Volume discounting is a method by which the price of items bought are lowered when increased quantities are purchased.
Benefits of using Volume Discount Pricing
Volume discounting is offered for a variety of reasons. In B2B, it is useful as many businesses buy the licences for the product in large numbers. Volume discounting incentives for SaaS businesses is larger because there are fewer costs that are involved when allowing another customer to access your product. Here are the different benefits of implementing volume discounting to your SaaS pricing model.
Helps you compete in the market Businesses function dynamically with the ever changing needs of the customer and competition. To successfully thrive and compete in the market, it is very important to have a well-planned pricing strategy that will prove as attractive and valuable to your customers needs. Providing volume discounting to favor your customers every now and then helps you add value to your brand and market share at the same time. Providing volume discounting only as and when needed to keep your customer engaged with the product will help you increase the perceived value of the product in your customers eyes.
Attracts a huge customer base In your pricing strategy and promotions, volume discounting is a key concept. Leveraging it and offering your prospective customers volume discounts along with a good package plan that suits their needs will definitely create affinity towards your brand and product.
Encourages your customers to buy more When volume discounts are usually offered it encourages your customers to buy more of your product. Sometimes they might choose plans which they might need in the future because it’s affordable and will be useful as they scale. This inturn helps you generate more cash flow.
Psychology behind volume discounting
In B2B businesses volume discounting is offered to show appreciation and loyalty to your customers. As long as the idea is sparsely leveraged it sits well, but when offered frequently, it lowers your product’s perceived value from the eyes of your customers. In B2B SaaS, your perceived value is an important parameter that sits on a pedestal as the value cannot be linked to a physical product. When offering bulk discounts, businesses lower their perceived value thereby sabotaging their image. Here are some of the common problems faced by businesses when offering volume discounts,
Disadvantages of Volume Discounting
Lowered price value Once you lower your price to satisfy your customer, the lowered price of your product sets the new standard for your product price. Things might not go well with your customers if you suddenly need to increase your prices in the future to suit the ever-evolving business needs.
Profit loss By offering volume discounting frequently you put your business at a loss. For every 5% reduction in price you need to sell 38% more to ensure that your profitability doesn’t tank.
Product Devaluation Everytime you give reductions you reduce the perceived value of your product. They might think that the discounts are offered as the quality of the product is poor and diminishes your brand value in their eyes. It is crucial to ensure that your customer associates quality with your product and brand.
Types of Volume Discounting
There are three types of volume discounting, which are
All units (or) Volume model
Tiered and volume pricing model: Tiered and volume pricing model are overlapping terms which are used interchangeably. Let’s see the difference between the two using an example
The price of all the units you’re selling is within the set price range.
Difference between Tiered Pricing and Volume Pricing:
The fundamental difference between tiered pricing and volume pricing is the way in which the pricing structure is interpreted upon calculation. Even though both seem to be the same in hindsight, the accumulated costs at the end is where the difference lies. Now, let’s see how these calculations work,
Suppose you’re a business who is selling widgets. Here is how your prices would vary if you either opt for a tiered pricing model or a volume pricing model.
How do you calculate pricing for Tiered model?
You’ve sold 60 widgets to your customer.
In a tiered pricing model, you calculate your total like this
[($20x10) + ($10x20) + ($5 x 30)] = $550.
You move to the next tier only when one tier is completely filled.
Whereas, in a volume pricing model, the total is calculated as ($5x60) according to the total number of widgets bought which falls under the 30-100 widgets price range.
Let’s now see some real world examples to show you how these pricing models are implemented.
Confluence is a content collaboration tool which helps teams to work together. Look how they’ve implemented the tiered pricing model for their product. They charge $5 for the first 100 users and from the 101th user they charge $4 and so on.
Sketch is a design toolkit which helps you create your work from start to finish. They use a volume pricing model to price their product, so the more devices you want to buy the license for, the lesser you pay.
Package pricing model:
Package pricing is similar to that of tiered pricing model,but the difference between the two is that businesses offer a discount for specified number of units. The discounted price usually increases with the volume bought.
Packaged Pricing Example:
Price per unit
This is how the product is priced and discounts are offered. If you buy in larger quantities the prices are discounted. Suppose in a packaged pricing model you need to buy 6 widgets, you would pay the cost for 5 widgets and the full price for the other 1 widget. Therefore, your total price is calculated like
For the first five widgets your cost is $900 and for the other one widget your cost is $100, thereby your total cost being $1000 ($900+$100).
Volume discounting strategy is beneficial when done rarely. But, if offered frequently it can sabotage the brand and product value. Hence, it is necessary to carefully evaluate your pricing plans and product offerings before offering discount prices. If carefully planned and executed volume discounting can reap you benefits and helps you dodge competition.