Quantity discounts refer to the agreement between a business and its customers to give discounts according to the number of products ordered. They are a reduction from list price, as a result of quantity purchases.
It is also known as “volume discount.”
Quantity discounts can be used for almost any type of product. The most common include retail items, food items, books, clothing, software licenses but even services are included in this kind of arrangement.
For example, if you order three shirts instead of one, the shirts are usually priced at a lower amount.
How Do Quantity Discounts Work?
The main purpose behind quantity discounts is to encourage more sales.
It provides the customer incentive to buy larger quantities that they would not have bought otherwise or avoid buying due to price considerations.
However, that is not all. It also encourages bulk purchases by businesses themselves and lessens their overall burden when their inventory costs become higher than their selling price.
For instance, if a business were to buy 10 books at the list price of $10 per book, then it would be spending $100.
On the other hand, if the quantity discount for that purchase is 25%, then instead of paying $100, they will only have to pay $75.
This means that with every purchase above 10 books, they are saving money.
This is also true for service providers who might perform larger projects than normal due to scheduling reasons or lack of capacity.
Here are some techniques businesses may employ in giving out quantity discounts to their customers:
Tiering means that the quantity discount depends on which tier a certain quantity falls into.
For instance, a company advertises that for every bulk purchase of shirts, a 2% discount will be applied to purchases to the tier of 51-100.
As the tier increases, the discount will also increase. Say, for example, purchases within the 101 to 150 tier will earn a 5% discount.
In this case, tiering is also often referred to as “step pricing” or “block pricing.”
The disadvantage with this type of system is that customers have an incentive not to buy in bulk since it does not always equate to savings. For example, purchasing 10 shirts would only earn a 2% discount, which is not very significant.
However, the purpose of such an arrangement is to entice customers to purchase larger quantities.
A discount rate will only be given once a threshold of purchase is attained.
For example, a company will give a 5% discount if a buyer purchases more than 50 units of a particular product.
In this case, a buyer availing 100 units of the product will have to pay full price for the first 50 units and the 5% discount will only be applied for the 51st to the 100th unit.
Setting Unique Discounts per Bulk
In this scheme, discounts are based on a specific bulk purchased by the buyer.
For example, a company gives a discount rate of 5% for every 20 units of computer purchased by a customer. Another discount rate of 12% will be given if 40 units of computer will be purchased.
In this case, if a customer purchases 20 units of computer, he will be entitled to a 5% discount.
However, if he purchases 30 units only, he will not be entitled to the 12% discount. The buyer will only be given the 5% discount for the 20 units and the remaining 10 units will be paid at their original or undiscounted price.
Hence, for a buyer to fully avail of the discounts, it will be more favorable if he buys in the bulk of 40 units.
Impact of Quantity Discounts on Businesses
As mentioned, quantity discounts help increase the number of purchases and also encourage bulk buying. Since it allows for additional savings, more customers would avail of the opportunity to realize these benefits.
Though this is true, there are some caveats to consider as well.
In the case of quantity discounts, offering such a system means that less income will be generated from one-time sales though this can go up depending on new customer acquisition costs and marketing efforts.
To maximize your profits, you may need to balance your selling prices by taking into consideration how much discount you give per unit purchase or volume of the purchase.
Businesses may also opt to use other strategies to increase customer volumes such as incentivizing purchases with the help of points, coupons, and discounts.
Pros and Cons of Giving Quantity Discounts
As with every decision, there are pros and cons to this system.
The advantage of quantity discounts is their ability to entice customers to buy in bulk which means more products would be sold overall. This can ultimately lead to an increase in revenue.
However, it also has a downside since the business incurs additional costs per unit on certain products or services that will not translate into immediate benefits.
Moreover, offering quantity discounts may discourage first-time buyers who want to spend money right away on your goods but might end up buying less due to their budget constraints.
So are quantity discounts good for businesses? It is about striking the right balance of maximizing profit while also enticing customers to make larger purchases.
It’s important to note that this strategy should not affect your regular selling prices and should be applied across the board so as not to disadvantage any specific group of buyers or competitors.
Its purposes may vary but its goal remains the same: To sell more and earn more.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.