What is a volume discount?
A volume discount is a way to set prices so buyers get a deal when they buy a lot of the same good or service. It’s a great way to get people to buy more from you and one of the most popular ways to offer discounts in business.
Volume discounts encourage buying in bulk, which can help businesses save money by purchasing more.
They also help companies get rid of stock quickly and make more sales.
Volume deals are an excellent way for business-to-business (B2B) and direct-to-consumer (D2C) brands to keep customers coming back, make more money per customer, and get people to buy from you again.
Companies can make the most money while giving people good products and services at a discount if they offer volume discounts correctly.
Synonyms
- Volume Discount Pricing: A pricing strategy in which discounts are applied to purchase a specified quantity.
- Bulk Discount: A discount offered when a customer buys large quantities of a product or service.
- Volume discounting is a business strategy to incentivize customers to purchase larger quantities of products.
Discounts for buying in bulk
There are three main types of number discounts: package discounts, tiered discounts, and threshold discounts.
Discounts based on volume
A tiered volume discount is a way to set prices that give savings based on how much of a good or service is bought. Because of this, the discount gets more prominent as the number increases.
Here are some examples of tiered number discounts:
- If you buy ten or more units, you get 10% off.
- If you buy 25 or more units, you get 20% off.
- If you buy 50 or more units, you get 30% off.
When there is a big difference between the price of a single item and the price that is lowered when you buy more than one, tiered pricing works best.
Businesses that sell to other businesses online or make things often use a tiered discount system to get people to buy in bulk.
Price tiers are another way that SaaS companies use price. For companies that need more user seats, the monthly cost of a software license goes down.
Volume Discounts at a Certain Level
Threshold volume discounting is a way to set prices that give people discounts when they buy a certain amount of a good or service.
One deal a company might run is 20% off all sales over $500. People will be more likely to buy more and get a better deal this way.
It’s common for B2C businesses (like e-commerce) to offer threshold volume discounts. These discounts work for B2B businesses, too, because they get customers to buy more, which can help boost sales and total profits.
Discounts for large packages
Package volume deals are a way to set prices that let customers save money when they buy more than one good or service simultaneously. One online store might give you 10% off when you buy two things from the same collection.
Giving deals on packages is a great way to get people to buy more and sell them more related goods or services.
They also work well for software companies that charge a monthly fee and sell microservices, different levels of a product, and complicated price plans as a way to make money.
Pros of Offering Discounts for Large Orders
Businesses that offer volume deals can give their customers more value while improving their bottom line and ensuring their growth is sustainable.
Some benefits are:
Getting more brand recognition and market share
Companies effectively grow their share of their total markets by letting customers buy more products at once.
And companies can meet the needs of different market groups (SMB, mid-market, enterprise, etc.) when they don’t use a single discounting strategy but instead a variety of them.
Customers often hear about or share volume discounts, which can also be used to get people to know about a company’s brand and goods.
Increasing Sales Income
By raising the number of items they sell, volume discounting can help a business make more money.
This can be especially helpful for companies that depend on repeat purchases rather than repeat sales since customers may be more likely to buy again if they get a deal on their order.
Getting more significant profit margins when you buy in bulk
Selling more of a good or service can lead to a more significant profit margin than selling the same number of things one at a time.
The Big Gulp prices at 7-Eleven are a great example of this:
- At first glance, an extra 20 cents might not make a difference. However, it is known that fountain soda drinks bring in a lot of money.
- 7-Eleven said that their income from the Big Gulp line, which had sizes up to 128 ounces, almost doubled after they first put them on the market.
- According to some 7-Eleven managers, Big Gulps bring in 10% of all the money the shops make.
The franchise sold soft drinks at more significant discounts. Still, the sheer number of new sales and their ability to take advantage of economies of scale made the business more profitable.
Cons of Discounting for Large Orders
It’s not always a good idea to sell expensive items at lower prices. Businesses might lose money if they aren’t careful about using volume discount pricing methods.
Some problems with volume discounts are:
Loss of Money
When businesses use volume discounting, they risk losing essential gains.
One study found that a company had to sell 38% more goods to make up for the 5% discount they offered.
These discounts meant that the business had to sell many more things than it usually would have to make a profit.
When other businesses try to get the best prices, they don’t get the amounts right. Pricing psychology shows that a 33% discount is the same as a 50% rise in quantity. So, if a business makes a deal more significant than the amount of goods or services it offers, it could lose money.
When this happens, businesses can get stuck in a never-ending price competition loop that hurts their profits.
Loss of value for the brand
In the minds of buyers, quality, and price are not opposite ideas. The value of a thing depends on how well these two things work together.
A huge deal from a business might make people think that their product isn’t worth the total price, even if it’s a good one.
This could be especially bad for new businesses or ones that want to build brand trust.
If a company gives too many discounts, it might lose some of its overall value and find it hard to charge more for its goods in the future.
Lower ratio of LTV to CAC
InsightSquared studied how a 20% deal on a SaaS product changed sales.
It was discovered that if the product made $10,000 a month in recurring revenue (MRR), almost twice as many customers would have to upgrade for the average revenue per user (ARPU) to hit $15,000. This is compared to customers who paid the total price.
But you can’t expect to get and keep this many more people long-term.
This kind of deal would take too long to pay for itself regarding customer acquisition costs (CAC), even if the churn rate stays the same or goes down.
How to Successfully Start a Volume Discount Program
- To run a bulk discount program well, businesses should focus on economies of scale and customer lifetime value.
- Look into how volume discounts help the business.
- Some businesses don’t need to offer volume deals, or they might only be able to use them well in certain situations.
- Before putting in place a volume discount scheme, businesses should ask themselves the following:
- Does the company have a lot of set costs?
- How easy is it to add more of the goods and services?
- What is the customer lifetime value (LTV) for the business?
- Does a discount make long-term, stable income higher?
- How do people think about the brand at the price it’s selling for now?
- Businesses that get the most out of volume discounts usually have goods or services that can be scaled up and a lot of customers.
- When it comes to retail, economies of scale often help businesses that are good at discounting.
- They can already make a lot of goods and provide services for a low price, so giving discounts for big orders doesn’t cost them much money.
- Software companies that get bulk deals usually have a wide range of customer types and sizes, and they can offer slightly lower per-user prices to business customers.
- Giving people a discount for buying a yearly subscription is suitable for businesses that make money regularly.
Find out if you can get volume discounts.
Setting the rules for who can get discounts is the first thing that needs to be done to make a volume discount scheme work.
Here are some examples of volume savings that can grow:
Setting a minimum amount to buy
Only giving the discount to some people
limiting the price to a certain amount of time
Businesses should be careful not to leave out any crucial groups of customers because doing so could lead to much lower customer happiness for those left out.
Make a plan for a volume discount.
When businesses try to make the most money, they need to consider how much each customer is worth, how much it costs to get new customers, and any corresponding management costs.
When making their pricing plan, they should consider what kinds of discounts they can offer based on their CTV: LTV ratio.
Businesses must remember that volume discounts are meant to make more money, not just bring in more people. It’s not always a good idea to offer a higher discount rate.
For accurate pricing and billing, use CPQ and billing software.
CPQ software speeds up, improves accuracy, and makes it easier to keep track of the process of making quotes and handling discounts. This makes it easier to close deals with customers.
