Volume Discount

Volume discount is available for a number of reasons; it refers to the use of reduced rates to encourage a person or a company to buy a large quantity of a product all at once. It is a financial reward that encourages individuals or companies to buy products in large quantities or several units. The dealer or maker remunerates those purchasing in mass by giving a marked down cost to every great or gathering of merchandise. Volume limits, most normally utilized in discount markets, are helpful to the two players to an offer of product understanding. They allow a company to purchase more stock and retain inventory at a cheaper rate, and they allow suppliers to sell off a greater quantity of units to bulk buyers, reducing the cost of keeping inventory.

The idea of Volume Discount is pertinent for both business to business (B2B) and business to shoppers. It is not quite the same as an amount markdown, albeit both are genuinely comparative. Amount limits don’t really incorporate acquisition of an enormous number of units of a decent. In the case of business-to-business purchases, raw material suppliers provide volume discounts to manufacturing companies so that they can buy large amounts of the goods. As a result, manufacturing companies provide Volume Discounts to their wholesalers and retailers, as the companies have benefited from large discounts when buying raw materials in large quantities.

Example of Volume Discount

Volume discounts additionally exist in monetary business sectors; Several strategies exist for orchestrating volume limits, frequently using a layered markdown structure. It is an overall practice in business that when the clients submit a mass request, dealers offer them a markdown by virtue of an enormous volume of a request set. This is intended to entice consumers to purchase a large quantity of a commodities in order to save money. Furthermore, by selling more units of goods at a lower price, this phenomenon aids trading and manufacturing companies in reducing their inventory.

There are three types of volume discounting, which are

  • Tiered and volume pricing model: The concepts “tiered pricing model” and “volume pricing model” are interchangeable.
  • Tiered model: The discount varies depending on which tier the number of units falls into in this form of a volume discount. For e.g., if you buy up to 100 units, you’ll get a 5% discount, and if you buy 100 to 200 units, you’ll get a 10% discount, and so on.
  • Volume Pricing: The price of all the units you’re selling is within the set price range.

Some brokerage companies in the financial markets offer volume discounts on commissions based on the amount of investment or trading operation or for broad block order trades. Based on the number of goods purchased by the consumer, the discount rate will vary for different orders. As the markdown depends on the volume of the request, the term volume rebate is utilized. The significant highlight be noted here is that to get Volume Discount from the merchants, the discount and retail locations need to make a monetary venture for purchasing the merchandise in mass. As a result, brands with strong financial objectives are willing and capable of taking advantage of Volume Discount.

Tiering is the most widely used method of volume discounting. It means that for a certain number of units in that tier, a certain percentage discount can be offered. The level of markdown material to every level goes up as the quantity of units bought increments. Tiered volume discounts are common; that is, a certain discount is applied to a certain number of units within a tier. The discount gets bigger when you go up the tiers, which have more and more units.

There are many examples of volume discounts that we encounter in our daily lives. When we go to a shopkeeper and ask for a few items of our choosing, the shopkeeper informs us that there is a new deal in which we can get a discounted rate per unit if we purchase three packs of a specific product together. The idea of Volume Discount is not really appropriate on account of transitory things like natural products, vegetables, milk, and new dairy items among others as they have a restricted time span of usability.

Notwithstanding retail advertises, volume limits additionally exist in monetary business sectors. Financier firms may offer volume limits on the commissions charged on exchanging. The discount can be determined by the investor’s level of investment or the client’s trading operation. The discount is only applied in the threshold system after the purchase of a given quantity of products.

Advantages of Volume Discounting –

  • It aids in remaining competitive in the market and, on occasion, outperforming the competition. Manufacturers nowadays use volume discounts as one of their most common promotional strategies.
  • It assists in attracting a significant number of customers. When a high-quality product is available at a reduced price, it would undoubtedly draw more buyers.
  • It allows buyers to place large orders in order to obtain competitive discounts, which helps retailers minimize inventory. Finally, it aids in the creation of a brand name and market share.

Disadvantages of Volume Discounting –

  • Lowered price value: When you lower the price to satisfy a buyer, the lower price of your product becomes the new market norm. If you need to raise your prices in the future to meet changing business needs, things may not go well with your customers.
  • Profit loss: By frequently offering volume discounts, you are putting your company at a loss. To prevent your profits from plummeting, you’ll need to sell 38 percent more for every 5% drop in price.
  • Product Devaluation: When you offer discounts, you lower the perceived value of your commodity. They may believe that the discounts are being offered because the product’s quality is bad, lowering your brand’s value in their eyes. It’s vital that your customer associates your product and brand with quality.

Volume discounting strategy is beneficial when done rarely. But if offered frequently it can sabotage the brand and product value. Despite the fact that the principle and technique of Volume Discount have a broad variety of advantages and benefits, we must proceed with caution at all times. It’s a fantastic strategy, but it’s not appropriate for every company, particularly those selling perishable goods.

Information Sources:

  1. chargebee.com
  2. marketing91.com
  3. corporatefinanceinstitute.com
  4. wallstreetmojo.com
  5. investopedia.com