What is volume discount pricing and why is it used?
Volume discount pricing can be found in almost all places where a transaction occurs. At its most obvious, you might be tempted by a supermarket offer for 3 chocolate bars for the price of 2. “$1 each or 3 for $2?!” Don’t worry, I hear you. Other times the deal might not be signaled on a big offer sign, but the discount is still there, for example when you buy a 2kg bag of rice for $2.80 instead of the 1kg bag for $1.95. The 2kg bag’s price per kilo is significantly reduced. This is how volume discount pricing works; you’re rewarded for buying in larger quantities as the manufacturer is happy to take a lower price per unit to sell more of its product.
It’s a competitive market out there and companies are always looking to beat the competition. Companies employ volume discount pricing for a number of reasons, but in the case of a supermarket volume discount, shops often want your custom while they have your attention. They’d rather you opt for buying more quantity at a reduced per unit price than buy a smaller pack and take your custom elsewhere next time. Companies also use volume discounts to close their first deal. A 3 for $2 offer could be a good enough deal to encourage a first-time purchase and, once you love their product, you’re likely to happily pay full price when the deal ends.
What’s the benefit for digital companies?
The benefit of volume discount pricing for companies selling digital products stands to be much greater than the financial incentive for companies selling physical products. This is because there are often far fewer costs incurred when allowing another customer access to your platform or online service than having to make and distribute more of a physical product to meet demand. With the promise of a high profit margin, why wouldn’t these companies encourage high quantity buying?
Volume discount pricing formulas
There are a variety of formulas that companies employ to give their customers quantity-based deals on their products. Let’s have a look at the most common and effective models.
Volume or 'All Units' pricing
With volume pricing, a certain discount is applied to unit numbers that fall within a particular pricing tier. For example, a company may offer the following discount structure:
Often referred to as the ‘all units’ model, the discount is greater as the number of units sold increases - and the discount applies to all units. So, using the table above as our example, a customer who purchases 250 units benefits from a 35% saving off the total cost of all units.
Tiered or 'Incremental' pricing
Tiered pricing, sometimes referred to as incremental pricing, offers a lower rate for units on sale only when a particular threshold is met. Looking again at the discount table above, a company using the tiered structure will apply the next level of discount to units sold beyond the threshold of the previous discount amount. So if a customer wants to buy 150 units, they will receive no discount for the first 49 units they purchase, 10% off the next 49 they purchase, 15% off the following 49 and 25% off 1 unit. As our tiered pricing model blog details, it's a lucrative pricing strategy best used where the customer is already likely to require high quantities.
The pricing strategy behind package discounting is similar to that of the tiered pricing structure but, in this case, a company specifies a discount for an exact number of units, with the discount getting bigger as the unit numbers go up. For example:
As you can see, the discount rate is applied equally across the units in that section and a deeper discount rate is applied if the customer is content to commit to the next quantity up. Here the increments are fixed by the company and if the customer wants to purchase an unstated amount, for example 6 units, they must purchase with a combination of package deals. Here, the best option would be to opt for a package of 5 units at $400 and a package of 1 unit at $100 for a total cost of $500.
Price perception: it’s all in the mind
There’s some fascinating psychology behind how customers perceive prices. While volume discount pricing will pique your audience’s interest, there’s also a lot to be said for how your deals are marketed and how figures are presented.
Reducing the left digit of your price by one is a classic and frequently used strategy. Often referred to as ‘charm pricing’, this is the simple but surprisingly effective method of knocking one cent off your price to give the illusion of a product’s total being far lower. A product marketed at $49.99 is registered by the brain as belonging to a lower cost threshold (essentially, it’s $40.00) than $50.00, which appears at a glance to be a steep price hike.
Other price perception strategies include ‘buy one get one free’ and other such offers, which play on a buyer’s unconscious greed and determination to procure an additional and likely unneeded additional item for ‘free’, and highlighting an item’s former price. People are far more likely to purchase something if they see an impressive reduction from the item’s original RRP as it gives the impression that they are purchasing a quality item (expensive = quality, of course) for a steal.
There are myriad schools of thought where pricing is concerned and different businesses will benefit from different solutions. However, while pricing is a key consideration for the success of your product, pricing your product very low or perpetually discounting runs the risk of devaluing your brand and can actually have the adverse effect on your overall business success.
Using volume discount pricing in your business
Having looked at the most popular pricing structures for volume discounting, you might be considering how your company can best benefit from promoting quantity sales. If you’re interested to discover what sort of pricing structure would be most optimized for your product, then check out Paddle’s pricing strategy guide.