Posted in Marketing and Strategy Terms, Total Reads: 410
Definition: Volume Pricing
It is a type of pricing strategy, where the price of the product is dependent on the volume (ie. The number of units of the product) bought. This means that if you buy more quantity of products or sometimes may be group of products, you would get discount based on the volume of purchase.
Some primary reasons that form the basis of volume pricing are:
• Capitalizing on the Law of Diminishing Marginal Utility: The law of diminishing marginal utility states that– the more a person consumes a particular product, the less he or she will value the product. For example, a customer may be willing to pay a high price for the first 10 cups of coke, but he/she may not be willing to pay even a very low price for the next 5 cups. This is because the value decreases with each extra cup of coke. So, to make the customers consume more cups of coke, generally the additional cup-price is significantly reduced. This leaves the customer in conundrum- whether to spend some extra cash to buy a large number of cups.
• Competing with rivals who also offer volume discounts: Sometimes a competitor is trimming away prices based on the volume purchased and this has resulted in increasing sales. So, to prevent a loss in sales, a company offers similar price discounts.
• Locking in customers: Generally in highly competitive markets, volume discounts are responsible for gaining the commitment of customers. This gives company a competitive edge by preserving its marketing share and raising the barriers to entry into that market.
• Encouraging large orders, instead of small ones: Providing volume discounts results in increase in the placement of large orders instead of the small ones. Large orders reduces the cost incurred by the company and thus are preferred.
While there are many logical reasons for providing volume discounts to the customers, but some companies just over-use this strategy without giving this much thought. This can eat away a large chunk of profits and thus be carefully planned.