Volume pricing is a pricing structure where the cost per product decreases (aka volume discounts) as the quantity of products purchased increases. Essentially, volume pricing works by offering varying pricing thresholds that are tied to the quantity of products purchased. Beneficial to both the sellers and the buyers, this pricing strategy enables the seller to incentivize buyers to increase the volume purchased, as well as attract new customers – increasing revenue, while allowing customers to save money by purchasing in bulk.
Tiered Pricing vs Volume Pricing: What’s the Difference?
While both tiered-based pricing and volume-based pricing are usage-based pricing models, the difference lies in how usage is priced. In the case of tiered pricing, the price per product decreases at set quantity levels and the customer pays a different price per each tier. The larger the quantity purchased, the less per product charged. Whereas volume-based pricing sets a single price per unit based on the total quantity purchased.
There are many volume pricing examples we could explore. But for this example, let’s imagine that a customer requires software for 22 users.
| Pricing Model | 1 – 10 Users | 11 – 20 Users | 21+ Users |
| Tiered Pricing | $20 per user
(users 1 – 10) |
$15 per user
(users 11 – 20) |
$10 per user
(21+ users) |
| Volume Pricing | $20 per each user | $15 per each user | $10 per each user |
Tiered Pricing
- The cost for the first 10 users would be $20 per user, totaling $200
- The cost for the next 10 users would be $15 per user, totaling $150
- The cost for the remaining 2 users would be $10 per user, totaling $20
Add the totals for each of the tiers ($200 + $150 + $20), totaling $370 for 22 software users.
Volume Pricing
- 22 users fall within the 21+ user category, meaning that the cost per user (for all users) is $10 each.
A simple calculation ($10 per user * 22 users) provides a total software usage cost of $220.
Let’s take this one step further and factor in the cost for 22 software users where neither tiered or volume pricing are offered – $20 per user * 22 users = $440.
Types of Volume-Based Pricing
There are several types of volume-based pricing models, and these are the most common:
Threshold Volume Discounting
Threshold volume discounting provides buyers with a discount once a certain quantity of units are purchased. For example, a seller offers a discount when the initial threshold of 50 units are purchased.
- 0 – 49 units: Full price
- 50 – 100 units: 15% discount
- 101+ units: 25% discount
If a customer purchases 115 units, they will receive a 15% discount on the first 100 units and the remaining 15 units would be discounted at 25%.
Tiered Volume Discounting
This pricing scheme uses various pricing tiers where discounts are applied once the purchase of a certain quantity of products are purchased. Although similar to threshold volume pricing, transparent volume-tiered pricing discounts apply broadly to every purchase after a certain point. Again, we’ll assume that a customer purchases 115 units.
- 0 – 49 units: $75
- 50 – 100 units: $50
- 101+ units: $25
The purchase of 115 units will cost the customer:
- The first 49 units (49 * $75 = $3,675)
- The remaining 66 units (66 * $50 = $3,300)
The total purchase price will be: $6,975 ($3,675 + $3,300)
Package Volume Discounting
This is sometimes referred to as bundling pricing. This pricing model provides discounts when customers purchase additional products and/or services at the same time such as training, installation, supplemental features/functionality, etc.
Volume Pricing: Advantages and Disadvantages
Volume pricing offers numerous benefits, but there are also some pitfalls that you should consider.
Benefits of Volume Pricing
Increases sales volume: Like virtually all discounting methods, volume discounting is designed to incentivize buyers to purchase more. The increase in sales volume can lead to higher revenue and increased profitability.
Attracts new customers: Offering discounts can pique the interest of potential customers, which can aid the business in building a solid base of new customers.
Builds customer loyalty: Customer retention can improve since customers are incentivized by volume discounts and typically prefer to make their purchases from a single business.
Provides competitive advantage: By offering volume discounting companies can sway customers and potential customers away from the competition.
Provides for market fluctuations: The flexibility of volume-based pricing enables businesses to adjust pricing in response to market fluctuations. So when demand is low, discounts can be increased to boost sales and when demand is high discounts can be minimized.
Decreases inventory cost and improves inventory management: Depending on the type of business and industry, companies can reduce inventory holding costs and reduce the risk of having unsold items. Additionally, volume discount pricing can help in more effectively managing inventory. Both of these benefits can lead to decreased inventory costs.
Potential Drawbacks of Volume Pricing
Lowers profit margins: By offering products at a lower-than-normal price, profitability is undermined with each unit sold. However, the increase in sales volume can offset per-unit losses.
Reduces perceived product value: Typically encountered in markets where price is equated to quality, customers may associate lower prices with lesser-quality products. This potentially devalues the product and even diminishes the business’s brand reputation.
Strains the business: Larger orders can negatively affect the business’ inventory and supply chain and even support personnel. This is especially true if the company isn’t prepared to handle large orders efficiently. Ultimately, it can lead to delays and customer dissatisfaction.
Increases pricing structure complexity: Implementing an effective and efficient volume pricing strategy adds a level of complexity to current pricing models, which can lead to customer confusion. Negating potential challenges requires a flexible yet sophisticated billing solution that can easily adapt to any billing need, price volume model, and business requirement.
Implementing Volume-Based Pricing
Volume pricing provides an effective strategy for businesses aiming to improve market share, increase sales, and drive customer loyalty. But success requires four key elements:
- Careful data analysis (profit margins, markups, and break-even points)
- Customer segmentation
- Impeccable implementation
- Ongoing monitoring, management, and refinement of pricing tiers
Implementing volume-based pricing requires automation. This is where a billing solution that not only supports volume pricing, but automates the entire quote-to-cash process is essential.
BillingPlatform quickly and easily delivers any combination of one-time charges, subscription, or usage-based billing while automating the entire billing, invoicing, and revenue management process. With unmatched agility you can react to market changes in real time with tools that enable you to make pricing and product changes on the fly.
Are you ready to implement volume-based pricing? Reach out to our team of experts to begin.
