3 types of volume discount pricing with real-world examples
Nov 19 2021
Businesses leverage volume discounts as part of their sales and inventory management because product pricing is usually a matter of concern for any buyer. Some companies experience tremendous growth, which means increased product output. Granted, they provide discounts on volume purchases to take advantage of the economies of scale. But is using a volume discount strategy worthwhile for your business?
This article offers valuable insights into volume discount pricing, its advantages and disadvantages, and real-life examples of its application.
Volume discount pricing means providing discounted prices for bulk purchases. It's a pricing model that product manufacturers and service providers use to incentivize customers to purchase multiple units of a single product. It's a win-win strategy for the seller and the buyer. The former can reduce its inventory, while the latter takes the opportunity of discounted prices to increase its inventory.
3 ways to perform volume discount pricing
There are three types of volume discount pricing. They include:
Tiered volume discounts
In tiered pricing, the costs per unit of an on-sale product lie within a particular range. Once a buyer satisfies the first tier, they can then move on to the next. Depending on whether the prices go higher or lower as you advance the price ranks, companies may limit or include additional product features. It's a pricing model used by many subscription-based services.
Threshold pricing model
Another effective means of providing volume discounts is by having threshold pricing. Here, a business offers discounted prices once a buyer purchases a specific quantity of a product. For instance, if a company offers a discount after selling 100 units, the buyer will receive the discount if he purchases 101 units at once. Any purchase below 100 units will cost the full price.
Package pricing method
Packaging pricing works similarly to tiered pricing; the only difference is: In package pricing, discounts are offered based on the prepackaged units. Consider this example; a particular product is sold at a discount of 5% for a package of 10 units, and the same product sells at a discount of 10% for a package of 25 units.
If a buyer wants to purchase 30 units, they will get a discount of 10% for the first 25 units. However, they'll pay full prices for each of the remaining five units.
The pros and cons of volume discount pricing strategy
While providing greater discounts for volume purchases increases sales while incentivizing consumers, the pricing strategy has its upsides and drawbacks. Below are the pros and cons of volume discounting.
Volume discounting helps companies drive sales because the reduced price motivates buyers to buy multiple units at once. Still, it would help if you were strategic. Such promotions are beneficial when used in the short term.
Consider an offer like this: "Purchase 100 units of product X this fall, and we'll offer a 10% discount." Thus, the offer only lasts during fall and is likely to drive sales because consumers will scramble to make purchases before the promotion ends. If you offer discounts frequently, your customers will get used to the routine. They are less likely to purchase, knowing that a better discount is coming soon.
According to the Harvard Business Review, one of the primary benefits of providing discounts on large orders is to compete with rival brands. If your competitor implements volume discount pricing and you still haven't considered it, they might end up taking away your market. In that case, you'll also be compelled to do the same.
Increase in appeal
Providing slashed prices for large-quantity purchases creates interest among the target consumers. It's an effective means of appealing to a new market. The secret is to focus on referral discounts. Why? People feel more confident about a discounted product when referred by their trusted friend, colleague, or relative.
The problem with providing regular price cuts on your products or services is that it lowers the product's perceived value. Consumers usually associate low pricing with poor quality. Hence, by cutting costs, consumers may start thinking that the goods or services are of poor quality, which hurts your brand value.
Lowered price value
Another downside to bulk discounts is that the reduced prices tend to set new pricing standards. Considering that the business environment is full of uncertainties, circumstances may compel you to bring the prices back to the previous standards, which might not go well with the buyers.
By providing frequent volume discounts, you risk losses. The price reduction means you'll need to record more sales to offset the loss, which is always not guaranteed.
5 successful volume discount pricing examples you can learn from
Volume discount pricing is a strategy that has worked successfully for many big renowned companies. Below are the selected volume discount pricing examples based on search volume:
Shopify volume discount
Shopify is an excellent example of a company that leverages volume discounting, particularly the tiered pricing model. The eCommerce platform offers its users the VolumeBoost app to set quantity-based discounts based on several metrics. Shopify provides a four-tier pricing plan for the app based on a consumers' Shopify plan: The Basic Plan ($ 7.90), Pro Plan ($ 12.90), Advanced Plan ($ 19.90), and Shopify Plus ($ 29 .90).
