As consumers, we’ve all experienced the way that volume pricing can affect the way we perceive value. Take one slice for $2 or two slices for $3.50? It’s a no brainer – buy two and save one for later. Volume pricing is fundamentally about increasing sales volume, even at the expense of a lower per unit profit. But could volume pricing cause you to lose revenue, or even cut back sales volume? Let’s take a look at the three main volume pricing strategies.
All Units Pricing
The ‘all units’ approach involves setting volume prices at stepped intervals and then applying the corresponding volume price to each unit. In other words, the price of each unit is the same and is determined by the highest volume tier reached. Consider an example of a cidery, which sells product to small bars and large retailers, pricing its pear cider at $25 a case for orders up to 750 cases and at $20 a case for orders over that threshold. While 100 cases of cider would have an ordering cost of $2,500, 1,000 cases would only cost $20,000.
Many businesses favour all units pricing given the ease of communicating pricing to customers – only one calculation is required to determine the total amount a customer will pay. On the other hand, all units volume pricing can actually result in your business earning less money when a customer only slightly exceeds the volume threshold. If a small bar purchased 750 cases, it would pay $18,750 ($25 per case); however if the bar purchased 800 cases, it would only need to pay $16,000 under this pricing model. This is a significant loss of revenue for a boutique cidery!
To avoid revenue loss at the margins, volume pricing can also be incremental. Using this pricing strategy, volume discounts are only applied to units ordered above the volume tier. If the cidery offered incremental rather than ‘all units’ volume pricing for orders of more than 750 cases, 100 cases of cider would still cost $2,500, but $1,000 cases would now come to $23,750. Crucially, the price for 800 cases would not be lower than the price for 750 cases.
Because incremental pricing is a little harder to calculate and communicate, it tends to be used at a commercial scale, where customers are much more likely to take advantage of step-down points to minimise ordering cost. To keep marketing simple, retail businesses often favour all units pricing, knowing that relatively few customers will exploit the step-down.
Package offers can be used to implement a much more restrictive form of volume pricing. This pricing strategy involves offering product to customers at several fixed quantities. To implement this strategy, a cidery might offer cases in multiples of 250 (at $25 per case) and 750 (at $20 per case). If a retailer wishes to purchase 1,000 cases it might purchase 750 cases at $20 per case and 250 at $25 per case (an ordering cost of $21,250). Alternatively, it might purchase two sets of 750 cases – more than it needs – in order to secure the volume discount.
Package offers work well when a business has a good handle on customer demand. Unfortunately, poorly thought out package pricing can result in customers buying less product to avoid paying for a more expensive package (such as a supermarket buying 750 cases of cider rather than 1,000 in order to keep ordering costs low and margins high).
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.