Don’t Offer a Quantity Discount Until You Understand These 3 Things
Pricing Pointers, Issue #67
Most small businesses struggle with a false choice: either charge a high price to make more per sale, or charge a low price to sell more units. This “either-or” mindset inevitably leaves money on the table.
Quantity-dependent pricing allows you to increase both sales volume and total profit by matching your prices to the variable value customers place on additional units.
Focus on the value of incremental units
As buyers purchase more of a good or service, they generally become more price sensitive. This is true in both consumer and business sales (though for different reasons). By offering a lower price on incremental units, you can entice customers to increase their order size. As long as your price on incremental units is greater than your unit cost, a larger order will add more to your revenue than to your costs.
Reward loyalty using cumulative discounts
Quantity discounts don’t have to be limited to single orders. You can also offer discounts based on total purchases over some period of time. These “cumulative” discounts increase the cost of switching to a competitor. Once a customer is close to a major price break, they are unlikely to start over with a rival. This locks out competitors and keeps your customers off the market for longer periods.
Weigh your volume trade-offs
A potential pitfall of offering a quantity discount is that your customers can load up on your product – stockpile it – in order to pay a lower average price. The result is you cannibalize some of your full-price sales.
On the other hand, you might reason that it’s better to sell some units at a lower price because you’re essentially locking out your rivals while your product is sitting in your customer’s pantry or warehouse.
The risk looks different for services. Stockpiling is less of a threat when you sell a service, provided the purchase and performance occur at the same time.
However, services can be stockpiled if you allow buyers to pay in advance of performance. In effect, you allow them to stockpile the right to your services in the future.
Is it worth the risk? Run the numbers. Imagine, for example, you run a “Buy one, get one at 50% off” promotion. You can do a quick breakeven calculation: If you lose profit on the second units your loyal customers already buy, how many existing buyers must upgrade their purchase, or new customers be drawn in, to cover that loss?
Make buying more rewarding for your customers and yourself
Ask how you can reward customers for buying more. Use purchase discounts to increase order sizes, cumulative purchase discounts to increase loyalty, and breakeven calculations to manage the cannibalization risk. Stop leaving money on the table with a false choice between price and volume. You can build a price structure that secures both.