Ever notice how buying more of something often brings down the cost per unit? Well, this simple idea, referred to as a "volume discount," isn't just a good deal for customers; it's actually a major booster in sales, inventory management, and customer loyalty for any business.
In this article, we will talk about the advantages and disadvantages of volume discounting with examples. You'll also learn practical advice on how to use volume discounts in your business. If you're curious about other types of discount strategies, check out our guide on types of discount in marketing.
What is Volume Discount?
Volume discounts refer to the reduction of prices due to acquiring the product in greater amounts. Commonly known as bulk or quantity discount, this type of discount attracts buyers to purchase more in number, as the price per unit decreases with an increase in the total ordered. This type of approach has proved remarkably popular across a wide range of industries, from retailing to B2B sectors, not least because it creates a win-win situation: customers get even better value, while companies reap the rewards of greater sales volumes.
Learn how this approach differs from tiered discounts, where the discount varies based on the purchase amount.
Advantages of Volume Discounting
Clearly, the volume discount is not just about moving products but brings a wide range of benefits for both the business and the customers. Here are some major advantages:
- Increased Sales and Revenue: Offering a discount for bulk purchases often leads customers to buy more than they originally planned. During seasonal sales events like Black Friday, consider using discount pricing strategies for BFCM to increase total sales volume. This could result in more significant overall returns, even if the profit margin per unit is smaller.
- Improved Cash Flow and Inventory Management: Volume discounts speed up product movement through bulk buying, helping reduce inventory holding costs. This is highly beneficial for businesses working with time-sensitive or seasonal inventories.
- Competitive Advantage and Customer Loyalty: Volume discounts can become a differentiator in a highly competitive marketplace. Added value gives customers a reason to select your brand over competitors. Once customers associate your brand with a good deal, they’re likely to return.
- Better Customer Relationships: Volume discounts demonstrate appreciation for high-value customers. These discounts build loyalty for B2B customers who frequently make large purchases and foster long-term business relationships.
Disadvantages of Volume Discounting
Though volume discounting has its merits, there is a flip side to it. The following are a few factors to consider:
- Lower Profit Margins: Because volume discounts cut the per-unit price, profit margins from the sale will be leveraged and fall. If the discounts turn exceptionally deep, it might become difficult for the company to maintain profitability if the sales volume doesn't increase proportionately.
- Brand Perception and Product Value: Regular discounts lower customers' perceptions of product value. This may be more true for high-end brands or even luxury/premium categories where price is touted as a key brand attribute.
- Inventory and Supply Chain Strain: Larger orders can put strain on your inventory and supply chain. If a business is not ready to take bulk orders, this may lead to delays, stockouts, or higher logistics costs.
- Customer Dependency on Discounts: When customers are sure or get used to buying at lower prices, they are very reluctant to purchase items at the full price. This may make them dependent on the discounts and, in return, pressurize your pricing strategy.
Types of Volume Discounting
Understanding the types of volume discounting can help you choose the best fit for your business:
Tiered Volume Discounts
In a tiered pricing model, a different discount per unit follows the purchase amount. For instance, a subscribed customer who purchases ten items gets 10% off, and for 20 items, the discount increases to 20%. Customers "climb" the tiers as they buy more, receiving tier rates where discretion regarding the discount falls on the seller.
Threshold-Based Discounts
One model for applying discounts is when a certain threshold has been reached regarding purchases. For example, purchases over $500 could receive a 15% discount on the total purchase. This kind of structure will incentivize customers to increase their order sizes to reach the next discount level.
Package or Bundle Pricing
Package pricing discounts specific bundles, which is common in subscription-based services or multi-product purchases. For instance, buying a set of complementary items together might offer a 25% bundle discount, making the package a better value than individual purchases.
Cumulative Volume Discounts
Unlike immediate discounts, cumulative discounts reward repeat purchases over time. For example, a business might offer a 10% discount after the customer’s total purchases exceed a certain threshold within a quarter or year.
For a deeper look at different discount strategies, check out our article on Types of Discount in Marketing.
Volume Discount Pricing Formula and Calculations
Calculating the right discount is key to ensuring profitability. Here’s a quick look at the basic pricing formulas:
- Tiered Pricing Calculation: Each tier has a fixed price. For example, the cost per unit might be $20 for 1-10 units, $18 for 11-20 units, and so on. This method requires calculating the total based on each tier’s price.
- Threshold Pricing Calculation: Once a threshold is met, a fixed percentage discount is applied. For example, if an order of 100 units receives a 15% discount, multiply the total cost by 0.85 to get the final discounted price.
- Package Pricing Calculation: Calculate the discount based on bundles rather than individual items, typically offering lower prices for buying the whole package.
Each method suits different industries and customer needs. Retailers might prefer threshold discounts, while B2B SaaS companies may find cumulative or tiered models more effective.
When and Why Businesses Use Volume Discounts
Businesses use volume discounts primarily to drive sales, but this strategy can have various purposes depending on the industry and timing:
- Increasing Seasonal Sales: Volume discounts work better during peak seasons such as Black Friday or holiday season sales, where customers are making bigger purchases.
- Moving Extra Stock: In industries with seasonal products, bulk discounts can help clear stock before a new season begins.
- Strengthening B2B Relationships: For B2B businesses, volume discounts strengthen client relationships by valuing large and repeat purchases.
Volume discounts can be a powerful way to increase sales and manage inventory, but their effect on overall profitability must be considered. Learn more about how discount strategies impact margins here.
Tips for Effective Volume Discount Offering
Set What You Want to Achieve: Define your goals, whether they’re increased revenue, customer loyalty, or inventory reduction.
1. Set Clear Goals
Define what you want to achieve—whether it’s increased revenue, customer loyalty, or inventory reduction. Clear goals help you structure discounts that align with your business needs.
2. Choose the Right Discount Type
Based on your industry and target market, decide which discount type will work best. For example, threshold discounts might attract new retail customers, while tiered discounts might suit a SaaS model.
3. Calculate Discount Impact on Margins
Make sure your discounts don’t undercut profitability. Calculate margins for each discount level to ensure you’re still generating a profit.
4. Use Automated Tools for Management
Consider using tools like Discounty.ai to set up and track your volume discount campaigns smoothly in real-time. Discounty allows you to create tiered discounts, apply automatic updates to product collections, and easily manage large campaigns on Shopify.
Learn more about automatic discounts to streamline your Shopify store’s checkout process.
5. Monitor and Adjust Regularly
Track the results of your volume discounting campaigns and be prepared to adjust as needed. Keeping an eye on what works (and what doesn’t) ensures long-term success.
Volume Discount Campaigns with Discounty.ai
Discounty simplifies volume discounting for Shopify users, letting businesses set up and manage campaigns with ease. Here are a few ways Discounty supports your volume discount strategy:
- Customizable Discount Tiers: Create multiple tiers (e.g., "Buy 5, Get 10% Off" and "Buy 10, Get 20% Off") that can be tailored to specific collections or product types.
- Auto-Updates: Discounty’s auto-update feature ensures new products added to a category or collection automatically receive the same discount, saving time and keeping everything consistent.
- Easy Integration and Support: Discounty integrates seamlessly with Shopify and offers 24/7 support to resolve any setup or customization issues.
With features like these, Discounty lets you focus on sales growth while handling the logistics of your volume discount campaigns.
Examples and Case Studies of Volume Discounting
Let’s take a look at how volume discounting works for different businesses:
- Big Retail Example: It could be Costco, which gives bulk discounts across various product lines. This entices buyers and shoppers who dream of savings through bulk purchases.
- B2B SaaS Case Study: A SaaS company can issue tiered discounts for license purchases. This approach is often used alongside functional discounts in B2B sales strategies. This will compel organizations to make block purchases for large team sizes at much lower prices, leading to not only sales growth but also customer retention.
- Small Business Example: A local wholesaler, for instance, might institute threshold discounts during peak season, such as a 10% discount on all orders over $1,000, to encourage customers to make larger orders. As the above illustrations show, volume discounting is quite flexible and, therefore, an important tool for industries of all kinds.
These real-life examples show how versatile volume discounting can be, making it a valuable strategy for various industries. For step-by-step guidance on using volume discounts in your Discounty app, see our guide on How to Create a Quantity/Volume Discount Campaign.
For inspiration, explore our Halloween marketing ideas for Shopify stores to boost seasonal sales.
Conclusion
Volume discounts efficiently work to improve sales, clear inventories, and establish customer loyalty. They set up volume discounts strategically, yielding mutual benefits for businesses and customers alike. This instigates a repeat purchase cycle and brand loyalty.
With tools like Discounty, running and managing volume discount campaigns is much easier on Shopify than it ever was. Thus, if boosting sales is on your radar, give it a go with volume discounts and see how this could work in your favor.
