July 28, 2023
What is volume pricing? Where is it mostly used? What is the difference between volume pricing and scaled pricing? And how can you win 99% of the deals in a highly competitive environment using volume or scaled pricing?
Costco is a renowned US-based company. Last year, its revenue reached $166B, and sales numbers grew 9.2% compared to the previous year, all amid rumours of recession and high inflation rates. Why does the company show such impressive results when other retailers are suffering from small basket sizes and revenue drops? Costco uses volume pricing. More than that, it uses dynamic volume pricing.
Let’s start from the beginning to figure out all the details.
Volume pricing is a common term in the world of distribution and wholesale. It refers to the practice of offering quantity discounts to customers who buy goods in bulk. For example, if your customer wants to buy one item, you will charge them $10. If they buy 100 items, you will apply a 20% discount to the final invoice.
This popular strategy encourages larger purchases by providing a discounted price per unit as the volume of purchased goods increases. The premise is simple: the more a customer purchases, the lower the price per unit they pay.
Volume pricing incentivises bulk purchases, which, in turn, increases sales volume and, ultimately, total revenue. It appeals to a broad customer base, especially those looking for cost-effective solutions and businesses that need to buy products in large quantities. Offering discounts for larger quantities works effectively in attracting both one-time buyers and regular customers.
Although conceptually similar, volume pricing differs from scaled pricing. While volume pricing provides discounts based on the quantity purchased in a single order, scaled pricing offers discounts as the cumulative quantity of purchased items increases over time or across orders. For example, scaled pricing could be implemented as part of a loyalty program where customers whose overall shopping history has reached a certain threshold are entitled to a lifetime discount of 5%.
Volume pricing is about "the more you buy now, the more you save," while scaled pricing essentially says, "the more you buy overtime, the more you save.
Scaled pricing is also a common strategy for subscription services. For example, you sell coffee beans by subscription. Your customers can choose between three monthly subscriptions:
— 3 refills for $100/month,
— 5 refills for $150/month, or
— 10 refills for $250/month.
In this case, the price per refill declines from roughly $33 in the lowest tier to $25 in the highest tier. This is also an example of scaled pricing.
In simpler terms, volume pricing is about "the more you buy now, the more you save," while scaled pricing essentially says, "the more you buy overtime, the more you save."
With increased competition due to economic instability and heightened customer price sensitivity, implementing a volume or scaled pricing strategy has become more challenging. Distributors, wholesalers and retailers who use scaled pricing for their loyalty programs need to constantly track hundreds of prices offered by various competitors, not only per item but also per 10, 100, 1000, and any number of items or pricing based on the timeline (prices for a one-time purchase, prices after three months of cooperation, prices for long-term customers, etc.). They then have to compare their own prices against this data and adjust accordingly to remain competitive.
This is where dynamic pricing software can help.
Dynamic volume pricing software for wholesale and distribution helps streamline the process of tracking and adjusting prices. It allows businesses to quickly respond to market changes, ensuring their volume discount strategy remains competitive. The software can track prices across various online resources and catalogs, extract prices per quantity, and send this information to sales managers. This makes it easier to maintain a profitable pricing structure regardless of the quantity sold.
Dynamic scaled pricing software does the same for scaled prices. It tracks subscription prices or “loyalty program” prices across multiple web resources, extracts information on the price per item, price within a subscription tier, discount after reaching a certain threshold, the threshold itself, and other data points that are necessary for a seller to stay competitive. It then analyses this data and reprices based on the seller’s desired profit margin, sales velocity, or other business goals.
All operations take minutes instead of weeks necessary to collect and process this data manually.
So why Costco is so successful? Exactly because they use volume pricing dynamically. The retailer is known to consistently monitor the market prices to stay competitive. As they know: in digital age customers can quickly compare prices online.
By ensuring their bulk products offer better value than smaller quantities elsewhere, they maintain customer loyalty and keep their volume sales high.
Ana is a rare breed: T-shaped marketer with a wide experience in eCommerce, B2B, B2C and B2B2B marketing. Writes about unconventional strategies for exceptional growth.
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