The concept of Quantity Discount can be defined as the incentive offered by the seller to the buyer on the purchase of a large number of goods. The delivery of the purchased goods is scheduled at one time or over a specified time period.
Breaking Down Quantity Discount:
- Quantity Discount is offered to the buyer that results in the decreased cost per unit of the goods manufactured by the firm.
- The concept works when the buyer is able and capable to purchase a large number of goods from the seller.
- One of the major mottos behind the concept of Quantity Discount is that the seller wants to move out the goods from his warehouse, reducing the overhead expenses.
- And from the customer’s point of view, the concept of Quantity Discount works for them as they get a favorable and discounted price of the goods working as the pocket-friendly deal for them
- Various marketing and promotional terms such as Buy One Get One Free and Buy Two and Get One Free is associated with the concept of Quantity Discount.
- The community of retailers and wholesalers get quality and good deals if they order more quantity of the goods from the manufacturer, and the same can be passed to the final consumers.
- One of the major considerations with the concept of Quantity Discount is that the payment terms are either in one shot or spread over a period of time.
- Even the delivery is to take in one shot or over a period of time that is mutually decided by the seller and buyer.
- For instance, the seller offers the pair of jeans for $20, and the price is applicable up to the quantity of 50 numbers of jeans. And if the buyer orders more than 50 number of jeans say up to 75, the seller offers the price of $35 per jeans as the buyer is ordering the jeans in large quantities.
- The concept of Quantity Discount is equally beneficial for the buyers as well the sellers as the seller is able to release the excess stock from his warehouse and is able to increase his cash flow and that can be used as working capital.
- And if we think from the point of view of the buyers, they are able to get a favorable and attractive price with quick deliveries.
Quantity Discount v/s Linear Pricing:
For example, if the shirt company follows the strategy of linear pricing and sells each shirt at $10, then the price for five shirts will be $50, and ten will be $100. If the manufacturing cost of each shirt is $10, each of the unit will earn $10 as a marginal profit despite the number of shirts sold in the order.
One of the major demerits of linear pricing is that it does not provide incentive and motivation to the buyers to purchase in the large quantities.
Linear pricing doesn’t allow the manufacturer or the seller to take and enjoy the opportunities of economies of scale.
When the seller follows the business strategy of Quantity Discount, it allows his business to combine all the actual and incidental costs such as of shipping, packaging, and distribution amongst others.
In-depth details of Quantity Discount:
- Quantity Discount strategy is mostly applicable to the consumables and not all of the items available in the market.
- Though there are some items like regular wear clothing for women, accessories, and domestic household items that can be bought at the current stage in significant quantities by the consumers and they can use it at a later date as it doesn’t have any expiry date.
- The concept and strategy of Quantity Discount are quite useful to the sellers and manufacturers who have stocked a large quantity of the specific product and wish to relieve the excess stock.
- Quantity Discount is quite useful with the strategy of negotiation. The seller can negotiate with the buyer by giving him an incentive if he buys the goods in large quantity. It preserves the unit price and helps the seller to sell the excess stock of goods.
4 Merits of Quantity Discount:
- The primary benefit of Quantity Discount is the reduced cost of per unit motivates and encourages the customers to place the order in vast quantities.
- And when the customers order the goods in huge quantities, the seller can earn huge profits and revenues.
- Within the strategy of Quantity Discount, the buyer can apply the discounts in steps by lowering the cost per unit as the quantities go higher.
- It helps the seller to clear the excess and redundant stock of goods and focus on the next line of production.
Demerits of Quantity Discount
One of the significant demerits of Quantity Discount is that it reduces the profit margin of the seller as the cost is not applied as per unit but on a lump sum basis.
5 Top reasons to consider the strategy of Quantity Discount
- The seller can beat the competition in the market by applying the strategy of Quantity Discount as it is the common tendency of the customers to go for the products that are discounted in rates.
- The seller is able to expand its market share as compared to the other players in the market. There is word of mouth publicity from one customer to the other, and this way, the seller is able to enhance its brand value and reach in the market.
- By applying the strategy of Quantity Discount, the seller is able to let go off the stock that is not in trend and is almost redundant in nature. And with the profits earned, the firm can allocate them in the next line of manufacturing.
- It also helps to attract a large number of buyers and also retain loyal ones.
- It helps to curb its excess expenditure of warehouse maintenance, product safety, and other such overheads.
As mentioned earlier in the article, the strategy of Quantity Discount is not applicable to each and every line of products. It is mostly opted by the firms that are into selling the goods that are consumable in nature, or that can be stored for a longer time period without any sort of wear and tear.
But there are a lot of factors that the firm needs to consider before applying this strategy in order to make it a successful one.