Many people, buyers and vendors alike, do not understand the fundamental differences between tiered and volume pricing, and sometimes they even consider them to be the same. Both pricing models reward buying in volume with discounted prices. However, it is detrimental to business to think they are the same, as if their differences are understood correctly, they can be optimised to build the client base and maximise profits.
The tiered pricing model is a way of rewarding loyalty while still maximising profits. Consider this example:
- 1 – 10 items = $10.00 per item
- 11 – 20 items = $8.00 per item
- 21 – 30 items = $6.00 per item
- 31 – 40 items = $4.00 per item
Now, this is a dramatic price drop for higher volume ordering however, it will still illustrate the concept. Under a tiered pricing model, if someone ordered 15 items, they would pay $10.00 per item for the first 10 and the latter five items would cost $8.00 each. Therefore, their total bill would come to $140.00.
There are several bonuses to using this pricing model one of which is that a customer who orders 15 items and a customer who orders 35 items are both rewarded for their custom with a discount. In doing so, customers will feel valued and in turn will be more likely to continue their purchasing relationship with the company.
Other bonuses to tiered pricing include a higher return for the company and a greater reach of clientele. Simply put, this means the company can give value for money to the small business who cannot commit to big orders, while also providing to the massive company who always orders in big volumes. There is also the potential that any small customers will graduate to higher order volumes in time which again, retains and grows the client base while maximising profits.
Volume pricing also rewards customers for bulk buying however the difference is that by reaching a predetermined order threshold to unlock a discount if you will, their entire order is discounted. If we take the example mentioned above, volume pricing would reward the customers with the price of $8.00 per item for all 15 items not just the last five. The result of this is the customer’s 15-item bill would come to $120 rather the $140 under a tiered pricing structure.
Which pricing model should you choose for your business?
There are very clear pros and cons for a company with both pricing models. Tiered pricing is fantastic for appealing to a range of customers while ensuring the company gets the maximum amount for their product. It enables customers to pick and choose products based on what they can afford while getting the most bang for their buck. An added benefit is that it captures smaller businesses while they are still starting out with a limited budget but with the potential and likelihood that they will be able to commit to higher volume orders in the future.
On the other hand, volume pricing is a great way of clearing inventory stock that may be at risk of expiry or obsolescence and in doing so, inventory storage costs are reduced. The reason why it is easier to clear stock with volume pricing is that each item in the bracket qualifies for the price reduction, thus clients pay less overall for their bulk purchase.
Deciding on a pricing model whether it is when you are buying or selling stock, really depends upon inventory stock and accurately understanding your product and how much you want on hand. If your product is close to expiry, then perhaps a volume pricing model is appropriate to try and attract the largest volume purchases, however if that is not a significant problem, then perhaps it is more beneficial to have attractive prices to a larger range of customers using tiered pricing. Likewise, if you are purchasing inventory that is not likely to expire or you already have a customer to pass it on to, then finding a supplier who offers volume pricing would be advantageous. If, on the other hand, the product is sensitive in terms of shelf-life and you cannot absorb the risk of expiry, then perhaps a supplier who offers tiered pricing would be a better choice.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.