A pricing strategy that allows discounts for bulk purchasing, volume pricing offers financial incentives for consumers to purchase products and/or services in high volumes. Volume pricing can motivate purchasing behaviours where a customer will buy in bulk to simply to achieve a discount.
If your business operates in a highly competitive environment, volume pricing is a viable means to encourage new customers to commit to a purchase, or to lock an existing client into a repeat purchase.
If your reasons for holding stock is an attempt to gain new and repeat customers through bulk discounts you are at risk of being left with surplus stock. This not only affects the businesses profitability but also increases holding costs of the inventory stock. There are three common models of discount pricing that organisations use, each with differentiating risk and benefits.
All Units Pricing
The all units pricing method is easy for customers to understand, however, this price per unit approach to discounting offers lower profit to you. Unit prices decrease as the volume purchased increased. For example:
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The sales price at 20 units drops to $20, a total sales value is $400. Sold individually at the single unit price of $50, a sale of 20 units would net $1000 sales value. As you can see, that’s a difference of $600 on every 20-unit volume sold.
The incremental pricing model offers consumer discounts only when units are purchased above a specified price tier. The benefit of this model is that you are maintaining sales at the higher unit price, avoiding the situation where you are earning less the more you sell.
Package pricing or bundling of complementary products is a great way to rid yourself of old stock. Customers perceive value in obtaining matching products at a reduced price. Packaging will often entice customers to buy in bulk.
It is important to understand your customer base for this strategy to be profitable. Getting the package quantities and combinations right is essential. If the package doesn’t suit what the customer needs or is prepared to pay, they will forego the package in favour of individual units. This is great for all units pricing but not if you are holding an excess of inventory stock.
Is discounting the right move for your business?
While volume pricing often gives companies the opportunity to purchase goods at a cheaper price, reasons for holding inventory stock in large quantities should not be motivated by price alone. Volume pricing can potentially benefit or harm your business; therefore, it is important to understand which model works better for your organisation and for your customers.
Discounting can attract new customers and encourage greater sales, and it can also limit the likelihood that customers will compare your product to that of a competitor. But is discounting even necessary? Would your customers still purchase the product without the discount?
Bulk and regular discounting can have the effect of lowering the perceived value of your product, particularly with premium products, where often the perception is that a higher price equates to a higher quality product.
If you operate in a seasonal or FMCG’s industry, then there is certainly some justification for volume-priced purchasing and sales strategies. Holding stock at higher levels can become more justified as it supports customer service delivery, particularly for items with a higher inventory turnover ratio.