Rafi Mohammed

How to Offer a Volume Discount

Posted on December 10th, 2008 (1 Comments)

In the mood for pizza, the other night I decided to order a Chicago deep dish pizza from Unos. Scanning their web site, I noticed an incredible carryout deal which translated to: buy 1 pizza for full price ($17.99) and get a second one for $4 more. It would have been a crime to not purchase that second pizza, don’t you think? Given Uno’s quality, I’d be surprised if the ingredients for this extra pizza cost much less than $4.

Quantity discounts are a timely topic to discuss as I’ve received several emails from readers about these types of promotions (e.g., buy 1 crate of Harry & David’s pears and get the second for 50% off). There are two reasons to offer a volume discount: (1) As a competitive price cut and (2) To capitalize on the law of diminishing marginal utility.

A volume discount can be used to keep your price competitive relative to the competition. The potential drawback is if this deal cannibalizes a full priced purchase (i.e., “I was going to order two crates of pears anyway”), offering a volume discount is an expensive promotion. So when offering a volume deal, ask yourself, will the additional discounted item cannibalize a full priced future sale?

Offering a volume deal to capitalize on the law of diminishing returns is a great pricing strategy. The law of diminishing returns in essence says the more you consume, the less you value. Consider 7-Eleven’s 52 ounce X-treme Big Gulp soda offering. No human being needs to drink a 52 ounce fountain drink in one setting. Purchases are triggered by cleverly setting prices in accordance to the law of diminishing utility: “an extra 25 cents gets me 16 more ounces!” In other words, they use a volume discount to incentivize customers to purchase more than they normally would. This is the key to avoid cannibalization.

Going to Fenway Park last summer, I popped into a Popeye’s Fried Chicken restaurant (purely for research purposes) and they had an interesting pricing strategy. Once your order had been rung up, you have the option to pay an additional $1 and an electronic “Wheel of Fortune” like wheel lights up with several different offerings (e.g., an extra side, dessert, etc.). It randomly selects which product you get for your $1. Since you don’t know what product is going to come up, this is truly an attempt to entice you to spend more than you normally would have.

In this vein, Unos or Harry & David could offer the special only after 1 product (pizza or pears) has been purchased. Retailers can offer $20 off an additional $50 purchase only after customers come to the cash register ready to pay up. This spurs additional sales.

Volume discounts are a common pricing strategy. My point is to clearly understand the effects of these discounts on your business. This simple discount can end up making (or costing) you a lot more than you had thought.

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Readers' Comments on This Blog Entry

From Steve on December 10th, 2008
I've got a feeling that over the next 12-24 months, people are going to be doing a lot less purchasing and businesses are going to get creative with volume discounts to reduce stagnant, growing inventory. By the way those 7-11 Xtreme Big Gulps are usually served with a catheter.