T-Mobile volume discount
T-Mobile provides its volume discount pricing under its T-Mobile Advantage program. It gives employees of eligible companies a $ 25 gift card for every device purchase. Additionally, the company provides a Business Family Discount for employees whose companies pay for their phone services. It means an employee's family can get up to 50% discount when they purchase two lines under the Simple Choice Plan and $10 off any subsequent purchase.
FedEx volume discount
FedEx is another company that understands how to leverage volume discounts. It offers cost incentives under the FedEx More Savings Program. The shipping company gives businesses a 22% discount on eligible FedEx Express services and 9% off eligible FedEx Ground and Home Delivery services so long as they use the company's electronic shipping services. It's a time-sensitive discount, which lasts for nine weeks. After satisfying the introductory phase, the company raises the discount to 32% and then 11% for every eligible shipment.
Lowe's volume discount
Lowe's, the renowned home improvement tools and fixtures supplier, offers excellent discounts on bulk purchases. The company has a Contractor Packs program that drives sales through convenient, quick, and discounted prices on a bundle of items or prepackaged bulk quantities. Professional contractors get a percentage discount for every purchase worth $ 1,500 and above. The discount varies, and buyers must first visit the in-store Pro Desk to claim their discount before checking out.
Still, other credit card transactions, such as American Express, yield higher underlying costs. Typically, Stripe charges 2.9%, yet processing Amex card costs 3.5%, which means the company records a loss for Amex transactions. Therefore, it increases the minimum monthly net processing required to qualify for a discount.
Set the right pricing strategy with Price Intelligently
In many instances, businesses fall short in their pricing analysis when setting subscription plans. Guesswork leads to failure in meeting your profitability and sales margins. Here at ProfitWell, we specialize in subscription pricing, giving businesses the insights they need to set the right, growth-focused pricing strategy. We'll help you create a pricing strategy to increase your business' sales and profitability margins.
Using our Price Intelligently software, companies can make the right pricing decisions to unlock 30% more growth. Instead of focusing on a single subscription growth lever, our software looks into other additional metrics to offer accurate and proven pricing plans that guarantee increased sales. Price Intelligently is highly steeped in:
Advanced algorithms – science-based software, Price Intelligently is created using ProfitWell's proprietary and powerful algorithms that intuitively generate data that can help you set a companywide pricing strategy that forms your business's core competency.
Team of experts – We have a team of expert economists in the pricing world who can work together with you to understand your business. They'll offer professional expertise across all facets of subscription strategies, from acquisition and pricing, to retention and engagement.
Market mapping – Your volume discount pricing plan must be highly competitive to guarantee sales growth. ProfitWell offers industry-focused market mapping to understand competitor behavior based on pricing and product quality. Using that data, we can identify gaps in the market that you can leverage to achieve growth.
Volume discount FAQs
Below are some frequently asked questions (FAQs) on volume discount pricing:
What is volume discount pricing?
It is a pricing model that offers buyers a discount when they purchase bulk quantities. It's a strategy aimed at incentivizing consumers to purchase more, thus helping the seller take advantage of its economies of scale.
Is there a volume discount pricing formula?
Yes, there are three formulas you can use to set a volume discounting strategy. They include tiered, packaged, and threshold pricing models.
Do bulk discounts help customers?
Volume discounts benefit buyers because they get an opportunity to restock their inventory at a significantly cheaper cost. In turn, it empowers them to offer their consumers lower prices on the products without incurring losses.
Should I offer volume discounts?
It depends on your product or service. Volume discounting is an excellent means of driving sales, appealing to new markets, and increasing your competitiveness in the market. However, it requires strategy. It would be best to provide time-sensitive, infrequent offers to guarantee profitability and growth in the long term.
What is the difference between volume and bulk discounts?
Volume discounts and bulk discounts are often used interchangeably because they mean the same thing. It's a discount on a product purchase based on a specific minimum quantity or volume of products/services.
Subscription software helping you achieve faster recurring revenue growth.