My team and I at the Kini Group have shared many pricing tips over the years. There’s one area, however, we haven’t really covered – offering discounts to customers based on volume.
Fortunately, we’ve fielded many questions from our KiniMetrix customers about it and have empowered them find data-driven opportunities to make volume discount pricing work. We think it’s time to share our thoughts on the topic.
Let’s start with the basics. Volume discount pricing is a strategy that provides financial incentives for purchasing a product or service in high volumes. A customer purchases a lot at once to get a lower price per unit.
The pricing strategy – as a general rule – works. Customers often purchase more. Win rates increase.
Here are three other big reasons companies move forward with volume discount pricing:
- To close that first deal. A large discount for a large volume gets a first-time customer in the door. Then you have a longer period of time to sell them on value before their next order with a higher price tag. You can make it obvious why they can’t live without your product or service during this stretch of time.
- To beat the competition. Price wars are scary, and you should avoid them at every turn. However, if you really want a specific customer who seeks the lowest price, this is a good way to go to protect yourself. You get the customer and a big order – just for a smaller margin.
- To free up sales reps’ time and reduce operational complexity. Reorders take up time for sales reps who could be on the phone closing deals with new customers. They also take time for your operations group to fulfill. If you’re in a comfortable place with an existing customer and know they’re going to come back and order again every three months, give them a small discount to order higher volumes at once. This gives them a discount, frees up their time, and allows your company to dedicate resources to new prospects.
Everything related to volume discount pricing appears successful on the surface.
Unfortunately, the devil is in the details. Most companies deliver a blanket strategy to deals and customer segments.
That’s rarely a good (let alone, profitable) idea.
Here are a few ways it can easily go wrong:
- You give the same discount to all customers. The more you treat your customers the same, the more profit you’re missing out on. If you don’t consider the specific needs of each customer, you risk missing the boat with customers who don’t need to – or just can’t – purchase a huge volume at once. The customers who can afford to purchase in huge quantities often take advantage of volume discount pricing. Then your company ends up making razor thin margins. This happens often with big-spending customers – where you should be making significant margin gains instead of losses.
- You overdo it on discounts and devalue your product. Anytime you give a price concession, it devalues your product. If you give your customers a discount enough times, in their eyes, they think it’s only worth the final purchase price. After a while, the value of the discount diminishes in their eyes. Then they want another concession to make the deal worth their while. This quickly cuts down the perceived value of the product until your sales reps struggle to make sales at all.
- You make it impossible to raise prices. When purchasers become accustomed to discounts, it becomes difficult to raise prices when you need to do so. Customers are used to getting a deal, and when the opposite happens – when they have to pay more – they balk. If you go overboard on price concessions, raising prices becomes next to impossible.
These common issues aside, profitable volume discount pricing is possible. You just need to put a bit more effort into its implementation and pay attention to the direction your data gives.
Follow these 5 steps to put your strategy into motion:
- Set a target price for each transaction based on carefully-run analytics. Some sales reps resort to volume discount pricing as a last resort and make ill-informed decisions. Do not do this. If you’ve already given the customer 10 percent off and free shipping, giving them even more concessions will make the deal unprofitable, even if they’re purchasing more volume.
- Segment your customers. Only give a volume discount to customers who match your volume strategy (absolute growth vs. relative growth). For example, some customers are going to purchase big orders anyway, regardless of if you’re incenting them or not. Giving them the discount “just because” makes no sense. It’s a costly “thank you” for customers not pushing for a discount. Save this incentive for a customer who needs a nudge to close the deal. Then you have a bigger closed deal rather than not one at all.
- Offer it as a last resort. Use volume discount pricing as the absolute last resource to close a deal: “Hey, if you can just increase your order, I can give you X% off, but that’s the only way I can lower the price per unit.” Be very selective and careful about how you market this strategy. Customers will often try to order at the higher volume level. Then they try to cherry-pick you and reduce volumes afterward while still demanding the lower price. Make your customers feel special with it, and don’t allow it to become a regular crutch in your sales strategy.
- Set a minimum threshold per product. Set a strict minimum price per product and per pricing segment. Some products have more wiggle room than others in price. Some sell at high margins and can afford a bigger percent. Others already have too-thin margins and will become unprofitable if you offer more than 3%. Put someone in charge of overseeing this. They shouldn’t approve any invoices that show volume discount pricing below the threshold percentage.
- Constantly evaluate your strategy. Analyze your sales data for transactions that fall into your volume discount pricing strategy to determine if it’s working. Is it contributing to absolute volume growth with customers in declining markets? Is it creating growth of share with participating customers in growing markets? These are both signs of success. Are your margins growing rather than shrinking for deals made with this pricing strategy? That’s another sign of victory. Use your data as a guide to what’s working and what’s not. Refine accordingly.
Fine-tune Your Volume Discount Pricing Strategy
Perfect your pricing strategy to make it profitable for every single deal. Get transaction-level pricing insights from your data with an intuitive pricing analytics solution. KiniMetrix empowers companies to set profitable prices at the transaction level and offer strategic discounts that close deals without sacrificing margins. See how the cloud-based analytics software can boost your volume discount pricing strategy by watching a video demo here.