Volume Discount: Meaning and Operation

What Is a Volume Discount?

A volume discount is an incentive to encourage individuals or businesses to purchase goods in large quantities. The seller or manufacturer rewards bulk buyers by reducing the price for each good or group of goods. Volume discounts allow businesses to purchase additional inventory at a reduced cost and help sellers or manufacturers reduce inventories by selling more units to bulk buyers.

Key Takeaways

• A volume discount is a price reduction offered to buyers who purchase in bulk.
• Producers or sellers can reduce inventories and take advantage of economies of scale by offering discounts to bulk buyers.
• Several methods exist for arranging volume discounts, often using a tiered discount structure.

Understanding Volume Discounts

Volume discounts allow buyers to purchase goods at a discounted rate. These savings are often passed on to consumers. For example, Walmart can purchase large quantities of each good and receive volume discounts from vendors. As a result, Walmart’s customers can purchase goods for less money than they would at a store that does not buy in such great volume.

In financial markets, some brokerage firms offer volume discounts on commissions based on investment or trading activity or for large block order trades.

How Volume Discounts Work

Volume discounts can take on various structures. They are often tiered, with a specific discount applied to X number of units within each tier. The discount increases as the tiers include larger numbers of units. For example, a discount could be applied to 50 to 100 units sold, with a greater discount for 101 to 200 units sold, and an even larger discount for 201 to 300 units sold, and so on.

Another method of offering volume discounts is to apply a lower rate only when a certain threshold is reached. For example, the discount might go into effect after 100 units are purchased and only apply to the units beyond that threshold. The buyer would still pay full price for the first 100 units they procure.

Yet another discount structure is to offer reduced prices on packages of units. A discount price could be offered for every 10 units sold, with the same rate applied equally. Another deeper discount rate might then be applied for every 25 units sold. To benefit from the lower prices, the buyer must purchase units in the stated increments. In the previous example, if the buyer purchased 15 units, they would pay the lower rate for only 10 units and full price for the remaining five units. The same would be true if 27 units were purchased, with two units costing full price while 25 units receive the lower rate. The volume discount would not apply to the entire order.

Another discount structure is to offer reduced prices on packages of units. A discount price could be offered for every 10 units sold, with the same rate applied equally. Another deeper discount rate might then be applied for every 25 units sold. To benefit from the lower prices, the buyer must purchase units in the stated increments. In the previous example, if the buyer purchased 15 units, they would pay the lower rate for only 10 units and full price for the remaining five units. The same would be true if 27 units were purchased, with two units costing full price while 25 units receive the lower rate. The volume discount would not apply to the entire order.