What is volume discount pricing?
Volume discount pricing, or volume discounting, is the method used by manufacturers or sellers that rewards customers who purchase more of a product or service with an increased discount. The more they purchase, the bigger the discount.
How does volume discounting work?
Everyone loves a discount, and with a volume discount, you create the perfect incentive to encourage customers (individual or business) to buy goods in bulk or larger quantities. By rewarding those that buy more with a reduced price per unit of your product or service, you are more likely to profit from a higher sale.
If customers see greater value in buying in bulk or in larger quantities, it can be hard to resist.
The advantages of using volume discount pricing for SaaS businesses
Volume discount pricing has a number of advantages for businesses, but it is particularly beneficial to B2B SaaS businesses. Have your ears just pricked up? Thought so.
Here are three reasons why volume discounting works so well for B2B software businesses:
1) It encourages your customers to buy more:
Like we’ve already mentioned, it’s hard to resist a good discount. By rewarding your customers with greater discounts for buying greater amounts, you are creating the incentive for them to purchase more.
This method works particularly well if you are looking to shift materials quickly. And it works even better when there are minimal costs involved to allow more customers to access your product - with no need to make or distribute more for new users, for example. (That one’s for you, SaaS 👏).
Snaps for SaaS.
2) It ups your competitive value:
By offering up your product or service at a reduced rate, it can put you ahead of the competition.
If you’re offering a similar service or product to competitors, what’s going to turn their head in your direction? The same value and positive impact for their company, but at a cheaper or more reasonable price. Who doesn’t love a bargain?
Volume discount pricing provides your customers with the incentive to up their demand and buy more because they see the value in your product. Plus, growing businesses will be more inclined to return to you if they are in need of more licenses, for example, meaning an easy upsell for you.
That’s why your pricing strategy is so important, because it can so easily make you stand out in the eyes of your customers.
Get your pricing wrong and they may view your product as cheap, low-quality, or totally overpriced - three opinions that will quickly lead your target audience into the hands of your better-priced competitors.
Get it right, and the demand for your product will soar.
3) It appeals to a wide audience:
It’s not only the pricing strategy that can boost your sales, it’s the promotion too. By creating different price points or segments in your pricing plan, you are appealing to small businesses who may need just 5 licenses at a reasonable price, and to larger businesses who need 5,000. A volume discount solution prevents the final price of the package from becoming obscenely prohibitive for larger organizations.
Plus, volume discounting grants reduced rates of products that can appeal to (and incentivize) businesses, both big and small, to opt for larger quantities.
Whether they have future scaling in mind or they just can’t deny a good deal and see the value of buying more, you’re making the decision to buy more a whole lot more tempting - and a whole lot easier too.
There’s a whole psychology behind it, but let’s talk about that in a bit.
Types of volume discounting
There are different ways to introduce volume discount pricing into your software business, which means more chance of the method working for you.
Here are three different examples of volume discount pricing formulas:
1) Volume or ‘all units’ pricing:
The main gist of volume pricing - or ‘all units’ pricing - is that a certain discount is applied to unit numbers that fall within a particular pricing tier. This discount is then applied to all units - just like it says on the tin. The discount becomes greater as the number of units sold increases, meaning the original price per unit goes down.
Example time ⏰ :
50-99 units = 10% discount
100-149 units = 15% discount
150-199 units = 25% discount
200+ units = 35% discount
As you can see, customers purchasing 1-49 items would receive no discount, as they would be claiming the products at their original price. Whereas, if a customer was to buy 250 units, they would benefit from a 35% saving off the total costs of units.
2) Tiered pricing:
Similar to volume pricing, as the purchase rate increases, so does the discount. However, with tiered pricing, the discount varies within the different tiers. For example, if a customer was to buy 15 units of your product, which crossed tier 1-3, the units in tier 1 would have a different price reduction than those in tier 3.
