Volume discount refers to the usage of discounted prices to incentivize an individual or a business to purchase a particular good in a large quantity at one go. When a customer purchases a product in multiple units or a large enough quantity at once, the seller rewards the buyer by selling at a reduced price for each group of goods purchased.
Volume discounts, most commonly used in wholesale markets, are beneficial to both parties to a sale of goods agreement. They enable a business to purchase additional stock and maintain inventory at a lower cost, and they allow manufacturers to reduce the cost of holding inventory by selling off a larger quantity of units to bulk buyers.
A volume discount is different from a quantity discount, although both are fairly similar. Quantity discounts don’t necessarily include purchases of a large number of units of a good. For example, at the retail level, a “Buy One Get One Free” deal offered to consumers is a quantity discount.
Volume discount refers to the usage of discounted prices to incentivize an individual or a business to purchase a particular good in a large quantity at one go.
The discounts can be structured in several ways, such as setting different tiers, setting a threshold, or setting separate rates for packages.
Volume discounts also exist in financial markets.
How do Volume Discounts Work?
There are multiple techniques to structure a volume discount, including the following:
1. Tiering (or setting different tiers)
The most common technique of volume discounting is known as tiering. It means that a specific percentage of discount may be offered for a given number of units falling under that tier. The percentage of discount applicable to each tier goes up as the number of units purchased increases.
For example, for a bulk purchase of Product X, a 5% discount is applied to the tier of 50-100 units. As the tier changes to 101-150 units sold, a larger discount is applied, say 10%.
2. Setting a threshold
In this second method of offering a volume discount, a lower price rate, or a higher discount rate, is only applied once a predetermined threshold is reached. For example, a volume discount may not be applicable until at least 500 units of a product are purchased.
It means that the reduced price rate will only be applicable to the 501st product purchased. The buyer will still be required to pay the undiscounted price for the first 500 units.
3. Setting unique rates for packages of units
Under the last method of structuring volume discounts, reduced prices are offered on packages of units. For example, for Good X, a discount rate of 5% may be applied to every package of 10 units, and a 10% discount may be applicable to purchasers of every 25 units.
Thus, in order to reap the maximum benefits of the discount, the buyer would need to buy in batches of 25 rather than batches of 10. If the buyer buys 30 units of X, the discounted price would only be applicable for 25 units of X. Thus, the buyer would still need to pay full price for the remaining five units.
Examples of Volume Discounts
Volume discounts enable a buyer to purchase a large quantity of a good at a discounted rate. The savings made are usually passed on to the final consumer of the buyer. For example, companies, such as Walmart and Amazon, are routinely beneficiaries of volume discounts from their vendors because they always purchase a large quantity of every good.
Traditional brick and mortar stores, or local stores, cannot make such large purchases. Walmart’s and Amazon’s final consumers are consequently able to make purchases at a lower amount than would be charged by a local store.
In addition to retail markets, volume discounts also exist in financial markets. Brokerage firms may offer volume discounts on the commissions charged on trading. The discount may be subject to the level of investment made by the investor or the trading activity of the client.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful: