Volume Discount

What is a Volume Discount?

A volume discount is a pricing strategy businesses use to encourage customers to buy larger quantities of a good or service. When a customer purchases more items upfront, the seller offers each item at a lower per-unit price.

Volume discounting is common in wholesale markets. But it also applies to various B2B and B2C scenarios, including retail, manufacturing, and service industries.

Examples of volume discounts include:

• A clothing brand offering a bulk discount to retailers purchasing a certain number of items at once
• A SaaS company giving discounts on software licenses for a customer who signs up for a yearly subscription instead of monthly
• A grocery store offering a lower price per can on a case of soda versus buying individual cans

Volume-based pricing typically follows a tiered structure — the more items purchased, the lower the per-unit cost. Let’s say an energy drink costs $3.50. However, if a customer buys 10 or more, each one will cost $3.00. And if they purchase more than 20, each one will cost $2.50.

Sometimes, volume discounts only apply to items purchased beyond a certain minimum threshold. For example, a clothing supplier may offer a 10% discount on any units purchased beyond an initial 100. They also tend to go hand-in-hand with product bundles.

Synonyms

• Volume-based pricing
• Volume discounting
• Volume discount pricing
• Price break
• Bulk pricing

Why Companies Use Volume Discounting

The practice of volume pricing benefits both the seller and the buyer. The seller increases sales, reduces inventory/overhead costs, and prevents churn.

Especially if they were planning on buying more items in the future anyway, saving money over time by spending more upfront is often a no-brainer for consumers.

Increase Average Order Value (AOV)

By offering price reductions for larger quantities, businesses incentivize customers to buy more products in a single order to take advantage of the cost savings. This results in a higher total spend per transaction (i.e., boosting your AOV).

For instance:

• Instead of buying one energy drink at $3.50, a customer might buy 10 at $3.00 each, increasing the AOV from $3.50 to $30.00.
• As a wholesaler, offering additional price breaks for large volume orders can help you secure bigger contracts (potentially with larger companies).
• For a SaaS company, every annual subscription that would have otherwise been monthly will be 10-11x higher order value.

Although this means less frequent purchases, the higher revenue per transaction often makes up for any potential loss in frequency when you factor in customer retention and other benefits of offering volume discounts.

Retain Existing Customers

Every company spends a certain amount of money to acquire each customer. Operating in the green requires them to retain customers long enough to break even on that investment. And growing means their customer lifetime value (CLV) needs to exceed their customer acquisition cost (CAC) by at least 3:1.

An easy way to do this is by offering discounts when they reach certain thresholds. There are plenty of ways volume discounting could be part of your customer retention strategy.

• A SaaS company selling annual licenses at 10% off the 12-month total guarantees subscribers stay for at least a year.
• A grocery store customer may be more willing to shop at a specific location if they know they can get discounted bulk prices for items they regularly use
• A retailer might order more of a certain product from their supplier if they anticipate (or can create) a period of higher customer demand in the future.

Besides proactive measures you can take to get customers to buy more, bulk pricing in and of itself promotes long-term customer loyalty. By rewarding your most valuable customers with favorable pricing, you foster a sense of value and appreciation that goes beyond individual transactions.

Attract New Customers

Whether you’re using penetration pricing as part of your go-to-market strategy or simply want to nudge customers at the bottom of the purchase funnel, volume pricing is one of the best ways to do it. If you can offer a better volume discount than a competitor, you may even be able to convert their customers.

Let’s say you’re a clothing vendor for large retailers. You might target small-to-mid-sized brands working with smaller suppliers. Since they’re growing, a small supplier might not be able to keep up with their demand. In that case, you could use economies of scale to your advantage — as they grow their business, you can support bigger orders at a price smaller suppliers can’t compete on.

Boost Profitability

It seems counterintuitive that offering a lower price for something can improve your profit margins, but this is often the case when it comes to price breaks. Since it’s easier to get new customers (lower CAC) and you’ll have better cash flow and inventory management procedures, a well-executed volume discount can actually help you operate more profitably.

When you account for freight, storage, insurance, taxes, and shrink, the total cost of excess inventory is an estimated 25% to 32% of total sales revenue. A simple way to mitigate high inventory costs is to turn over more of your inventory faster.

It’s also worth mentioning there are some instances where sellers can offer volume-based discounts while improving their profit margins compared to selling each item individually. A perfect example of this is 7-Eleven’s Big Gulp pricing.

When they first introduced large fountain drinks in the 1970s, they instantly became a hit. Instead of only offering one size (and probably making less money overall), they introduced sizes up to 128 ounces.

The price difference between sizes was minuscule. And customers could refill certain cups for free. But, over time, the sheer volume of additional Big Gulp sales (which sometimes accounted for 10% of total store revenue) made 7-Eleven stores significantly more profitable overall.

