What is Volume Discounting?

What are the benefits of using volume discount pricing?

Volume discounts are offered for a variety of reasons. It’s useful for many B2B companies to buy software licenses in large numbers, for example. 

Volume discounting incentives are especially high for SaaS businesses because there are fewer costs that are involved when allowing another customer to access your product. Here are some of  benefits of implementing volume discounting to your SaaS pricing model.

1. Helps you compete in the market

Businesses function dynamically according to  the ever-changing needs of the customer and competition. To successfully thrive and compete in the market, it is very important to have a well-planned pricing strategy that will be attractive and valuable to your customers.

Providing a quantity discount to your customers every now and then helps you add value to your brand and market share at the same time. Plus, providing volume discounting only as and when needed to keep your customer engaged with the product will help you increase the perceived value of the product in your customers eyes.

2. Attracts a larger  customer base

In your pricing strategy and promotions, volume discounting is a key concept. Leveraging it and offering your prospective customers quantity discounts along with a good package plan that suits their needs will definitely create affinity towards your brand and product.

3. Encourages your customers to buy more

When volume discounts are offered it usually encourages your customers to buy a bulk quantity  of your product. Sometimes they might choose plans which they might need in the future because it’s affordable and will be useful as they scale. This, in turn, helps you generate more cash flow

Understanding the psychology behind volume discounting

B2B companies usually offer quantity-based discounts to show appreciation and loyalty to their customers. As long as the idea is sparsely leveraged it sits well, but when offered frequently, it lowers your product’s perceived value from the eyes of your customers. 

For B2B software businesses , your perceived value is an important parameter that sits on a pedestal as the value cannot be linked to a physical product. When offering bulk discounts, businesses lower their perceived value thereby sabotaging their image.

 Disadvantages of volume discounting

Let’s review some of the common problems faced by businesses when offering volume discounts:

1. Lowered price value: Once you lower your price to satisfy your customer, the lowered price of your product sets the new standard for your product price. Things might not go well with your customers if you suddenly need to increase your prices in the future to suit the ever-evolving business needs.

2. Profit loss: By offering volume discounting frequently you put your business at a loss. For every 5% reduction in price you need to sell 38% more to ensure that your profitability doesn’t tank.

3. Product devaluation: Every time you offer a reduced price, you risk reducing the perceived value of your product. They might think that the discounts are offered as the quality of the product is poor and diminishes your brand value in their eyes. It is crucial to ensure that your customer associates quality with your product and brand.

Types of volume discounting

There are three types of volume discounting strategies:

• Tiered model

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• All units (or) Volume model

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• Package model

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What is the difference between tiered pricing and volume pricing?

Tiered and volume pricing models are overlapping terms that are often used interchangeably. That said, the fundamental difference between a tiered pricing model and a volume pricing model is the way in which the pricing structure is interpreted upon calculation. 

Even though both seem to be the same in hindsight, the accumulated costs in the end are where the difference lies. To sum it up: 

• Tiered model: The price per unit you’re selling is within a particular price range. Once you fill up one tier you move to the next.

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• Volume model: The price of all the units you’re selling is within the set price range.

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Now, let’s see how these calculations work.

Tiered vs. volume pricing structure 

Suppose you’re a business who is selling widgets. Here is how your prices would vary if you either opt for a tiered pricing model or a volume pricing model.

How do you calculate pricing for Tiered model?

You’ve sold 60 widgets to your customer.

In a tiered pricing model, you calculate your total like this

[($20x10) + ($10x20) + ($5 x 30)] = $550.

You move to the next tier only when one tier is completely filled.

How do you calculate it for a volume pricing model?

Whereas, in a volume pricing model, the total is calculated as ($5x60) according to the total number of widgets bought which falls under the 30-100 widgets price range.

Let’s now see some real world examples to show you how these pricing models are implemented.

Examples of volume discounts

1. Tiered pricing:

Confluence is a content collaboration tool that helps teams to work together. Look how they’ve implemented the tiered discount structure for their product. They charge $5 for the first 100 users and from the 101th user they charge $4 and so on.

2. Volume pricing:

Sketch is a design toolkit that helps you create your work from start to finish. They use a volume pricing model to price their product, so the more devices you want to buy the license for, the less you pay.

3. Package pricing model:

Package pricing is similar to that of tiered pricing model,but the difference between the two is that businesses offer a discount for specified number of units. The discounted price usually increases with the volume bought.

This is how the product is priced and discounts are offered. If you buy in larger quantities the prices are discounted. Suppose in a packaged pricing model you need to buy 6 widgets, you would pay the cost for 5 widgets and the full price for the other 1 widget. Therefore, your total price is calculated like:

For the first five widgets, your cost is $900 and for the other one widget your cost is $200, thereby your total cost being $1100 ($900+$200).

Moving Forward

A volume discounting strategy is beneficial when done rarely. If offered frequently it can sabotage the brand and product value. Hence, it is necessary to carefully evaluate your pricing plans and product offerings before offering discount prices. 

If carefully planned and executed, volume discounting can help you reap many benefits and beat the competition.