Volume Discount can be defined as when the business or the brand gives the financial incentives or advantages in order to motivate the customers or the group of individuals to purchase in the huge quantity.
Meaning of Volume Discount
- The concept of Volume Discount is applicable for both business to business and business to consumers.
- In the case of business to business, the manufacturers of the raw materials give Volume Discount to the manufacturing firms so that they are able to purchase the same in large quantities. And in turn, the manufacturing firms give Volume Discount to their wholesalers and retailers as the firms have profited by getting huge discounts whilst purchasing the raw material in huge quantities.
- Taking the cycle forward, the wholesalers and retailers give bulk discounts to their customers motivating them to purchase their products in large and huge quantities.
- At the end of the day, it is a win-win situation for all the parties involved.
- The discount is passed on from the raw material vendor to the manufacturer and from the manufacturer to the wholesalers and retailers. And they pass on the same to the customers.
Volume Discount Examples
Let’s take an example of Tesco or Wal-Mart
The US and UK retail giants such as Tesco and Wal-Mart are quite renowned for offering huge and Volume Discounts on their products that makes the customers throng their stores, especially on the weekends. The retail giants are able to give discounts on the products especially the household items as they purchase from the vendors in bulk quantities and get Volume Discount for the same.
They pass on the same to their customers making their brand carve a niche for themselves in the market and gain a competitive advantage.
The important point to be noted here is that in order to get Volume Discount from the vendors, the wholesale and retail stores have to make a financial investment for buying the goods in bulk. Hence, the brands that are high on their financial goals are able and capable to take advantage of Volume Discount.
The concept of Volume Discount is hardly applicable in the case of perishable items such as fruits, vegetables, milk, and fresh dairy products amongst others as they have a limited shelf life.
The process of Volume Discount
1) Tiered Method
The overall process of discounts can be formulated in various forms but the modus operandi of Volume Discount is tiered in nature and approach. For example, a specific amount of discount is applicable to the A number of units in total. And the amount of discount increases tier on tier.
For instance, for the tier of 100 to 200, X amount of discount is given. And for the next tier of 201 to 400, the X amount of discount is increased to XY. And for the next tier of 401 to 700, the XY amount of discount is elevated to XYZ.
So, the number of goods you purchase, you are eligible for the bigger and better discount rate.
2) Threshold Method
The next methodology to offer the Volume Discount is the Threshold Method. In this method, the discount is only applicable after the purchase of the specific quantity of the goods.
For example, the discount is applicable only after the sale of 100 units. Meaning, it is applicable from the 101 unit. The firm is able to sell the first 100 units at an original and full price. It is by the way method to push the customers in purchasing the higher quantity of goods in order to enjoy Volume Discount.
3) Packaged Method
The next modus operandi of the Volume Discount is the Packaged Method. Here is the discount is applicable for the certain packages of the units.
For example, a certain amount of discount is available if you purchase 10 units of the products. And if you purchase 15 units, you will enjoy the discount for 10 units and will have to pay full price for the 5 units. The next package is 25 units. That means, if you buy 27 units, you will enjoy the discount on 25 units and will have to pay full price for the 2 units.
Why is Volume Discount given in the market?
There are an array of reasons that the businesses and the brands give Volume Discounts to their vendors and customers. Let us have a look at some of the most common reasons:
1) To beat the competition in the market:
The businesses and brands nowadays are operating in the highly dynamic market environment that is high on the evolving tastes of the customers and competition from the new as well as established players in the market. To successfully survive and thrive in the competitive market, it is necessary to come up with the well-planned strategies to gain a competitive advantage.
Volume discount is one of the finest sales and promotional strategies for the retail and manufacturing firms especially. And if the competitors are already following the Volume Discount strategy, it is high time that you have to embrace the same in your own unique way. It will help you to enhance your market share and brand reach at the same time.
2) To attract a large number of customers:
It is a universal fact that customer is the king of your business and you have to keep him at the central point of all your business facts and operations. And sales pricing strategy and promotional ideas such as Volume Discount are one of them.
The customer today is looking for a high-quality product at a reasonable price and offering him Volume Discount on the bulk purchases will surely attract him towards your brand and its product offerings.
And having a long list of loyal customers automatically makes you a monopolistic player in the market with a huge market share. Plus they earn a huge number of referrals further elevating your sales and profits.
3) To encourage large orders instead of the smaller ones:
Having a constant level of cash flow is one of the biggest assets for the business. And when you offer Volume Discounts to your customers motivating them to purchase your products in large quantities, your cash flow problem is solved automatically.
From one customer to the other and many more, your cash registers are ringing and there is a constant flow of money. The working capital that you generate with the constant cash flow helps you to make investments in your business that results in its growth.
4) To attain your business objectives:
As mentioned earlier, it is very important for the business to have a constant amount of cash flow and working capital to keep it up and running. It also helps you to attain your business objectives in this ever tough and dynamic market that is always high on competition.
The strategy of Volume Discount is quite helpful in enhancing your market share, brand value, the long list of loyal customers, and attaining financial stability.
Even though the concept and strategy of Volume Discount come with a huge range of merits and benefits, you have to each and every step with caution. It is a wonderful strategy but is not viable for every business especially in the case of perishable items.