Grow Market Share

Sometimes building brand awareness and establishing a foothold in your respective market is more important than short-term profitability. In that case, companies may offer volume discounts to incentivize customers to buy more products (even if the discounts themselves mean they aren’t making as much profit per unit).

New SaaS companies, consumer goods brands, and marketplace startups like Uber and Airbnb are perfect examples of this. These types of companies are more focused on scalability and expanding their customer base than short-term profits.

In fact, they’re often willing to operate at a loss for years before achieving profitability — as long as the growth keeps coming. And offering lower prices when customers buy more is one of the best ways to get that to happen.

Disadvantages of Volume Discounting

Although it can increase sales, help you enter new markets, and help you attract more customers faster, it isn’t always the best strategy. In some cases, you might want to do the opposite.

Here’s a look at the potential disadvantages of volume discounting:

Brand Devaluation

Some industries benefit from premium pricing, an exclusive image, and the perception of value. A discount runs counter to this overall brand strategy, which results in fewer sales and a less favorable brand perception among your target market.

Examples of this include:

• High-ticket offers like enterprise coaching, consulting, or business courses
• Luxury goods like watches and handbags
• Technology products that use exclusivity and scarcity as part of their marketing strategy (think the new Apple iPhone)
• Items with high performance or quality standards where the price directly correlates to overall quality, safety, or longevity (e.g., top-of-the-line car parts, raw materials, or food ingredients)

Insight2Profit consulted a B2B manufacturer on pricing strategy and found that, for every 5% discount they offered, they had to sell 38% more just to keep the same level of profitability.

Suboptimal Product Pricing

Price optimization describes the sweet spot between profitability, perceived value, and demand. Sometimes, it’s worth it to forgo some profit because the discount rate drives enough sales to offset it. But, for it to work that way, you have to create the ideal structure. And each tier needs to be optimized for your customers’ price sensitivity and value perception.

Another consideration is pricing psychology, which demonstrates a 50% increase in quantity is fundamentally the same as a 33% discount. If the discount you offer (in real dollars) ends up being higher than the proportional quantity increase, your company will probably end up taking a loss.

Volume Pricing Models

The three main volume pricing models are:

• Tiered pricing
• Threshold pricing
• Bundle pricing

Tiered Pricing

In the context of volume-based pricing, tiered pricing is a strategy where customers pay different per-unit prices depending on their order quantity. When the move from one order quantity benchmark to the next, a new price per unit kicks in.

For example:

• 1-100 units: $20 per unit
• 101-200 units: $18 per unit
• 201+ units: $15 per unit

The idea behind tiered pricing is to incentivize customers to buy more and get the best possible deal, while still maximizing profits for your company. The highest tier (in this case, 201+ units) typically offers a larger discount than previous ones.

The strategy works because it’s a win-win for both parties: customers save money on bulk purchases, and your business enjoys larger orders and higher profitability.

It’s also easy for your customers to understand, which makes it an easier sell.

Threshold Pricing

In a threshold structure, discounts kick in only after a customer purchases a certain amount of goods. This baseline volume acts as a threshold.

Below this level, customers pay the regular price. Once they exceed it, a discount applies to the purchase, often retroactively.

Sometimes, it works similar to a tiered discount structure. The main difference is the first discount won’t kick in until a customer reaches the minimum amount.

• Regular price: $10 per unit
• 101-150 units: 5% discount ($9.50 per unit)
• 151-200 units: 10% discount ($9 per unit)
• 201+ units: 15% discount ($8.50 per unit)

Unlike tiered pricing, threshold pricing may not have multiple tiers. One flat discount percentage applies to the entire order.

• Regular price: $10 per unit
• Volume discount price (applied retroactively): 10% for orders exceeding $5,000

Threshold pricing incentivizes customers to buy more than they might have initially planned, with the goal of crossing the threshold and securing a better price per unit. It’s an effective way to drive larger sales volumes while maintaining profitability on smaller orders.

This model works well for businesses with retail and wholesale operations. You can offer tiered discounts exclusively to your high-volume, wholesale customers while individual buyers continue to pay regular prices for your items.

Bundle Pricing

Bundle pricing is the practice of selling items in combination. Instead of paying for each item individually, customers pay a flat fee that covers them all. The items within the bundle add up to proportionally lower per-unit prices than if your customers had bought them separately.

The advantages of this pricing model are similar to those of threshold and tiered pricing:

• Simplified purchasing process. Customers can buy multiple items at once, or your sales team can automatically configure and price it in CPQ.
• Perceived value. Bundles make your customers feel like they’re getting a deal, but they don’t necessarily see your product as “cheap.”
• Market penetration. Getting customers to purchase multiple complementary items means they won’t buy one item from you and then another from a competitor.

Bundle pricing works best for direct-to-consumer products and SaaS companies. It can also work well for distributors and manufacturers if you have a loyal customer base that frequently sources multiple products from you.

