profits.
7-Eleven reported that after first introducing the Big Gulp line—which included sizes up to 128 ounces—their profits from these drinks nearly doubled.
A few 7-Eleven operators revealed that Big Gulps account for 10% of their stores’ total income.
Although the franchise sold their soft drinks at larger discount prices, they increased company profitability from the sheer volume of new sales, coupled with their ability to implement economies of scale.
Disadvantages of Volume Discount Pricing
Selling valuable products at discounted rates isn’t always a good idea. If an organization isn’t careful about how it implements their volume discount pricing strategies, they could end up losing money.
Disadvantages of volume discounting include:
Companies risk losing valuable profits when they use volume discounting.
In one study, a manufacturer needed to sell 38% more product for every 5% discount they gave.
This means that, in order to make a profit, the company had to sell significantly more items than it would have without volume discounts.
Other organizations fail to get the proportions right when optimizing their pricing. Pricing psychology shows that a 50% increase in quantity is equivalent to a 33% discount. So, if a company offers a discount that outstrips the quantity of products or services provided, it risks taking a loss.
In situations like this, companies can find themselves in an endless cycle of competing on price and undermining their own profitability.
Devaluation of the Brand
In buyer’s minds, quality and price are not mutually exclusive concepts. The value of a product is determined by the balance of both factors.
When companies offer massive discounts, it can create an impression that their product isn’t worth the full price—even if it’s a high-quality item.
This could be especially damaging for startups or businesses that are looking to establish brand loyalty.
Offering too many discounts could detract from the company’s overall value proposition and make it difficult to charge a premium for the company’s products in the future.
Lower LTV:CAC Ratio
A study by InsightSquared, looked at how a 20% discount on a SaaS product affected revenue.
It found that if the product had a monthly recurring revenue (MRR) of $10,000, it would require almost twice as many customers to upgrade to reach an average revenue per user (ARPU) of $15,000 compared to if they had paid the full price.
However, it’s not practical to expect to gain and keep this many extra customers in the long run.
Even if the churn rate remains the same or decreases, the payback period for a discount like this would be too long to recoup the customer acquisition cost (CAC).
Implementing a Volume Discount Program Successfully
To successfully execute a volume discount program, businesses should focus on principles of economies of scale and customer lifetime value.
Examine How Volume Discounting Benefits the Business
Not all busiensses need to offer volume discounts, or they may only be able to use them effectively in a limited capacity.
A few questions organizations should ask themselves before implementing a volume discount program include:
- Does the business have high fixed costs?
- Are the products and services easy to scale?
- What is the company’s customer lifetime value (LTV)?
- Does a discount increase long-term predictable revenue?
- How do buyers perceive the brand at its current pricing?
Businesses that benefit most from volume discounting generally have scalable products or services and large customer bases.
In retail, companies that discount successfully often have economies of scale on their side.
They can already produce a large quantity of products and services at a low cost, so they don’t lose much money offering discounts on bulk orders.
Software companies that benefit from bulk discounts usually serve multiple customer sizes and segments and can offer slightly lower per-user rates for enterprise customers.
Businesses using a recurring revenue model benefit from giving customers a percentage off for purchasing 12 months of a subscription.
Determine Eligibility for Volume Discounts
The first step to implement a successful volume discount program is to set the eligibility criteria for discounts.
Examples of volume discounts that can scale include:
- Setting a minimum purchase threshold
- Limiting the discount to certain customers
- Tying the discount to a specific time period
Buinesses should take care not to exclude any important customer segments—doing so could mean dramatically lower customer satisfaction for those that are left out.
Create a Volume Discount Strategy
When optimizing revenue, businesses need to consider the cost of goods they can produce, their customer acquisition costs (CAC), any associated administrative costs and how much revenue they want to generate from each customer.
When creating their pricing strategy, they should set sensible limits on what kind of discounts they can offer based on their CTV:LTV ratio.
Businesses need to remember that the goal of volume discounts is to increase revenue, not just attract more customers. Offering a deeper discount rate is rarely the right decision.
Use CPQ and Billing Software for Accurate Pricing and Invoicing
CPQ software makes the process of generating and managing quotes and discounts faster, more accurate, and easier to track, ultimately making it easier to close deals with customers.
Having the right platform for billing and invoicing is essential for businesses offering volume discounts. Billing software automates the process of managing quotes, invoices and customer data, allowing companies to create dynamic discount structures quickly and accurately invoice customers in bulk.
People Also Ask
What are examples of volume pricing?
Examples of the volume pricing method include:
1. Bulk (quantity) discounts
2. Tiered pricing
3. Annual subscription discounts
4. Loyalty programs
5. Discounts for large single orders
6. Group buying discounts
What is the difference between a volume discount and a quantity discount?
A volume discount is a discount given for buying a certain quantity or more of an item, while a quantity discount is usually for buying multiple quantities of the same product. Volume discounts are usually based on the total number of items purchased, while quantity discounts are based on the number of groups or sets purchased.
How are discounts recorded in accounting?
When sales discounts are applied, they are subtracted directly from the gross sales during the recording process on the income statement. This means that the amount of sales that appears on the income statement represents the net sales after any cash or trade discounts have been accounted for.