Let’s look at how tiered pricing compares to volume pricing with another example:
Unit 1: $200
Units 2-4: $170 per unit
Units 5-9: $160 per unit
Units 10-19: $140 per unit
Units 20+: $120 per unit
Here, you’ll see that if a customer opts for 8 units, they pay full price for unit 1, a slight discount of $170 for units 2, 3, and 4, and a further discount for units 5 to 8. This totals at $1190, whereas if all units were charged at the original price, it would be $1600 - giving the customer a $410 discount.
For more on tiered pricing and its differences with volume pricing, check this out .
3) Package model pricing:
Package pricing is a pricing model that includes everything that a customer might need for the product or service you’re selling, including the equipment and installation process, for example.
The pricing strategy behind package discounting is similar to that of tiered pricing, but with some important differences. The company specifies a discount for an exact number of units, with the discount getting bigger as the unit numbers go up. The discount is applied equally across the units in each section, with a larger discount applied if the customer is happy to commit to the next ‘level’ up.
Here’s an example:
1 unit = $100 ($100 per unit)
5 units = $400 ($80 per unit)
10 units = $700 ($70 per unit)
20 units = $1000 ($50 per unit)
With this pricing strategy, if a customer wanted to purchase an unstated amount - for example, 7 units - they would have to choose between going up to 10 units or purchasing a combination of package deals. Here, the best option would be buying a package of 5 units for $400, and a single package of two units at $100 each, with the total package price coming to $600.
Price perception: it’s all in the mind
The success of volume discount pricing for businesses, whichever method you may be using or trying out, is all down to the psychology of how customers perceive price.
Sure, discounts of any type are enough to pique anyone’s interest, but there is a lot to be said about how your deals are marketed and your figures are presented.
You might have heard of ‘charm pricing’, for example. The age-old yet effective method of knocking one cent off your price gives the illusion of the product’s total being far lower. A product marketed at $49.99 is registered by the brain as belonging to a lower cost threshold ($40) than $50, which appears at a glance to be a steep price hike.
Another price perception strategy is ‘buy one get one free’, which we know you’ll know. This is where we get to play (or get played!) with a buyer’s unconscious greed and determination to get as much value for their money as possible, even if they don’t need the extra ‘free’ product.
However, whilst pricing is a key consideration for the success of your product, it’s important that you don’t price your product too low or with too great a discount as you run the risk of devaluing your brand. And that’s the last thing any business wants.
Take your time when it comes to deciding on your pricing plans and the potential of a volume discount, because it can make the difference to the growth and success of your business. When it goes well, it’s great, when it goes bad, it can be detrimental.
The disadvantages of volume discount pricing
That leads us to our next point: the disadvantages of volume discounting. The disadvantages revolve around value and profit gained from your product and its pricing plan.
As we’ve already mentioned, it’s something that is easy to get right, but get it wrong and it could result in the following three issues:
1) Customers devaluing your product:
The psychological side of discounts is all well and good, but as mentioned, if the pricing plan isn’t well thought out, your customers can quickly cross the line from questioning how the product or deal is so cheap, over into the deadly zone of questioning why it’s so cheap. When the value of your product is being scrutinized, you could be in trouble.
2) Lowered price value:
By lowering the price of your product, you are setting a new standard for your product pricing. If you’re looking into volume discounting as a growth method for your business, make sure you take this into account because a steep price increase is no customer’s favorite thing.
3) Profit loss:
Of course, by offering your product at discounted rates - whichever volume pricing formula you’re opting for - you are missing out on profit. Do the maths to make sure that you’re getting in the extra sales to make up for the price reductions you’re offering up.
Find out what pricing model works best for your business
Seeing as you’re here, you were probably considering using an element of volume discounting for your business. We might have swayed you, but we may have also swayed you in the other direction.
If you’re sitting there, twiddling your thumbs, wondering what the best pricing model is for your software business, have we got just the thing for you: our guide to choosing the best pricing strategy for you .
Because we’re helpful like that.
Want to optimize your pricing?
Our guide informs your pricing strategy and experimentation.