Best Practices for Implementing Volume Discount Pricing 

There’s no single “right way” to set up volume-based pricing for your business. I’ll cover the general steps you need to take, but keep in mind every company is different and may require a unique approach to their discount management process.

1. Understand your customer base inside and out.

Before implementing a volume discount, you have to be able to reasonably assume it will be well-received. Otherwise, you risk losing money and potentially damaging customer relationships.

Look at your customers’ purchasing behavior. Pay attention to:

• Seasonality. Is there a specific time of year when they’re more likely to make larger orders?
• Order frequency. How often do they typically place orders? Can you encourage them to order more frequently with a volume-based incentive?
• Price sensitivity. How much are your customers willing to pay for your products? Do they expect to spend a certain amount?
• Customer segment. Do certain customer segments tend to buy more frequently or in larger quantities than others?

2. Determine (and standardize) your discount prices.

Consider how much additional revenue each potential discount tier could bring in and at what point it becomes a loss for your business. You’ll also want to factor in any external costs associated with larger orders, such as shipping or handling fees.

Once you have a clear idea of these price points, create product rules in CPQ so your customers and sales team can configure products and bundles and see accurate pricing. Standardize them across your company to avoid price discrimination and confusion.

3. Monitor competitor pricing.

Competitors aren’t the be-all and end-all. But being aware of how your pricing compares to others in your industry and region is useful.

It’s also worth looking for similarities across your industry. There’s no point in offering a significant discount if the general expectation in your industry is to offer a lesser one.

4. Communicate with your customers.

When you’re making changes to pricing and discount structures, it’s essential to communicate them clearly with your customers. This includes giving them plenty of notice about any upcoming changes, explaining the benefits of volume-based pricing, and addressing any concerns or questions they may have.

You might offer your most valuable customers special pricing for their loyalty, but you should include your basic volume discount tiers and prices on your website’s pricing page. That way, potential customers can see the potential savings and evaluate their purchase without having to wait for a response from your sales team.

5. Keep track of sales and revenue performance.

Over time, you’ll either notice a positive or negative trend in your sales volume and revenue. Keep track of this data, and make adjustments to your volume discount pricing model as needed. You may need to add more tiers or adjust the discounts based on customer behavior and market dynamics.

How CPQ Enables Volume Discounts

Guided Selling

Guided selling simplifies the CPQ process by helping sales reps choose the most suitable products or services based on their customers’ unique needs (or, in the case of self-service, letting buyers choose for themselves).

Using guided selling, customers progress through a series of qualifying questions that narrow down their options to a manageable selection. This step-by-step approach ensures only relevant products or bundles are presented, removing unnecessary complexity and confusion for the buyer.

When you program your pricing rules, guided selling can quickly show customers how much they’ll save by crossing a volume purchase threshold. And, if they’re just short of qualifying for a higher discount tier, it can suggest complementary products to help them reach it.

Supports Complex Pricing Models

CPQ lets businesses configure products and services with multiple variables, calculate pricing considering various factors (including volume discounts), and generate quotes that reflect this complexity accurately.

Regarding volume-based pricing, CPQ software can:

• Automatically apply volume discounts based on predefined rules as the quantity in the quote increases.
• Scale discounts dynamically, adjusting the pricing as the customer reaches different thresholds.
• Customize discount structures for different customer segments or products within the same quote.
• Integrate with CRM and ERP systems to ensure consistent application of volume discounts across the business.
• Provide analytics and reporting to track the performance of volume discount strategies and their impact on sales and profitability.

By handling these complex calculations behind the scenes, CPQ software makes it much easier for sales teams to offer volume discounts and other pricing strategies without manual intervention.

Real-Time Pricing Engine and Product Catalog

CPQ software automatically calculates each customer’s pricing based on their unique product selections and order quantity. That way, you never have to worry about inaccurate or outdated pricing information being presented to your customers.

During CPQ implementation, you’ll input all your product catalog info, including pricing and configuration rules. As your product catalog evolves, you can adjust pricing and rules to reflect those changes. And, as availability changes, ERP integration automatically updates product availability and pricing in your quote.

CPQ Bundles

CPQ bundles are product bundles you’ve preconfigured in your CPQ platform. Your customers and sales team will automatically see them appear (with updated package pricing) when they add certain items to a bundle using your product configurator.

With CPQ bundles, you can:

• Predefine bundle contents and their respective prices.
• Apply discounts to individual items within a bundle or the entire bundle.
• Create custom pricing rules for different bundles based on product characteristics, order quantity, and more.
• Track sales data to identify opportunities for new bundling strategies.

With these features, CPQ makes it easy to offer volume discounts through bundled products while ensuring consistent and accurate pricing across your customer base.

FAQs

Andrew Parker

Andrew is a professional copywriter with expertise in creating content focused on business-to-business (B2B) software. He conducts research and produces articles that provide valuable insights and information to his readers.